Luceco : Earnings Document

• Progress in favourable conditions maximised by: o Steady pipeline of new business wins
  o Superior channel access
  o Actions taken to increase product availability despite widespread supply chain delays, facilitated by our vertically integrated model
• Impact of cost inflation on gross margin mitigated by manufacturing efficiency gains, proactive selling price updates and hedging, in an increasingly challenging environment
• On track to deliver ambitious ESG objectives for 2021
• On track to launch new EV charger range in H2 2021
• Luceco has performed well during COVID and should continue to prosper as the effects of the pandemic recede: o Shift toward home working should drive a structural uplift in our core residential RMI market
  o COVID has accelerated the existing shift in electrical product distribution toward our largest sales channels o Agile business model and vertical integration has proved a clear advantage in changing market conditions o Healthy post‐COVID profitability, cash generation and balance sheet will support investment in future
  growth

Commenting on the results, Chief Executive Officer, John Hornby said:

"The Group has outperformed the market throughout its history thanks to its leading brands, strong channel relationships, well‐invested product innovation and operational agility. The competitive advantages of our business model have been accentuated during COVID, accelerating our market share gains. As a result, in the first half, we have increased Group revenue by 31% and doubled Adjusted Operating Profit against pre‐pandemic levels.

COVID has also brought severe supply chain disruption to our industry, driving significant cost inflation and making it harder for all participants to serve the customer. We have navigated these challenges comparatively well, adjusting inventory cover, production levels and prices proactively. We have managed to protect our overall margins and deliver strong profit growth in favourable market conditions. Cost pressures are expected to increase in the near‐term as the global economy gathers steam at the end of the pandemic. Our gross margins will inevitably see some temporary compression during this phase, but I expect this to be compensated by good operating leverage from sales growth.

Thanks in large measure to the dedication of the entire Luceco team, I believe the Group is well positioned to continue to prosper as markets eventually adapt to a post‐pandemic future."

There will be a webcast presentation and conference call of the results at 9:30am BST today for analysts and investors. Please contact Florence Mayo at MHP Communications on 020 3128 8572 or email luceco@mhpc.comfor details.

There will also be a live presentation relating to the 2021 Interim Results via the Investor Meet Company platform on 13 September 2021 at 11:00am BST. The presentation is open to all existing and potential shareholders. Questions can be submitted pre‐event via your Investor Meet Company dashboard up until 9am the day before the meeting or at any time during the live presentation. Investors can sign up to Investor Meet Company for free via:

https://www.investormeetcompany.com/luceco‐plc/register‐investor

Investors who already follow Luceco on the platform will automatically be invited.

This announcement is released by Luceco plc and contains inside information for the purposes of Article 7 of the Market Abuse Regulation (EU) 596/2014 (MAR). It is disclosed in accordance with the Company's obligations under Article 17 of MAR. Upon the publication of this announcement, this information is considered to be in the public domain.

For the purposes of MAR and Article 2 of Commission Implementing Regulation (EU) 2016/1055, this announcement is being made on behalf of Luceco plc by Matt Webb, Chief Financial Officer.

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Business summary

Luceco is a manufacturer and distributor of high quality and innovative wiring accessories, LED lighting and portable power products for a global customer base.

The Group supplies trade distributors, retailers, wholesalers and project developers with a wide range of products which broadly fall into the following market recognised brands:

• British General ("BG"): wiring devices including switches and sockets, circuit protection and cable management products;
• Luceco and Kingfisher Lighting: energy efficient internal and external LED lighting products and accessories; and
• Masterplug: cable reels, extension leads, surge protection, timers and adaptor products;

Luceco's long‐established BG brand commands a loyal following amongst professional electrical contractors in both the UK and overseas. It is synonymous with quality, safety, innovation and value for money. The production of BG wiring accessories is the main focus of the Group's Chinese manufacturing facility, allowing it to control product quality, cost and availability.

The Luceco and Kingfisher LED lighting brands combine to present a comprehensive range of indoor and outdoor LED lighting solutions that is well positioned to benefit from growth in the net zero economy. The range focuses largely on professionally installed products with an emphasis on performance and quality. The Group is able to support these products by offering customers access to its in‐house installation design team.

Masterplug is the market leading brand in the UK Portable Power category. It is sold largely to consumers through retail distribution and online. Its products are offered in a wide range of global electrical standards and they are sold in every territory in which the Group operates.

