Electronics Production | February 25, 2008

Raymarine full-year pretax profit up 66%,<br>good news for Flextronics

In the year to 31 December 2007 UK based Raymarine demonstrated that it could continue growing its world-wide business to successfully offset a softer US market.
Group revenues improved by 3.1% to £140.7m from £136.5m in 2006. In real terms, accounting for the devaluation of the US dollar and on a like for like basis (excluding the benefit of acquisitions), sales grew by 4.0%. The performance demonstrated the benefits of a broad geographical spread of business. Overall revenues rose by 3.1% to £140.7m (2006: £136.5m) and adjusted profit before tax* was up 18.8% to £26.9m (2006: £22.6m).

The profit was supported by strong margin growth, upheld by the outsourcing programme which has now settled into a routine process within the Group. The strategy of continuing to acquire a number of key market distributors has contributed positively to earnings with new wholly-owned subsidiaries in Australia, France and Germany.

The markets that have remained as independent distributors have collectively performed well and continued to build both OEM and aftermarket business. Despite the challenges in the US retail market, the OEM revenues with the US boat builders have held up extremely well, supported by the stronger demand being on larger vessels where Raymarine enjoys greater and more complex levels of equipment.

Of the new product launches in 2007, the G Series was the most significant addition to the range. The product fully meets the strategy of moving to both larger craft and greater system capability. It is our most powerful and comprehensive multi-function display product to date with extensive systems networking capacity. When coupled to the new digital radar, it creates one of the most complete control systems in leisure marine electronics. Presentations of the G Series at recent boat shows in Europe and the US have resulted in enthusiastic reviews both from the press and marine professionals.

Whilst the Board is mindful of the new pressures in world economies, it recognises that the fundamentals of the business remain very strong. The brand remains pre-eminent in the marketplace. The strategies of continuing to build a growing and comprehensive product range and driving new markets are supported by the continuing strength of OEM demand on growing large boat order books in Europe and Asia. It is the Board’s view that current trading is in line with expectations and the outlook for 2008 remains positive. It is therefore with this confidence that the final dividend for 2007 is proposed, subject to shareholder approval, at 6.63p per share.

Throughout 2007 pricing was maintained. Cost of goods fell as the Group started to benefit from the lower cost of labour, overheads and components achieved through outsourcing production to Hungary.

As a result of these activities adjusted EBITDA* grew by 21.0% to £33.5m and we are pleased to propose, subject to shareholder approval, an 11.4% increase in the final dividend to 6.63p per share.

During 2007 the market outside of the US continued to be driven by robust demand for the supply of equipment across continental Europe and the emerging markets of Eastern Europe, the Middle East and Asia Pacific, which have different characteristics to the US markets, were particularly strong. Across the US, the retail market weakened dealer channels were soft, but sales to OEMs grew by 13%.

By boat size, those companies building larger boats (and that includes those based in the US) continued to see strong demand. Above 60ft in length, builders were claiming business up 10%, above 80ft market estimates put last year’s growth at 18%. However, builders of smaller sized boats, most notably those in the US, were in a less upbeat mood, seeing downturns in volume and in some cases they were consolidating plants.

In January Raymarine set up its own subsidiary to serve Australia and South East Asia thereby replacing the long standing distributor that had represented Raymarine in that region for more than 20 years. This acquisition differed from the others in that a new organisation was set up from scratch. In March the Group acquired SDM Electronique SAS (“SDM”), the sole distributor for France, Monaco and Overseas French Territories and in August acquired its German distributorship H.E. Eissing KG (GmbH &Co.) (“Eissing GmbH”). These have been trading well on the back of excellent and well established relationships with boat builders, retailers and dealers. This has proved to be invaluable in getting even closer to the customer base and tapping into a profitable supply chain. Whilst these are successful organisations with years of experience in the sales, marketing and support of marine products, there are opportunities for improvement.

On a like-for-like basis and excluding the benefit of the acquisitions of distributorships, Raymarine business in regions outside of the Americas grew by 12.7% in 2007 over 2006. The emerging markets across Eastern Europe and the Middle East provided excellent growth at 21% and 19% respectively. It is particularly pleasing to record strong performances in the more well-established regions ‚Äď Australia and South East Asia grew year on year by just over 20% and Southern Europe showed an improvement of just under 19%.

