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

Hello, everyone, and thank you for joining the Videndum 2024 Full Year Results. My name is Lucy, and I will be coordinating your call today. [Operator Instructions] I will now hand over to your host, Stephen Harris, Executive Chairman, to begin. Please go ahead.

Thank you, Lucy. Good morning, everybody. My name is Stephen Harris. I'm the one speaking at the moment. I'm joined by Sean Glithero, our Interim CFO. We're going to take you through this presentation this morning. A brief overview, and then Sean will take over to the financial review. I'll come back with a market update and then on to operational actions and eventually the outlook. So without further ado, look at the overview. The results were in line with our 16th of December trading update. And not much to talk about there because that all should be known by everybody. Effectively, we broke even after the one-off charges before the one-off charges of GBP 18 million. Our cash flow was up 45% to GBP 17 million and closing net debt was GBP 133 million. Notably, our covenants have been reset for the remaining life of the revolving credit facility, which is until August 26. And this morning, we did a small equity raise of GBP 8 million, giving us some extra liquidity. The refinancing has been launched, and we're actually moving on with that. And very importantly, there is significant progress on our operational improvements, generating GBP 18 million of annualized savings out of the work that we've announced so far. And finally, we'll come back to it in more detail, but we think we're well positioned to weather the U.S. tariffs. With that, I'm going to hand over to Sean, and he'll take you through the financial review.

Thank you, Stephen. I'm going to run through the results for FY '24 and then update on our refinancing. Revenue for the year at GBP 284 million was as outlined in our December trading statement, 8% down year-on-year after what was another challenging year. Revenue includes GBP 3 million within the VCS division from the recently sold Amimon business. And if you exclude that in FX, the decline on a like-for-like basis was about 6%, so similar to the headline fall. On the left, from a divisional perspective, VCS grew year-on-year, but as the division most exposed to the strikes in 2023, they were starting from a lower base. VPS was down 10%, but given it was an even year, there was GBP 8 million -- or 8 points of upside from the Summer Olympics within that result. VMS, our largest division, was down 14%. Looking to the top right graph and share of revenue, it has been H1 weighted for the past 2 years. With the strikes in 2023, full storm in cine at the start of 2024, the weighting is more to the first half than in the past and what we will see in the future. However, our past actions have driven the shape too. By pushing for sales at the end of a quarter or particularly end of the half, we have put more stock into the channel and pulled forward into H1. Normalizing is not a science, but our best estimate is that if we adjust for this pull forward, the H1 versus H2 split for 2024 is more like 51%, 49%. But more importantly, our normalized half-on-half profile has been flatter at 5% down moving half-on-half for each half from the second half of '23 to the second half of '24 as shown on the graph on the bottom right. The reported growth of 12% in the first half of '24 being flattered by that pull forward and other normalization adjustments. This is important as we look forward as we expect the normalized half-on-half improvement to continue with the first half '25 revenue higher than that achieved in the second half '24. However, it will be down double digit on reported first half '24 as those normalization adjustments are lapped. The converse is that the second half '25 will benefit from a more natural revenue profile and not have the headwinds that the second half '24 did. So no doubt, another challenging year, but the decline in the second half was less pronounced than it first appears. Looking at revenue from a year-on-year perspective, the biggest driver of the 8% decline is lower volume. However, greater discounts in part linked to the pull forward of revenue and negative FX play a part too. These were offset by the Olympic contract. It's worth spending a moment on Amimon as a quirk of the accounting rules means it's moving around our P&L. In financial year 2023, it was a discontinued item and outside of revenue and operating profit. As we have now sold the business, it will be a discontinued item again in 2025. But as the sale was not until after the year-end, it is back as a continued operation in '24. However, the P&L impact is limited with only GBP 3 million of the revenue included. And on an adjusted basis, the operating losses have been stripped out as an adjusting item. Looking at the gross profit bridge on the left, revenue movements from volumes, discounts and FX flow into a lower gross profit before we have the upside from Olympics and some operating efficiencies included in