Zumtobel Group AG

VSE:ZAG

Earnings Call Transcript

[Harald Albrecht, executive]

Good morning, everybody, and welcome to our Earnings Call on the first 3 Quarters of the 2018/19 Financial Year.

I trust that you could all download the management presentation from our website. Today's call will be hosted by Mr. Alfred Felder, CEO of Zumtobel Group; as well as Mr. Thomas Tschol, our CFO.

As always, Thomas will start the call and talk you through the financial part of today's presentation. And then, Alfred will take over to give you more color on the retail development as well as an update on the new strategies.

So that's it for the introduction. May I now hand over to Thomas, and ask him to start with the financial part.

[Thomas Tschol, executive]

Good morning, ladies and gentlemen. Also a warm welcome from our side. Like always, we want to start by giving you a brief overview on the major developments in the first 3 quarters of the current financial year.

Comparing the first 9 months with the previous year, we can see a continuing weak topline due to weak market development. But despite the challenging market, we were able to improve our profitability. This clearly shows that the initiated measures to improve our cost structure has been successful.

Anyway, group revenues in the current 3 quarters are down by 4.9%. But thereby, the U.K. market is roughly minus 14% and negative foreign exchange effects remained the biggest drag. Adjusting for foreign exchange, the revenues would be at minus 3.8%. The shortfall in the top line is mainly driven by the Lighting Segment. The Components Segment was, after adjustment Forex, even able to grow slightly by 0.2% in the first 9 months.

The group level EBIT adjusted increased from EUR 20.5 million to EUR 23.9 million, and this is driven by the improved profitability, meaning selling, admin and development expenses favorably influenced by saving measures. And also we have to keep in mind, the previous year was also negatively impacted by substantially higher warranty provisions.

The good news here is that the corrective actions initiated by the management team are already clearly visible in the P&L, and we could substantially lower our cost base, particularly in admin and selling expenses. However, needless to say that we will need to continue this effort and that's why there will be further selective adjustments in selling and admin areas.

In addition, the production at the Lighting plant in Guangzhou in China, will be scaled back to a minimum by the end of this financial year just for small-lot production. The local volume production for the Asian lighting market will be handled by a partner network in the future.

We have high one-off costs relating -- related to restructuring measures and these led to minus of EUR 6.1 million for the first 9 months. Just to give you a little bit more color on that, in the third quarter, we had restructuring expenses amounting to EUR 11 million. These are mainly due roughly EUR 7 million to the closure of Jennersdorf and roughly EUR 2.5 million relating to an adjustment for pension obligations in the U.K. This is concerning the gender-neutral treatment of pension commitments. This goes back to the '90s. There was a decision by the High Court in London and this is the EUR 2.5 million expense is -- reflects this High Court decision.

We feel confident to confirm our guidance, which calls for a slight year-on-year improvement in our group adjusted EBIT, and last year's adjusted EBIT amounted to EUR 19.7 million. And after first 9 months, we spent EUR 23.9 million. But however, in the background of the low visibility as well as ongoing risks like Brexit, the topline development for the fourth quarter is still connected to the uncertainty.

I assume that many of you are wondering, how we find a slight improvement. Therefore, let me specify as follows: We see an improvement of up to 1 percentage point of the adjusted EBIT margin as a slight improvement. In other words, an adjusted EBIT up to roughly EUR 30 million would be within our guidance.

Let me now move to the next chart to give you more details on the development of each segment.

First, at the Lighting Segment. As usual, you see the revenue development by quarter on the left-hand side, and adjusted EBIT development by quarter on the right-hand side. Revenues in the third quarter declined to 6.6%. After an adjustment for negative foreign exchange effects, the decline in the Lighting segment was 6.9%.

After a promising second quarter, we thought that we were able to slow down the declining revenues. This is, obviously, disappointing, but it clearly reflects the very difficult market environment. The total decline in the first 3 quarters of roughly EUR 44 million was a combination of the following impacts: negative foreign exchange effects in the magnitude of EUR 5 million; and significant volume drops in Great Britain and the U.S. versus previous year of EUR 20 million and EUR 6 million, respectively; and -- but also for internally, around EUR 9 million behind our previous year in the first 9 months.

Also the state [indiscernible] environment, which is also reflected in many statements from peer companies, particularly, in terms of ongoing intense price competition in the Lighting business.

On the right-hand side, EBIT adjusted development is a result of significant topline shortfall to under -- to roughly EUR 200 million, the adjusted EBIT in the third quarter fell to minus EUR 0.7 million versus plus EUR 1.2 million in the previous year.

