Videndum Plc (VID.L) Earnings Call Transcript & Summary

Hello, everyone, and welcome to the Videndum Plc 2022 Full Year Results. My name is Nadia, and I'll be coordinating the 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 full year results presentation for 2022. Here's today's agenda. I'll begin with a brief summary and then give a market and strategy update. Our CFO, Andrea, will then cover our financial results in more detail, and I'll conclude with a summary. Turning to our results. I'm very pleased to report that we made further good progress during 2022. We delivered record revenue and adjusted profit, which clearly demonstrates the underlying strength of our market drivers of our brands and our operational execution. Reported revenue was up 14% to GBP 451 million and slightly up on an organic constant currency basis. PBT was up 27% to GBP 54 million. These results were achieved despite the operational challenges we faced, particularly in the first half, with capacity constraints and component shortages and a tough end of the year with softness in the consumer segment. We also saw more retail destocking than we expected due to a lack of business confidence more generally. And on top of that, there was some purchase deferral by independent content creators, which mainly affected our Media Solutions division. We completed the acquisition of Audix in January to expand our addressable market further and the business had a great 2022. We continue to improve the group's margins and are on track to our stated mid- to high-teen goal as we drive revenue growth. We own many of the industry's leading brands and our premium prices reflect their competitive strength, product quality and our investment in product innovation. Our vitality index is strong. And last year, again, about half of our revenue came from new products launched in the last 3 years. Our products are typically mission-critical to our customers with little price elasticity. They are a relatively small proportion of a customer's budget, and many of our products help drive productivity, which I'll talk about later. As a result of all this, the price increases we implemented across the group last year have stuck. These have more than offset inflationary headwinds and will have a further positive impact this year. We remain focused on managing our cost base while continuing to invest in our key strategic priorities. Cash performance is consistently good, and we have a track record of converting profit into cash. As expected, our net debt-to-EBITDA increased due to the acquisition of Audix and the strengthening of the U.S. dollar. Given our confidence in the group's long-term growth prospects and in line with our dividend policy, we're proposing to increase the total dividend by 14% to 40p per share. We have an exceptionally experienced leadership team of Videndum, and I'm really proud of what the business has achieved last year. I'd like to thank all of our employees for their commitment and contribution to these record results. Videndum is in great shape, executing its strategy well and uniquely positioned right at the heart of the content-creation market. We'll continue with our program of self-help actions to further streamline our cost base and improve margins. And in addition, we identified a number of opportunities to deliver cross-divisional synergies to ensure that the group is even better positioned for long-term growth. Looking forward, the fundamental market growth drivers remain very attractive and our direction of travel has not changed. However, we're not immune to the current conditions and the short-term macroeconomic environment may continue to affect some parts of the business. As a result, although operating profit is growing as expected, we expect PBT in 2023 to be stable due to increased interest charges. We're also expecting a higher-than-usual H2 weighting this year. We're in a really exciting market with strong growth drivers, and we look forward to the future with confidence. Now an update on market and strategy. We're continuing to execute well on our strategy, which we've had for many years, which is to deliver organic growth, improve margins and grow through acquisitions. I don't believe there is any area that we have not executed well. Let's look at organic growth and margin improvement. Organic growth is being driven by advances in technology and by the 4 strong structural market growth drivers on this slide, which I've talked to you about before. We see these continuing to be strong growth drivers for our business. The one area I know there is speculation about is the spend on original content. I'd like to reconfirm that we see this continuing to be a strong driver of growth for the business. It's true that some companies like Netflix and Disney have talked about reducing budgets but investment in original content creation is still huge and expected to continue to grow significantly. Our products are a very small percentage of the overall production budgets. And what is driving our growth is the fact that our products have new technology that our customers need and love. Additionally, when companies like Netflix and Disney talk about reducing costs, they see many of our products as part of the solution as our products reduce setup time, lower operating costs and ensure that content is captured right the first time. And because most of the production cost is in people, being able to be more efficient is enormously attractive. Our technology innovations improve productivity for our customers and drive shorter product replacement cycles for us. A great example of this is on-set monitoring, which really reduces setup costs on the shoot and ensures that content is captured right the first time. The economic rationale for onset monitoring is stronger now than it's ever been. Other examples are automated robotic and prompting solutions, which reduced the number of operators, LED lights, which are more versatile and have lower energy costs, video live streaming solutions, which enable remote collaboration and the new Avenger lighting stands, which make lights easier, quicker and safer to set up. On top of this, a key focus for us is continued operational excellence. Videndum is a well-managed, agile business. This enables us to adapt quickly to market and technology changes and constantly innovate. We have a continuous improvement culture and our divisions are targeted with making year-on-year productivity improvements. They're also highly experienced at delivering acquisition synergies and restructuring. We've identified a number of additional opportunities to drive even more efficiency across the group and have appointed Marco Pezzana as Chief Operating Officer, to work with me to execute these self-help actions to ensure that the group is even better positioned when the economy starts to improve. These actions include capital allocation, delivering cross-divisional synergies and maximizing operational and organizational efficiencies. We'll update you in our future reporting as appropriate. Now moving to briefly discuss each of our 3 divisions, and first, Media Solutions. The market drivers are still very relevant for Media Solutions, but this division has been impacted by the weaker global economy. About 25% of the division is completely unaffected with strong growth in the high-end professional area, where we have exposure to Cine, professional audio, broadcast and streaming, our business is extremely healthy. The Consumer segment, which is about 20% of the division has been very tough, and this mainly affects our JOBY and Lowepro brands. Consumers are obviously spending less, and this has been compounded by destocking in the channel across all consumer electronics products, so a double impact. The mid-ground is a more complex story and is where the economy, lack of business confidence and lower digital advertising spend has been impacting more than just the Consumer segment. Here, some independent content creators have delayed purchases if they can and retailers are also holding less inventory in this area. Despite the short-term issues in the division, the overall drivers going forward are just as valid. We're in the right segments with market-leading products, and we help our customers capture exceptional content. During H2 last year, we implemented a number of self-help actions in the division to ensure that the business is well placed when the economy recovers and new cameras start to sell through more. We're also focusing our resources more on the high end, for example, with our Avenger lighting stands. We continue to invest in developing innovative new products across the division to shorten replacement cycles, for example, an exciting new Manfrotto Tripod, similar to flowtech will be available in the next 18 months. I feel very positive about Media Solutions as we expect things to bounce back pretty quickly as they have in the past, after a period of destocking, and we're already seeing our business in the U.S. starting to improve. Our Savage and Audix acquisitions have been well integrated, and I'd now like to show you a short video to explain more about our exciting audio strategy. [Presentation]

