Luceco plc (LUCE) Earnings Call Transcript & Summary

Okay. Well, good morning, everybody, and welcome to the Luceco 2022 Final Year Results Presentation given by myself and Matt. 2022 results were in line with the update that we gave earlier on this year in January with our revenues at GBP 206.3 million and adjusted operating profit at the top of the range of GBP 22 million. A more advantageous tax rate resulted in EPS of 11.1p. This reflects a normalization after the incredible year we had last year in 2021. There has been a slowdown in the residential RMI sector. And as you know, in 2022, we had a significant headwind from the overstocking that occurred in the previous year. But our results remain well ahead of the pre-pandemic levels of 2019. Our revenue is up over 20%. Our adjusted operating profit up over 22% and adjusted EPS up over 44%. We have gained share in attractive markets during that time. And with that, I shall hand over to Matt. No, I've got enough. Yes. So the year started with a lockdown still that drove higher-than-normal volumes. But as we go into the second half, there was a slowdown in the residential RMI and also customers accelerated their destocking. In total, we think the overstocking was valued at about GBP 25 million. So it had a huge impact on the results in 2021 and 2022. However, last year, we had extremely strong generation of cash, and we ended the year with a much healthier balance sheet. The outlook for this year, so far, we are trading in line with expectations, higher margins as a result of lower input costs. I'll talk about it more later. Customer destocking has mostly worked its way through and the gross margin is improving, but as I say, a slower RMI market, particularly in the residential sector. As we get through the year, our comparators get easier because the first half of last year was relatively stronger against the second half. And with that, I will hand over to Matt.