Let's move on to the Components Segment. Revenues in the Components Segment decreased by 1.7% in the third quarter and FX adjusted decline was minus 1%.

The Components Segment was after an adjustment for fixed slightly growing by 0.2% in the first 9 months. The main challenge for Tridonic topline is still the continuing pricing pressure which remained at roughly 7% to 8%. On adjusted EBIT level, the profitability fell to 4.2% as a result of the price pressure. But just keep in mind, Tridonic is selling approximately 5% more volume compared to previous year, but is not seeing a revenue growth. This obviously puts pressure on the margins.

Let's move on to the Zumtobel group. Here you see the combined result of the Components and the Lighting Segment. And I think, there is not much more to add, and we can move to the EBIT, which is on Page #6.

Starting with the prior year adjusted EBIT for 9 months of EUR 20.5 million. The absolute gross profit before R&D of the group declined by EUR 28 million. Roughly 60% of this shortfall comes from the Lighting Segment, hence, the remaining 40% from the Components Segment. The decline is primarily due to the ongoing intense price competition in the lighting industry and substantially lower revenue in key markets like U.K., where we lost roughly EUR 20 million of revenues at Zumtobel versus the previous year period.

That means that without any corrective measures on the fixed cost side, adjusted EBIT would have been deteriorated significantly versus Q1 to Q3 last year.

R&D decreased by EUR 4.7 million, which is a result of lower personnel expenses and increased owner capitalized, mainly in the Components Segment. As we have indicated that you can expect additional savings in the financial year 2018/19 in functional areas of selling as well as admin. And efficiency improvement and cost reduction has resulted in the first 3 quarters in the further increase in selling and admin expenses of -- in total EUR 22.6 million in spite of salary increases that are required by collective agreements, and especially streamlining the management structures and strict cost control contributed to this improvement.

And on other operating results, excluding special effects, increased by EUR 4 million due to higher license income and government grants.

This brings us all together to an adjusted EBIT of EUR 23.9 million for the first 9 months of the 2018/19 financial year. Because we have again added to the P&L, the full P&L statement has a backup chart in the presentation.

Now let's move to the cash flow statement. We were able to further optimize our working capital during the important period. Especially the decrease of inventory was a great effort despite the additional stocks needed for ramp-up of our new production plant in Serbia. The receivables sold on the basis of a factoring agreement totaled EUR 60 million as of end of January 2019.

In comparison with Q3 of the previous year, working capital decreased from 60.9% to 50.1% of rolling 12-months revenues. The cash outflows for changes in other operating positions were substantially lower, whereby the comparable prior period was influenced by high cash outflows related primarily to use of provisions for restructuring and for bonus checks.

Investments remain stable at EUR 49.9 million, of which, roughly EUR 18 million is attributable to our new plant in Serbia. And the increase in the cash flow for operating activities and the lower investment activities led to an improvement in free cash flow, which is now at minus EUR 8.9 million versus the minus EUR 39 million in the prior year.

Quickly for the balance sheet on Slide #8. In particular, our liquidity position, the net debt totaled EUR 159 million as of end of January and EUR 13 million above the value as of April 30, 2018. With our liquidity situation, this is backed by an additional bilateral credit agreement of EUR 40 million by the European Investment Bank, which was made available in February 2019 with a term extending to February 2025. The consortium credit agreement with a maximum line that equals EUR 220 million by end of January 2019 was reduced to EUR 200 million in February this year. The two bank agreements of EUR 40 million, each fully drawn by end of January. And one of these the credit agreements is the first credit charge from the European Investment Bank, so the total financing package from the European Investment Bank amounts to EUR 80 million. And we have uncommitted credit lines totaling EUR 63 million.

As you all know, there are 2 financial covenants attached to the financing agreements, namely a debt coverage ratio of less than 3.5%, and the equity ratio of more than 25%. And these financial covenants are tested end of October and end of April, and we are confident that we will fully meet these covenants at the next testing date in April 2019.

So this is all with respect to financial developments in the first 3 quarters. And I think, we made very good progress in the cost base and handling our liquidity situation. But, obviously, this is not the end of the journey, but it's a good start for reestablishing a stable financial foundation.

May I now hand over to Alfred, to provide you with a brief update on regional sales development.

[Alfred Felder, executive]

Yes, good morning, everyone. Alfred Felder speaking.

