Videndum Plc (VID.L) Earnings Call Transcript

Good morning, and welcome to the Videndum plc Half Year Results 2022. My name is Katie, and I'll be coordinating your call today. [Operator Instructions] I will now hand over to your host, Stephen Bird, Group Chief Executive, to begin. Stephen, please go ahead.

Good morning, and welcome to our half year results presentation for 2022. As usual, I'll begin with a brief summary, and then give an update on our market and strategy before we review our financial results in more detail. Martin Green, our Group Finance Director, is currently taking a short period of time out from the business for personal reasons, but it's anticipated that he will return soon. We have a really strong finance team, and Andrea Rigamonti, our Deputy Group Finance Director, is handling the group's financial matters in this interim period, and he's presenting our results with me today. Now I'd like to tell you about how we performed in the first half. As we said at our Capital Markets Day in June, the group is in really good shape, and we've had a great start to the year. We delivered a record first half performance, with significant growth across all 3 divisions, and this reflects the underlying strength of our markets and our strong execution. Reported revenue was up 23% versus 2021 and up 11% on an organic constant currency basis. PBT was up 36% and 17%, respectively. These record results were achieved despite some capacity constraints and component shortages. We all know that in the last 6 months, there have been multiple macroeconomic and geopolitical challenges, and that these are continuing. But we have a really experienced leadership team at Videndum, which has responded extremely well to mitigate these headwinds. Our margins are improving, and are on track to our stated mid-to-high teen goal, and we remain focused on managing our cost base while continuing to invest in our key strategic priorities. We own many of the industry's leading brands, and our premium prices reflect their competitive strength, product quality, and our investment in new product development. Last year, about half of our revenue came from products that we had launched in the last 3 years. Our products are typically mission critical to our customers. They often help drive productivity, and are a relatively small part of the customer's budget. As a result of all this, the price increases we've implemented across the group during the last 18 months, have stuck, and these will more than offset inflationary headwinds, and will have a further positive impact next year. This, coupled with our operational excellence helps us on our pathway to achieving our mid-to-high teen margin goal. Cash performance was again exceptionally good, even with increased investment in working capital to support our growth and to manage supply chain disruptions. Our net debt to EBITDA is expected to decline materially by the end of the year. So given our confidence in the future and our dividend policy, we're proposing to pay an interim dividend of 15.0 pence per share. As we said at the Capital Markets Day, our markets are larger and growing faster than pre-pandemic. This is driven by the structural changes which were accelerated during the pandemic, and our exposure to new markets like audio. Of course, we're not totally immune to current conditions. And for example, our products associated with travel were impacted during the pandemic, but even these are recovering. And the consumer segment is somewhat impacted by softer consumer spending, but accounts for less than 10% of group sales. As a group, we continue to execute well on our strategy, and we've built a platform to significantly grow the business. We're driving organic revenue growth from 3 different routes: first, our core business is growing; second, we're getting growth from new areas of content creation like audio; and third, growth is coming from live streaming with our Amimon technology. On top of all this, we're also improving our margins, and making value-accretive M&A. Our outlook for this full year is that we now expect adjusted PBT to be at the top end of current market expectations, despite the challenging backdrop. So now let's have a short recap on the organic strategic ambition which we set out at our Capital Markets Day in June. Our goal is to achieve GBP 600 million revenue in 2025, and that's growing from less than GBP 400 million last year, and we expect more than GBP 100 million of operating profit and mid-to-high teen operating profit margins in the zone of 16% to 18%. We also expect to reduce our net debt-to-EBITDA to below 1.5x. As I've said, we've built a platform to significantly grow the business, and we're on track to achieve these ambitious targets. So now let's have a look at our total addressable market. Our total addressable market pre-pandemic was about GBP 2 billion, and it was growing slowly at low single-digit. Post pandemic, the TAM has grown to GBP 3 billion, particularly due to the growth in live streaming, our exposure to new markets such as audio, and we're also seeing growth in some of our core markets. So we now believe that our TAM is growing faster at high single-digit CAGR, driven by the increasing demand for our products. Therefore, just through organic growth by 2025, we expect our TAM to be about GBP 4 billion. Specifically, about 75% of our business is being driven by 4 key drivers, which I've talked about in detail before: first, the internet and the demand for photography and videography from retail e-commerce; second, influences driven by social media platforms like TikTok and YouTube; third, subscription TV, both feature films and the volume of TV shows for subscription TV channels; and the final driver is live streaming, which is a very big opportunity for us. Technology change is also driving shorter product replacement cycles. First, advances in technology in our market, for example, cameras moving from HD to 4K, means that we are having to replace all of our HD video transmitters with 4k; and second, our own technology innovations, for example, our revolutionary flowtech Tripod or our patented