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Edited Transcript of VTC.L earnings conference call or presentation 28-Feb-20 10:30am GMT

Mar 24, 2020 (Thomson StreetEvents) — Edited Transcript of Vitec Group PLC earnings conference call or presentation Friday, February 28, 2020 at 10:30:00am GMT

Great. Good morning, everyone, and welcome to Vitec’s full year results presentation for 2019, and welcome also to those of you joining us online for our live webcast. I’m Stephen Bird, Group Chief Executive. And with me here is Martin Green, who we were delighted to announce was appointed as Group Finance Director earlier this month. So as usual, I’ll go through the highlights. Martin will then take you through the financial, and then it’s back to me to look at the market and strategy before we have Q&A. I will also talk briefly about the impact of the coronavirus on our business. And we’re going to play 2 short videos to highlight some of the key growth opportunities. So now let’s look at the highlights.

2019 was a busy year for Vitec, during which we made a lot of progress in many areas and will position the group well for the future. That said, 2 issues impacted our expected financial performance and led to November’s announcement. Financially, we delivered a robust performance, despite it being a non-Olympic year. We maintained our operating margin and benefited from some specific self-help actions. The severe H2 retailer destocking in Imaging Solutions was worse than we had expected when we told you about it last August, but we do believe the impact is lessening as we move forward into 2020. SmallHD’s recovery was slower than we would have liked after the fire, but we are now well placed for the future. We will provide some further details on both issues later in this presentation.

Vitec is in a strong financial position with net debt-to-EBITDA at 1.2x, giving us plenty of capacity to invest in both organic growth and value-adding acquisitions. Total dividend is up 4.4 — 5.4%, in line with our long-term progressive dividend policy and our confidence in our long-term prospects.

I’m pleased to report that we made significant progress in several strategic areas during the year. The group is increasingly exposed to the faster-growing segments of the market where we are investing in targeted growth initiatives. The transformation of our digital and e-commerce capabilities in Imaging Solutions is on track. We were already restructuring to take advantage of the growing higher margin e-commerce channel when the severe retail destocking hit us, so we’ve expanded that restructuring further, as announced in the November trading update.

Our Production Solutions Division had a good year with further operational efficiencies, resulting in improved margins and profit grew on an underlying basis.

And one of the big growth drivers for us is Amimon, the wireless video transmission business we bought at the end of 2018. The integration of Amimon into Creative Solutions is complete, and its financial performance is on track. The progress we made in 2019 developing the new generation of wireless video products has put us in a great position for 2020, and I’ll talk about this in more detail later.

So now I’ll hand over to Martin for the financial review.

Martin Green, The Vitec Group plc – Group Finance Director & Executive Director [2]

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Good morning, everyone. Thank you. I was delighted to be appointed the Group FD in February, and so this is my first results presentation in this role. However, I’ve been with the group for 15 years, most recently working on strategy and acquisitions.

So turning first to the results. The group delivered a robust financial performance in 2019, despite the significant headwinds Stephen referred to. The group’s revenue declined 2.4%, mainly driven by the severe retailer destocking in Imaging Solutions, which I’ll talk about later on. It was also impacted by the slower-than-expected recovery at SmallHD and Creative Solutions. Please note that 2018 also contained the benefit of the Winter Olympics in Production Solutions. Adjusted operating profit was only GBP 1.1 million lower than the prior year. This lower operating profit reflects lower volumes and net year-on-year impact of about GBP 2 million from U.S.-China tariffs, offset by operational efficiencies across our portfolio. It also included the full year impact of moving some manufacturing operations from the U.S. to Costa Rica in Production Solutions. The operating margin was flat at 13.9%, or 10 basis points higher on a constant FX basis.

As previously announced, the SmallHD insurance in proceeds were accounted for in gross profit with no adjustment for revenue. Without this benefit, and after adjusting for the estimated impact of the lost revenue, the operating margin would have been circa 13.5% in both 2019 and the prior year.

Net financial expense was GBP 2.1 million higher, as expected, reflecting the impact of IFRS 16 and higher average net debt following the acquisition of Amimon. This resulted in adjusted PBT of GBP 48 million, which is in line with the guidance given at the November trading update. The group’s effective tax rate on adjusted profit was 24%, 6% higher than in the previous year, but as anticipated. Please recall that 2018 benefited from a number of one-off benefits, including a favorable decision in relation to the Patent Box in Italy. Adjusted EPS declined by 12.6p or 13.5%, reflecting the lower profit and the higher tax rate year-on-year. In line with our progressive dividend policy, the Board has recommended an increase in the dividend — the final dividend of 4.7%, resulting in a full year dividend increase of 5.4% to 39p. This is covered 2.1x by adjusted EPS. Return on capital employed reduced from 21.8% to 18.5%. This was mainly due to the full effect of the acquisition of Amimon and the impact of IFRS 16.

