Chief Executive’s statement

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We had a good year in 2007, but we have the potential to do much better.

We increased revenue by 21% and pre-tax profit by 19%. We maintained the improvement in cash flow. And we increased our share of the European maritime all weather beacon market.

But it would be wrong to imply that everything in the garden is rosy. Of course, we want investors to note our strengths. But our future success will come not just from playing to our strengths, but also by addressing our weaknesses.

CEOs tend not to dwell on their companies' weak points. But I believe our most significant achievement in the past year is the action we have taken to identify and rectify vulnerabilities. This has not been about quick fixes. It has been about plotting a new course towards more rapid growth and more sustainable long-term success.

We have addressed the quality issues that have weakened our position in the huge North American market. We have invested in new technology and new product development to sustain market competitiveness, create new market opportunities and reduce our dependence on the maritime all weather beacon market. And we are driving down costs so that we can reverse falling margins while also pricing competitively. The benefits are already becoming evident in this year’s trading.

Financial results

In 2007 we increased revenue by 21% to £209.9m. This reflected particularly good growth in our core all weather beacon markets, exchange rate movements and a full year's contribution from Tracker Navigation, which we acquired in October 2006. This business, now our GPS division, has fully met our expectations: its 2007 revenue was up 35% compared with the previous 12 months, albeit from a relatively small base.

Our North American revenue benefited from exceptional exchange rate fluctuations: the 11% increase in the average sterling to US dollar rate increased our reported sales by £15.0m.

Pre-tax profit grew 19% to £26.0m. This was a respectable performance in a technology-based market where falling prices put relentless pressure on margins.

Operating margins have continued to tighten. At the same time we have been investing heavily for the future. Our spending on R&D more than tripled to £4.9m last year, and will rise further: we aim to invest 10% of revenue on R&D by 2010. As our revenue grew, working capital rose by £1.7m, excluding exchange-related movements. In addition, we invested £0.8m more than in 2006 in upgrading production facilities to increase capacity, quality and efficiency (from £5.7m to £6.5m). Despite this, through strong revenue growth, we achieved a 22% increase in cash added value, our preferred measure of value creation, to £13.4m. Our economic return increased from 19% in 2006 to 23% - comfortably above our estimated weighted average cost of capital (9.8%) and well above our historic levels.

Dividend

Implementation of our strategy is progressing as planned, and delivering the results we promised. We are therefore recommending a dividend of 75 pence/share, payable to ordinary shareholders, an increase of 15%.

Strategy

Our strategy aims to create shareholder value by increasing market competitiveness, by meeting customer expectations and developing next-generation products, and delivering operational excellence.

I am delighted by the progress we have made on all fronts in the past year – particularly by our work to identify and remove impediments to further success through our Fast Forward programme. Launched in 2007, this is designed to support both elements of our strategy by delivering improvements in quality and delivery while reducing operating costs.

It is clear that we have not been meeting customer expectations consistently on quality – particularly in North America, where this has cost us our coveted market leadership. We have been taking rigorous action on quality under our Fast Forward programme. As a result, our AWB division is already ahead of industry quality norms in Europe and in line with the average in North America. Our goal is to move rapidly to clear industry leadership.

Customers’ expectations are a moving target: to stay competitive we must keep developing next-generation products that offer ever better performance and value. In recent years we have focused too much on improving our existing lines. We have begun to increase the percentage of revenue arising from new products, but it remains far too low. In 2007 we enhanced our new product development process: by 2012, our target is to generate 20% of revenue from new products less than two years old – compared with 8% in 2007.

The acquisition of Innovsea has given us exciting new technology to exploit. As a result, we are developing new all weather beacon models that will make us more price competitive and have the potential to take us into new markets – including jet skis and skidoos, mountain biking, climbing and hiking. Read more about AWB development pipeline.

This could further advance the diversification of the business, which is already making good progress through the rapid growth of our GPS division. It makes sense for us to broaden into new markets where our technology and skills are relevant – not only to spread risk, but also because our ambition is ultimately to grow the group at a faster pace than the growth rate of the maritime all weather beacon market will allow. Read more about our GPS division.

New technology will help us to keep offering more performance for less cost – a competitive necessity in markets where prices are always trending downwards. But how will we protect our margins? Here, too, we must own up to not working hard enough.

Our margins have slipped for five years in a row. We do not have to accept this as a fact of life: our Fast Forward programme has identified ample opportunity for reducing production costs. We are targeting a steady increase in margins from 2008 onwards. View our performance trend.

Acquisitions

We acquired Innovsea in July 2007 for £4m and have integrated it into our AWB division. It was a small business, employing just 40 people, but it has developed technology that will be invaluable for miniaturising our next generations of all weather beacon and, potentially, positioning system products. This technology is protected by several patents that should secure us significant competitive advantage.

People

The skills, knowledge and dedication of our staff are important to us. We are grateful to them for what they have achieved this year, and determined to earn their loyalty. This is not philanthropy. We have identified our current levels of staff turnover as an unnecessary waste of expertise and money: a single percentage point improvement in staff retention would bring a 0.75% increase in operating margin. We urgently need to increase staff commitment and loyalty, so to support Fast Forward we have introduced the ORTS employee incentive scheme.

Corporate reporting

This year’s annual report looks very different from its predecessors. It reflects our desire to achieve the highest standards of governance and openness with investors. We believe the International Accounting Standards Board’s Management Commentary Discussion Paper points the way forward in corporate reporting and we have used it as our guide. We hope this will help investors to assess our strategy and performance.

Outlook

We spent 2007 bolstering our strong points and addressing the weaker ones. As a result, Generico is now a considerably more robust business. Our markets continue to grow; and, although they remain extremely competitive, we have honed our competitive edge.

We are not content to be No. 2 in our key markets: market leadership in maritime all weather beacons offers significant marketing and credibility benefits that we can use to support other business streams, particularly our GPS business. We are just one percentage point behind the all weather beacons leader in Europe, and two points behind in North America. In both markets, leadership is within our grasp if we stay focused on our strategic objectives. In the newer positioning systems market we are very much a challenger brand, but with rapidly growing sales and market share.

In the past year we have firmly established our new strategy, GPS division, product development process, Fast Forward programme and employee incentive scheme. The benefits will be increasingly apparent from 2008 onwards, in both revenue growth and profitability.

Gene Rico
Chief Executive