Zumtobel Group AG (ZAG) Earnings Call Transcript & Summary

Thank you. Good morning, everybody, and welcome to our conference call to the first 3 quarters of the 2020/'21 financial year. Like always, you can find the presentation for this call on our website. And the call will be hosted by Alfred Felder, our CEO; and Thomas Tschol, our CFO. Alfred will start the presentation, and then Thomas will give you more details on the financials of the first 3 quarters. May I now hand over to Alfred to start his presentation.

Yes. Good morning, ladies and gentlemen. Alfred Felder speaking. Also a warm welcome to our call today on the Q3 numbers. Before I hand over to Thomas Tschol, I would like just to show you on the summary page on Page 2, a couple of highlights for the Q3. Obviously, in our business, with the lock down, we have been seeing deteriorating numbers, especially in the segment retail and partly also in the office. So we had started the push program on those system-relevant businesses, especially on the e-commerce, especially on the topics where new investments has been done. And what you see here is an example out of many. We have been able to win a couple of projects in new customers like Amazon, in logistics [ hauls ], in industry [ hauls ], where we see a very, very sustainable growth across all Europe. And you see a couple of examples, typically turnkey solutions, that concludes lighting out of our portfolio of the different brands and include in the controls like the last one what we did for the South Danish University. It's just an example of many projects that we had where we have been able to compensate partly the loss what we suffered, especially in the nonsystem-relevant retail and lately in a flat development of the office environment with the home office situation. We also started already in Q2 with 2 major programs. One is listed here, the focus on sustainability, where we have launched the key initiatives on structure to accelerate not only our drive towards CO2 reduction and neutrality, but also focusing on circular economy. The launch window in March, what we had done this week, to be exact yesterday, already included 2 products which have been designed based on circular design guidelines, and we will accelerate this moving forward. And the second topic is the start of the digital initiatives, obviously triggered by the pandemic, but then, of course, where we are investing substantial amount of money over the next years in the digitization of our company. I also would like to announce what goes out in parallel with the announcement of the Q3 figures that we will have a change in the management board that Thomas Erath, who is currently the CFO of Tridonic and a lone member of the management team in the group, will join the management Board effective August 1, '21. And Thomas Tschol, who has been with us more than 3.5 years, helping us to transform the company from a loss-making company into a robust balance sheet company, will, as planned, leave the company by the end of July. This will guarantee and I think it's also something that is not new to the company, but good for the company in a smooth transition and the handover of the financials responsibility within the group. With that, I would like to hand over to Thomas, who will guide you now through the financial situation, both on the group components and luminaire business.