UK Domestic revenues climbed by 11.6% reflecting the strength of UK boat builders and most significantly gains created in the retail channel. Northern Europe excluding the UK fared less well ‚Äď Holland and Sweden were weaker than they had been in previous years and in total this region advanced by 3%.

In the Americas, sales direct to boat builders, accounting for 22% of Raymarine’s Americas business, grew by 13% but Retailers (19% of business) fell by 20% when compared to the prior year. Dealers and wholesalers, who were flat at the half year, shrank by 2.7% by the year end. Sales in the US overall fell by 3.9% year on year at constant exchange rates, just marginally worse than we reported at the half year stage. Overseas distributors, which includes sales to Canada and South America, fell by 5% - this was particularly disappointing and these regions must represent an opportunity for growth in the future.

Revenue was £140.7m (2006: £136.5m) a nominal increase of 3.1%. Underlying this, however, reported sales have been suppressed by the weakness of the US Dollar while having been increased by the acquisitions made during the year. Like-for-like sales after adjusting for these two factors was 4.0% up on last year. At the time of the interim results the Group reported that US sales were not achieving the rate of growth that had originally been anticipated for the year. For the full year, sales in the Americas were down by 3.9% in Dollars and in the USA down by 3.6%. Across the Rest of the World sales have been strong, offsetting the US weakness, and growing by 19.5% overall or by 12.7% when the contribution of the new acquisitions is removed. As remarked elsewhere the strength of sales into boat builders has been a significant feature of sales in all territories and reflects the positioning of Raymarine’s product portfolio, which is largely focused from the mid to upper end of the market where demand is more resilient. Sales to the Americas were $120.6m (2006: $125.5m). Sales to the Rest of the World were £80.0m (2006: £67.0m) of which the newly acquired distributorships contributed £4.6m (2006: £nil). The weakness of the Dollar against Sterling, which reduced reported sales by £6.1m compared to last year, has not had any negative effect upon the reported profits of the Group due to its natural hedging of the Dollar Adjusted EBITA* before foreign exchange was £30.6m (2006: £24.2m) an increase of 26.6%. The increase in profits is mainly attributable to the growth in sales, the reduction in costs resulting from the outsourcing project, and the first time contribution from the acquisitions.

The outsourcing of production to Hungary, a project that has taken up a great deal of management resource since its announcement in 2005, was successfully completed during the year. The benefits are now showing through as expected and the project was completed at a cost very close to the original estimates.

The Group’s finance charges after interest received rose to £3.7m (2006: £2.0m), reflecting the higher average level of net debt throughout the year brought about by a number of factors discussed below, including the purchase consideration for the acquisitions.

Adjusted profit before tax was £26.9m (2006: £22.6m) an increase of 18.8%. The statutory profit before tax was £23.4m (2006: £14.1m) an increase of 66.1%. Profits were charged to tax at an adjusted underlying rate of 25.1% (2006: 26.8%). Adjusted basic earnings per share* were 24.5p (2006: 20.0p) an increase of 22.5%.

At 31 December 2007 net debt stood at £60.0m (2006: £43.6m).

Gross profit was £63.3m (2006: £56.2m) an increase of 12.6%. Gross margin percentage increased to 45.0% from 41.2%. The principal gain in gross margin has come largely from the lower cost of goods sold due to the outsourcing of production to Hungary. This was offset to a degree by the need to increase the charge in respect of the provision for warranty to reflect a rise in the running rate of warranty costs to 3.1% from 2.6%, and also a small increase in inventory provisions against a non-outsourced item. Product warranty is a significant cost for Raymarine as the Group provides warranties extending up to three years and featuring repair or replacement on board. The increase in warranty costs is in contrast to a decrease in 2006. However, had it not been for the rise in warranty costs and inventory provision, the gross margin percentage would have risen to 45.8%. Freight costs remained at similar levels to 2006 having been budgeted to reduce. It is anticipated that the desired savings in freight will be realised in 2008 following a review of logistics arrangements and the opening of a new distribution hub in Holland. This combined with the full year effect of the outsourcing benefits should ensure that the Group’s gross margin percentage increases further in 2008.
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