I’ll now summarize the performance of our divisions. This year, we’ve added a column on this table to strip out the impacts from acquisitions, FX and European services. European services is our business, which benefits from the Olympics every other year. The purpose of these adjustments is to try and provide a better view of the underlying performance of the business.

Turning first to Imaging Solutions. Revenue fell by 2.5%, driven by the retailer destocking. However, as I will talk about in more detail later, end-user demand remains resilient. The results include the benefit of the acquisition of Syrp in early 2019 and Rycote and Adeal in 2018. Excluding the impact of destocking, imaging sales were broadly flat on an organic constant currency basis. We further increased our exposure to the more attractive, faster-growing parts of the market, targeting independent content creators. We increased our investment in R&D, focusing on new products and smartphone accessories, audio capture and motion control equipment. Stephen will talk more about these when he discusses JOBY later on. As well as circa 10% sales growth at JOBY aimed at the independent content creator, we also saw increased sales of lighting supports and lighting controls, mainly aimed at professionals. These increases were offset by declines in photo supports and bags.

As previously announced, we’re transitioning the business to take advantage of growth in the higher-margin e-commerce channel. We incurred restructuring costs of GBP 5.8 million in the year in relation to this project, and as mentioned in the trading update, we expanded its scope. So the total cost is now forecast to be GBP 9 million. We achieved GBP 1.4 million savings in the year and expect to deliver annual run rate savings of GBP 3.7 million by 2021. Operating profit in the division of GBP 27.1 million was lower than the prior year due to the lower volumes and the impact of U.S.-China tariffs, partly offset by strong cost control and sourcing out of China to mitigate the impact of the tariffs. The division’s operating profit margin decreased by 160 basis points to 13.8%. After excluding the impact of destocking, acquisitions and foreign exchange, operating margin actually rose by 70 basis points.

Now taking a brief look at Production Solutions. Revenue in this division decreased by 5.8% versus 2018, which included the benefit of the Winter Olympics. It also reflects, in 2019, the exit from the medical batteries business. We achieved high sales in robotics, offset by lower sales of manual supports and white LED lighting products. Operating profit decreased, but only slightly, to GBP 19.6 million. After stripping out the impact of FX and our European services business, operating profit actually grew by GBP 1.1 million, and the operating margin increased as anticipated at the time of the trading update by 200 basis points. This included the benefit of the operational efficiencies that I mentioned before.

Finally, turning to Creative Solutions. Revenue in Creative Solutions grew by 4 percentage points, which reflects the full year benefit from the acquisition of Amimon, and despite the slower-than-expected recovery of SmallHD. Amimon is now fully integrated into Creative Solutions and the performing business performing slightly ahead of the guidance given at the time of the acquisition. SmallHD is focusing on the premium end of the monitor market, which is lower volume but higher margin. Operating profit for the division was GBP 15.6 million, which includes GBP 6.5 million of insurance income, which was GBP 1.3 million lower than in 2018. The operating profit margin decreased by 100 basis points to 23.1%, which includes the benefit of the insurance income accounting which will not be repeated in 2020.

Turning now to the group revenue bridge. Overall revenue decreased by GBP 9.3 million. European services decreased by GBP 3.6 million, mainly due to the non-repeat of the Olympics. SmallHD revenue decreased GBP 2.1 million, with a slower-than-expected recovery and from focusing on the lower volume, higher margin market. Retailer destocking had an estimated GBP 8.5 million year-on-year impact as the trend that started at the end of 2018 accelerated in 2019. The impact in 2019 was estimated at GBP 12 million, as expected. Underlying revenue decreased by GBP 12.8 million for the reasons I’ve mentioned in the earlier slides. There was a net year-on-year benefit of GBP 11.8 million from acquisitions, mainly driven by Amimon, but also including Adeal, Rycote and Syrp. Finally, there was a net FX benefit of GBP 5.9 million resulting from the translation of the group’s revenue into sterling.

Now moving on to the operating profit bridge. Overall adjusted operating profit fell slightly by GBP 1.1 million. European services decreased by GBP 2.4 million because of the non-repeat of the Winter Olympics. SmallHD profit decreased by GBP 2.7 million, half of which was due to the lower insurance payments. Retailer destocking had an estimated GBP 4.3 million year-on-year impact. We estimated that the destocking had an adverse impact of GBP 6 million in 2019, which is in line with what we said at the trading update. U.S.-China tariffs had a GBP 2 million year-on-year net impact. Underlying profit growth of GBP 2.2 million, despite the lower underlying revenue, reflects self-help actions, including operational efficiencies in Production Solutions and savings from the digital restructuring in Imaging Solutions, as mentioned earlier. There was a year — net year-on-year benefit of GBP 3.4 million from acquisitions, which includes a full year benefit from Amimon. The group’s operating profit also benefited from GBP 0.3 million year-on-year FX impact. Corporate costs were GBP 3.5 million lower, mainly due to a lower charge for share-based payments.