As Marco said, audio is a significant and exciting growth opportunity for the group and we're making good progress. Now let's look at Production Solutions. Production Solutions is a really important part of the group and is performing very strongly, driven by demand for original content, automated production and on-location news and sport. In the Cine market, we're seeing growth and we expect to bounce back from China as the country recovers from the pandemic and lockdown. Technology advancement is driving growth across the division. First, in LED lighting, where virtual production is increasing and there is strong demand to enhance virtual environments with real lighting. We're also innovating in mobile power and have a groundbreaking, environmentally friendly, portable battery generator launching in the first half of this year. This will replace portable petrol generators, which will be banned from sale in California shortly. The new e-generator will significantly reduce setup times and costs as well as noise onset and emissions, helping productions to become more environmentally friendly. This is a really big opportunity. Our market-leading robotics and prompting technology drives cost efficiencies in broadcast TV studios. This is another important growth opportunity for the division, particularly as customers look to reduce production costs. Our prompting business driven by our new voice-activated products had an excellent year, and the pipeline is the highest it's ever been. This is another great example of technology advancement driving shorter product replacement cycles. We're also benefiting from growth in major sporting events and have recently been awarded the contracts for both the 2024 and 2026 Olympic Games. We're also developing new player-tracking software to be used by sports broadcasters. In summary, in Production Solutions, their core business continues to grow and we're continuously involving innovative new technology to drive shorter product replacement cycles. Now on to Creative Solutions. Creative Solutions is growing strongly. In Cine, sales of our 4K/HDR products are going well but we estimate that we're only about 40% through the replacement cycle. Our SmallHD monitors had a great year with a new large production monitors gaining share, and they recently launched a small on-camera monitor for high-end cinematic cameras. Our Cine customers are demanding more remote access, and we're investing to evolve our monitoring technology to the cloud, so it can be used both onset and remotely. In the enterprise market, we expect continued growth in our high-end Teradek IP-based live streaming solutions. There are also significant growth opportunities in the Medical segment, where our Amimon wireless video solutions are being used in operating theaters. The Medical segment was up significantly in 2022. It has a large order book and growing pipeline of leading medical equipment manufacturers who want to integrate ART zero-delay solutions into their products. ART or adaptive reliable transport is the video where ultra-low latency streaming protocol jointly developed by our Amimon and Teradek engineers. It delivers secure, ultra-low latency, broadcast quality video and audio for mission-critical video transport over public networks. We've now had feedback from customers on the initial product and the feedback is extremely encouraging. And we're working on miniaturizing the product for volume production. We will be integrating ART into our live production products for customers who need to send robust video over the internet. And in 2024, our bulk products will be ART-enabled so that they can connect to the Internet and the cloud. In summary, in Creative Solutions, the core business is growing strongly, and we have significant growth opportunities both in new vertical markets and with our ART technology. Now I'll hand over to Andrea for more details on our financial performance.

