Group Chief Executive's Review

Group Chief Executive Stephen Bird
reviews strategy and performance

Delivering our strategy
The Group continued to implement its strategy of focusing on its core Broadcast and Photographic markets and investing and growing sales in new technologies and regions. Our core markets are showing some signs of stabilisation and are expected to grow in the medium-term. This growth is being driven by the increase in the capture and sharing of high quality images, and by the continued evolution of new technologies.

Our strategy is to grow the Group’s core business by leveraging our premium brands and strong market positions supported by new product development. This includes launching new premium products and services, particularly for the growing number of independent content creators. These independent content creators provide video to a growing number of platforms including educational and religious establishments, corporate entities and governmental bodies.

In our Broadcast market we have launched a number of innovative products including: Teradek’s VidiU Pro and COLR; the Paralinx Ace; and new ranges of SmallHD on-camera monitors. The Teradek VidiU Pro is an easy to use portable device that enables users to broadcast their events live to the internet. The Teradek COLR is a camera accessory that allows creative colour correction to be completed in real time on a cinema camera. The Paralinx Ace is a lightweight, portable device offering uncompressed real-time wireless monitoring, ideal for UAVs ("drones"). The SmallHD 702 Bright is an on-camera field monitor offering very high brightness and reduced glare, allowing high resolution monitoring and accurate colour correction in outdoor daylight.

In our Photographic market we have launched the Manfrotto Digital Director – an Apple-certified electronic device that connects a camera and iPad and enables photographers to fully control the camera through the iPad. We have also launched a new range of LED lights specifically for photographers and two new ranges of Manfrotto branded bags and accessories for action cameras and drones.

We believe that the Asia-Pacific region is a particularly important medium-term growth market with good opportunities. We have continued to make investments in this region including the introduction of a new direct distribution model in China for the Photographic Division.

Driving profitable growth in a changing market
The Group is investing in its higher technology product businesses and streamlining those activities with lower growth prospects. The restructuring actions identified in our 2015 half year results announcement are underway and progressing to plan.

As a result of continuing challenging markets, we are supplementing our initial actions that were predominately in the Broadcast Division with the streamlining of additional operations. This includes the restructuring of some back office operations within our Photographic Division and further actions within our Broadcast businesses. As a result, the one-off costs are anticipated to increase from the previously announced estimate of £6 million to approximately £10 million, the majority of which will be in cash. These overall actions, which principally relate to restructuring in the UK, US and Europe, will be completed by the end of 2016 and will deliver an approximate two year payback on an annualised basis.

Post year-end we have sold the main UK Broadcast manufacturing site based in Bury St Edmunds for proceeds of £3.9 million. We plan to relocate the business to a smaller, more efficient, leased facility nearby, having transferred a significant proportion of the manufacturing to Costa Rica in recent years, and will use the net cash proceeds from the sale to reduce the Group’s debt.

2015 Performance overview
We have continued to invest additional resources in driving new product sales in line with our strategy. As expected, the full year results reflect the non-repeat of the 2014 Sochi Winter Olympics and FIFA World Cup, and an anticipated negative impact from foreign exchange. There was growth in revenue and operating profit* over the prior period excluding these items. The Group is making good progress in streamlining certain activities with lower growth prospects, with some further actions being taken to drive profitable growth.

The Broadcast Division performed satisfactorily in variable market conditions. Our higher technology product businesses are performing well, including further strong growth of our wireless products. This partially offset lower sales of large camera supports, the non-repeat of major sporting events, and investments in the future growth of our higher technology businesses.

The Photographic Division continued to face challenging markets, particularly in the US, but there are some signs of stabilisation. The Division delivered broadly similar sales to the prior year at constant exchange rates, having benefitted from the launch of new products and expanding its distribution geographically and across online distribution channels.

Profit before tax of £31.5 million was £3.8 million lower than the prior year (2014: £35.3 million). Adjusted earnings per share* decreased by 11.6% to 49.4 pence per share (2014: 55.9 pence per share). Group profit before tax of £18.5 million (2014: £20.1 million) was after £4.9 million of restructuring costs (2014: £2.7 million) and £8.1 million charges associated with acquired businesses (2014: £8.5 million). 2014 also included a £4.0 million loss arising from the disposal of the IMT business.

Vitec continues to be a cash generative Group with free cash flow+ of £16.2 million (2014: £18.2 million) after £3.5 million of cash outflows on restructuring actions (2014: £3.2 million). The Group’s balance sheet remains strong with net debt at 31 December 2015 at £76.3 million (31 December 2014: £70.9 million) including a net adverse foreign exchange impact of £2.1 million, and a net debt to EBITDA ratio (covenants definition) of 1.5 times (31 December 2014: 1.2 times).

Product development
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 has also remained strong in 2015, including products for the growing number of independent content creators. We continue to invest over 4% of Group product sales into research, development and engineering.

Acquisitions and disposals
The Group continues to identify and make appropriate, value-adding acquisitions. This year's acquisitions have met our pre-acquisition expectations and introduced a number of leading edge products. In 2015, Vitec acquired Paralinx, a leading provider of high quality wireless radio transmission systems, which has been fully integrated into the Teradek wireless business. In January 2016 we acquired Provak for a net consideration of £0.9 million. Provak is a photographic distribution business based in the Netherlands which will complement our owned distribution channels.

Market overview
An overview of our two markets is provided here.

Approval of Strategic Report
We have provided information in this report on our strategy, business model and objectives which is contained in the Strategic Report. You will find the Strategic Report on pages 1 to 39 of the 2015 Annual Report and its content has been approved by the Board.

Outlook
Vitec remains in a sound financial position and the Board remains confident about the future growth prospects of the Group. Although challenging market conditions look likely to continue in 2016, we have taken actions to streamline our lower growth businesses while building a strong platform and making investments in higher technology products that will position us to grow sales and margins in the future.

Stephen Bird
Group Chief Executive

* Before restructuring costs and charges associated with acquired businesses. Profit before tax and adjusted earnings per share are also before disposal of business.

+ Free cash flow: cash generated from operating activities in the financial year after net capital expenditure, net interest and tax paid.

Group revenue

£317.8m

Revenue
£m

Vitec has continued to deliver its strategy of focusing on its core Broadcast and Photographic markets and investing and growing sales in new technologies and regions.