Amimon technology also drives shorter replacement cycles. As I mentioned before, last year, about half of our revenue came from new products launched in the last 3 years. Now moving to briefly discuss each of our 3 divisions. We renamed our Imaging Solutions Division, Media Solutions during the first half. This was to mirror the wider range of content creators that the division now serves. This market is larger and growing faster than pre-pandemic, mainly driven by demand for content for the internet, social media and subscription TV as well as our recent acquisitions. We continue to invest in new product development, particularly in our core professional business, and the faster-growing segments of vlogging and audio. We're also continuing to develop our market-leading higher-margin online sales capabilities. We launched a new JOBY mobile-friendly website during the half, to further improve our digital marketing and get us closer to our customers, and also enable more cross-selling. Our high-end professional segment is resilient with strong demand from professionals who need equipment to take still and video product images for online retail sales, and both our Savage and Audix acquisitions have been fully integrated and are performing well. Our B2B business is seeing significant growth, mainly being driven by demand for our Avenger lighting stands, we saw record revenue in the half. JOBY is an important strategic growth engine for the group, with a huge untapped customer base of influencers who earn a living by sharing their content on social media. We're using our digital platforms to grow the installed base, and are adding new technology to the JOBY ecosystem with software, motion control, and workflow management apps. And the new JOBY on-camera microphone range is due to be fully rolled out next month. Overall, Media Solutions core business is growing, driven by the internet, and we have new growth areas in content creation and audio. Now let's look at Production Solutions. Production Solutions is once again a star performer, achieving record results across the board, driven by demand for original content, automated production and on-location news and sport. Light panels lighting products continue to gain share. The recent launch of the 2X1 Hard light was a huge success with stock sold out immediately, including large orders from leading production companies. Our exciting strategy using Quasar Science lights in virtual production stages, is also progressing well. In mobile power, in June, we launched a new upgraded Anton/Bauer BCLX battery. This is the market-leading product in any high-quality production, and the new product has been very well received. Our new technology to enable automation to drive cost efficiencies and studios, is an important growth opportunity for the division, particularly as customers look to reduce production costs. Our robotic camera systems and voice-activated prompting had an excellent half. We're also benefiting from rescheduled major sport events, and I'm really pleased that this market has returned to normal, and broadcasters are now actively planning for events over the next 2 years. So in summary, in Production Solutions, our core business is growing, and we're continually evolving with innovative new technology to drive shorter product replacement cycles. Now let's talk about Creative Solutions. Creative Solutions is growing strongly. Sales of our 4K HDR products have really taken off, but we estimate that we're only about 30% through the replacement cycle. Demand is very strong, and this is another example of technology change driving a shorter product replacement cycle. Revenue growth is still being impacted by component shortages, particularly the chips in our Teradek Bolt transmitters. However, the situation is improving. In the [ city ] industry, our customers are demanding more remote access, and we've invested to evolve our monitoring technology to the cloud so that it can be used both onset and remotely. We've also started to integrate Lightstream technology into our cloud offerings. In the enterprise market, we expect continued growth in our high-end Teradek IP-based live streaming products. There are also significant growth opportunities in the medical market where our Amimon wireless video solutions are being used in operating theaters. The medical segment was up significantly on 2021, and has a very large order book and growing pipeline of leading medical equipment manufacturers who want to integrate our zero-delay solutions into their products. We're also supplying the industrial market in remotely controlled machinery such as cranes. We've introduced new high-end streaming products with ART, which was incredibly well received at NAB earlier this year, and initial sales are well ahead of what we were expecting. ART has been delivered to CNN and NBC, and feedback has been positive. CNN used ART during the Queen's Jubilee celebrations, for example. As many of you saw at the Capital Markets Day, ART dramatically increases the viewer experience with higher video quality and a lower transmission delay over the internet or mobile network. And the team is working on miniaturizing art into smaller devices and to embed ART into the entire Teradek product range. We expect ART to become a significant part of our business over time, and are extremely excited about its potential. In summary, in Creative Solutions, our core business is growing strongly, and we have significant growth opportunities both in new vertical markets and with our ART technology. Now a brief update on ESG. Over the last 12 months, we've made really good progress developing our ESG strategy. We have clear targets and priorities, and our initiatives are centered around the 7 key priorities listed on this slide. We have a focused and coordinated group-wide approach, and we've significantly improved our data collection, measurement and disclosure. We published comprehensive ESG and TCFD reports in April with all the detail as well as videos to explain some of our environmental and community projects. Now I'll hand over to Andrea for more details on our financial performance.

