Zumtobel Group AG (ZAG) Earnings Call Transcript & Summary

Ladies and gentlemen, thank you for standing by. Welcome, and thank you for joining the Zumtobel Group AG Conference Call. [Operator Instructions] I would now like to turn the conference over to Emanuel Hagspiel, Head of Investor Relations. Please go ahead, sir.

Yes. Good morning, everybody, and welcome to our conference call on the first quarter results of the 2021 financial year. I hope you were all able to download the presentation from our website. As always, today's call will be hosted by Alfred Felder, CEO of the group; and Thomas Tschol, CFO. Like always, Thomas will start the call and talk you through the financials of the presentation, and then Alfred will take over and talk you through the regional sales development as well as the corona update. May I now hand over to Thomas and ask him to start with his presentation.

Yes. Good morning, everybody. Like always, we want to start by giving you a brief overview of the highlights of the first 3 months of the financial year. Obviously, the development of our business in the first quarter was negatively affected by the impact of the COVID-19 pandemic, and the revenues fell by over 15%. However, Zumtobel Group was able to generate a profit in this quarter, which is, in our view, very encouraging. Anyway, as mentioned, revenues are down by 15.4% or adjusted for foreign exchange, revenues should be at minus 15.2%. And the top line decline is coming from both segments. Lighting Segment is down by 14.8%, and the Components Segment is just 18.1%, also clearly below previous year level. The business in the Components Segment was also negatively influenced by advanced stock purchases by many customers at the beginning of the worldwide lockdown measures enforced, which took place in our fourth quarter of the 2019/'20 financial year and which then led to the substantially lower order levels in the first quarter of this financial year. Anyway, the development was different between the markets. Our core DACH markets avoided double-digit decline and were down by roughly 6%. But the European market, in Great Britain, France and Italy, were particularly hard hit with declines of approximately 30% in the U.K. and about 20% in France and Italy. The group adjusted EBIT decreased from EUR 15.1 million to EUR 9.1 million as the gross profit before R&D was EUR 17.2 million lower compared to previous year. However, positive earnings have been supported by cost savings and the utilization of the short-time work options in different European countries. As a consequence, SG&A costs were EUR 10 million lower than previous year in the first quarter. The largest savings were realized in the personnel costs, travel expenses and marketing and in the lower transport costs, which resulted from the decline in the revenues. The good news here is that the development of the earnings during this quarter shows that the Zumtobel Group has a much more robust position than before due to the measures implemented in the last 2 financial years. And this development also underscores the success of our quickly implemented effective crisis management in dealing with the effects of the COVID-19 pandemic. And below the line, the net profit equaled EUR 3.1 million. And we have recorded one-off costs for restructuring measures of EUR 2.1 million, and these are primarily related to costs arising from the shutdown of the acdc plant in Barrowford, we mentioned some, and the relocation of production to the plant in Spennymoor, which would take place during this financial year. You hope will understand that we are still unable to estimate the exact impact of the corona pandemic. We have, therefore, decided not to issue any guidance on the development of the revenues and earnings for the full 2020/'21 financial year at the present time. Let us move now to the next chart to give you more details on the development of each segment. On the Slide #3, as usual, you can see the revenue development per quarter on the left-hand side and the adjusted EBIT development per quarter on the right side. As mentioned before, as a result of the pandemic, revenues in the first quarter decreased by 14.8% with basically no foreign exchange impact. On the right-hand side, you see adjusted EBIT development. And there is a result of decreased top line adjusted EBIT in the first quarter declined to EUR 8 million versus EUR 13.5 million in the previous year. However, this is still a satisfactory level given the top line development. And obviously, this was achieved by strict cost control and short-time work options. Let's move on to the Components Segment. The revenues in the Components Segment were down by 18.1% for the first quarter -- in the first quarter, sorry. And after an adjustment for foreign exchange, the segment was declining by 17.4%. As mentioned before, the beginning of the crisis in the fourth quarter in the last financial year led to increased inventory purchases by customers in reaction to supply chains that were disrupted by the COVID-19 pandemic and a subsequent positive effect on the segment revenues in the fourth quarter of last financial year. This was followed by negative effects on the Q1 revenues for the current financial year. One more interesting point, in the past quarters, we have always been talking about the strong price pressure