Thank you, Stephen. For the financial review, I will go through a top-level overview before focusing in a bit more detail on the performance of each division, turning them to cash and debt. I'll also provide a recap on our track record of delivering operating cash flow and efficiencies and our performance against the midterm goals that we set out with the 2021 results. Finally, I'll provide guidance on a number of financial items for 2023. So turning to the full year results. In 2022, we achieved record revenue and profit. Revenue grew by 8% on a constant currency basis, driven by the acquisitions of Savage and Audix. On an organic constant-currency basis, growth was 1% despite the challenging macroeconomic environment in the second half of the year. Gross margin stayed at 44% and in fact, increased by 40 basis points when stripping out Litepanels royalties, which were particularly high in 2021. Pricing more than offset inflation following price rises in early and mid-2022. The price rises in June benefit both 2022, but also have a larger effect on 2023. We are confident that our pricing strategies will keep us ahead of inflation in 2023 as well. Operating expenses rose by 9% on a reported basis. But on an organic constant-currency basis, they actually fell by 1% as we closely monitor the cost base. Operating profit was up 30% on 2021 and up 12% on our previous record year of 2018. As expected, net finance expense increased, but we also benefited from net FX translation gains resulting in a lower figure than we had previously guided. In summary, we achieved an operating profit of GBP 60 million and PBT of GBP 54 million, our highest ever performance. EPS grew by 29% to 90.1p. I am pleased to report that the Board is recommending a final dividend of 25p per share, which takes the total dividend for 2022 to 40p per share covered 2.3x by EPS. This is in the middle of our previously communicated range of 2 to 2.5 cover and is 14% higher than the total dividend of 35p per share of 2021. ROCE improved to 18.8%, up 80 basis points on 2021, returning towards historic levels and reflecting higher profits despite the initial effect of recent acquisitions. Turning now to the divisions. All divisions grew revenues and margins in 2022. The macroeconomic environment most significantly impacted Media Solutions, where 20% of revenue is for consumers. Retailers destocking compounded this effect and also impacted revenue from our professional independent content creators. However, revenue from our high-end professional segment continued to thrive, driven by our life and support products, which included the launch of the Avenger Buccaneer in September, which is our unique groundbreaking lighting stand. Audix and Savage were successfully integrated into the business, and Audix had their best-ever year in 2022, benefiting from plugging into the Media Solution distribution network. The acquisitions drove a 150 basis points improvement in the operating margin for the division. It was another excellent year for Production Solutions. Revenue grew by 6% on a constant-currency basis, whilst maintaining the high operating margin they delivered in 2021, and, in fact, improved it by 80 basis points when excluding the impact of Litepanels royalties. The Broker segment returned to pre-pandemic levels significantly increasing studio spend year-on-year, driving high growth in studio support. Our voice-activated prompting, launched in 2021, continued to drive growth in this area as well. Outside of the studio, our market-leading flowtech tripods and active [ flower heads ] helped drive material growth in non-studio support. The Litepanels, Gemini 2x1 Hard launched in May was very well received by the market. Camera Corps provided bespoke cameras to the Winter Olympics in the first half of the year, although second half year-on-year comparisons are unfavorable given the Summer Olympics was in the second half of 2021. Finally, Creative Solutions had a fantastic year of growth with significant increases in the Cine/script TV market following the continued 4K/HDR rollout. All our board transmitters and receivers are 4K as are 1/3 of our SmallHD monitors. Revenue from medical products continues to grow significantly, although elsewhere in the enterprise market, we saw a decline in revenue due to less remote working than in 2021 and the repositioning of our brand towards the higher margin or higher end of the market. This repositioning was part of a wider reorganization announced in November, arranging our sales and marketing teams into vertical segments to maximize the division's growth potential. Operating margin improved by 240 basis points as the revenue growth dropped through to the bottom line. Now that we've looked at the P&L, let's turn to cash. Working capital increased by GBP 19.4 million in 2022. Inventory was up by GBP 12.2 million in the first half of 2022 due to cost inflation, capacity constraints and component shortages. And it then fell by GBP 2 million in the second half as we managed our cash position carefully. Receivables increased by GBP 5 million, in part due to price rises and payables decreased by GBP 4.2 million, mainly due to year-on-year movements in accruals. Investment in PP&E was GBP 3.7 million lower than in 2021 when we insourced some of JOBY production to Feltre. We maintained our investment in R&D at around 6% of sales to continue to develop our next-generation products and deliver future growth. Cash conversion of 83% exceeded our financial goal to be greater than 80% and overall operating cash flow was in line with 2021. Below operating cash flow, interest payments were higher than in 2021 due to the rising rates, but also due to borrowings and related fees incurred for acquisitions. As such, free cash flow of GBP 28.5 million was GBP 4.6 million lower than in 2021. Let's now turn to the movement in net debt. Net debt increased by GBP 48.3 million, primarily due to the acquisition of Audix that was completed in January 2022 and the translation effect of the dollar strengthening against the pound. The ratio of net debt to EBITDA was 2.1x at the end of 2022, which remains comfortably within our bank covenant of 3.25. I'd like to take a moment now to look at our track record of turning profit into cash and driving efficiencies. This graph shows a rolling 3-year view of our cash conversion and so smooth out the phasing of receipts and payments between years. As you can see, we have a consistent track record of turning profit into cash. Our financial goal is to deliver greater than 80% cash conversion, which we have consistently achieved. In November, we announced the reorganization of our Creative Solutions division. This is the most recent example of restructures that we have successfully carried out. Across 2019 and 2020, we implemented a transition in Media Solutions to take advantage of the higher-margin e-commerce channel by setting up a digital center of excellence in the division HQ at Cassola and reducing headcount in lower-margin local direct channels located around the world. As previously mentioned, at the end of 2022, we reorganized the Creative Solutions, sales and marketing teams into specialist vertical segments to maximize the growth and potential of the division. Having started in 2022, throughout 2023, we are looking to increase synergies from our recent acquisitions and rationalize our site portfolio. Outside of specific restructuring project, continuous improvement is in our DNA with all divisions targeting 3% year-on-year productivity gains. Finally, our ESG initiatives are also driving cost efficiencies as we look to reduce the group's carbon footprint. Hopefully, that provides a good feel for how the group is structured for success. I'd like to now touch on how we're doing against our financial goals before providing some selected guidance for 2023. You can see here the 8 midterm goals we set out at last year's results presentation and that underpinned our Capital Market Day strategy. I won't go into detail on each as they have been covered by the previous slides. As you can see, we are already delivering against the majority of our goals. Constant currency organic revenue growth was not where we wanted it to be in 2022 as a result of the macroeconomic environment, but we are confident this is a short-term effect. Similarly, the net debt to EBITDA, whilst this is higher than we would like, we remain confident, and we expect it to reduce below 1.5x by 2025. Turning to 2023, we'd like to provide some selected guidance as usual. We expect challenging conditions to continue in the first half of 2023. And as such, this year, will be more second-half weighted than usual. Our depreciation and amortization would be GBP 4 million higher than in 2022, primarily due to R&D amortization increasing following investments in recent years to drive growth. Offsetting this, our restructuring plans are expected to generate a benefit of GBP 4 million in 2023. In 2023, an average of 65% of our borrowings will be fixed at a blended interest rate of 4%. Our floating borrowing is currently up 6%. As a result, net finance expense, which also includes interest on lease liabilities and amortization of loan fees would be around GBP 13 million. We expect our effective tax rate to increase slightly to 24%. As for cash items, we will continue with our policy of gross R&D investment of between 6% and 7% of revenue at a similar level of capitalization as in 2022. Cash tax will rise as a result of higher profits in recent years and rising tax rates. Lease additions are expected to be around GBP 7 million following the lease renewal for our Media Solutions HQ in Cassola. Net debt to EBITDA is expected to increase at the half year, but to materially decline thereafter. So let's recap. '22 was a record performance for Videndum. We are managing the impact of inflation well and more than offset it with price rises that will also benefit 2023. We continue to control our balance sheet, converting profit into cash, whilst macroeconomic conditions are still expected to be challenging in the first half of 2023. Going forward, we remain well positioned for growth. I'll now hand back to Stephen.