Thank you, Stephen. My name is Andrea Rigamonti, and I'm the Deputy Group FD. I've worked at Videndum for over 11 years in total, having rejoined in 2021 following 6 years at Senior plc. I'm proud to be presenting an excellent set of half year results to you today. I'll go through a top level overview before focusing in a bit more detail on the performance of each division, turning then to a strong cash generation, and finally, I'll provide selected guidance on some financial items for the full year. So turning to the half year results. As Stephen said, the first half of 2022 has seen record revenue and profit. On an organic constant currency basis, revenue was up 11%. This is a great performance. Gross margin was maintained at 43.8%. Excluding royalty income, which as expected, reduced slightly, gross margin improved by 60 basis points. Price rises were implemented in 2021 and also in the first quarter of 2022. These price rises covered the cost inflation that we experienced in raw materials, freight, duty, utilities and labor. We increased price again in June 2022. The benefit of these will be seen in the second half. We believe we can continue to more than offset inflationary pressures. Operating expenses increased mainly due to recent acquisitions and FX, with the remainder due to investing in growth. The pace of increase in expenses was lower than the growth of the top line. And as a result, our operating margin improved from 12.1% to 13.4%. We believe that we are on track to achieve our mid-to-high teen goal. Net finance expense increased by GBP 1 million year-on-year mainly due to the borrowings for acquisitions and the interest on their IFRS 16 leases, and partly due to higher interest rates. At the end of June, around 60% of our borrowings were fixed through swaps, which will mitigate the effect of future higher interest rates. So for the first half of 2022, I'm very pleased to report that PBT was a record GBP 27.1 million. And with the effective tax rate reducing to 23% from the 25% of the first half of 2021, EPS grew by 39% to 45.40 pence per share. As a result of the strong trading performance and improving market conditions, the Board has declared an interim dividend of 15.0 pence per share, which is an increase of 36%. For the full year we expect dividend payout to be within our policy of 2x to 2.5x cover of adjusted earnings per share. ROCE was up year-on-year, driven by our profitability and partially offset by the initial effect of acquisitions. In summary, the first half of 2022 was an excellent performance, delivering on all 3 of our strategic priorities: organic growth, margin improvement and growth through M&A. Let's now take a look at each division. Every division delivered more than 20% revenue growth, and all set new records. At Media Solutions, the growth was driven by the acquisitions of Savage and Audix. On an organic constant currency basis, revenue grew by 2%. Significant growth in lighting supports continuing the strong trend seen in 2021, was largely offset by headwinds from lockdowns in China, the war in Ukraine, weaker consumer spending, and the move of Amazon Prime Day from June in 2021 to July in 2022. Production Solutions grew by 24% on an organic constant currency basis. There was a significant uplift in sales of manual and studio supports, as the broadcasting returned to pre-pandemic levels. Sales were also boosted by our voice-activated prompting, which was launched in 2021. As usual, we also provided our best book equipment at the Winter Olympics and Paralympics. Accretive Solutions revenue grew by 13% on an organic constant currency basis. This was driven by our continued rollout of our 4K HDR ecosystem, despite component shortages which limited our ability to fulfill some orders. The order book remains at a record level, and we expect to fulfill the backlog in the coming quarters. Sales to the medical