All right. Thank you, John. Good morning, everyone. So let me just start by pulling out some of the key themes within our numbers. So before I talk about the 2022 performance, I should just quickly remind you of how we entered that year. So 2022 obviously came on the back of an outstanding performance in 2021. In that year, the pandemic drove strong demand within the residential RMI market, particularly within the DIY sector. It also created significant supply chain disruption and our customers responded to strong demand and uncertain supply by increasing their stock levels. This added to already strong demand for our products, resulting in 2021 exceptional sales and profit performance. Almost inevitably, we have fallen short of that record performance in 2022, as you can see in the red numbers on this page. We have seen a slowdown in underlying demand, particularly in the DIY sector, which drives about 30% of group revenue. The demand from other areas of the construction market has remained relatively robust. But the slowdown in underlying demand was not the biggest driver of our 2022 performance. The biggest driver is that our customers in the distribution channel have responded to slower demand and normalizing global supply chains by removing the extra inventory of our products that they bought in 2021. This has left our 2022 sales unusually, but temporarily, lower. I will talk more about that in a minute. This customer destocking explains all of the reduction in sales and profit versus 2021 that you can see on this page. And obviously, whilst it's naturally disappointing to fall short of 2021's record results, we must also try to look through this highly unusual pandemic period to assess the progress that we are making longer term. For this reason, I've added a pre-COVID 2019 comparator on this page. And as you can see from that comparator despite giving back some ground in the year, we remained well ahead of 2019's performance across nearly every metric. We have taken share in our attractive markets, as John has said, using our advantaged business model, which is very encouraging for the future. John will talk more about this later. So those are the key themes. And with that, I'll get into the numbers in a bit more detail. Okay. So reviewing the income statement. You can see that revenue came in at just over GBP 206 million, that was 10% lower than 2021 due to customer destocking, but it remained 20% higher than pre-COVID levels. The combination of organic growth and M&A means that we have gained share in our most attractive markets during the pandemic. Gross margin for the year was 36%. And whilst this was lower than 2021 and lower than where we want to be long term, we are very pleased with how our margins improved as the year progressed, thanks to proactive action on selling prices, and a recent easing of input cost pressures. The gross margin performance was all the more impressive when one considers that customer destocking left our manufacturing overhead relatively underutilized, suggesting room for further margin upside as production volumes recover. Overheads were GBP 52.3 million, with the majority of the increase year-on-year attributable to acquisitions. And overheads, therefore, for the rest of the group increased only very slightly. Tight overhead control has been a key driver of recent improvements in our profitability, and we maintained our discipline in this area. Adjusted operating profit was GBP 22 million at the top end of our previously guided range. Similar to revenue, customer destocking resulted in a reduction in profit versus 2021, but profit remains ahead of pre-pandemic 2019. Turning to tax. Our tax rate has continually reduced over recent years as we have taken advantage of various government incentives. We expected an effective tax rate of 15% for the year. It actually -- we actually achieved a rate of 11.3% for the year, thanks to some one-off benefits. And that pushed our EPS up to -- adjusted EPS up to 11.1p, which was slightly ahead of market expectations. Okay. So this slide provides a bit more detail on the drivers of our revenue performance. So as I've mentioned, the biggest influence on our revenue performance year-on-year was not changes in end market demand, but rather how our customers in the distribution channel, serving those end markets have chosen to flex their own inventory of our products in the highly unusual circumstances of the pandemic. This was particularly evident in the retail and hybrid channels because the business model of these distributors requires them to hold more inventory of our products than others, plus they did experience the largest change in end market demand because they serve the DIY market. I've got a slide on this later on. We also saw some professional wholesale customers buying stock ahead of price increases during 2021. The net result of this is that our largest customers stocked up by GBP 27 million in 2021 and then stock down by GBP 20 million in 2022, thus creating a GBP 47 million swing in revenue year-over-year. As can be seen in the top chart, destocking, therefore, explains all of the like-for-like decline in revenue we have seen. Needless to say, this means that the like-for-like revenue absent destocking, in other words, demand for our products from our end markets was actually flat on last year. Put simply, underlying demand was better than what our headline numbers suggest. Despite the headwind of destocking in the year, you can see that our revenue remained well ahead at 2019 levels, thanks to both M&A and solid like-for-like growth. Within the increase in revenue since 2019, there has also been an important change in mix. Efforts over recent years to rebalance our revenue towards professionally installed products, particularly those installed in nonresidential settings, allowed us to mitigate the slowdown in DIY that we've seen and also benefits as high energy prices drove strong demand for LED retrofitting. Okay. So this slide shows the key drivers of our profit performance. So overall, the story is again dominated by customer stock movements. I just referenced a GBP 47 million like-for-like swing in revenue from customer stock movements. These movements largely impacted our high-margin wiring accessory sales meaning the profit impact from this revenue reduction was relatively high at GBP 24 million. Despite this, as you can see, the like-for-like profit decline was limited to GBP [ 17 ] million. So the question is why? Well, the reason is that we got some like-for-like profit growth from the full impact of selling price increases put in place during 2021 and 2022 to combat input cost inflation. Input costs rose sharply during the pandemic. And even though we monitor these costs very closely and responded very proactively to them, we did not fully recover all of the cost inflation that we faced in 2021, and that held back our profits in that year. The gap has closed in 2022, adding about GBP 8 million to our profit. Input cost inflation is now in reverse for us at least as the global economy calls, and I've got a slide on that in a minute. So given the way that customer destocking held back our profits in 2022 by about GBP 10 million, in fact, our profitability will benefit as customer destocking comes to an end, helping