Thank you very much, Alfred. Yes, good morning, ladies and gentlemen. I would like to start by giving you a brief overview on the financial highlights of the first 9 months of this fiscal year. Obviously, the first 3 quarters have been negatively affected by the impact of the COVID-19 pandemic, and the revenues fell by almost 13%. But on a -- however, on a positive note, we have seen further progress on the slow upward trend. This is to say that in the third quarter, decline was reduced to roughly 9%. In addition, despite the drop in revenues, we are clearly in the black and closed the first 9 months with positive earnings and a substantial increase in the free cash flow. Anyway, as mentioned, group revenues are down by 12.9%. Adjusted for FX, the revenues would be at minus 11.8%. The negative currency translation effects resulted primarily from the devaluation of the Turkish lira, the British pound and the U.S. dollar against the euro, but they were partly offset by the appreciation of the Swiss franc. The top line decline is coming from both segments. Lighting Segment is down by 12.2% and the Components Segment is down by 15.1%, meaning also clearly below previous year level. And just here in the Components Segment, we have to keep in mind that we had this advanced stock purchases by many customers at the beginning of the global lockdown, so roughly 1 year ago, and this led to substantially lower order levels in the first quarter of this fiscal year. This is the main reason for this -- for the Components Segment being -- the top line decline below the Lighting Segment. Anyway, the development was different between the markets. Our DACH market avoided a double-digit decline and was down by 7%. But the markets in Great Britain, France and Italy were particularly hit by the crisis with declines of roughly 23% in U.K. and about 16% in France as well as in Italy. The group adjusted EBIT decreased from roughly EUR 47 million to roughly EUR 28 million as the gross profit was EUR 45 million below previous year level as a result of the decline in the top line. However, positive earnings have been supported by cost savings and the utilization of the short-time work options. And as a consequence, the SG&A costs were EUR 28.6 million lower than in the previous year. And the largest savings were realized in personnel costs and further expenses in marketing and in lower transport costs, which was added from decline in the revenues and the lower volume in [ the segments ]. The good news here is that the development of earnings during the first 3 quarters confirms the strength and stability of the Zumtobel Group due to the measures that have been implemented in the past 2 financial years. And this development also shows the success of our quickly implemented effective crisis management in dealing with the COVID-19 pandemic. Below the line, the net profit was at EUR 14.9 million. We have recorded one-off costs for restructuring measures of EUR 0.4 million in the full 3 quarters, and they relate primarily to cost for the termination of production at the acdc plant in Barrowford in the U.K. as well as write-offs of products and equipment and some restructuring of back-office activities. And on the other hand, these restructuring costs were partly offset by the release of provisions related to the premature cancellation of a lease contract, also to the restructuring of the Europhane, where we had some release of provisions that we have built and also an agreement in a legal dispute that has been closed. The pandemic situation, obviously, remains uncertain, but we expect full recovery in our business on a year-on-year increase in revenues during the fourth quarter of this fiscal year. And so we also assume that the operating results from the group, our adjusted EBIT will be positive in the fourth quarter. Now let me now move to the next chart to give you more details on the development of each segment. The Lighting Segment, as usual, you can see the revenue development by quarter on the left-hand side and the adjusted EBIT development on the right side. As mentioned before, the revenues in third quarter decreased by 8.8%. And after adjustment for FX, revenues would decrease by 7.4%. And on the right-hand side, you see adjusted EBIT development. And here, the good news is that despite the decreased top line, the adjusted EBIT in the third quarter is at EUR 2.4 million, even slightly above the previous year. This is a satisfactory level given the top line development. And obviously, this was achieved by strict cost control and also by using the short-time working options. On Slide #5, the Components Segment. Here, the revenues were down by 9.1% in the third quarter, and the revenue development was negatively influenced by the devaluation of the Turkish lira. And after an adjustment for FX, the segment was declining by 6.4%. And anyway, the revenues have been -- as you can see, they have been stable over the past quarters at around EUR 73 million per quarter. And in the past quarters, we have always been talking about the strong pressure -- price pressure Tridonic is facing. But however, the price pressures in the current fiscal year has been down by only approximately 1% versus previous year. And this was also supported by the logistics surcharge of 3.5% that Tridonic was charging on additional logistic costs they have been facing when the crisis started. So this means mainly during the first quarter. On the adjusted EBIT level, the profitability fell to 5.1% as a result of the lower contribution that Tridonic was facing. On Slide #6, the group revenues and the EBIT development. The Slide 6 shows the combined results of both segments, and I think there is not too much there. So let's move on to Slide #7, the group adjusted EBIT bridge. On the left side, you can see the prior year adjusted EBIT for the first 3 quarters of EUR 46.9 million and the absolute gross profit of the group before R&D decreased by EUR 45 million, what is the result of the EUR 112 million lower revenues versus the previous year period. R&D was slightly increased by EUR 1.5 million. And the SG&A, as I was already mentioning, we could realize significant cost savings versus previous year and amounting to the EUR 28.6 million. The other operating results, excluding the special effects, were slightly above the previous year level, and this brings us all together to an adjusted EBIT of EUR 27.7 million in the first 9 months of this fiscal year. On Slide #8, you see the income statement. And there also is not too much to add. Maybe the financial result, it improved by EUR 1.6 million compared to previous year. And the interest expense, as a consequence of the lower net debt, was down by EUR 1.3 million compared to previous year. And as already mentioned, we have a bottom -- really the bottom line net income of plus roughly EUR 15 million, which is, from our point of view, given the circumstances, a very satisfactory level for us. On Slide #9, we come to the cash flow statement. Here is -- I think we have very positive news. Cash flow-wise, the cash flow from operating results fell from EUR 86 million in the 3 quarters of the previous year to the roughly EUR 81 million in the first 9 months of this fiscal year, and of course, is a result of the lower operating result. And regards to the working capital, the working capital totaled EUR 166 million compared to EUR 176 million the previous year. And therefore, we had a slight improvement or slight cash inflow from the working capital in the first 9 months. But we had significant inflows from the change in other operating positions, the total is EUR 6.5 million. This is primarily due to a decline in other receivables and the higher balance of prepayments that we have received. Consequently, the cash flow from the operating activities increased from EUR 72 million to EUR 84 million for the first 3 quarters. And also, the cash flow from investing activities was significantly lower year-on-year. It was at EUR 24 million and compared to the EUR 38 million in the previous year. Anyway, the free cash flow improved significantly to plus roughly EUR 60 million compared to EUR 33 million in the first 3 quarters of past -- of the past financial year. Let's move on Page #10 to the balance sheet data. A quick look at the balance sheet and particularly our liquidity position. Of course, as a consequence of the strong cash flow, the net debt decreased to EUR 123.7 million as of end of January. This is more than EUR 40 million below the value that we had at the beginning of this fiscal year. Our liquidity situation is still backed by a consortium credit agreement with a term ending in November '22 and a maximum volume of EUR 200 million, whereof only EUR 15 million have been drawn; 2 long-term credit agreements of EUR 40 million each with the European Investment Bank, here we have bullet repayments in September '24 and February '25, both have been fully drawn; and OeKB special framework credit for large enterprises of roughly EUR 40 million, whereof EUR 30 million withdrawn; and on top of that, uncommitted lines of credit totaling roughly EUR 63 million. To sum it up, strong balance sheet that secures our liquidity position in the current crisis. And regarding our financial covenants, as you know, we have 2 financial covenants attached to the financing agreement, namely the debt coverage ratio of less than 3.55 and equity ratio of more than 23.5%. And these financial covenants are stress tested end of October and also end of April. And anyway, we see today no risk to meet the covenants. This is all with respect to the financial development in the first 9 months. I think we reacted quickly to this exceptional situation and have systematically adapted our business activities to meet the changing demand in the various markets. And given the difficult circumstances, I think we can be satisfied with the development of our results and the liquidity position that we have, highlighting, once again, especially the strong development of the free cash flow and the net debt. However, needless to say that we will need to continue the good effort in, in particular, looking ahead into the challenging fourth quarter and the upcoming financial year '21/'22. Now I will hand over to Alfred to provide you with a brief update on the regional sales developments and the outlook for the next fiscal year.