other. As outlined on the right, gross margin would have held year-on-year at 38% if we exclude the noncash one-off charges. These one-off charges relate to increases in our stock provision. Product line by product line, we have reviewed the inventory levels against future demand expectations and adjusted accordingly. Similar to gross profit, operating expenses were impacted by one-off charges this time related to additional amortization on previously capitalized development spend. Excluding those noncash write-downs, spend was in line with 2023 at GBP 108 million, very much consolidating the reductions made in 2022. Stephen will talk later about the extensive restructuring we planned and commenced in Q4 '24 that drives a GBP 15 million cost reduction in '25. 2024 saw GBP 1 million to GBP 2 million impact from this, but the balance will be in 2025 as it has taken time to complete employee and union consultations as well as supplier negotiations to realize the procurement savings that will come through gross margin. In the operating profit box, the divisional profit split of the breakeven result is shown before one-off charges. Media Solutions down from GBP 11 million to GBP 3 million as the 14% lower revenue fell through to profit. Production Solutions top line also down a similar amount, but the profit impact was cushioned by the margin on the major sporting events that only occur in even years, this time the Olympics. Creative Solutions profit increased as did revenue following the lapping of the 2023 strikes. Ultimately, on a pre one-off charges basis, the GBP 12 million reduction in gross profit falling through to a GBP 13 million reduction in operating profit as operating expenses were broadly flat. So far, I've talked to the result before adjusted items and an operating profit level. Looking at the full profit and loss account in the statutory format, we had GBP 78 million of adjusting items as outlined in the box below the P&L. GBP 51 million of these related to impairment of assets, mainly in respect of goodwill write-offs. Amimon operating losses were GBP 12 million, approximately half of which was from asset impairments. The restructuring costs of GBP 11 million reflect the provisions made in 2024 for spend that will be in 2025 as we complete the restructuring projects. Back to the P&L. Net finance expense of GBP 7 million was half of the GBP 14 million in 2023. The main driver of this was that the average RCF borrowings fell nearly 50% following the use of proceeds from the equity raise at the end of 2023. However, as in 2023, net finance expense was also aided by GBP 4 million of FX gains. There was a large tax charge in the year as we wrote down GBP 63 million of the deferred tax asset balance. And this, together with the adjusting items charge of GBP 78 million drove the increase in statutory loss for the year to GBP 147 million. Turning now to cash flow and net debt. In the box on the top left, we can see operating cash flow was up 45% to GBP 17 million despite the fall in revenue and lower EBITDA. EBITDA and working capital both presented here, excluding the noncash one-off charges of GBP 18 million. Working capital was favorable due to a reduction in debtors that followed the revenue fall, plus a small increase in creditor balances. Excluding the extra stock provision, inventories were flat year-on-year and are focused for reduction in 2025. CapEx was very much in line with prior years at GBP 15 million. Increases in physical property, plant and equipment spend were linked to the Olympics contract and extra investment ahead of new product launches, particularly the Manfrotto camera support coming to market in H2. This was offset by less capitalized spend on R&D, albeit gross spend remained at 6% of revenue. Bridge of net debt in the chart on the right, we can see that net debt has risen GBP 4 million to GBP 133 million. Offsetting operating cash flow has been interest of GBP 10 million. And within other, there is GBP 4 million of Amimon cash out and GBP 4 million of net lease additions. Cash tax was minimal in 2024. Leverage is stated on a covenant basis and increased from 3.3x to 5.2x as whilst net debt was relatively flat, EBITDA declined. A reconciliation has been included in the appendix. Before handing over to Stephen, I wanted to share the progress we have made on our balance sheet. As outlined in a number of trading updates, we met the December 2024 covenant tests and had both the February '25 and March '25 tests waived. This was the precursor to the full covenant reset we have just completed for the remaining life of the facility. The reset has been significant, involves new covenant tests, including that of minimum liquidity. And together with the GBP 8 million gross equity raise announced this morning, sets a strong cash base from which to focus on our refinancing. Preparations for the refinancing have been extensive, and we launched these earlier this month with completion targeted ahead of our H1 '25 results in September. I will now pass back to Stephen to provide a market update.