Tridonic is facing. However, the price pressure in the first quarter has been down at only approximately 1% versus the previous year. And this is above all due to the logistics surcharge of 3.5%, which Tridonic started to charge to customers based on additional logistic costs they have been facing when the crisis started. So here, we have to add that this logistic surcharge is no longer charged as the logistic costs were -- or came back to, so to say, normal levels. On the adjusted EBIT level, the profitability fell to 5.2% as a result of the lower contribution due to the significant volume declines. On Slide #5 we see the combined results of Components and the Lighting Segments. And I think here, there is no additional use, so I will move to Slide #6 showing the EBIT bridge. Starting with the prior year adjusted EBIT for the first quarter of EUR 15.8 million. The absolute gross profit of the group before R&D decreased by EUR 17.2 million. That is basically the result of the EUR 46 million lower revenues versus the first quarter of the previous year. R&D expenses decreased by EUR 1.1 million, which is mainly the result of lower personnel expenses. And in the functional areas of selling and admin, we can see additional cost savings versus previous year. Efficiency improvement and cost-reduction measures resulted in a further decrease in the SG&A expenses of EUR 10 million, especially utilization of the short work -- short-time work options supported the lower cost rates. Other operating results, excluding the special effect that were slightly above the previous year level, so this brings us altogether to an adjusted EBIT of EUR 9.1 million in the first quarter of this financial year. On the next slide, you can see the full P&L statement. There is, in general, not too much to add, maybe just a few comments. Here, special effects increased from EUR 0.4 million to EUR 2.1 million. And as I already mentioned, this is related primarily to the relocation of the acdc production. And the financial result declined by EUR 1.2 million to minus EUR 3 million. And here, we have the other financial income expenses. This includes the -- also the income and expenses resulted from the changes in foreign exchange rates. And here, we had a market valuation of exchange rate hedges that we make just for the operating business. And here we have -- and this represents the major component of that negative result here. And on the bottom line, this brings us to the EUR 3.1 million net profit in the first quarter. Let's move to Slide #7 (sic) [ Slide #8 ] to the cash flow statement. As a result of the crisis, we were not able to first optimize our working capital during the reporting period in comparison with the prior year. The working capital rose from 15.1% to 17.6% of the rolling 12-month revenues. The cash inflows from the change in the operating -- or in the other operating positions totaled EUR 7.1 million versus outflows of EUR 6.9 million in the previous year. And consequently, the cash flow from the operating activities dropped from EUR 19.6 million to EUR 5.6 million in the first quarter. The cash flow from investing activities was lower than the comparable year period. It was minus EUR 8 million in the first quarter. This included also investments for capitalized development costs of roughly EUR 3 million. Anyway, the free cash flow fell to minus EUR 2.4 million, primarily due to the reduction in the cash flow from operating activities. Let's go to Slide #8 (sic) [ Slide #9 ] to the balance sheet or some selected balance sheet data. Our net debt totaled EUR 179 million as of end of July 2020. This is EUR 13.5 million above the value as per 30th of April 2020. Our liquidity situation is backed by the consortium credit agreement with a term ending in November '22 and a maximum value of EUR 200 million, where EUR 60 million were drawn end of July. Then we have, as you already know, 2 long-term credit agreements of EUR 40 million each with the European Investment Bank. And here, we have a bullet repayment in September '24, respectively, February '25; both are fully drawn. And what is new, we have, let's say, OeKB special framework credit for large enterprises, a so-called somewhat higher in Austria of roughly EUR 40 million, whereof roughly EUR 20 million were drawn end of July. And on top of that, we have uncommitted lines of credit totaling EUR 63 million. To sum it up, we have a strong balance and liquidity situation that is, of course, a very strong backbone in the current crisis. As you all know, there are 2 financial covenants attached to the financing agreements, namely the debt coverage ratio of less than 3.55 and equity ratio of more than 23.5%. And these financial covenants are tested end of April and end of October. This is all with respect to the financial development in the first quarter. I think we have successfully adjusted our business to reflect the substantial decline in the activity in our various markets. And in particular, the positive net income shows once again that we are today in a much more robust position than 2 years ago when we started the journey to establish a lean and effective organization. May I now hand over to Alfred to provide you with a brief update on the regional sales developments and the outlook for the full financial year against the backdrop of the COVID-19 pandemic.