Finally, implementing IFRS 16 had the effect of increasing operating profit by GBP 0.9 million, representing the difference between lease costs under the old accounting standard and lease depreciation under IFRS 16. Please note, we’ve not restated the year comparatives for 2018.

So now let’s look a little bit more at retailer destocking. So this graph basically shows that impact indexed back to January 2017. Whilst consumer demand for our products has remained steady, and that’s shown by the sell out, which is the gray line, which is — or black line, which is broadly flat, our retailers have been reducing their stock holdings, that’s our sell-in to those retailers, as shown by the blue line. We first saw the impact from destocking really in Q4 2018, but it became more severe in 2019, particularly in the second half as shown by the shaded red area. The key drivers of the retailer destocking were threefold. First, the growing impact of e-commerce, where key customers like Amazon typically hold less inventory than traditional retailers. You can see how much our business has been growing with Amazon by the dotted gray line compared with sales to independent distributors who sell to traditional retailers, which is shown by the dotted green line. Second reason for the retailer destocking is the decline in low end digital SLR shipments. This has not had much of an impact on Vitec as this is not a key market for our products. So the end users typically don’t buy many accessories. Finally, the launch of new flagship compact system cameras by the major camera manufacturers was not as successful as anticipated. These impacted retailers and basically tied up working capital in shelf space to purchase what were ultimately not very successful cameras. Despite all this, as I said, end-user demand remains resilient, and we believe the worst of the destocking is behind us and will, therefore, have less of an impact in 2020 where we’re expecting a net year-on-year benefit.

Now looking at cash. So cash generation remained very strong in the year, with free cash flow of GBP 30.5 million. This was GBP 3 million lower than in 2018, including the higher back of depreciation of GBP 7.2 million, GBP 3.3 million of restructuring costs, GBP 4 million higher net interest and tax paid, and GBP 4.2 million higher Capex. Operating cash conversion of 85% was broadly in line with 2018, with a favorable impact of IFRS 16, offset by higher net year-on-year R&D capitalization.

Turning now to net debt. Net debt was GBP 96 million, which was about GBP 7.5 million lower than the prior year after adjusting for the impact of IFRS 16. This was better than expected at the time of trading update. Free cash flow of GBP 30.5 million supported dividend payments in the year of GBP 17.1 million. The GBP 2.2 million outflow on net acquisitions was principally in relation to Syrp acquired in January 2019. There was a net outflow of GBP 4.3 million to the employee trust to buy shares to hold and underpin LTIP awards. Net and lease additions of GBP 2.6 million represents the cash impact of new leases taken out during the year. There was also a GBP 3.1 million favorable impact from FX. This was driven by the weakening of the U.S. dollar against sterling at the balance sheet date versus the prior year. A new banking facility was signed earlier this month, increasing our RCF from GBP 150 million to GBP 165 million. This is a 5-year facility and includes an option to extend for a further 2 years. The blended interest rate is similar to what we incurred under the previous half year at about 2.3%, excluding the impact of arrangement fees. The group’s balance sheet remains very strong with net debt-to-EBITDA of 1.4x or 1.2x on a pre-IFRS basis.

Finally, I’ll give you some guidance on FY ’20. Stephen will explain the impact of coronavirus on our business later. Aside from that, as previously indicated, SmallHD’s operating profit is likely to be GBP 5 million lower than in 2019, with no further insurance payments to be received. In respect of our digital restructuring project, we expect costs of GBP 3 million and incremental P&L savings of about GBP 2 million in the year. There will be a higher amortization charge of around GBP 2 million following the increased R&D investment in 2019. The effective tax rate on adjusted profit is expected to remain a maximum of 25%, slightly higher than 2019. Cash tax is expected to be GBP 6 million, assuming any potential payment is not made in relation to EU state aid. Finally, we’ve provided details on IFRS 16 and FX in the appendix.

I’ll now hand back to Stephen for the market and strategy update. Thank you.

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Stephen Clive Bird, The Vitec Group plc – Group CEO & Director [3]

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Thank you, Martin. Now I’m going to briefly look at each division’s market trends and the investments and actions we’re making to deliver long-term growth and returns. And before I do that, let me just remind you of our group strategy. Our strategic priorities are unchanged: to drive organic growth, to improve margins and to invest in new technology and markets. We continue to see this combination as the right strategy for long-term growth and value creation.

So now let’s look at the 3 main markets that we serve. We estimate that currently, 70% of our Imaging Solutions revenue comes from the photographic market, which for the purposes of this chart includes audio capture, and 30% of the imaging’s revenue comes from ICC and Cine market. In Production Solutions, we estimate that 60% of our revenue comes from the core broadcast market and 40% comes from the ICC and Cine market. And in Creative Solutions, 90% of its revenue comes from the ICC/Cine market. For all 3 divisions, we are focusing our investments on the faster-growing ICC/Cine market.