Further information on the Group can be found on www.lucecoplc.com.

Forward‐looking statements

This announcement contains forward-looking statements that are subject to risk factors associated with, among other things, the economic and business circumstances occurring from time to time in the countries, sectors and markets in which the Group operates. It is believed that the expectations reflected in these statements are reasonable, but they may be affected by a wide range of variables which could cause actual results to differ materially from those currently anticipated. No assurances can be given that the forward-looking statements in this announcement will be realised.

The forward-looking statements reflect the knowledge and information available at the date of preparation of this announcement and the Company undertakes no obligation to update these forward-looking statements. Nothing in this announcement should be construed as a profit forecast.

Use of alternative performance measures

The commentary in both the Chief Executive Officer's and Chief Financial Officer's Reviews uses alternative performance measures, which are described as "Adjusted". Definitions of these measures can be found in note 1 of the condensed consolidated financial statements. The measures provide additional information for users on the underlying performance of the business, enabling consistent year‐on‐year comparisons.

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CHIEF EXECUTIVE OFFICER'S REVIEW

Overview

The Group has a long track record of outperforming the market. Since its formation in 2000, it has grown twice as fast as the UK Construction RMI market that it largely serves. Our strategy for success - leading brands sold through established sales channels, supported by product innovation and an agile supply chain - endured throughout the 19 years that followed until the world encountered COVID.

COVID has created an appalling global public health crisis. It also created a set of market conditions that accentuated our sources of competitive advantage. Our diverse sales channel access, with a bias toward multi‐channel distributors, provided continuous and relatively healthy demand as markets responded differently to COVID. Our production capacity increased faster than others to meet robust post‐lockdown market demand. Our team on the ground in China secured scarce sea containers amid a global shortage to ensure deliveries were made on time. Our sales teams continued to win new business throughout the pandemic as customers recognised our ability to deliver consistently in changing circumstances. Widening the gap between us and the competition in these and other ways accelerated our rate of market outperformance. Our revenue is now 31% higher than it was pre‐pandemic. This trend has continued as our key markets have begun to transition from a pandemic to endemic footing this year, suggesting the advantage we have gained is here to stay.

In 2020, COVID created relatively good conditions in the Residential RMI market, as people spent more time and money in and on their homes. This has continued into the first half of 2021 and been joined by an improvement in demand for LED retrofits in commercial and institutional settings in the second quarter, broadening our sources of growth.

We have made a decent start to the third quarter. We have an encouraging order book from Hybrid and Retail customers that we are working hard to ship amid continued sea container shortages, and macro leading indicators such as planning applications and architect/surveyor workloads suggest a good second half. We have recently seen a softening in late July and August in previously very robust UK Professional Wholesale demand which has slowed the Group's rate of revenue growth compared to H1. This could be attributable to both contractors and homeowners taking well‐earned post‐lockdown holidays en masse at the end of the academic year, but we are keeping the situation under review.

Healthy market conditions have been beneficial to our performance but increased demand for goods over services during COVID has also brought widespread supply chain disruption, making it more difficult for us all to serve the customer, and resulting in cost inflation. The average cost of copper and plastic in 2021 to date has been 37% and 71% higher than 2020 respectively. The cost of a sea container from China to the UK has increased nearly five‐fold over the same period. We estimate the total annual cost of inflation to Luceco to date will be £20m, a 15% increase in our cost of goods sold, of which £13m will arise in 2021 and £7m will be deferred into later years by hedging arrangements.

We have had little option but to update our selling prices in response to this industry‐wide phenomenon, albeit with a slight lag due to notice periods and order lead times. We expect 75% of our update to be in place by the start of the fourth quarter, with the remaining 25% to follow in early 2022. Some of the profit gap caused by the lag has been filled by impressive efficiency gains from earlier manufacturing investment, whilst strong operating leverage from 2021's sales growth has further mitigated the impact at the operating margin level.

A selling price update of this magnitude whilst gaining share underlines both the value of our brands and the widespread nature of the underlying inflation. We have navigated the inflation challenge well to date but we are not complacent. The mathematical reality is that cost inflation will always dilute the gross margin % even if every pound is passed through. This situation is also fast moving. For instance, we have recently received notification of a further 40% increase in sea container rates for the fourth quarter that we may not be able to pass through until early 2022. All of this leads me to conclude that we will see some gross margin compression as we navigate this post‐lockdown inflationary phase in the second half, albeit mitigated by solid operating leverage on strong sales growth. We continue to expect to achieve Adjusted Operating Profit of £39m for FY 2021, as previously guided, although temporary margin compression and the recent softening in Professional Wholesale demand over the summer may have curtailed any potential upside.