Good morning, ladies and gentlemen. Warm welcome also from my end. Alfred Felder speaking. If you have a look at in Page #10, then you see that our journey of slight growth and what we have established until quarter 4 of last year came to an abrupt stop towards the end of the quarter 4 last year. Biggest impact, if I may just spend 2 sentences on that, was that by mid of March, so 6 weeks before the year-end, especially in the Lighting Segment, we had a severe decline, what led, as a group, to minus 12.7% in quarter 4. We have to say, and Thomas mentioned it already, that the Tridonic was basically having the surcharge of logistic costs due to the supply chain disruption out of China in February, which led to a buffer stock increase at the customers so that the last fiscal year was more or less very little impacted on the Tridonic top line until the end of April, and then the drop came. If you look into our quarter 1, then we see from the lowest April numbers, what we have, a constant increase May over June and over July, where July is then in a -- still in a double-digit decline but close to single-digit trend so that we see that the businesses in the different territories are recovering. If you have a look at the next page, then you see again our split in the different territories. And Thomas mentioned it already, the DACH region has been, obviously, also with the proper management of the government, going through this pandemic quite smoothly. All in front, we do see that in Switzerland, our higher-margin business was more or less, not only still, but still slightly in a growth mode. Austria, with the reopening, especially of the construction sites, was also almost on par the previous year level. In Germany, we are a little bit behind what contributes to this minus 6%. But also here, I have to say that in Q1 last fiscal year, we had a couple of very big projects in stadium like Bayern Munich, Borussia Dortmund, [ Mines 05], what basically did not come anymore into the Q1. More severe is the impact in the Northern and Western Europe. This includes Benelux, Nordics and U.K. Obviously, U.K., I guess, we will deepen a little bit. That was the biggest drop with partly decline of more than 30%. Similarly, in the Nordic territory, with the exception of Norway, but of course with Sweden going a different way, that was quite having an impact. In Southern and Eastern Europe, Southern heavily impacted, as you know, Italy, more or less in a complete lockdown with partly for a couple of weeks almost 0 revenue, similar to France. And in Eastern Europe, it depends a little bit on the countries here. We had, in Q1, still difficulties to go over these different borders and countries, and we had partly not been able to serve the customers simply because of the traffic on the borders, also with a double-digit decline. Asia Pacific, a different picture. China, after the February lockdown, came back. But it's not a big revenue stream, heavily impacted more specific with New Zealand, which is a nice market there for us in -- for weeks in a complete lockdown. Then Australia, partly locked down, we've also seen that a couple of weeks back, Victoria, a bit territory around Melbourne, is again locked down. And then, in addition, we had these bushfires, what were limiting the business. Rest of the World, you see an increase of 15.5%. This is mainly driven by Middle East, by MEIA, where especially in the Emirates in Saudi Arabia and in Qatar, we have been able to navigate through the business here quite smoothly. Of course, it's not a big number, but it's nice, and that seems to be continued also in the quarter 2. If you have a look at the Page #12, then this is the latest result of Euroconstruct, what we received in August compared to the June numbers. It's seen in most of the countries a slight improvement on the decline. Obviously, U.K. was more than 30%. It's now still 23.7%. The GDPs, I think I didn't -- no need to comment, you have also the data here. Promising, Germany, Switzerland and also Austria with a single digit. Slight recovery in the Nordic territories where we believe, in the next quarters to come, business might come back a little bit more aggressively than in other territories. Then France and Italy, obviously, in a deep decline, very surprising to us that France is so much down, but obviously, the latest numbers show again that we are stalling the business with partly certain construction sites are not open. If we look into 2021, and that's the comment on paragraph #2, there is, compared to the June, a more moderate outlook with a slower growth of, let me say, 3% to 5% per year, what we have as a growth. And that's also indicating that going back to the pre-COVID-19 level, it will take a little bit longer than we originally anticipated when we were entering into the crisis. If you go to the next page, I think that's pretty much in line what we also presented in the last fiscal year results, what is the status quo, luckily and also that continued. Up to now, we have been able to manage the business through the crisis. Obviously, with all the measures, what we did with home-office regulations, with safety and health precautions, we have been able to keep all the businesses up and running. Especially when it comes to supply chain and product availability, we had the luck. But with the exception of France where we had one corona case and we had to close the factory for 2 weeks, all the factories are up and running, are serving the customers and obviously, I think it shows what Thomas has presented. We have been continuing to do a strict cost management with looking into all the functional areas on both discretionary spending and CapEx investment, very careful in hiring short-time work measures in main countries, especially in Austria, in Germany and in U.K. You have to say with the increase of the activity on the customer base, most of the sales territories are out of short-time work. Already, we are still in there until September in Austria. And obviously, what also helps is the reduction of flextime hours and vacation during the summer period in the months of June, July and now also August. On the other hand, especially now during the Q1, we have been extremely focused on the development of the ongoing projects in lighting solutions. We are coming in the launch window in autumn with a couple of new releases of products that we believe we can concur the market in the different segments we are in. However, we are also now looking into the new opportunities for new applications, what obviously emerge when it comes to health and care in hospitals, in elderly homes, where money is spent in education, also monitor very carefully how the retail business develops because also what we see in not system relevant applications in retail business went back. And also in home, in office, we are looking now on the opportunities of providing home-office solutions. On the people side, we have been dramatically increasing the digital customer experience, not only through webinars and e-commerce, but also to video conferences, what we are partly using also to introduce our new products simply because we are limited in having face-to-face meetings right in all our light forums, especially here in Dornbirn where we plan to have these big events during this already the quarter 1 here. Looking into the outlook, obviously, this corona pandemic has triggered an economic downturn, what we did not anticipate, and it's very difficult to predict. We are all hoping in the industries that a second lockdown will not come. Partly, we see slight impact of local restrictions, what we have in different countries, but up to now, still very well manageable. But obviously, we are currently not in a position to provide the guidance on both revenue and earnings in 2021 so that our original EBIT margin of 6%, what we plan to accomplish in 2021 will be delayed after the 4.8% what we have achieved last fiscal year. So with that, we would like to come to an end of this presentation, and then we are open now to your questions and we are able to start the Q-and-answer session. Thank you.