So let’s look at our targeted growth initiatives. We’re targeting our resources and investment on developing a range of new products across our leading brands in faster-growing segments. In Imaging Solutions, it’s smartphone accessories, audio capture and motion control. In Production Solutions, in 2020, it’s delivering the Summer Olympics, which together with the U.S. presidential election, is expected to stimulate the demand for TV and photographic equipment. And we also are expecting to grow in LED lights, robotics and mobile power. And finally, in Creative Solutions, the group’s most significant growth opportunity will come from delivering the complete 4K ecosystem for the Cine market and new wireless products for the adjacent live production market.

So let’s look at Imaging Solutions in a bit more detail. Imaging continues to outperform a disruptive market, as Martin explained earlier. And I’d just like to say what a great job Marco and the imaging team have done in the face of all this disruption. We’re seeing continued growth in the e-commerce channel and in 2019, over 1/3 of Imaging’s revenue was generated from our own and third-party websites. Our core professional and keen amateur customer group remains resilient. And we are well positioned to offset any further market disruption in the lower end of the camera market, where CIPA date, the camera shipment data, shows low-end DSLR cameras continuing to decrease sharply. We’re not too affected by this, as those customers do not tend to buy our products. However, CIPA data also shows compact system camera shipments continuing to grow, both in value and volume, and they now account for nearly 50% of the ILC market. Compact system cameras are replacing the installed base of advanced DSLRs used by our core customers, shown below the red line in this chart on the right. We expect this trend to continue as more and more better CSC models are released. And last week, Canon announced the launch of its new CSC camera, the EOS R5, priced at around GBP 3,000, and we expect this to stimulate demand for our products once it’s released later this year.

Smartphones continue to replace entry-level cameras, which has led to the decline in sales of lower-value DSLR cameras, shown above the red line in this chart. Our strategy to address these trends has not changed. We accelerated our digital strategy during the year, investing to take advantage of the growth in the high-margin e-commerce channel, and I’ll update you on this on the next slide. We’re capitalizing on the continued growth in JOBY smartphone accessories, and we’re also driving growth of new product lines with new motion control gimbals and stabilizers and new audio capture products. We continue to invest selectively in our core business. And looking ahead, we expect imaging to continue to outperform the market. This is in line with our 3-year strategy to increase revenue and maintain margins.

In May, we announced a significant investment in a new digital platform and team to improve our web marketing and e-commerce capabilities across all of our imaging brands, an important strategic move. It means we can take advantage of retail trends towards e-commerce, allowing us to outperform the competition and enjoy higher margins. We’ve dismantled our local marketing capabilities, and we’re investing in global e-commerce capabilities, which mirrors a similar shift for our major e-commerce customers. In October, we expanded the project scope and closed the Petaluma office to consolidate everything into one New Jersey facility. This restructuring is well advanced, and the new organization is now live. It will give Vitec the industry-leading e-commerce platform with a long-term competitive advantage, and we’re on track to achieve the projected cost savings by the end of 2021.

Now let’s look at our new JOBY brand strategy and products. In January this year, JOBY launched its new brand strategy and a range of new Smartphonography products are being launched this weekend via digital marketing campaign. JOBY has been positioned as the destination brand for aspiring influencers and vloggers from Generation Z. And just to be clear, that’s those born between 1995 and 2015. Not many of those people here, I think. The new products are compatible with our top-selling JOBY GorillaPod platform and enhanced content creation capabilities all under one brand. This weekend, we are launching Wavo, a portable microphone powered by Rycote; Beamo, a portable vlogging light; and StandPoint accessories, which are protective cases with a built-in tripod. And later this year, we’re going to launch stabilizers, robotic heads and mini sliders, all using our Syrp Motion Control technology, a great example of the integration of technology from an acquisition being used across our product range. We’re selling these new products direct to consumers and on JOBY.com, Amazon and in major Apple stores and later via other premium partners. Our aim is to become the accessory brand for smartphones with superior camera technology. And here is a short video, which will give you a flavor of some of the new products.

(presentation)

This whole JOBY launch is going live as we speak and it’s huge and exciting.

Now let’s look at Production Solutions. Production Solutions performed well in a non-Olympic year, benefiting from continued operational excellence. The core broadcast market is broadly stable. Some of the more traditional areas are declining, but we are seeing growth, for example, from robotics, where customers are looking for more cost-efficient and automated products. And the Cine segment is also more buoyant, driven by ARRI’s new ALEXA Mini camera. ARRI is a leader in camera and lighting systems for the film and broadcast industry, and we’re developing a much closer relationship with them. We’re also continuing to see growth from on-location productions, especially for news and sport. This is where we’re focusing our investment and new business development.