Thank you, Andrea. So to summarize, we achieved record revenue and adjusted profits in 2022. The group is executing its strategy really well and we're uniquely positioned right at the heart of the growing content-creation market. The fundamental market growth drivers remain extremely attractive. Everything that we can control ourselves, we're managing very well. And I'm really pleased with the way my very experienced team is running the business. We've got great people and great products. We're offsetting inflation with pricing, driving operational excellence, launching innovative new products and have integrated new businesses. Our customers are increasingly looking for ways to reduce their costs and improve their productivity, and our products are seen as part of the solution. We are delighting our customers. Our program of self-help actions will further streamline our cost base, and we're also executing on a number of cross-divisional synergies to ensure that the group is even better positioned for long-term growth. The one thing we can't control is the world economy. Clearly, we saw a sharp slowdown in H2 last year, and we expect that to continue in H1 of this year. My experience of previous slowdowns going back as far as 2009 is that we managed the downturn really well. And then we bounced back extremely strongly and quickly when the market picks up. I am increasingly confident that this is exactly what is going to happen. Of course, predicting the timing of that is very difficult, but we're starting to see early signs of sell-out picking up in the U.S. To conclude, we're in a really exciting market with strong growth drivers. The business is in great shape, and we have numerous exciting strategic opportunities in all 3 of our divisions. We remain committed to our previously stated organic strategic ambition. However, the timing is likely to be delayed due to the current macroeconomic environment. We expect operating profit in 2023 to grow as expected. However, PBT will be stable due to the increased interest charges, and we do expect a higher-than-usual second-half weighting. We are well placed to deliver growth and value for our shareholders. We're now going to move on to our question-and-answer session, so I'd like to hand over to our operator, and dial-in details are shown on this slide.