So on Page 11, you see the curve over the last fiscal year in the quarters. And obviously, what you see here, as Thomas mentioned it already, if you take this, quarter 1 was the worst drop, May, June, July. We are slowly but constantly on our way up with minus 13.9% in Q3 -- in Q2, sorry, and 8.8% in Q4. And you see that will continue when we give the outlook, and we believe that quarter 4 will be above quarter 4 last year, knowing obviously that we have been suffering in the last months of quarter 4 last year quite substantially with a drop in revenue, especially on the lighting brands. If you go to Page #12, you see how especially the Q3 numbers developed in the different territories. Again, as part of our strategy, a special focus has been given on the DACH region where we have the high-margin businesses, and we clocked here at EUR 79.1 million, which in quarter 3 was only a drop of minus 2.5% or accumulated Q1 to Q3, minus 7%. Here, I have to say, Austria and Switzerland are almost on pre-corona levels here, where Germany is slightly behind and in a recovery mode also here. A little bit a different picture in Northern and Western Europe, where we have Benelux, Nordic and U.K. in there. U.K., obviously, suffering on both the final Brexit situation as well as the COVID. Nordics with the different ways, especially in Sweden, where we have seen in a later development, especially Q2 and Q3, a quite significant deterioration of the business with then minus 14.5% or in total, for the key countries, minus 18.6%. Here, I have to say, since beginning of Q3, so November, December time frame, we are seeing a constant positive development in U.K., and that is also continuing now even at a stronger pace in the Q4, where with a higher vaccination rate as well as the outlook on better plannability, we see that budgets are released. And we are seeing this in our order intake already, especially here in that territory. Southern and Eastern Europe, different waves. While Italy and also France was recovering in Q3 compared to the Q2 and Q1 numbers, it's different in Eastern Europe, mainly affected by the heavy infection rates, especially in the Czech Republic and the neighboring countries. What makes it more difficult to bring goods into, install the goods, especially the Czech Republic. At the moment, we are completely locked out and suffering here. A different picture in Asia Pacific, where over the last quarters, we have almost been able to get back on the pre-corona levels. You see Q1 to Q3, minus 5%, where the Q3 is already positive. We are now waiting of the lockdown release, especially in South Asia, which is the remaining territories where we have difficulties, but that also shows a positive trend. And last but not least, the Americas where obviously, South America, even though that was not a big revenue-driving business, it's more or less since almost 3 quarters on a 10% to 20% level in the different countries we are operating. And especially the Q3 was extremely difficult also for the U.S. as this, yes, infection rates was exploding. So all in all, minus 8.8% in Q3 or accumulated, like Thomas said already, the 12.9%. So on the last page, Page #13. We do see that there are challenging market environments, but difficult -- different in different countries. What we also see since January, an increase of raw material, especially on copper, steel and aluminum and also partly a 3.5x higher freight cost, especially for shipments that are coming either via sea or via air or via rail from Asia. In addition, due to the, let me say, bounce back also on the automotive, especially the e-car industry, on the component level, we are partly suffering on allocation for certain semiconductors that are simultaneously used in the car industry, even though up to now, everything is perfectly under control. Nevertheless, we do see the positive trend in our business. We do see, in a lot of countries, the investment volume coming back, also partly with larger projects that are in the pipeline. So that we believe that the Q4 of this fiscal year will be above [ one ]. Now you might say, well, that's not so difficult because your Q4 in last year was already a shrinking quarter. That's true when we -- it's part of the lighting brands. On the Tridonic, the Q4 was perfectly intact because we had mainly an issue where customers were allocating parts from Tridonic and Tridonic was suffering mainly in Q1. But nevertheless, we believe that we will be having a quarter which is above the last fiscal year. On the EBIT number, you see the lower edge, what basically indicates a EUR 28 million. And on the top line, the minimum would be that the EUR 260 million is exactly the Q4 results, what we have achieved in '19/'20. So with that, we would like to come to a conclusion of the general presentation and now are open to your questions on the Q3 numbers and beyond.