market grew significantly as we embed ourselves further into the operating room and develop relationships with more customers. Around GBP 2 million was invested in sales and marketing to serve new verticals as well as in R&D to drive future growth. Operating margin improved sequentially from the second half of 2021. Corporate costs were GBP 2 million higher than in the first half of 2021, primarily reflecting the RSP share awards that were issued in June 2021 to retain key people, and to a lesser extent, fees relating to legal, tax and all these services. Now that we have looked at the P&L, let's turn to cash. The record profit led to near record cash generation. Cash conversion was strong at 90%. Working capital increased by $7.8 million. Inventory rose by $12.2 million, which was expected following cost inflation, capacity constraints and component shortages. This was partly offset by an increase in trade payables, net of trade receivables, due to increased activity. Gross R&D was maintained at around 6% of our fast-growing revenues, as we continue to ensure we invest in future growth. Overall capital expenditure reduced, reflecting the [ non-repeat ] to JOBY investment to bring production to Italy in the prior year. Other items include the add-back to cash of the noncash share option charges within operating profit. This increased, as mentioned earlier, due to RSP awards. Tax payments were lower than in H1 2021. The prior half year had included a $3 million payment to HMRC of a charging notice in relation to EU State Aid. We continue to expect that this will ultimately be paid back to us. The lower tax was partially offset by higher interest costs due to fees for the Audix term loan as well as the increased P&L charge. The earnout and retention bonuses are in relation to last year's acquisition of Quasar and Lightstream, whilst restructuring costs include the rebranding of Vitec to [ Videk ]. The resulting free cash flow of $19.3 million was $3.5 million higher than last year. Let's now see how that flowed through to net debt. Net debt increased with the acquisition of Audix, and the final dividend of 2021 more than offsetting strong free cash flow. The other items bar includes $8.3 million of IFRS 16 lease additions, largely reflecting property leases or the recent acquisitions, Audix and Savage. There was also a nearly GBP 15 million adverse impact from FX on net debt due to the stronger U.S. dollar. Total liquidity of GBP 81.6 million remained strong. Net debt to EBITDA on a covenant basis was better than expected at 2.2x. We expect the ratio to decrease materially by the year-end. I'd now like to provide a few quick pointers for the full year, which I hope can help you with modeling. We continue to expect to deliver high single-digit organic revenue growth. R&D amortization is expected to increase in H2, with a full year charge of around GBP 7 million. Net finance expense will be higher in the second half, and given expected increases in interest rates with a full year charge of around GBP 7.5 million. The effective tax rate for the full year will be similar to the 23% of H1. Thereafter, we expect to revert to the 24% of previous guidance. Gross R&D will be around GBP 30 million for the full year, a GBP 5 million increase on 2021 as previously set out. We expect the full year cash conversion to continue to be at least 80%, as previously guided. Cash tax is now expected to be GBP 10 million, and lease additions around GBP 15 million, as the second half will include the expected renewal of our Media Solutions property lease at Cassola. So let's recap. The first half of 2022 was a record performance for Videndum. We are managing the impact of inflation well. We continue to control our balance sheet, converting profit into cash. And going forward, we are well-positioned entering the second half of the year. I'll now hand back to Stephen.