[Operator Instructions] And our first question today goes to Scott Cagehin of Investec.

My first question is about the strategic ambition and building on what you -- sort of your closing comments. How confident do you really feel about that? And also, on the other hand, given what's happened recently, is there any things that you can point us to that sort of enhances your confidence in a way? Clearly, there's external factors at play. But just have you learned anything new in the current environment and your confidence on the ambition? That's the sort of first question or first topic of discussion. And the second question is, could you just give us an update on ART and where we are with that and the traction that you're seeing there?

Scott, it's Stephen here. Thanks for your questions. In terms of strategic ambition, we laid out our ambition at the Capital Markets Day back in May, June last year. We remain -- I remain absolutely committed to that. We believe that we can achieve more than GBP 100 million operating profit in the medium term. We talked about achieving that in '25. That probably looks a bit more difficult than previously. And so I think it's more likely now to be 2026. But we continue to be extremely enthusiastic and committed to that. The longer-term drivers that we talked about at the Capital Markets Day are all still there. In fact, some of them, I think, are even stronger. Some parts of our business are actually trading ahead of where we expected to. So for example, Production Solutions, which is benefiting from the growth in the Cine market and is doing extremely well in the broadcast market and driving good productivity. So Production Solution is actually ahead of where we expected. Creative Solution is about where we would have expected. And as we said, VMS is behind. Why am I confident? And what is -- what can I point to? I can point to the fact that, first of all, the real -- the headwind that we faced in VMS is largely around quite a small amount of the business to the Consumer segment, which is only 10% of the group. The real impact has been from destocking. So I've seen this 3 or 4 times before Videndum and when we see a bit of a downturn in the economy, if retailers feel that they are a bit overstocked and they start to have their own working capital pressures then we see a very, very severe reaction even if our products are selling out reasonably well, which they generally are. If they are overstocked, let's say, the consumer are trying to sort of stock our TVs or are they more of a specialist, they're overstocked with cameras, which is actually what's going on at the moment, then the impact on us is pretty, pretty severe. The encouraging signs are that we think we're through that V-shaped effect. We think we've probably seen the worst of it, and certainly in the U.S., which tends to be a bit of a lead in to [indiscernible] where it tends to be ahead of the other parts of the world economy. And if we look at, for example, at Amazon, we can see that, first of all, Amazon sellout has started to pick up and turn out positive. So most of last year, it was negative. So the trend was negative. And we saw Amazon numbers that were down sort of 10% to 15%. We are now seeing some year-to-date for this year, which is only 6 weeks, we're seeing that Amazon is off 80%. And we also know that Amazon are now running on stock levels that are pretty much as low as they can get to. So there are -- in the U.S. is running at 3-weeks inventory, which is probably unsustainable as they get into more of the growth phase of the market in April and May. So we feel pretty confident about that. Clearly, it's hard to predict the world economy, but certainly is as we can see if the market starts to pick up in the second half, then we believe that we'll be back on track and be able to achieve that ambition. In terms of part, good news here, we've been doing exactly what we said we're going to do, which is we have got products out with customers, and they are -- they love it. I've actually got Marco Pezzana here today. So Marco is with me, we're talking through some of the programs and projects that we're working on from a group point of view. So Marco, as you've probably seen, has been appointed Chief Operating Officer to help me with some of the group projects that we're looking at, particularly around what we're doing with Creative Solutions, where we think we've got very interesting options in terms of what we do with that business. Marco, maybe you can briefly talk about ART, and what you've seen out in the U.S. and where we are there.