[Operator Instructions] The first question is from the line of Markus Remis of RBI.

Let me start with one related to the FX effect. On the cost side, you elaborated on the top line. But how did currency movements impact your cost base? I'm particularly thinking about U.S. dollar sourcing. So yes, I'll have them one by one, please.

Yes, of course, the U.S. dollar had a positive impact as the repurchase of the raw materials in the Components Segment in U.S. dollar, and this compares positively to previous year and also to budget. And the overall effect compared to budget is around EUR 3 million to EUR 4 million.

Then coming to the input cost inflation you've mentioned. I mean, to which extent do you think you will be able to somehow compensate this via price increases? Also thinking about the logistics surcharges you've introduced for components. I mean, is there any way you can pass this on to a larger extent? And how would you think about -- I mean this is apparently a topic for the whole industry, how disciplined do you think are your competitors in this respect?

Yes. A very good question. So obviously, we have reacted already on both businesses due to the fact that Tridonic has a large manufacturing setup in China. And also we, on the lighting, are sourcing some of the luminaire based on our specifications from third-party sources. We have increased the prices for those products that have set a surcharge of 3.5% logistic costs for both businesses what we have rolled out already to our customers. In addition, what I mentioned due to the upcoming increases of raw materials on copper, steel and aluminum, we have done the same also, especially on the lighting brands. Your question regarding our competitors, we do see across the globe that, obviously, this is affecting everyone in the market and that we are seeing that also our competitors are doing the same as those increases are so substantial. And currently, we are having, for both businesses, a price increase out in the market, and we are also seeing an understanding of the customers.

Okay. Do you think this will cover the entire cost inflation? Or will there be some kind of residual margin squeeze left?

Well, I think it's -- when we talk about logistic costs, obviously, when everything will ease out, again, we have to remove this. Same would be then on the raw material. But we believe -- and I think we have mentioned it in one of the beginning slides that the whole, let me say, price decrease has been reduced to a minimum. On the Tridonic level, it was, over [ three quarter, 1% ]. And obviously, we believe that, that will then result in a slight margin increase in a tight market we are being.