On Page #9, we have the overview on the development of the different regions. In details, as follows, if we look at the D/A/CH region, we have Q1 to Q3 turnover of EUR 267 million, which is a nominal decline of minus 2.6%. But as you see in the quarter 3, we have been able to shrink this down to 0.7%, ending up with EUR 83.3 million. And here from the Tier 3 regions, based on the restructuring what we did almost a year ago, Switzerland is back in a very solid growth mode. Austria, after a decline in first half, is getting back on track and ending up in even to the previous year. The challenge is in Germany, where we see already first signs also of the decline of that economy.

As it says in the title, on the Northern Europe, which combines Nordic as well as U.K., we have the greatest impact on U.K. with a minus of 14%. But also, if you look into that here in quarter 3, we have been able to slow this down to minus 11% and it's looking that we have reached the bottom also from the other entry moving forward.

Benelux, here we have to distinguish 2 regions, Benelux and Eastern Europe, part of that what we see, especially in Q3, with the minus 15.9% is the effect of 2 big projects that we had last year in Eastern Europe that we were not able to compensate, and partly, the ongoing restructuring process what we have completed now in that Benelux in the entire management team.

Southern Europe, with a very stable and growing; Italy, with a flat; slight decrease in France; and on a small level, a growing Spain, we ended up Q1 to Q3 with EUR 132 million. And we had a weaker Q3, especially coming out of Italy, ending up with EUR 41.3 million.

Asia-Pacific. Here the second half of the year will be stronger than the first half as a couple of projects are kicking in, both in Australia and New Zealand as well as the Pacific region, especially in Southeast Asia. Therefore, you see the quarter 3 on a growth path of 4.4%. The overall result Q1 to Q3 still slightly negative but as I said, there is a couple of projects that will be materializing until the end of this fiscal year.

Middle Eastern & Africa. I think I mentioned it in one of the first calls, we also did a complete management reshuffle and the results are clearly visible, especially in that region with a growth after 3 years of shrinkage, of 5.1% in Q1 to Q3 to 40.5% and even accelerating in quarter 3 to 10.7%.

In America, we have done a complete reshuffling, basically reducing the workforce by more than 40%, as we basically overlook in the previous year in new product introductions on the LED base. We have launched the key products now and we are back on our order intake upscale, but still on a very low level, where you see that Q1 to Q3 is a minus 23%. And it looks like that in Q3 we have been able to slow down and the outlook is slightly more positive than the numbers look here.

So all in all, on the group level, Q1 to Q3, EUR 863.8 million, a minus of 4.9% without the exchange rate FX adjusted of minus 3.8%. And the Q3, the EUR 268.7 million, a minus of 5.3%.

Just a few more words on the U.K. topic, on the Brexit. So what we are seeing is an interesting development, especially on the Components level, from, as we said, January onwards we are seeing a higher revenue coming where customers of Tridonic are building up inventory for a hard Brexit. So it's a basic -- a positive revenue development, and we are also seeing that some of the projects are released now on the Lighting side where we are seeing the other income slightly increase.

But all-in-all, it's a big uncertainty with a lot of customers stalling their investments and waiting for a final decision. And obviously, as U.K. is still our single biggest market, that's having a huge impact on our turnover.

That is all for the sales. So if you look at the outlook, as Thomas already confirmed, we are sticking with the '18/'19 is the transition year where we stabilize the business. I think we have made quite a significant progress on both cost streamlining as well as the operational excellence, what we have discussed in the previous calls. We do see, starting with U.K., but also in the rest of the economy in Europe, a very low visibility. The intense price competition in the lighting industry is continuing. We are seeing this, again, on the components as well as the luminaire level, a little bit different approach and that means that we expect a slight year-on-year improvement on the adjusted EBIT, and as Thomas mentioned, up to the EUR 30 million for this fiscal year. And we stick with the medium-term target of the EBIT margin of 6%, what we plan to reach latest by 2020/21 financial year.

So I think we have a couple of back-up slides that basically would be the slides that we have prepared for you today. And that leads us now to the question-and-answer session.

Thank you very much for your attention.

[Operator]

[Operator Instructions] We have a question from the line of Andreas Willi from JPMorgan.

[Andreas Willi, analyst]

I've got 3 questions. First one on IFRS 16. Is there an impact for next year from the leasing change that we should be aware of on earnings and the net debt? Second question, on the restructuring that you have ramped up and are ramping up at the moment, maybe you could give us some indication on payback or savings for next year? Also how that compares to the savings of this year? And last question, on the goodwill on Thorn given that the U.K. business has shrunk, maybe stabilizing now, but how do you look at the annual review that's coming up for that?