Thank you, Stephen, and good morning. Yes, we've just been visiting Creative Solutions. And I can confirm that the protocol performance and development is now complete. As we speak, we are in installing part on our Prisma and coders, and the coders that actually bring the technology directly to the end user and makes it accessible to system integrators and our largest customers. We are planning to launch the integrated product at NAB and this is very exciting because the addition of ART makes Teradek very relevant again to the live production segment of our business in addition to what we've been doing successfully in Cine, so great opportunity for incremental growth.

And the next question goes to Andrew Douglas of Jefferies.

Can we just keep on the ART topic? You talked in the presentation and the preprepared remarks that next step is miniaturization in terms of kind of volume step-up. How difficult is that from a technical perspective? I'm assuming because I'm an idiot who sits in an office in London, that's kind of reasonably straightforward. Is that fair? Or is there actually some technical challenges, which made that a bit more competitive? Secondly, on -- I guess these are a bit CS-related topologies. Can you give us an update on the progress you have made with regards to medical? Clearly, a big opportunity there. It would be interesting just to hear your thoughts there. Then last on CS. Just in terms of the strategic review, no comment in the statement, clearly, which I suspect the answer to the question, but can you just give us some thoughts on the optionality from where you see it and just whether that's changed in the last kind of 12 months? And then last, but not the least, M&A. Clearly, M&A has gone well for you. I recognize that the balance sheet is not quite where we need to be in terms of large-scale M&A, but just thoughts on M&A over the next kind of 1, 2 years, please? Or is this more of an organic recovery story?

Thanks, Andrew. If it's okay, I might answer those in reverse order. I'll probably ask Marco to answer a couple of the questions. I mean in terms of M&A quickly, we're certainly not ruling out M&A. I mean, clearly, at the moment, you referenced the balance sheet, we want to get our net debt-to-EBITDA below where it is at the moment. It's higher than we'd like it to be, although we're actually pleased that we've managed to beat the forecast that we've got as you know, net debt to go down to 2.1x by the end of the year, we can get it down below 2x and certainly by 2025, as we said, we will get it down trending well below 1.5x closer to 1x. And at that point, clearly, the opportunity to do more M&A will be there. We haven't got anything in the funnel at the moment of any significance, but the one area that we are hugely pleased with at the moment, as I hope you saw the video with Marco, it's Pro-audio. Audix is a gem. We think we can go Audix out potentially through other acquisitions. So that would be the area that we would particularly look at. In terms of strategic review, i.e., what are we doing with Creative Solutions. I can't say a lot more than we put in the statement, except to say that as Marco is about to tell you, progress in medical is really exciting. So we're now in a new phase where the products we are building are rather than being OEM of products in their own right, which we think are going to be very exciting through various medical customers. So the Medical opportunity is very exciting, a nice [indiscernible] is one of a few cases where we have a very clear visibility going forward. We've got a very good order book there. And Medical looks very exciting. Marco will talk about it in a second. And also, obviously, the technology is phenomenal, the customers love it. And so the opportunity is to take that technology and potentially take it into other markets and so on, I think, is even more enhanced. So I think both Medical and ART are opening up new options for us. And all I can tell you is that we are working on that actively. It's something that we are looking at right now. And when we can update you with further progress, we will. So Marco, do you also just talk a bit about, first of all, about where we are with Medical because you've been over in the U.S. working with that team and then also just a little bit about ART and the fact that miniaturization is kind of what we do. It's what we have done for the last sort of 10, 15 years, they are experts assets and maybe you can talk a bit about that.