to counterbalance the impact of weaker macro conditions. Okay. Now so given how evidently important customer destocking was to our performance in 2022, I've chosen to show a detailed slide on it. So the graph summarizes 2 things. So firstly, inventory value, which is shown in the dark green and also imagery cover, which is shown in the light green as held by our largest retail and hybrid customers during the pandemic. These customers drove most of the destocking impact. In 2019, which is the far left-hand side of that chart, pre-COVID, you can see how relatively stable customer inventory levels were. In other words, customer stock movements are not normally a big influence on our performance, but the pandemic created an exception to that rule. In 2020, COVID-related supply chain disruption meant that our customers are actually unable to add inventory quickly enough to cover the strong lockdown demand from DIY that they're experiencing. And that meant that our customers started 2021 actually in an understocked position, as you can see from the light green chart. Customers, therefore, placed very large orders to correct this increasing inventory levels very materially in 2021, as you can see in the dark green chart. Due to supply chain disruption, however, many of these orders arrived later than planned in late 2021 and early 2022. From the customer's perspective, their inventory cover at the end of 2021 seemed appropriate for the high level of demand that they were experiencing at the time. But demand had already begun to slow as the pandemic drew to a close. It slowed further in early 2022 as hostilities in Ukraine dented consumer spending. Thus, an understock in 2021 quickly turned into an overstock in 2022 and customers, therefore, started to destock in early 2022 and then very rapidly in the second half of that year, as you can see. As we sit here today, you can also see that this destocking phase is largely complete with inventory cover largely back to pre-pandemic levels. We continue to estimate that the total impact of destocking on 2023 revenue will be circa GBP 5 million. As you look at the inventory value movements in 2021 and 2022, you can see that they largely mirror each other, adding extra stock in 2021, boosting our sales; removing that extra stock in 2022, reducing our sales. So when trying to understand the normalized results for the group, absent these temporary stock movements, it is therefore not unreasonable to average the performance of both years, as shown in the bottom right-hand corner. Admittedly, this average does include 2021, a year in which our core residential RMI market was experiencing strong demand, but this strong demand also brought with it significant cost inflation that we had not fully passed through in that year, basically making it a year of above-average activity but below average profitability. The 2 impacts actually broadly offset one another. So this does add some weight to the argument that the group can return to the average performance shown as market conditions allow. In summary, the impact of customer destocking has been unusual. It's been significant, masking our underlying progress, but the issue is now largely behind us. Okay. As I've said, whilst customer destocking inevitably left our results lower than 2021, we were encouraged by the underlying progress that we made. And certainly, the underlying progress has improved as the year has progressed. As you saw on the previous slide, customers destocked more rapidly in the second half than the first. And there's also little doubt the conditions in the residential RMI market became tougher as the year went on. So therefore, profit in H2 should have been materially lower than H1, but it wasn't. The reason is because, firstly, our gross margins improved from 34% in the first half to 38.1% in the second half, as we said that they would, in fact, thanks to selling price increases and some cost deflation. And secondly, we saw improving demand from LED retrofits in the nonresidential and infrastructure markets. This, for example, helped Kingfisher Lighting to deliver record profits, which John will touch on later. In summary, we ended 2022 with encouraging trading momentum, and this has continued into 2023. But of course, we remain cautiously optimistic given the very uncertain world that we continue to operate in. Okay. So this slide provides a quick update on input cost inflation. So the good news is that cost prices continue to move in our favor. This time last year, I said that pandemic and conflict-driven input cost inflation in all of its forms would add GBP 25 million to our annual cost base. By the half year, my estimate had reduced to GBP 21.5 million, as you can see. Now you can see my latest estimate has reduced further to GBP 14 million. The biggest single reason for the reduction is freight. A year ago, we were looking at a GBP 7 million cost increase in this category alone. And as you can see from the top chart, the on cost is now nil because sea container rates have returned to historic norms. We have also seen some welcome appreciation in the value of both the U.S. dollar and sterling against the RMB, which is pretty important for us, and that has reduced our currency headwind. The only cost really that remains stubbornly high is copper, and the electrification of heating and transportation means that this may remain the case for some time. The good news is that, as you can see from the bottom chart, to date, we've experienced -- in fact, you can't -- we'll see it on that chart, but it does say that you've experienced GBP 18 million worth of cost inflation so far through to the end of 2022. Meaning that at current prices, we would see a GBP 4 million cost deflation from here, creating a tailwind to profit, unless, of course, it's pass-through. So through this period, we have proven our ability to protect our margins from inflation by resetting prices as appropriate, which I think is a testament to the strength of our brands and to the strength of our service. Okay. So just finishing up on the numbers. This slide summarizes our working capital, cash flow and debt performance. In short, we have guided or we did guide to lower inventory, strong cash generation and lower leverage in the second half of the year, and that indeed is what we've delivered. As you can see on the top left, shorter delivery lead times out of China have allowed us to remove the buffer inventory that we added during COVID without impacting customer service levels. Converting this buffer inventory into cash whilst also improving our cash collection from customers drove record cash flow in H2, as you can see in the bottom chart. This has transformed our balance sheet with leverage reducing to 0.8x EBITDA by year-end, thus creating options that we simply didn't have 6 months ago. Full year free cash flow amounted to nearly GBP 31 million, which is equal to a free cash flow margin of very nearly 15%. As you know, we guide to an average margin of at least 10% through the cycle. So this was a very strong performance and driven by, of course, that removal of the buffer stock. We will inevitably see some normalization of this margin in 2023. With that, I will hand you back to John to talk through the business review and the outlook.