[Thomas Tschol, executive]

Okay. Thank you for your questions. First question, IFRS 16. Yes, there will be an impact. We will have -- this will add approximately 40 -- this is not yet -- we do not yet have the final figures, EUR 40 million to EUR 60 million in assets and that will increase our EBITDA. And we will adjust corresponding -- depending on the effects, we will adjust the financial covenants with our banks according to the impact of this. It shouldn't have an impact -- It shouldn't have, at least, not a negative impact regarding our financial covenants. Second question on the restructuring savings. As I said, in the 3 quarters, mainly driven by the closure of Jennersdorf, of roughly by EUR 7 million and the payback of this closure will be within 1 to 2 years. So we will already have significant savings out of that in the next fiscal year and with -- for approximately roughly EUR 4 million -- EUR 4 million to EUR 4.5 million is expected in savings for our next fiscal year. Goodwill of Thorn, the goodwill is related to the Lighting Segment as a whole, not just U.K. So this is tested on the level of the Lighting Segment. And currently, we are preparing the budget for the next fiscal year, and also based on the budget, we'll make -- or update our business plan, and we are confident that we can keep the goodwill on the Lightings -- on level of the Lighting Segment based on the -- on our budget and our business spend.

[Operator]

Next question is from the line of Lucie Carrier from Morgan Stanley.

[Lucie Carrier, analyst]

I have 3 questions. The first one -- I mean you're talking about a stabilization of the business, and I understand all of the efforts which are being made on the cost side. But when you think about the top line, I'm a little bit surprised by that comment because all of the leading indicators we are seeing at the moment in Europe are pointing to a deceleration in the construction end markets. So how do you think about that in regards to your objective? That's the first question.

Secondly, I was hoping you could give us a bit more color on the pricing pressure and whether it has increased or not? Or whether you have seen maybe more Asian players coming into the European market, considering they are a bit blocked at the moment in the U.S. by the tariffs. And then my last question was around U.K. exposure. Can you remind us, how much of your U.K. sale is manufactured in the U.K. itself, whether this is on Lighting and whether this is on Components? And what has been the impact in your view of the restock you have seen at Tridonic?

[Alfred Felder, executive]

All right. Lucie, thanks for your question. This is Alfred. There is a question of stabilizing the business. So first of all, what we have done is we have rebuilt the 3 key pillars of our -- if I'm talking about the Lighting business, of our channels, where basically 2 we inherited on a very, very desolated stage. Freight was okay-ish. We built it with the right people, with the right interfaces to respect business in most of the countries, especially, if I take the 3 biggest ones, which is U.K., which is Germany and which is France was more or less gone. So we have restarted, reinstalled key spec -- multiple spec people in this market. We partly have higher than that from competition who left us before. And as I said, we have been building up the key -- the global key account management structure with a completely new dedicated team. What we see now is that we are getting traction, we are getting engagement with large customers in the retail, in logistics, in automotive, where we are expecting that this momentum will increase. We have seen first fraction on the spec business which obviously, as you know Lucie, is not coming overnight. The reason why we are down in our revenue is because we did not spec in projects 2 years ago. So as a contrary, if we do everything right, this business will get back on track in 2-years' time. And we are seeing this in the pipeline. A lot of projects that are materializing, where we have order intake here, but they will basically materialize first in the second half of next year.

Yes, you're right. The commodity indicators are not that friendly at the moment. But we believe that what we have done is basically regaining market share. We see this fantastically in Switzerland where we are roughly 7% above previous year. We are seeing this in Austria, where we are regaining market share. And we are starting now also in Germany, which obviously is a big magnitude to do so. So that will help us to grow the top line. But that's why also our guidance is as it is, because simply we see that the economic indicators are not really that positive. Pricing pressure. So what we do see is on the components level we see a little bit of an easing out of price going down on the LED segment that's coming from the LED makers. So we believe that partly we have reached the bottom line even though for the next year we are still seeing a decrease. It's a little bit different on the luminaire side for a couple of key running products where we are really having a fantastic cost situation. We see in the first half year a price decrease of roughly 2% to 3%. So much less than it is comparable with the Components level.

On your question on the trade conflicts with the Chinese companies, yes, we do see -- but already since a couple of years, certain Chinese players in the trade business. That's why also the trade business rises and the margins have gone down, also driven partly by players like Ledlenser but also by Opple and those guys. But when it comes to spec business or turnkey solutions, we are mainly seeing our European competitors in this marketplace. U.K. exposure you said how much of the business we do in the U.K. As you know, we have 2 factories. One is the Tridonic, and one is the lighting brand both sitting in -- is spending more. And I would say, it's close to 95%, 98% of the business what we do in U.S. out of the U.K. plants. Simply, we basically are dealing with this Brexit scenario ever since years now almost, and we have shuffled -- or reshuffled product portfolios to the U.K. for the U.K. market. We have a program running in our company what is called U.K. for U.K. And basically now we are there that we are able to ship most or all of the products from both Components as well as from the luminaire side out of our U.K. plants.