Yes, indeed and thank you, Stephen. The problem I was able to see was actually pretty similar for Medical and ART in that in both instances we have been pioneer in the technology, and where we are now is integrating that technology into finished products that the end user can capitalize on. So when we look at Medical, great order book on OEM, but we are now ready to launch a range of products called Falco that integrate the Amimon technology into finished products that will provide effectively the full network solution to our customers, enabling us to talk to system operators in the industry and not just to OEM customers. This is obviously a game changing, the step forward for that opportunity. Very similarly, with ART, we have successfully utilized the technology. This is now embedded, as I said earlier, into our Prisma and coders and decoders, so the challenge was there, but it has been resolved and the product is coming to market at NAB.

And NAB is in April. So it's not absolutely done. But to your point, Andy, this is what we're good at. The regional Teradek Bolt product was originally quite big. And the team in California are world experts at miniaturizing this sort of technology, and that's what we're doing, and we'll be able to show that to everyone at NAB, and that's going to be a big deal because that will make ART available to a very wide market.

And the next question goes to Henry Carver of Peel Hunt.

Just a couple from me. First of all, on the R&D spend and the capitalization, can you give us roughly the split of R&D spend? I mean, I'm guessing it's fairly sort of focused on what we've just been talking about in Creative Solutions, but sort of split across the divisions would be useful. Secondly, in terms of the H1-H2 split, if you could just give us what you think that's going to be on a revenue and probably an EBITDA line for '23. And then lastly, just to the debt, obviously, we're -- it's hopefully going to -- the debt to EBITDA is going to improve over the second half. But just if you could give us an idea of what sort of debt-to-EBITDA multiple, you think is the kind of peak point in, I guess, June? And yes, any sort of thoughts and comments around that would be useful.

Right. Thanks, Henry. So first, I've got Andrea here, so he will probably jump in if I get this wrong. But in terms of R&D spend and capitalization, you're right, that is very much weighted towards Creative Solutions. I think -- I don't think we've been too specific exactly what we've said before. But the spend on R&D in Creative Solutions is more of the other 2 divisions booked together. So that gives you a sort of idea of the scale of it. In terms of -- if you need more information, I'm sure, Andrea and I can provide that. In terms of H1-H2 split, in terms of revenue and profit, we think that's going to be probably as extreme as it's ever been, we've seen H1-H2 split are at sort of 40-60 before. And I think that's what broadly we would expect. We see -- as we said, we see a continuingly difficult situation with destocking in the first half. But as I said, I'm confident that we're going to see us bounce out of that certainly in the first half. So by June, we think we'll be bouncing out of that. And we think retailers are going to have to start to buy inventory again, that doesn't affect all of the group. So it's worth emphasizing that we're focusing a lot on Consumer, which is only 10% of the group. We're talking about destocking, which pretty -- only affects really about 40% of the group. 60%, 65% of the group is pure professional, pure B2B where the business -- it's dangerous to say on touch unaffected by the economy but we're seeing growth in all those areas. So if you look at the products like the Avenger Lighting, which is just sold into the film industry and in Netflix and Disney, that's up in 2022, that's up about 50%, 55% which is incredible. SmallHD, which -- monitors just used again on set is up about 30%, 35%. Onset monitoring is up. Prompting is up. Manual support like flowtech being sold into the broadcast and on location businesses is up significantly. We can't make enough of flowtech at the moment. So that point of business feels very solid, and we expect good progress there. The B2B is what's going to happen around the stocking and the economy and our expectations are we'll start to see things improving. And what that does, then we'll see a big bounce back. And then in terms of debt, and then I'll let Andrea maybe jump in on anything. We -- as I said, we got debt down to 2.1x at the end of 2022. We will get that down below 2x by the end of the year. It may -- seasonally, it moves up at the end of June, it always does that, and it may be up a little bit, a couple of points maybe to 2.2x to 2.3x. But yes, trust me, we take this incredibly seriously. I don't like having this level of debt. We will drive it down as fast as we can. Andrea, do you want to add anything there?

