Delivering on our strategy to transform Vitec to realise growth, by Stephen Bird
Vitec operates in the fast growing “image capture and sharing” market. Technology is driving fundamental changes to this market and Vitec’s unique heritage and the credibility of our premium brands enables us to capitalise on those changes.
We have grown our addressable markets and end users from traditional broadcast and photographic customers to now encompass faster growing market segments, like new media which includes social media. These include independent content creators and enterprises that are increasingly using high quality video for their communication.
Vitec continues to lead the market with its range of products and services. We have developed a significantly higher technology business by expanding our capabilities in software development to support our hardware solutions, by increasing our systems integration expertise, and by designing products for new imaging devices
We have been successfully transforming Vitec by implementing a growth strategy focused on five main strategic priorities:
1 To improve the core by improving and strengthening our business model while continuing to innovate. In 2016 Vitec delivered a strong cash flow through disciplined cost control and working capital management initiatives that reduced inventory levels significantly. The business has also been improved through lean manufacturing programmes and has realised savings on previously announced restructuring activities. We have demonstrated our innovation by launching new products, for example new tripods, market-leading robotics and innovative LED lights.
2 To maintain investment into new and faster growing markets and technologies to underpin future growth. For example, this year we expanded our product offering in Apple Stores globally and we launched Sphere, our award winning Virtual Reality product that allows the audience to become the producer of content. We are also building our business to address the growing demand for high quality video produced by corporates, religious, health and education establishments and other enterprises.
3 To continue to get closer to our end customers by owning more distributors and optimising our e-commerce activities. In January 2016 we acquired our former distribution partner in the Netherlands, Provak, for a net consideration of £0.9 million, which has expanded our strong photographic distribution model. We are also investing in and optimising our e-commerce capabilities through working with our major e-commerce customers, such as Amazon, and by further developing our own online platforms.
4 To focus on geographical expansion, especially in APAC, which we believe has good medium-term growth opportunities. In 2016 we grew revenue in this market by £12.8 million to £68.7 million, which included strong growth in Japan where we have achieved record sales performances this year. We expanded our Chinese direct distribution model and invested in initiatives to improve synergies across the Group in back office functions in APAC.
5 To supplement our many organic growth opportunities with carefully targeted acquisitions and corporate development. In April 2016 we acquired the business and assets of Offhollywood that provides cameraback modules for RED cameras and other services to a similar customer base to that serviced by the Group’s existing higher technology businesses, for an initial consideration of £1.5 million. In September 2016 we acquired Wooden Camera, a leading one-stop provider of high quality, essential camera accessories used by filmmakers and independent content creators, for an initial consideration of £15.4 million. Wooden Camera is performing ahead of our expectations. It complements Vitec’s strategy of providing premium branded broadcast products and services to our customers to capture and share exceptional images.
We believe that over the medium-term there are exciting opportunities for Vitec that should deliver sustainable sales growth while continuing to drive strong cash performance. This will enable us to finance a growing business, make value-adding acquisitions and pay well-supported, progressive dividends.
2016 Performance Overview
We are pleased to report that Vitec achieved a record performance with strong growth in revenue, adjusted profit* and cash. As expected, foreign exchange rates had a significant favourable impact on our results.
The Broadcast Division has brought further innovative new products and services to market, benefited from the acquisitions of Offhollywood and Wooden Camera, and successfully supported the Rio 2016 Olympics. Continued growth in higher technology products was partially offset by anticipated lower sales from the Haigh-Farr antenna business and a decrease in US asset rentals activity.
The Photographic Division performed well in 2016, growing revenue and adjusted operating profit*. We have outperformed the market by continuing to invest in and launch innovative new products.
Adjusted profit before tax* of £37.5 million was £6.0 million higher than the prior year which is a record performance (2015: £31.5 million). Statutory profit before tax of £10.5 million was £8.0 million lower than 2015 as it includes the stronger adjusted profit performance being offset by the one-off non-cash impairment of goodwill.
As a result of the stronger performance, and an improvement in the effective tax rate, adjusted earnings per share* increased by 24.1% to 61.3 pence per share (2015: 49.4 pence per share). Basic earnings per share were 20.2 pence per share (2015: 29.3 pence per share).
Free cash flow+ was particularly strong at £44.6 million (2015: £16.2 million) even after £7.4 million of cash outflows on restructuring actions (2015: £3.5 million). The strong free cash flow+ includes the benefits from working capital management initiatives, including a reduction in inventory of £11.2 million, and the consideration of £3.9 million from the sale of the Bury St. Edmunds site. Net debt at 31 December 2016 was £75.1 million (31 December 2015: £76.3 million). At constant currency net debt would have reduced to £63.5 million given a net adverse foreign exchange impact of £11.6 million. The Group’s balance sheet remains strong with a year-end net debt to EBITDA ratio of 1.2 times (31 December 2015: 1.5 times) that supports our growth and acquisition strategy.
We continue to invest in new products and enhancements to our existing product ranges and I am pleased with the new products that we have launched this year. The level of product development collaboration across our Divisions remained strong in 2016, including products for the growing number of independent content creators. We continue to invest around 4% of Group product sales into research, development and engineering.
Approval of Strategic Report
We have provided information in this report on our strategy, business model (which has been updated to reflect our current strategy) and objectives which is contained in the Strategic Report. You will find the Strategic Report on pages 1 to 47 of the Annual Report and its content has been approved by the Board.
We are continuing to transform the Group. We are outperforming our markets by driving sales, investing in new technologies, and expanding our capabilities in the exciting and growing “image capture and sharing” market. A strong cash flow performance and our robust balance sheet support our clear growth strategy.
Vitec has a strong position in changing markets and the Board remains confident about future growth prospects, assuming no significant adverse change in exchange rates.
Group Chief Executive
* Before restructuring costs, charges associated with acquisition of businesses and impairment of goodwill.
+ Free cash flow: cash generated from operations in the financial year after net capital exposure, net interest and tax paid.