Our strategy for Production Solutions is unchanged: to maintain revenue and improve margins. We will continue to invest selectively in new products and upgrades in our core business to maintain market share. And, for example in 2020, we’ll see Prompting voice control and new Litepanels partnerships. And of course, we will deliver further margin improvements in the division through continued lean manufacturing initiatives.

Key for 2020 are the Euros, the Summer Olympics and the U.S. presidential election. For the Euros, in the summer, we will be supplying a range of specialist equipment and crew for the 51 matches in 12 host cities and fan zones. And after that, our team will be in action in Japan for Tokyo 2020, supporting the Olympic games. Tokyo will be our largest ever provision of specialist camera systems and crew, meeting the needs of the Olympic broadcasting services to capture over 40 sports and venues. We will be showcasing new products and 4K technologies throughout the games. Alan Hollis and his team have done a great job in 2019, and we expect a great performance in 2020, particularly on margins with the benefit from the Olympics and the U.S. election.

Now on to Creative Solutions. Creative Solutions is well placed to grow in the medium term. Although traditional TV networks are still the largest spenders, companies such as Netflix, Amazon, Apple and Disney are investing heavily in original content. And the chart here shows the number of original scripted series commissioned in the U.S. each year, which is one of the indicators of growth and as these series are often shot using Cine cameras and our equipment. Our strategy for Creative Solutions is to grow through these 3 initiatives. First, to grow our presence in scripted series and film productions with our unique 4K products, and I’ll go into more detail on this opportunity in the next slide. Second, to leverage the Amimon technology by expanding into live production, such as sports and new products are currently in beta testing and are on track for launch later this year. And third, to drive more divisional synergies. Creative Solutions is well placed for the future, especially with the development of a unique ecosystem of 4K zero-delay wireless products.

So let me tell you more about this exciting opportunity. First, let’s look at the adoption of 4K and HDR in the Cine market. In 2014, Netflix mandated that an original content must be shot in 4K and other production companies have followed suit. And just to explain, 4K is 4x the resolution of high definition. And HDR stands for High Dynamic Range, and it refers to the contrast between the brightest whites and the blackest blacks. 4K and HDR are now in every aspect of the image capture and content creation market as the online platforms come up with original and high-quality shots to differentiate their content. The acquisition of Amimon has transformed Vitec’s wireless video capabilities and given us a great platform to grow. Amimon’s unique patented technology enables users to monitor multiple video signals wirelessly, in many locations, simultaneously, with no delay. This gives content creators much more creative freedom with camera angles and movement and saves tremendous time and cost on set.

Amimon technology was already behind Teradek’s installed base of high-definition transmitters and receivers. We have used this technology to strengthen our position in the Cine market with the launch of Teradek Bolt 4K, a world first in 4K zero-delay wireless video transmission. And the development to the complete 4K wireless video ecosystem to include 6 new SmallHD monitor models is on track to launch at the end of the first half. There is a significant opportunity to replace the existing base of HD equipment with 4K, and Vitec is uniquely placed to capture the benefits of this replacement cycle and see another wave of growth.

What’s exciting about this is, first, because we own the Amimon technology, we are uniquely able to do this. Second, we have the leading brand in the market and a large installed base of HD equipment, which consists of about 90,000 Teradek Bolts and 30,000 competitor units. Third, the price point of 4K products is significantly higher than for HD products. And finally, since we now own Amimon, the margin is higher. Once we have the complete ecosystem of products available to ship, we believe adoption should really take off over the coming years. And we’re working on how to accelerate this adoption, as indicated on the graph on this slide. Here’s a video from Nikko to bring the opportunity to life. Now Nikko filmed this video at a private test event to showcase aviation, car crane and drone cameras. Teradek and SmallHD were invited to provide the video monitoring so that the technical systems could be tested in a realistic environment. And this kind of scenario is growing more common as content companies push to create more dynamic and immersive content, both in scripted and live production.

(presentation)

I’m extremely excited about the opportunity that Amimon has brought to Vitec. Strategically, it has transformed our wireless video capabilities, and it gives us a great opportunity to grow over the coming years.

Now I’ll update you on the impact of the coronavirus on our business. Clearly, the duration and impact of the coronavirus is unknown at this stage. But given that half of our revenue comes from products either sourced from China or manufactured in Italy, I wanted to give you some information about our operations in those countries. Our priority, of course, is on taking actions and precautions to ensure the safety and well-being of our employees. In light of recent developments in Northern Italy, we have issued all of our employees with further guidance, including restricting travel and precautionary measures at our sites.

First, let’s look at China. Vitec employs 53 people in China and the country accounts for about 5% of group turnover. While we don’t own any manufacturing sites there, we have 25 suppliers of finished goods who supply products relating to about 25% of group revenue. They are mainly based in the Guangdong province, and we use a third-party logistics hub in Yantian. These are both over 800 miles from Wuhan. All of these facilities have reopened. However, our supply chain suffered disruption in January and February when the logistics hub closed and that has also been lower in demand from the domestic Chinese market. The hub is now open and started shipping goods this week.