[Operator]

[Operator Instructions] Next question is from the line of Sven Weier from UBS.

[Sven Weier, analyst]

Three questions please. First one on the full year guidance obviously implying up to EUR 6 million of EBIT for Q4, which I guess would be a bit of a more normal Q4 again? I was just wondering if that takes into account any kind of provision releases according to the management compensation and the share price performance? Second question was coming back on the outlook beyond this year, obviously not much help from the cycle next year. And you still have your 6% margin target. So what big levers do you still have in terms of factory footprint or any other major measures you can take to make a bigger leap towards that target? And the last question is on the factoring. Can you just repeat what you said in terms of the amount of factoring in the quarter and how that compares against the second quarter?

[Thomas Tschol, executive]

Regarding the full year guidance, yes, that is true it's up to -- this would mean up to EUR 60 million EBIT adjusted for the fourth quarter. And within this we would expect maybe some minor release of provisions for bonus payments, but this is quite an amount. Maximum between EUR 1 million and EUR 2 million would be included in there. And I think that's it for the -- regarding your question. Regarding next year and the EBIT 6% target, we are starting around an EBIT margin of 2% in the Lighting business, and we see approximately 2% to 3% coming from additional cost savings and 1% to 2% coming from reduction in costs. And we go regarding the topline stabilization to a slight growth to 1% to 2% maximum also according to our current assumption.

[Alfred Felder, executive]

And Sven, your second question was also related to our factory footprint. This is Alfred speaking. So if we just look at what we have done, we have now consolidated the smaller factories. We have smaller assembly plants since this year in Australia and New Zealand. We have downsized Guangzhou as we are basically producing this low-cost products out of Niš. And we are on the way to close Jennersdorf as these LED model are moved to this extremely low-cost location in Niš. Parallel, we have moved the European drivers, which is 50% of the volume that we produced in Shenzhen already to Niš so they are coming out of Niš. And basically now we are optimizing the footprint between Dornbirn, Lemgo and Niš, because, as I said, spending is already done, spending is U.K. for U.K. for the U.K. market. And basically, obviously, this is now a tradeoff on how much are we able to grow. The new product introductions are coming next year so we will reshuffle in those 3 factories in a manner that we are having the extreme cost-sensitive products out of Niš. The highly automated product scenario in Dornbirn and the sophisticated, more manual assembly parts out of Lemgo in that market. This is the task for the next fiscal year.

[Thomas Tschol, executive]

Then your third question, factoring, how does it compare from Q2 to Q3. It went down from EUR 67 million to EUR 60 million.

[Operator]

Next question is from the line of Michael Marschallinger from Erste Group Bank AG.

[Michael Marschallinger, analyst]

I have 2 questions if I may. First one would be on Niš and the ramp-up. Can you maybe give us update and some details on the ramp-up and maybe provide us some information in terms of volumes in the last quarter and what do you expect in the next quarter? Second, on what would be on the special effects in the fourth quarter, you talked about the reduction in China. Which impact on the top line do you expect here?

[Alfred Felder, executive]

Okay. On the Niš ramp-up, so as you know we have opened the factory in Niš in September. We have currently 3 lines in Tridonic there and 2 lines on lighting brand. And we are -- we have basically completed already the transfer of the volume, as I said, from Shenzhen into Niš. Now we're at beginning of '19, we have built-up the first line, our LED was -- what are coming from Jennersdorf. And that also a long-term ramp-up what we will have there. Currently we do have about 400 people in Niš for both the Components business as well as on the Lighting business. So if we do on the factory volume, we have roughly in '18, '19 a plan of doing about EUR 26 million, so with 400 head count, and the output in February was already on the Tridonic side, larger than 400,000 drivers and about [ 70,000 ] [indiscernible]. And the second question was on the...

[Thomas Tschol, executive]

Restructuring -- it was regarding the scale down of Guangzhou, and we expect roughly EUR 3 million.

[Operator]

There are no further questions at this time. And I would like to hand back to Alfred Felder, CEO, for closing comments. Please go ahead.

[Alfred Felder, executive]

Yes. Ladies and gentlemen, and I would like to thank you very much for listening, also for the questions. And if there are no further questions, that brings us to the end of this call. Thank you very much for your attention.

[Thomas Tschol, executive]

Thank you very much.