Yes. I think you got that, Stephen. And just a point worth noting is that we are very focused on inventory in particular. That's come down in the second half, as I just said. But particularly in Q4, we had a large reduction. So we're well on top and managing that very closely. If it goes up a little bit in the end of the first half is because we buying them would be looking to drive growth in the second half. So it's a seasonal thing, we know it's going to happen, and it's in the region of that point to points up, and then you will learn that back down as we approach year end.

The inventory -- sorry, go ahead.

Sorry, Henry, does that answer your questions?

Yes. No, I think just following on, now the inventory level as it is a obviously, you invested quite a lot in that, the last year -- does that mean that you don't need to spend as much to sort of fund the growth in the second half? So you shouldn't see that -- have to increase further to fund growth in the second half?

No. So inventory, we've got it down in December. It's about GBP 107 million. We are pretty much only that stable as it was across the first half. You might see the usual -- a little bit of a movement that is well controlled and managing.

Our final question today goes to Tom Fraine of Shore Capital.

Quite similar to the last question. I think now we're looking at free cash flow maybe in high single digits. So if you could just give us a bit of guidance on the working capital, obviously, a GBP 19.4 million cash outflow in '22. How do you expect that to be potentially reach the reversal soften for '23? And any guidance on the CapEx going forward for and/or any other material items in cash flow in '23 would be much appreciated.

Yes. So thanks, Tom, thanks for the question. So some of the movement in working capital in 2022 is down to the current position of receivables and payables. So we have higher pricing reflecting in our receivables. And there is cut-off issues at year-end which usually happen. The good thing is that we've controlled the inventory in the second half very closely, as I just mentioned, and we don't, therefore, expect working capital to increase that significantly in 2023. And we are targeting -- as you just saw in one of the slides there, we are targeting 100% cash conversion. We did 80% this year. We did slightly more last year. So ballpark, it's going to convert and continue to convert. We're going to continue to convert profit into cash at a very, very healthy rate and managing working capital through that.

And just on the CapEx, have you got any guidance going forward and for the immediate future?

Yes. So if you look at CapEx as a whole, GBP 20 million was investment this year, improving the R&D development costs. We expect a slightly higher number next year as we drive through our ambition of developing new products and getting up to that GBP 600 million of revenue over the next few years. So there's going to be a little bit of investment in CapEx. But again, it's part of the 100% cash conversion I just mentioned. So it will be in a controlled manner.

So I mean, while you're on, I know you've got concerns we haven't maybe spent any time on this, concerns about the noise around Netflix and Disney, reducing costs and so on. And as we discussed, clearly, there may be a little bit of disruption because I think we expect that some production will move out of higher-cost areas like California to lower-cost areas. So in the U.S., for example, we're seeing huge growth in the amount of production being built in, for example, Georgia, in Atlanta. And also more production moving out of the U.S. However, the overall spend on original content is absolutely huge. It's about -- in total, it's about $100 billion. It's growing -- it's going to grow this year about 10%, we think. And we are obviously a tiny bit of that. We're 0.001% of that. But what we are excited about and why we are -- don't see this as a major concern. In fact, we see it as a driver of our business, a driver of growth. And that -- if you look at the areas that we're doing well on, that gives us good evidence. What we're excited about is that we're part of the solution. So when Netflix want to save costs, the main cost is in people. So about half the cost of any production is in people. And a lot of the time, we have a lot of people standing around not doing very much. So if you can reduce the amount of time, it sets -- it takes to set up each shop. And if you make sure that you shoot it right first time, you don't have to come back and shoot it again. Then that saves you an awful lot of cost and productivity and so on. And our products are absolutely essential to that. So we expect our products like onset monitoring, which allows you to set up quicker, 4K because it gives you a true representation of what the camera is seeing, monitors, so that you can make sure everyone can see what's going on. Those products, we believe we're going to grow through this period. So we see original content as a big driver of the growth going forward. Okay. I think that's the end of the question. So I'd like to thank everybody for listening. I'm sorry that probably was a bit longer than usual. Hopefully, you've all made it through. I really appreciate you listening, and we'll no doubt talk soon. Thank you very much.

Thank you. This now concludes today's call. Thank you so much for joining. You may now disconnect your lines.