In Italy, we employ 550 people, and the country accounts for less than 4% of the group’s turnover. About 25% of group revenue comes from products made in our manufacturing facility in Feltre. We also have an office in Cassola. And we use a third-party logistics hub near Padua, and all of these are in Northern Italy. Currently, all of these sites are open. However, many Cassola employees are working from home as a precaution. We continue to evaluate the impacts of a closure of any of our — on any of our Italian facilities on our supply chain as well as any impact on end-user demand from the domestic Italian market. We currently estimate a total adverse H1 and full year 2020 impact on operating profit in the range of GBP 3 million to GBP 5 million, and this is based on the following assumptions. While we see the situation in China improving, and we don’t expect any further supply chain impact, we still anticipate a continued softness in domestic demand from China and APAC, significantly below our H1 expectations. In Italy, the lower end of the range assumes no shutdown to our Italian operations, but a softness in domestic demand in Italy. The higher end of the range assumes a 4-week shutdown to all of our Italian operations and a continued softness in domestic demand in Italy. We’re clearly monitoring the situation, and if it changes, we’ll, of course, update you. And further details are available in the appendices on Slides 36 and 37.

So to summarize, we delivered a robust 2019 financial performance despite some challenges. This is testament to the strength of our strategy, business model, the fact that we are leaders in most of the niche markets that we’re in and the management team that delivers all of this. As I’ve said before, this is an exceptional team whose average tenure is now over 9 years and who are very engaged and motivated about the future. Making value-adding acquisitions in growth areas is a key part of our strategy, and I believe our investment case. Amimon was an important acquisition for us, and it’s great to be able to report that this integration is complete and it’s going so well, and we expect it will be a driver of medium-term growth. In Imaging Solutions, our restructuring is on track. This will transform our routes to market and give us the industry’s leading e-commerce platform and a long-term competitive advantage. And across the group, we’re focused on growing in the faster-growing markets. In 2020, we will benefit from the launch of the complete 4K ecosystem using Amimon technology, and we will launch new wireless products for the adjacent live production market, plus new JOBY Smartphonography accessories in the ICC market. We’ll also benefit from further operational efficiencies in Production Solutions, the Summer Olympics and U.S. presidential election. The group has a strong balance sheet to support both organic investments and M&A. Expect more of the same here as we target bolt-on acquisitions.

We remain confident in delivering further strategic progress in 2020. And although the coronavirus is an issue and will impact our 2020 performance, the situation in China has improved and at the moment, none of our Italian facilities are closed.

So that concludes the formal presentation. Now Martin and I would be very happy to take your questions. So maybe you could just state your name and company before your question. Thank you. Or if everybody is extremely busy and needs to go away, then that’s absolutely fine as well. We can catch questions later.

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Questions and Answers

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Tom Fraine, Shore Capital Group Ltd., Research Division – Research Analyst [1]

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Tom Fraine from Shore Capital. First question is on the market for accessories for smartphones. Can you give us an idea about your market share for this and how strong the competition is?

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Stephen Clive Bird, The Vitec Group plc – Group CEO & Director [2]

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Yes. So we’re focusing — and so we’re using JOBY to focus on the high end of that market, so where people are really concerned about trying to shoot better — particularly better video with their smartphone. So we’re obviously focusing at that end. So the market’s huge, obviously, because there are lots of cheap plastic stuff around. We’re very much at the high end of that market. We think that market is in the zone of, I think, about GBP 50 million. We already have quite a high share of that. So in terms of premium products, we have higher than 50% share of that. So JOBY with, for example, the GorillaPod suggests a — if I can just wave this product around and you haven’t got one of these, you definitely should get one quite soon. You might — some of you might get them. This is a tremendous product. This would — is fantastic for vlogging if you want to basically, as many people do, video yourself doing something or obviously, video other people doing things. So these 2 lights, this is audio. The audio is fantastic. So the audio allows you to shoot video on your smartphone, which normally, so if there was any wind noise or whatever, you wouldn’t be able to hear what were you saying. It makes — turns an unwatchable video into a watchable video, which is a big deal. And this is about $179. So I think the answer to that is very high share. I mean the data is not terribly strong, but it’s — we’ve got a higher than 50% share. And we’re the main — we want to be the main brand in that high-end segment.

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Tom Fraine, Shore Capital Group Ltd., Research Division – Research Analyst [3]

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So now exposure to the SLR cameras, there’s a bit of concern that these are being replaced by smartphones and that churn might continue. How much of your equipment goes towards, as a percentage at group level, is exposed to that market?