Thank you, Andrea. So to summarize, 2022 has started extremely well. We achieved record first half results. The content creation market is a great place to be, being larger and growing faster than previously envisaged. Videndum is right at the heart of this fast-growing market, and executing well on its growth strategy. Our market-leading premium brands and operational excellence, are allowing us to manage inflationary headwinds and supply chain challenges. While we are, of course, mindful of uncertainty in the current economic environment, the Board now expects adjusted PBT to be at the top end of current market expectations. So to conclude, we've built a platform to significantly grow the group, and we're well placed to deliver sustainable growth and value for all our stakeholders. We're now going to move on to our question-and-answer session. So I'd like to hand over to the operator. Dial-in details are shown on this slide.

[Operator Instructions] We take our first question from Scott Cagehin from Investec.

Andrea, congratulations on an impressive set of results. 2 questions from me. Could you just elaborate a little bit more on the headwinds that you dealt with and how you dealt with them? Not just about sort of inflation or pricing, but just general headwinds and how you see that playing out in the second half, please? And then the second question is, could you give us a bit of a flavor for the composition of the order book, i.e., is it higher margin products in there? So can we expect some sort of margin upward pressure going into the second half of the year as you deliver those products?

So first of all, in terms of headwinds, yes, I mean, like everyone, we do have some headwinds. I've got to say they are, I think, becoming less worrying for us. So for example, supply chain component shortages and so on, we are managing very effectively. So right now, we don't have major component concerns. We've got a variety of challenges around business, but it's not material. And right now, even if we had every component we needed, we would probably only sell us sort of another GBP 5 million worth of product. So we are slowly managing that problem quite well. Inflation, of course, has set us -- so inflation is pretty significant. However, the great news is, and we said this a number of times, is that, because of our market position and our strong brands and our investment in R&D, we've managed to put our prices up significantly and well ahead of that. So you can see in these numbers at last that the impact of pricing is in the zone of about GBP 10 million of additional profit through the bottom line, and that significantly outweighs and mitigates some offset inflationary pressures, and we will see more of that in the second half and more of that next year, because the first half does not include the fact that we've significantly put our prices up in June. So for example, in our biggest division, Media Solutions, we put our prices up by 8% in June. Those have stuck, and those will be having a strong impact on the second half. So comfortably [indiscernible] produce, we're on top of inflation, we're on top of -- the market situation is really encouraging. Nearly all of our markets are extremely robust. The couple of areas that we talked about before -- travel have been a bit softer. We had a bit of a headwind with people just not traveling and not buying things like photographic bags and travel tripods. That is getting better. I mean, you're probably aware the travel business is coming back. So we're seeing a benefit now from that. So that's going to start to become a positive tailwind. And also, consumer spending. Generally, of course, consumer spending is a bit soft. We've seen a bit of softness in some of our pure consumer business going through Amazon, for example. But even there, actually, we've seen things pick up a bit. The latest Amazon Prime promotion has been very powerful for us. And just to remind you, the consumer business is less than 10% of our business. So over 90% of our products are bought by people who use those products for their living, and so, are not maybe quite so affected by consumer spending. And then the final thing that just to mention on headwinds is that, there's been a lot of speculation in the press about what's happening to subscription TV, particularly with Netflix. I'm really pleased to say that the whole [ phase ] we can see that, that whole business model is alive and thriving. Netflix may have lost a little bit of share, but you may have seen today, Disney have just released some numbers which are well ahead of what was being expected. They've added, I think, 14 million subscribers, which is more than people were expecting. We can see that happening. The only thing that's holding back more and more live content being produced, which is, of course, what these companies need to do, is capacity. There's not enough capacity, not enough stages out there to shoot these productions. So you'll see a huge amount of building of new stages. So all of that is really, really good for us. So I think that was your first question. The second question was about the order book. We've never had such a big order book. It's roughly twice as big as it was at the beginning of last year. So the beginning of last year, I think we did say it was -- even then it was pretty big. It was about GBP 40 million to GBP 45 million. Our order book now is twice as big as that. Some of that reflects customers changing the way they give us orders, giving us orders more in advance, which is really helpful for us, gives us much better visibility, that's good, high quality. And some of it is also starting to see large medical orders, which tend to be slightly longer term. So a lot of our business is booked and billed in quite short-term visibility. But some of these medical orders are quite big or longer term. So the quality of the order book -- So the margin in the order book is extremely strong and much stronger than, for example, we've seen in the first half. And the size of the order book is really encouraging. So all that is pretty encouraging.

The next question comes from Andrew Douglas from Jefferies.

I've got 3 questions, and then I guess, half a question, a bit of a follow-up on your previous comments. 3 questions, please. Can I just double check something on Media Solutions? It looks like you had 2% organic growth in the first half. I'm not sure if that includes price or whether that's just volume. Because I guess, if you had mid-single-digit price, that applies that volumes are lower year-on-year. I just want to make sure that my math is right and the phase right because of what's going on there. Because I take your point on the consumer stuff, but you just said that it was only a small part of that division. So if you can just give us an update on -- make sure my math is correct there. Just following on from your Netflix comment. Do you have the ability to break down your exposure by Netflix, Disney, Apple? Because I think a popular misconception is that Netflix leases for trips and not [ part ], and you've clearly talked to that. But do you have any understanding of the splits by subscription TV people? And then last when it was leased, there's nothing that I can see on the Creative Solutions strategic review. I was just wondering if you can give us an update on that, please.