Thanks, Matt, for that excellent summary, and I'd like to take this opportunity to thank you very much for all your extraordinary hard work and accomplishment over the last 5 years. And on behalf of everyone to wish you the very best in the future. I'm sure you'll have a fantastic career. As Matt says, the pandemic had a huge impact on our numbers. But in the meantime, we have made excellent progress on many of the important aspects of our business. First, I'd like to talk about why our business will grow faster than the market over the longer term. And we point to 4 main issues: the regulatory change, new technology, ongoing investment in commercial buildings, infrastructure and the residential sector and investments are needed to impact on the climate change. Starting with regulation. The electrical insulation market is highly regulated. In the U.K., for example, every 2 years of various changes across lots of different categories. This will drive product replacement. And it also increases the selling costs as for new regulations nearly always result in more sophisticated and thus more expensive products. An example of this is the fuse board category, which we entered approximately 15 years ago. But over the last 10 years, improved safety in these products has resulted in the average selling price increasing by over 110%. And that's over and above the cost of inflation. And hence, this is a significant tailwind on the revenue for us. Moving on to new technology. I give an example here of a plastic socket, of which we sell about GBP 5 million every year. We used to sell a simple plastic socket for approximately GBP 1. But as we've added more and more functionality and the latest thing is USB, USBA, USBC and actually, I've got an example of a -- sort of higher added value socket here, we've managed to increase the selling price by over 800%. This has obviously had a huge impact on our revenue and our margin. in the built environment, U.K. house prices have risen by approximately 6% on average since the year 2000, which has supported ongoing residential RMI investment, which has grown by approximately 4% per annum over the same period, significantly faster than GDP. People want to invest in an appreciating asset and they need to do so as the housing stock in the U.K. continues to age. So these support a long-term growth in demand for our products. And finally climate change. As Matt mentioned earlier, the electrification of heating and also transport will drive a big increase in the amount of electricity demanded in individual households, which will result in more demand for products like ours. And as you know, we made a big investment into the EV market, and I'll go on to talk about more of that in a minute. So you can see how this has impacted our recent growth. We compare that to the pre-pandemic period, our earnings and our revenue have massively outstripped the growth of U.K. GDP. And you can see on the right-hand side, how we have improved our customer exposure and mix. In the last downturn, we were mainly focused on the residential RMI and consumer sectors but we now have an infrastructure business and the projects business, which is countercyclical often. And in the bottom left, you can see lots of further potential to move into other product areas like we've done with EV charging. So Kingfisher is an example of a business that we bought in 2017. At the time of acquisition, it was turning over approximately GBP 12 million and it was making EBITDA of 1.3. Since we've owned it, we've invested in the product range, we've invested in the management team, we've invested in the commercial operation and we have more than doubled the EBITDA. This is a specialist outdoor lighting business, which is focused on infrastructure projects, lots of government work and is therefore, countercyclical and this year should have revenue of approaching GBP 20 million. So we bought it for GBP 9.8 million in 2017, which was 7.5x EBITDA. However, after the growth and the synergies that we have achieved that reduced to a multiple of only 3.3x. And we think we can do something very similar with the acquisition that we made last year of DW Windsor. It's a very similar business, a sort of niche outdoor specified a professional customer. We deal with all the large contractors on projects such as HS2 and with the same strategy that we apply to business we think that business has a great future. We bought in 2022 a small EV charging business called Sync EV. This gets us into an extremely exciting part of the market. As we know, by 2030, you will have to be buying a hybrid or a fully electric car and these will all be charged at home. It is much cheaper, it's much easier to charge at home. The demand for home chargers is therefore enormous, and we can forecast the growth of it here. The market has actually been underperforming estimates because of the shortage of chips and because of the shortage of cars but our business is performing as expected. We have approximately a 4% market share, which we are confident we can grow. And as the market grows, we think we can build a successful business in this category. Lots of product development. Since we've owned it, we have moved the production in-house. We're using the commercial teams that we have existing in the business, existing warehouse. The whole business is completely integrated and there's lots of product development coming. This is a very exciting opportunity. Innovation has always been an enormously important part of our business. We have approximately 100 engineers working on new product development, a lot of work at the moment on DW Windsor, as I talked about, commercial EV, the green home opportunity, inverters, possibly solar panels; obviously, we wouldn't make them, but the whole infrastructure that goes around having them connected into your home is an area that we believe we can get involved in, including 3-phase supply. This is an interesting example of a new product range that we launched at the back end of last year, relatively low investment because it's on a platform approach with the other wiring accessories, but we're very pleased with the market response. It's a slightly more sophisticated product than you often see in the U.K. market when you clip on a front play in lots of different finishes, very high margin, and we are hoping for very high sales. This year, we should do sort of GBP 1 million to GBP 2 million. But I think in the future, we can do significantly more. Sustaining our long-term progress, obviously, investment in lots of customer engagement, particularly trying to get beyond the wholesaler to have strong relationships with the contractor base. So lots of training we have been doing with contractors understanding how to use our products. On the Climate side, we were operationally carbon-neutral last year, and we had the lowest carbon density of any of the operators in our sector, as you can see on the chart on the top right. And we gave a generous pay rise to our people, 7.5% on average, but the lowest paid receiving over 10%. Onto outlook. Recent market trends. Residential DIY, as expected, is weaker, obviously, a lot weaker than the -- so the lock-time boom of 2021, but not as weak as we might have feared in the last autumn when it looked like interest rates were going to go significantly higher, but still housebuilding is weak, housing transactions are weak, and these things ultimately drive demand for our products. But as I say, not as weak as we might have feared. On the plus side, the infrastructure and the nonresidential side of the business has actually been quite strong. High energy prices feed well into LED retrofits. So return on investment for investing in highly efficient LED lighting obviously is a function of the energy price and is now highly attractive. Trading in line with expectations. As we said, as Matt pointed out earlier, normally, our second half is significantly stronger than our first half. That didn't happen last year. Last year, we had a strong first half. Customer destocking really accelerated in the second half. So the first half comparator for this year is therefore quite tough. But as we get through the year, that will improve. We would -- we definitely expect to have a stronger first half -- sorry, second half than first half, which has always been the case in our business. Customer destocking has almost run its course. The gross margin we exited last year with a 38% gross margin significantly higher than the average for the year, and that has continued into this year. And with the falling freight rates, if anything, that might edge a little bit higher. But as we say, there is the overhang of the macro slower residential RMI. And with that, I think we'll take any questions.