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Stephen Clive Bird, The Vitec Group plc – Group CEO & Director [4]

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To the bottom end of the DSLR market, very little. So the — if you remember that chart that we showed, so the kind of the core rump is basically the products that are being bought by professionals and keen amateurs, which tend to be higher-valued interchangeable lens cameras, where people do actually change the lens and are really quite keen on their hobby or profession and will buy our products. The volume above that was when, back in 2008, ’09, a lot of people started buying very cheap DSLRs, so for GBP 200 or GBP 300. I mean, my kids were good examples of that. They bought those cameras, they never actually really used them properly or really know how to use them. And they have been left in the cupboard and haven’t been used. So that whole market is declining. That doesn’t affect us because those people weren’t buying our accessories. The problem is it affects the retailers. So a lot of retailers have seen that market decline. And that’s been the issue we’ve seen through destocking. We think that destocking — that we know that destocking is reducing, and we think that’s going to hopefully come back into recovery pretty soon. So the impact of that is not directly on us. It’s more on the retailers.

And the exciting thing at the kind of residual part of the market is we’re going to see the current big DSLRs that professionals and keen amateurs own replaced by compact system cameras, which are smaller bodied. So they have got — had a mirror taken out. They’re sometimes called mirrorless cameras. They’ve had a mirror taken out, the body is smaller. They’re also connected. So I’ve just got one, I’ve got the Nikon Z7. It is connected so you are able to send pictures from your camera wirelessly without having to plug it into anything like that. So that — the compact system cameras are the new exciting wave of replacement. And if Canon get this launch right, which they got wrong 18 months ago, they get the launch right this year, that’s going to be very exciting. So we’re pretty positive about that market.

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Tom Fraine, Shore Capital Group Ltd., Research Division – Research Analyst [5]

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Okay, great. Now this slower-than-expected trading following the fire at SmallHD, that’s been regarded as a one-off. So does that really indicate that it’s starting to recover at the moment and this is the strategy?

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Stephen Clive Bird, The Vitec Group plc – Group CEO & Director [6]

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That’s — it absolutely does. Martin, do you want to say something?

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Martin Green, The Vitec Group plc – Group Finance Director & Executive Director [7]

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Yes. So obviously, SmallHD with the fire, we were affected by that and it affected our R&D. What we have decided to do is to focus on the higher margin, low volume end of the market. So the monitors that we’re coming out with are typically several thousand dollars. There has been some competitive pressure from Australian company called Atomos who have really gone after the low-end market, but that’s a very unattractive place for us to be. So we’d rather, as we have done, reduce our revenue, but focus on making more money. And we can do that because SmallHD and Teradek are well-known in the Cine space, which is where they’re finally now focusing.

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Stephen Clive Bird, The Vitec Group plc – Group CEO & Director [8]

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This one at SmallHD have obviously been painful. We had the fire, which combined with the fact that the bother in the market suddenly became very, very competitive. So we’ve strategically got out of that. Now we probably would have got out of that end of the market anyway because it’s not really where we want to be because there’s too much competition that kind of commoditized. So these were small 5-inch monitors that you’d put on any camera just to monitor what you’re doing. So not a lot of that value added, and they were selling, for example, $500. What we want to be selling is the high-end monitors used particularly by — in Cine, which will enable 4K monitoring and HDR monitoring, which are big — tend to be the bigger monitors, which we’ll be selling for thousands and thousands of pounds. And the margins on those are much, much better, obviously. And what we can do uniquely, which is very exciting is that we can integrate into the monitors, the receiver, the Amimon receiver and technology so that, that product rather than being both a receiver and a monitor sort of lashed together with bungee tape, which is what happens on set quite often at the moment, is an integrated product. No one else can do that. So it’s been bumpy, but yes, the answer to the — sort of the short answer is yes, the SmallHD is improving.

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Tom Fraine, Shore Capital Group Ltd., Research Division – Research Analyst [9]

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Great. And just one more on the retail stocking again. So do you have any idea on the benefit? Could you give us a range or just an idea of how much that’s expected to benefit the group from the restocking?

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Stephen Clive Bird, The Vitec Group plc – Group CEO & Director [10]

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Yes, I do have an idea. Yes. So we continue to have destocking. We continue to expect some destocking, which is structural because the market is moving from traditional bricks-and-mortar, small specialist retailers, to e-commerce. So we all know that. We expected that to happen. That’s not a surprise. And that move will continue to drive a bit of structural destocking, which is what we would have expected. And actually, that’s a good thing for us because we make more margin, and we have a higher share on e-commerce. So that is all a good thing. The problem we’ve had in 2019 was a massive amount of destocking because the bottom end of the camera market was declining and Canon completely messed up the launch of their new camera and tied up a huge amount of inventory. So we know that there will be less destocking this year. There will be a bit of destocking — the benefit year-on-year — the year-on-year benefit in destocking from a profit point of view is at GBP 2 million or GBP 3 million?