Sure. So in terms of Media Solutions, so the underlying organic growth in Media Solutions was a bit softer than we would like. So that is, as I said, is the one area that has been slightly affected by slowdown in consumer spending. So there's a number of moving parts. I mean, overall, there is nothing there to be concerned about. The underlying growth of that division is going to be stellar and extremely exciting. So we're very comfortable with that. But just in terms of the detail, yes, the first half has had a little bit of an impact from consumer spending. So for example, around JOBY. Secondly, Amazon have moved the Amazon Prime promotion effectively out of our first half into our second half. So that has actually quite a big impact. So the Amazon business is quite important to us. Amazon Prime is being delayed into the -- effectively the second half. So that means that the comparators are certainly affected by that. And then in terms of pricing, it does include pricing, but the big -- as I said, a big price increase from VMS, we've held it back until June. So all the pricing that you see in the first half is mainly the other 2 divisions. It's a bit in VMS. But the big price increase we put through in VMS is 8% across that whole division, which was -- has been implemented in June. So it will not be in these numbers, but will be in the second half. So you'll see those comparisons pick up very nicely. Andrea, do you want to add anything on VMS?

Yes, Stephen. Just -- as I mentioned earlier, there was obviously a little bit of holding back from China and lockdown there, that we saw in the first half. That hopefully won't repeat, and a little bit of the situation in Ukraine as well that hunter them in the short-term cure.

Hopefully that helps, Andy. But certainly, VMS is our powerhouse, and we expect it to be powering ahead certainly going forward. Second, Netflix. So I don't have to hand the split that -- our split by each of the different companies. Netflix has been obviously very important. They had typically about sort of 40% of the market. They are losing a bit of share to all the other new players. So -- and you know who they are, but they are big companies putting huge amounts of money. So Apple TV -- I mean, I know I subscribed with Apple TV, which I saw I would then do, because I wanted to watch their last so programs like that -- are being produced, and we are on those programs. And so we have a sort of even coverage over all of these. So if you look at the share of these companies of the overall market, we're pretty much evenly spread across them. The thing -- the other thing to mention is, even if -- and there's a lot of discussion about what's going on here, but I can tell you, the model is incredibly healthy. The way these companies will succeed is by generating new, exciting live content. That is the way they will survive. There's no real other way for them to be successful. They need to shoot fantastic programs that we want to watch. Of course, they will want to manage their budgets sensibly. Our products within those budgets are a tiny fraction. So most of the budget is in the time of the number of people you've got and the amount of equipment you've got out on rent for a particular time. Our products reduce the setup time for production, so they make a production more efficient. So for example, our monitoring products allow the Director to see very quickly whatever cameras fit in, check with the cameras in focus that it's looking at the right staff and the lighting's right, and then they can get the their production going quickly, our products reduce setup time and reduce production costs. So we are part of the way that people may try and run their budgets a little bit more lean. And that's also kind of broadcast with robotics. And then final question on the BSS strategy. It's not much more new to say there. So I'm not really going to -- well, I will repeat what I said at the Capital Markets Day, which is, we think we have a phenomenally exciting business with a huge exciting technology, particularly with ART. ART is going extremely well. We're not going to give any more numbers on ART because it is now becoming quite competitively sensitive. So frankly, we don't particularly want competitors to know exactly what we're doing. We've given a bit of flavor about who we're working with. We're starting with the broadcasters and they are using the product and they're loving it. Our focus has been -- is now to miniaturize that product and take it down from a rack-mounted product to a more smaller product. But again, we look at the options for what we do with Creative Solutions, and we have a range of options, which range obviously from looking at whether we can do some partnerships and JVs with people, whether we can sell the technology itself or whether essentially even we might sell the division. But right now, there's nothing new to say about that, and we'll probably update you early next year.

Just one quick follow-up, if I may. On your comment on ART and looking at, I guess, the evolution of that product, from an analyst who's never actually done a proper job, how difficult is it to kind of reduce the size of the ART business from the -- as you just said?