It's Kevin Fogarty from Numis. Can I just kick off with 2, please. Just starting with destocking headwinds and what you've seen there. I just wondered if you could comment on how is your kind of visibility over customer inventory levels changed throughout this whole process? And are you more confident in terms of what you can sort of call, I guess, for the year ahead in terms of the level of destocking? And sort of adding on to that, I guess, do you think sort of destocking will feature throughout 2023? Or is there a period where you think you'll have worked through from that perspective? And just secondly, in terms of working capital, clearly, a big performance given the buffer stock coming down, but I guess the outlook, what does that mean for your need now to sort of invest in inventories as you move through this year, given what you can see currently?

So Kevin, thanks for the question. So destocking. I think our visibility generally at customer stock levels has undoubtedly improved during this whole sort of 18-month period. And in terms of what are our customers trying to achieve? It feels like they are trying to get back to where they were before the pandemic came along. No more, no less. So that -- recognizing that, we kind of know how the story ends. The only thing that could really change it is if there's a further step down in underlying activity more than we're expecting, put it that way, right? So safer there, we think we know where this ends up. In terms of the phasing, based on our projections, they should be able to deal with the remaining GBP 5 million in the first half. On working capital, I'll answer it this way. There was nothing temporary about the cash that we delivered in 2022. So we've seen no reversal in working capital in early 2023. If anything, the debt has slightly reduced since then. In terms of what do I expect for 2023? Ultimately, I mean, certainly, if you look at the numbers that are out there in the market, I'll put it that way. I think the market is expecting the tailwind that we get from the end of destocking to be offset by a slowdown in residential RMI, leaving our volumes pretty flat. If that's the case, working capital should be flat.

Yes. I mean I'll just add in on the stock inventory issue, it wasn't just our customers who got it wrong. I mean we got it wrong as well. And there is some excess inventory in certain areas. I mean we've -- last year, we reduced it quite a lot, but we should be able to reduce it further this year. So I think cash generation should be a little bit better than average. But as Matt said, actually, if you look at the numbers, 2021, we made an incredible profit. But actually, our cash generation was very poor, that reversed in 2022.