Thanks, Sean. Okay. So if we get into the markets, the Slide #14, I'm showing at the moment is showing the markets, 3 markets that we sell to, not our divisions. We might have 3 divisions, but they are actually not a one-to-one map with our markets. This information was derived from a consulting study that was done very recently that was required for our refinancing. And it was very insightful. A lot of work was done, a lot of interviews carried out. And what you can see on the slide is the results of that. I would point out that the TSM, total shared market is actually only part of the potential addressable market, and it's that market that we can currently serve with our current geographies and distribution channels and some of our products. If we go market by market, the independent content creation market, obviously, a very high market share, 44%. And all 3 of these markets, by the way, structurally are sound and forecast for continuing growth, which is quite pleasing. So 44% of GBP 400 million served market. cine and scripted TV, 26% of GBP 200 million served market and the broadcast market, 20% of GBP 125 million. So that's quite useful information that we glean from that. Moving on to look at what's happening in those markets. We take them one by one. So independent content creation. It's quite clear that the demand for photo services and growing amateur interest have now stabilized. They have been in a downward trend for 5 or 6 years, but it seems to have bottomed out, and we're just turning the corner on that now in 2025. There was some concern that there would be an impact on the business from artificial intelligence. People worry that might be negative for us. And the study showed that the only real impact that it will have is on backgrounds. So our paper business where that's fairly straightforward for AI. The rest of the products that we sell into this area, we don't think in the foreseeable future that there will be any impact from AI. So we're now into regular upgrade cycles. It's interesting to note that camera sales are growing quite nicely. And of course, the camera sales, we will see that come through in supports and tripods by the attachment rate to those. The other thing that we've done here, we've kickstarted our new product development programs, which had been paused for a few years. So that's also going to help our growth in these markets. That comment actually applies to all 3 of the markets. The other important point here is that the channel inventory is now normalized. What we saw is, as Sean mentioned, a big pull forward into the channels that wasn't meeting customer demand. That was just putting inventory into the channels. And since the half year last year, we've been burning that off. We actually stopped the heavy discounting that was going on. And that meant that our sales into those channels went down as they were waiting for us to give them big discounts again, and we weren't giving them. And in the meantime, they've been burning off the extra inventory that they had. As we come into 2025, what we see is that the inventory now, which we've got a good view of actually about 60% of the channels, we have a good view of the inventory. It's now pretty much burned off. What we're seeing is that our sell-in data, our revenue which started off being quite low at the beginning of '25 has now come on par with the sellout data, what the channels are selling out to the market, meaning they've actually burned the inventory down. Moving on to cine. Again, Sean mentioned the full storm at the start of '24. This is where post strike, people went back into production to finish off for production. Once we got past Q1, the cine market started dropping off back to where it would have been. And it stayed in lackluster land throughout the year, frankly, just starting in the fourth quarter to slowly pick up. We've seen that continuation of the pickup now into '25. And the -- there's growth across the piece, except in North America, we're yet to see Hollywood turn the corner, but there's a lot of growth around the rest of the world. There's some structural issues that help us in cine and scripted TV, and that's that the more cameras that are onset, and of course, it's much cheaper to have multiple cameras rather than retaking the scene again and again. So they put multiple cameras on now. That drives more transmissions, which we use for our Teradek equipment, and that also drives more monitors because each camera requires several monitors. And we've now returned to regular upgrade cycles with the destocking over in cine and scripted TV. Broadcast, a bit of a mixed picture. It's turning, but it's been slow in '24. Some strong growth in sports and entertainment. And in our business, particularly, we've got continuing automation driving growth in robotics. We've got some great products in that. Moving on to just looking at another piece of work that came out of the consulting is our product positioning. And you can see our products laid across the different markets here. And the thing that should jump out at you is that the number of them are #1 in the market. And in many instances, we're #1 by a long way. So there are very few of our products where we aren't in the lead and are leading by quite a way. So we've got a very strong position with our products and brands. Just want to talk about U.S. tariffs. So our strategy on this is to pass 100% of the tariffs on through the price increases, and we're well set to do this because of our strong position in each of the markets, each of our brands being so strong. the main competition we've got is Chinese. And that -- when I say that, I mean across all of the products that