We have worked hard to insulate our customers from widespread supply chain disruption. We have delivered a further increase in output from our production facility in China, from last year's record levels. Our team there have had an outstanding year to date. We have leveraged our extensive network of OEM component suppliers in China and Taiwan to mitigate global integrated circuit shortages. We have increased our inventory cover to combat extended third‐party supplier lead times, with the latter increasing through COVID from an average of 87 to 134 days. We successfully implemented market‐leading software to manage our fulfilment operations, improving order fill rates and delivery capacity. These agile actions collectively turned a cause of potential disruption into a source of market share gain. Whilst I am very pleased with our efforts to maximise product availability during COVID, it would be remiss of me not to highlight that there is still the potential for the more contagious delta variant to disrupt supply chains in countries

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with lower vaccination levels or COVID‐free strategies, such as China which is of course important to us. Recent partial closures of the Meidong and Yantian ports in China illustrate the potential of localised COVID outbreaks to still impact our short‐term forecasts.

Whilst COVID continues to challenge us in different ways, we have found time to advance our strategy. We have accelerated our manufacturing transformation initiative, improving efficiency and adding capacity for the future. We have continued to invest in our supply chain transformation initiative, implementing new software and adopting more efficient working practices as previously described. We have been very active in seeking M&A opportunities and, whilst we have not completed any acquisitions in the period, I am increasingly positive about the role that M&A can play in both bringing additional professional brands into our portfolio and perhaps adding some geographic diversity to our sources of supply. We have increased our marketing efforts with a focus on improving our brand presence and engagement with the contractor directly. We have made good progress in the ESG area, delivering many of the targets we had set for ourselves this year, as described in more detail in the Chief Financial Officer's Review. We have also launched our new Commercial Power range and plan to expand significantly our range of EV chargers before the year‐ end.

As we look ahead with cautious optimism to a world in which we hope COVID can be managed safely and with less economic disruption, I believe Luceco has emerged from the COVID pandemic to date stronger and well positioned for the future, with clear long‐term growth drivers. Whilst our core Residential RMI market has undoubtedly been buoyant during COVID, there are reasons to believe there will be a permanent shift in consumer spend toward the home following an inevitable permanent shift in working location. Surveys suggest COVID has driven more contractors permanently toward multi‐channel distribution, which favours some of our key sales channels. We are well positioned to exploit the electrification of energy to meet climate goals, particularly within EV charging. Our balance sheet, profitability and cash flow have all improved during COVID, unlike many others.

In short, we are well positioned to continue to invest in both organic and acquisition opportunities to maintain the market outperformance that has been Luceco's hallmark.

Performance by sales channel

We group our customers into the following sales channels:

• Retail: Distributors serving consumers only, including DIY sheds, pure‐play online retailers and grocers
• Hybrid: Distributors serving both consumers and professionals, typically with multi‐channel service options
• Professional Wholesale: Distributors serving professionals only, largely via a branch network
• Professional Projects: Sale agreed by Luceco direct with professionals, but fulfilled via Professional Wholesale

The following table, at constant exchange rates, outlines revenue by channel and the growth rates versus H1 2020 and

H1 2019:

The table makes clear that our 31% increase in revenue versus pre‐pandemic levels, significantly better than the wider market, has been broadly based albeit with some obvious highlights.

Progress in the Retail channel has been driven by healthy demand from UK DIY, supported by key business wins in the Wiring Accessories category, and good progress with major DIY chains in Continental Europe.

We estimate that Hybrid operators, of whom we have a greater than average share, outperformed the wider market in 2020 by 32% due to their multi‐channel business model and this has continued in 2021. We supplemented this benefit with key business wins, particularly in the Circuit Protection category, leaving Hybrid sales considerably higher than pre‐ pandemic levels with no sign of a slow‐down as contractors regain their choice of distribution channel.

Professional Wholesale recovered very strongly in the first half of 2021 after a prior year punctuated by COVID‐enforced branch closures. We believe we served this recovery better than most with good product availability. We continue to see the strongest growth from the minority of wholesalers with good online ordering options.

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