Charlie Campbell, Liberum. A couple from me as well. Sort of -- just thinking about selling prices. Clearly, I guess, your customers must be aware of what the movements and freight rates as well. So how hard or easy will it be to hold on to selling prices this year given the input cost unwind? And the second question is just on the EV charger segment. So you've moved manufacturing to China. Just wondering kind of how much capacity you've got there. And also, if we look at the U.K. sort of charger market. Are your competitors also manufacturing in China or not? And if not, does that give you a significant cost advantage over them?

Yes, do you want to take the first one and I'll...

Yes. So I think -- yes, and obviously, as you say, customers will be aware of what's happening to container rates. They -- many of them are importing in the same way that we are. I think there are some things that go the other way, though. As an industry, I think the overall manufacturing base supplying our marketplace, they will all be experiencing lots of western wage inflation. They will also be experiencing a relatively weak sterling. Those things impact us a little bit less, I have to say, for various different reasons, right? So I think if you look at the industry, I think the industry where we're trying to hold on to the pricing that it's already got because it knows there's still some inflation to come and we will follow whatever the industry does on selling prices. At the same time, of course, we won't do anything the prejudice is our commercial and competitive positioning, right? So I think you can expect that in our most price-sensitive lines, so portable power, in particular, it's likely that we may have to give some ground, but I don't think it would be significant giving.

Yes. And I'll just -- I mean, I can add to that. I mean there's a technical point, which is that those customers who have power to negotiate prices generally by FOB. So there is actually no freight element in their costings, right? -- All the Kingfishers and the [indiscernible] and all those guys. Smaller customers who buy non-FOB don't actually negotiate prices, it's a market price. So if the whole market moves, we will obviously need to move with that. We've not seen that happen yet at all. In fact, some of our competitors have been putting up prices. So I don't worry too much about that. I think maybe we can -- maybe later on the year, we can edge our prices. The second question about EV. Our competitors generally don't make in China, 1 or 2 of them to you. the largest operator in the U.K. residential market, which is a list of business, I think, manufacturers in Eastern Europe. Lots of Swedish and Scandinavian entrants because they were ahead of the curve generally manufacturing in that part of the world. We do have a competitive product. You asked about factory capacity. I mean we have done -- I mean, I didn't talk about this, but we've done a huge amount of work in the factory over the last 3 years. I've actually been there twice in the last 6 weeks, having not been able to get that for 3.5 years. And I think that will make a real difference to our business actually. I mean our U.K. product guys have been out of China for a very long time, and I think that's had an impact. But we've done a lot of work to improve the productivity, the efficiency and therefore, the space utilization in our factory. And I would say at this point, it's probably only 50% occupied. So there will be no capacity constraints for the foreseeable future. And I think Chinese manufacturing does give us a significant cost advantage. I mean we are making very strong margins on the EV category, unlike others. The operating margin, as you can see, we're reporting 18.5%, and it's a subscale business. So as it grows, I think the contribution margin rather a bit should be north of 20. We're using existing commercial teams, we're using existing warehouses, we're using existing everything. And therefore, it's highly margin accretive. And we were actually modeling over time, having prices of this category would come down as it became more competitive as there were more new entrants. But actually, we haven't seen that. I guess it's relatively short. We've only been in 1.5 years. But the market prices are holding up, if anything, are increasing, lots of regulatory additional requirements have come into this product category, which has increased selling prices.

[indiscernible] Firstly, can you just talk a bit about the U.K. housing new-build market and your exposure there? And then secondly, we've obviously focused on the U.K. market as that's core. But just update us on the overseas and your thinking and what's going on there?

Yes. I mean I think our total exposure to U.K. housing is approximately GBP 10 million. That is spread across various different businesses including DW wins that we bought recently because they will be doing the street lights on the housing development. And everyone reads what's been happening in that sector. I mean it's worth noting that we are one of the last things to happen on the house, which is built. Our products probably go in 8 to 9 months after the housing construction has started. So we would expect to be seeing a slowdown in that probably now, and we've definitely budgeted for that. So we'll have to see. In terms of overseas, we have a business in the Middle East, which is doing very well. High energy prices have been benefiting our lighting projects businesses generally. And most of our overseas business are focused on lighting projects. So our business out of Dubai, we also have a business in Mexico, which is performing very strongly. We have a business in Spain, which is doing okay. But overall, we are still at 80% U.K. business. And I think without significant M&A activity that will remain the case. I mean one thing we haven't spoken about is the China plus One question. Concern over our manufacturing concentration in 1 territory may lead us to look at acquiring diversified manufacturing outside of China with a revenue stream probably. And if we made a significant move, then that would reduce our U.K. exposure.