we produce, it's virtually all Chinese. In a steady-state world, that would actually say we are competitively advantaged and the Chinese are disadvantaged by the current high level of tariffs on China. But I mentioned in a steady-state world there because right now, what's going on is anybody's guess, things are coming and going and the actual disruption out there is causing problems, particularly with shipments and things like that. Hopefully, it will settle down soon. We have no intention to change our sourcing strategy at this stage. That would be presumptuous because we've got to see where this goes. But right now, we're in a pretty good shape to weather this. There is a second order risk we see, and that's the higher pricing, not just from our markets, but right across the piece, could lead to a global recession. And that, of course, would impact demand for our products as well. With that, let's move on to the operational actions that we've been taking. Clearly, in the fourth quarter, we really went at this quite strongly. You can see we've actually taken quite a chunk out of the business in terms of cost savings, GBP 18 million annualized out of the actions we've announced so far, GBP 15 million of that will hit 2025. Quite a big program. And just a point to note, I'd like to say thank you to our employees. Without their support, this wouldn't have been so straightforward to do because there's a lot of work that's been doing right across the piece. One of the things we're doing is simplifying the structure. So we have 3 divisions that we're moving to 2 going forward. That work will be complete by next year, and we'll be reporting on that basis from the start of next year. The advantage of making just 2 divisions here is actually it eliminates a lot of duplicative overhead. I mean, you see 3 divisions as we are at the moment. But actually, there are a lot more operating units within those divisions. So part of moving to the simplified structure is to consolidate operating units within divisions so that we've got a much cleaner approach going forward. We've done some so far, but it's more work to do on that. We've reinstated pricing discipline. One of the problems we had was a lot of independent, I'll say, pricing going on with discounts being offered around the place with no real coordination of it. We've now put in place a governance system to manage that, and we've reduced the level of discounting. There's a lot of work gone on that, and the sales force are actually handling that quite well. One of the things that we mentioned was this heavy discounting and people holding off buying hoping for a discount. We didn't give them a discount. But what I can say is as we hit March this year, pretty much everybody started buying for us at the lower -- higher discounted price. So the prices are higher and people have started buying. So there's no resistance anymore to that. And indeed, we're moving forward quite well. One of our targets is to drive gross margin expansion. And in doing that, we're actually rationalizing the SKUs that we've got. procurement is being improved. We've hired in some specialists for that, and our supply chain is being optimized. As a no-brainer, we've reduced discretionary spending. That's pretty easy. And so that's taken out a chunk. And our operational efficiency is being worked on as we speak. This, of course, is a never-ending thing. I mean, you should always work on these, but there was a lot to do, and we're doing it, a lot of costs coming out of that. Manufacturing efficiencies, we had too much manufacturing capacity. I mean, if I tell you that we were operating in our 3 main facilities, each one at about 40% utilization on 1 shift. So a lot of space. And what we've announced so far is that we're closing the Berry St. Edmunds site and consolidating that into our Italian site in Feltre. So more work to be done, but a great start. And we are virtually complete with this. I mean, having negotiated things with the unions and the other employees involved, this is now just a case of putting things in place. We should be in very good shape with most of these savings coming in the second half. Reduction in headcount. Our year-end number will be about 1,380, and you could see the headcount has been falling quite steadily. So moving to the summary and outlook. So we've talked about the 2024 performance, clearly a challenging year and recovery anticipated at half 1 '24 didn't happen and the shift to focus on prioritizing actions within our control is what we've moved to. Full year results are in line. Operational efficiency program, I've just talked about that. And balance sheet, which is what Sean was touching on. So we've done the equity raise. We've actually got the covenants reset. So we're moving forward quite fast on that. Moving to the outlook. This is the same word for word as you'll find in the RNS press release, also our annual report. I don't intend to go through every word. But the bottom line here is that we are improving at the moment. We started the year fairly softly. But month-on-month, there's been quite a marked improvement. And going forward, that's what we need, and it looks good. So we've got no inventory lag at the moment. That's been burned away. month-on-month improvement looks good for the second half. With that, I will leave it there and hand it back to Lucy for any questions. Thank you.

[Operator Instructions] We currently have no questions. So I'll hand back to Stephen Harris for closing remarks.

Okay. Well, thank you very much, everybody. I appreciate you listening. I'm sure we'll meet up with a lot of you in the coming weeks, but let's go from there. Thank you. Goodbye.