[Operator Instructions] The first question comes from the line of Markus Remis with RCB.

Congrats on the results. A couple of questions, please. Firstly, on the Components business and your comments regarding the logistics surcharge, the 3%. I didn't quite get it. Did you say that this surcharge is actually already abolished? Or should we regard it as sticky going forward? And in connection with that, is there any change to the price pressure in the luminaire business?

Okay. Yes, the surcharge -- thanks for your questions. The surcharge on the Components business was as following: as you know, our single biggest volume factory is in China. And 50% -- or quite a lot of both drivers, especially as well as component for drivers, what we manufacture more and more in niche for the European market, are coming from China. During the lockdown in China in February, we had tremendous difficulties, not so much to get the parts, but to get the parts out. And more or less, it was a time where over weeks, we have to fly 100% of the parts out of China, which obviously was bringing additional cost. We started then to say to the customers during that time, we are -- we need to add a surcharge, which, as Thomas mentioned, is 3.5%, what basically was valid until the end of July. But basically then everything came back to normal. With this additional charge on the components, and we saw then only a price erosion in the range of 1% because the estimation was obviously much higher. But obviously, if you say 1% price erosion, if we would not have done the surcharge, it's still in the range of 4% to 5% of price erosion, what we see in the Components business. When it comes to the Lighting, we have done a selective price increase on certain products, what has been impacted by the supply, but we have not done it like Tridonic, an overall 3.5%, which also countermeasures a little bit the price erosion. And luckily, here, I have to say that also the price erosion of -- in the Lighting Segment during that period in Q1 was less than we had budgeted and what we had forecasted. However, in a shrinking market, what we see very clearly now is that the price pressure is coming back because the fight for the project is coming by the different competitors, what we see in the market. And most likely, over the next quarters to come, the price pressure on the Lighting Segment and also on the Components Segment will not get less. We also hope that it will stay as, let me say, nowadays, moderate in the single digit for Components and in the lower single digit for the Lighting brands.