Actually just following on from that. So why would you acquire rather than new-build in Malaysia or something like that as a start up? And then anyway, coming on to sort of longer-term stuff, you've done some analysis here effectively sort of thinking about normalized earnings and those sorts of things. Could you talk -- but on the other hand, if I take the 2 years that you got here on Slide 10, you've got an operating margin of 10% in 1 year in 17% in another. So quite a wide range if one's thinking about taking an average as a normalization. Can you give some sort of thoughts as to -- do you think gross margins in wiring can sit at 50%? Is that too high? What do you think operating margins, this is in a long-term view when things are stable? Operating margin, what sort of level do you have in mind for those?

I mean if you went to our factory, you would see why you would buy something rather than build something. I mean it's taken us 12 years to build that. the level of expertise in manufacturing that we have there now takes some time. I mean if you could move that expertise somewhere else in Asia. I mean, Vietnam is a province of China effectively. The laser is not that cheap. But I think the idea for us is not to move manufacturing out of China with the greenfield. I think the idea for us is to have a life boat, have a capability elsewhere that if we needed to move manufacturing out of China in a hurry, we could do so. So Bill -- so acquiring expertise, which is already in the market, manufacturing, maybe with some excess capacity and we could tool some products there. But China, and we've done a lot of work on this, it's still the cheapest place in the world to manufacture by quite a long way. And we have a fantastic team there. We've invested a lot of money there. We have a great operation there. Our plan is to say not to make that factory any more underutilized than it is already. It would be more to accelerate diversification, if we had to. I mean I personally don't believe we will have to. But having a like way to jump into, I think it's a sensible risk mitigant. I mean I'll just say something quickly about margins then Matt can maybe say something more. Wiring accessories at 50%. Now, wiring accessories is at 40% to 45%. I mean operating margins, if you average the 3 years actually '20, '21, '22 of around 15%. And I think it's through the cycle average at that level is achievable. 2022 is an anomaly, obviously, as is 2021. 2020, we achieved 17% and actually, I thought that if the pandemic hadn't hit us in 2020, we would have probably made a higher operating profit than we did maybe on a higher revenue line. But I think gross margins between 38% to 40% on a normalized volume would lead to operating margins of around 15. But that is a benign normalized macro environment, which we might not have for a couple of years. Matt?

Well, I think you've taken the words right out of my mouth. So yes, I mean, as John says, I mean, you picked 2 years, I prefer to look at 3, 17%, 17%, 11%. And the reasons for the 11%, as you can see from the charts I've shown is really quite unusual. And given that we've achieved that in more than 15% in 2 of the last 3 years, one has to ask the question, well what has changed such that we couldn't achieve that again. We passed through all the cost inflation that's out there to pass through. The nature of the business hasn't fundamentally changed. I believe this business is a 40% gross margin, 25% overheads, 15% net margin kind of business. That's what we are on course to achieve and did achieve. As John says, not reasonable or prudent to expect that in the near term until such time as we all know where the world is heading and whether we're going to have a 2018 all over again.

I mean Matt touched on this earlier. I mean 2021, yes, we had very high volumes, particularly wiring accessories, particularly made in our own factory, and that's very good for operating margin. We also had a huge amount of inflation. And our gross margin in particularly the second half of 2021 was well below where -- yes, it is now, where it can be normally because of the time lag to get a price increase into those major customers. And it took us almost a year to get a price increase into the light of Kingfisher by the time they work through their supply chain of stock and FOB orders, et cetera. So I think we've demonstrated that we are able to pass on inflation. Our brands, our services, Matt said, allow us to do that. So I think 2021 with a normalized volume and a normalized margin, the operating margin would have been at around the 15% level. And that was sort of -- that was relatively normal market demand. So long-winded answer to your question.

I had a quick follow-up, if I may. Within that, if I look at LED, so last year, a gross margin of 45% or something. Sorry, last year, 45% in the project business, that's assumed that Kingfisher and DW is more or less there, an overall margin of 25%. And let's say, half the business is project and half isn't suggests that the gross margin in LED lighting outside of the project business is de minimis. Is that right?