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Martin Green, The Vitec Group plc – Group Finance Director & Executive Director [11]

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Correct. Yes.

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Stephen Clive Bird, The Vitec Group plc – Group CEO & Director [12]

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GBP 3 million?

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Martin Green, The Vitec Group plc – Group Finance Director & Executive Director [13]

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Yes.

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Stephen Clive Bird, The Vitec Group plc – Group CEO & Director [14]

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Thank you. Is that all okay?

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Tom Fraine, Shore Capital Group Ltd., Research Division – Research Analyst [15]

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Yes. Thank you.

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Andrew Douglas, Jefferies LLC, Research Division – Equity Analyst [16]

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It’s Andrew Douglas from Jefferies. On the 4K ecosystem rollout, which I think you said was going to be kind of towards the end of the second quarter, end of the first half. Can you just give us a feel for how long that will then take before people start to kind of change their entire ecosystem themselves? And is this kind of Vitec push? Or kind of customer pull?

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Stephen Clive Bird, The Vitec Group plc – Group CEO & Director [17]

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Yes. You might have seen the little chart we showed, which is kind of — so it’s — so we took a long time over that chart. I can’t bring it up again. But if you look at it in your page — what page is it on? Can you check what page — sorry, anyway, while you’re finding it, so the answer to that is that the way we’ve drawn that is…

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Martin Green, The Vitec Group plc – Group Finance Director & Executive Director [18]

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24.

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Stephen Clive Bird, The Vitec Group plc – Group CEO & Director [19]

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The replacement — most of that market — so most of that installed base is going to be replaced by 4K products. So that is a fact. It’s just a question of how long it’s going to happen. And of course, it’s very hard to predict the adoption. We’ve — the adoption has been delayed somewhat because we didn’t have the whole system because we didn’t have the monitors, but we will have them by the middle of the year. So our hope is that we can see that adoption take off very, very quickly. There are loads of benefits of buying a 4K product, it’s not just that it’s 4K. It’s not just its HDR. It’s also — actually, products are much more stable. So in terms of robustness, the signal with the new 4K product is something like 6x more robust than the old HD product. So that means that it’s much less likely to drop, and it is much more capable of delivering over a long period of long distance. So the answer is we’ve got to drive that. The reason we show that on the chart is because our priority is how can we drive that replacement cycle faster because when we could drive that very far, very fast, then you — we will see a couple of years of huge growth. Now that’s a challenge, and we’ve got to get people to adopt it. But my experience with Teradek is that it kind of goes slowly, slowly, slowly, and then it takes off, and that’s what we’re hoping to see.

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Andrew Douglas, Jefferies LLC, Research Division – Equity Analyst [20]

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As to getting customers to adopt it, what’s the challenge we’re having as part of having customers adapt?

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Stephen Clive Bird, The Vitec Group plc – Group CEO & Director [21]

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It’s just awareness, but in really mainly around awareness and basically being able to explain the benefits of it. And we’re positioning it at quite a significantly higher price point to start with, which you should be reassured about. So with the Amimon margin, the through margin on this is very high. We’ve got to get that price elasticity right, but it’s very, very well understood. NAB in Las Vegas, a big broadcast show, should be where everyone just says, “Yes, I’ve got to do it.” Because if you are a director and you’re about to direct any sort of production, it doesn’t have to be Star Wars, it doesn’t have to be Game of Thrones, any sort of production, and you are given the option from the production company of monitoring in HD or monitoring in HD and in 4K, you’re not going to say, “Oh, yes, I’ll put up with HD, and it might not be quite right. And it — I might not be able to see quite whether the black is really black.” You’re not going to say that. You’re going to say, “For $100,000 investment, I want the new technology.” And I want — HDR, in particular, gives you this contrast between very black and very white. So if you’ve got something dark with — on a white background, you really want to make sure that you are filming that correctly. You’ve got the lighting right. And the only way to do that is if you’ve got HDR. So it’s all going to happen. It’s just quite — and it’s hugely exciting and I know we probably — we’ve been talking about this for 18 months. And it’s slower because of the lack of the monitors, but it is going to happen.

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Martin Green, The Vitec Group plc – Group Finance Director & Executive Director [22]

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Now bear in mind now that we gave — did actually sell GBP 2 million worth of 4K transmitters in 2019. So it’s not as if no one has been buying 4K equipment already. And most of the cameras are already 4K. So it’s simply, as Stephen said, I think once we’ve got the receivers with the monitors with the built-in receivers, that will be a real drive to the wider adoption of 4K.

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Stephen Clive Bird, The Vitec Group plc – Group CEO & Director [23]

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I’m conscious we’ve run over our normal allotted time because we’re extremely excited. All right. Should we leave it at that? Great. Thank you very much, indeed, everyone. Thank you.

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