Okay, very clear. Can I then ask you on the short-time work? You said that sales organization is out of short-time work. Have you made up your decision whether you will utilize the new scheme of the Austrian government after September? And also related to that, any plans for headcount reduction?

All right. So obviously, what we have done, now we have, again, the nice scheduling regulation in Europe. We have been following the local requirements of the local governments when it comes to short time. In most of the countries, now with the exception of Germany, Austria and U.K., we have sales -- we have only sales setups. And pretty much after end of May, when we saw business coming back and customers reopening the construction sites, we exited the short-time work simply because it was absolutely necessary to intensify the interaction with customers, which remains difficult because we were not able to visit. We were mainly doing it via a digital interaction, and that was quite intense. In the factories or in the production sites, we -- to the second question in -- especially in Austria, this is currently exactly the evaluation, what we do to find the right bandwidth of utilizing it versus the fact that now the time comes where we really need to speed up our -- all the new developments. Current situation is that we are evaluating this very carefully. And we might consider extending it where we need more flexibility on the production side, but that we are going back to a full-time work in the key functions, which are the R&D, which are the product marketing, the product-related parts, so that we are able to speed up again the development of the new products and the new solutions. Your last question, that's in line with our evaluation where we obviously see what is it and what we need to do on structural adjustments in functions where the business is not able to come back in the next 18 to 24 months to the levels what we had before the COVID-19. And we are currently running these evaluations, and we plan to see them and make a final decision by beginning of October. Obviously, similar to that, what we said, we are not able to issue a guidance. We are now seeing an increase of order intake but very moderate. But we are also seeing that the increase of the business is not going back to our original anticipation, where by the end -- middle of quarter 2, we would be back at previous year levels. That we know already for sure that this will not be the case. Now it depends heavily how the next couple of weeks will develop.

All right, very clear. I think one more, please. On the cost savings, can you help us maybe understand how much is actually fixed cost savings and how much over the last quarter or last 2 quarters is more a variable cost that will reemerge rather quickly once business picks up?

Out of the EUR 10 million savings, there are roughly EUR 6 million coming from the short time -- now I'm talking from the -- of the first quarter. And roughly EUR 6 million out of the EUR 10 million are really from the short-time working scheme. And on top of that, of course, we have reduced holidays, flextime working hours, et cetera. Also, as I mentioned, travel costs, some active costs because we cannot do events or participate in events. So basically, if we come back to a normal level, these cost savings will disappear.

Sorry, I didn't get the last sentence, please?

If we come back to normal levels, if we stop short-time working, and also, traveling is picking up or the activity is picking up, then these costs will reappear.

Okay. Okay, very clear. Just to clarify, so in the 4Q call, you said you had about savings of EUR 4 million from the short-time work?

Yes.

And another EUR 4 million from the other areas, travel and so on. So actually, it was a bit higher in the first quarter.

Yes. Yes, because this is due to the fact that last year, we had this very strong lockdown. There -- starting from mid-March until end of April, there was a total lockdown. So basically, no activity at all besides then work from home. And now starting with this business year, then we had some back to normal. People went back to the office, and that was -- the activity was picking up. And also we had, of course, a higher activity level even though we were still in the short-time working scheme, we were roughly at 70% on the average, and this was in the first quarter of last financial year. We were starting from mid of March, these were down at between 40%, 50%.

The next question comes from the line of Michael Marschallinger with Erste Group.

Just one quick one. Could you give us a guidance on the CapEx for the current financial year?

Yes, between EUR 45 million and EUR 50 million.