I'm not sure whether -- Andrew, I'm not sure whether 25% overall comes from to be honest with you.

I'm talking about gross margins. Yes, okay -- what was it overall, LED?

We don't publish that, so...

I mean Andrew, I'm not sure how you get there, but I can tell you the numbers. I mean, project gross margins LED is about 50% and residential RMI more consumers sort of B&Q type LED is near 30% to 35%. So yes, there is a big difference. The cost to serve, though you have to win every project individually. You have to do a lighting design. There's a lot of work on implementing these projects and executing them. I mean Kingfisher, last year, I think, made a 13.5% operating margin and I think it's on a path to 15%. Some of our listed competitors in this space make an operating margin north of 15%. So Project Lighting is a good business. You're right that non-project lighting is not such a good business. But we use the same commercial teams. We use the same infrastructure across the group to supply that to supply the non-project channels. So if you take everything into account, the returns are still good.

Yes, just to expand on that. So the project lighting business that we bought 5 years ago is doing great. The project lighting business that we just bought will do great. The project lighting, the Luceco project lighting business that we bolted on to our U.K. business is doing great, contributing well because it's sharing an existing overhead fundamentally. The bit that needs to do perhaps a little better is the overseas part of the equation for me. So still a bit more that we can do to mature those businesses and generate a little bit higher margin. Because they're subscale. I mean, they're only 5 years old, those businesses. And it obviously takes time to build the presence to build the brand and build the margin.

As it looks like there are no further questions in the room. We've had several submitted online. The first of which from Mark Simpson at Excellent Investing. What sort of financial capacity do you see for further acquisitions? And what is the acquisition landscape looking like in terms of opportunities and pricing?

Thank you for the question. I mean our capital policy is 1x to 2x leverage, we're at 0.8x currently. We'll be de-gearing as the year goes on. So you can do the math. I mean depending on how much EBITDA we can buy with the numbers. I mean, I think we might want to see the macro a little bit more stable. But certainly, if a good deal came along, we'd be very happy to execute on it now. In terms of opportunities, we get to look at lots of stuff. I think we're going to run a process to look at the China plus One activity that I talked about earlier. I think that's an important strategic step for the group. Yes, we look at stuff all the time, but we're not in a hurry and hopefully, we can do another excellent deal later on, maybe this year or early next. Matt, do you want to...

No. I think that's good.

The next question comes from Florence O'Donoghue at Davy. Can you tell us a bit more about how the DW Windsor business has performed?

Yes. I mean the first year of ownership to be honest, was a little disappointing. They had some long-term contracts which they didn't have inflation caveats in them, so the margin got under pressure. This year will be better. We're doing a lot of work on the product range as we did with Kingfisher, a lot of integrating it with the group sourcing activity and the manufacturing activity just by reengineering products, redesigning, resourcing, we have managed to make significant savings on the cost of sales line, which is an ongoing activity. So I think the future for that business will be strong. It obviously takes a little bit of time to properly integrate it.

The final question from Mark Simpson at Excellent Investing. Motor dealers are reporting secondhand electric car sales are weaker as higher electricity prices and lower fuel prices rode the running cost advantage. Are you seeing any impact of this on Sync EV?

Yes. I mean the market for EVs has underperformed what was being estimated a couple of years ago. And that's definitely having an impact. But I mean we don't necessarily view that as a negative. I mean we've had a lot of work to do on the product range on really understanding the market dynamics on integrating this with our -- the rest of our operations -- so the slightly slower market has actually given us space and opportunity to do that. Electricity prices, as everyone knows, have been very elevated, that probably doesn't last forever. And we believe in the future of electric vehicles. And unless the government changed their plans by 2030, every new car sold, will need to be plugged in at home.

Just to expand on that. I mean we should obviously define slightly slower. Slightly slower still means extremely rapid growth in demand for EVs and therefore, EV charges. So just a little bit slower than we thought initially, but helpful, as John has said.

Thank you. As there are no further questions online, I'd like to hand back for any additional or closing remarks.

Well, Matt, why don't you have the final word given that it is the final word.

I think it's [Foreign Language] baby, I think what people say in this situation. So no, thank you all for coming. It's obviously a pleasure to see you all in person for at least in this kind of setting for the first time in a number of years. And also thanks to everyone who's dialed in virtually as well. So with that, [Foreign Language].