All right. Okay. Then my third question relates to the topic of free cash flow. I mean CapEx has been contained at a very low level. I think your most recent guidance was something around EUR 45 million for the entire business year. I mean, is that still plausible? Will we see this pickup then in the fourth quarter? And also related to the working capital, I mean, how much more can be done in Q4? Or put differently, what level of net debt do you expect at year-end?

Of course, the -- with regards to CapEx, we have been, on average, around EUR 8 million per quarter, which is very low and related really to this CapEx control. It will be higher in the fourth quarter also since a program that is in place in Austria to support the CapEx spending with a 7% to 14% reduction or [ help from state ]

Subsidy.

So I would expect between EUR 35 million and, at the upper end, EUR 40 million with respect to CapEx. But again, the free cash flow also should be positive in the fourth quarter. And with regards to the net debt, I would expect a slight decrease again compared to the value as of end of January. But we have to keep in mind that we have to reevaluate our IFRS 16 assets. This is the right of use of all the lease contracts that was necessarily implemented 2 years ago. And every 2 years, you're obliged to review the contractual situation that you have. And then this is renew -- this is review that the ROU assets, the right of use assets, are going up, and also, the liability is going up. And this directly goes into the net debt. And here, we expect around EUR 10 million to EUR 15 million just out of this reevaluation of the IFRS 16. And hopefully, or let's say, of course, the goal is that we can compensate this by positive operating free cash flow. So that the net debt, really, the net position is still going down.

Okay. Very clear. And then can I just ask you on the order book at the end of the third quarter and how did it develop then into February? I mean, is -- I think you mentioned something about some positive trends in the U.K., for instance. And also you said Austria and Switzerland almost at pre-crisis levels, which I don't -- we just struggle to reconcile. Is that the current order book? Or is it kind of the expectations where we're moving to?

Yes. What we are seeing in the order book -- so basically, let me explain first with the last one on Switzerland and Austria. In Austria, at the beginning of the fiscal year, so at the beginning of the crisis, compared to the year before, we had developed a couple of larger projects, that fortunately for us have not been canceled or postponed. And that means that we are having here -- we had, at the beginning of this fiscal year, a higher order book compared to the fiscal -- beginning of the fiscal year '18/'19. In addition, we have in Austria, a couple of key customers that are in the retail system, relevant, if I may ask, [ REWE ], Spar, [ Endhausen ] and Aldi and Lidl, who basically were investing more than the normal. So that was the situation in Austria and Switzerland. The situation was that Switzerland was until, I would say, the last lockdown, more or less, open all time. That was with the exception of one canton that's [ really ] close to Italy had almost no restriction in the way of operating. So the electricians, the projects were online, which we are just seeing now a little bit of a shift of the project, especially in -- starting in Q3 and Q4 here. When you ask about the order book, we do see that our order book since, let me say, September time frame is increasing and is currently, and we are proud of that one, above the previous year. So it's entering -- and that's already until, let me say, now, yes, calendar week 10 was the first effect that we saw, so 2 weeks from now. It's all pre-corona. And here, we are quite confident that this is the case. And what I said about U.K., in the U.K., it's very transparent because since December time frame, and we are seeing a constant development of the order book, what made us believe that this is now first time something that is a little bit more sustainable. As you know, with the different waves, that I'm not counting this anymore in the different countries. The moment the government released, let me say, the lockdowns, we were seeing, after 2 or 3 weeks, a recovery, especially on our daily flow good business. And now it looks like in U.K., this is the first time a little bit more sustainable, what make us believe that this will hold on not only for quarter 4, but also for the upcoming quarters.

Next question is from Charlotte Friedrichs of Berenberg.

There's 3 questions. Firstly, following up on the raw material price topic. Can you give us an idea perhaps what percentage of your bill of materials is affected by the price increases and roughly what magnitude of price increases you are seeing?

All right. So obviously, what we see in our BOM, we have direct materials like copper, steel and aluminum; or the indirect, those are castings, profiles, batteries and metal parts, we are seeing here, if we look into that, a price increase in the range of 5%. When it comes more on the component level, like drivers, modules, LED, we are still believing that we can stay flat or partly can also have a slight reduction. On the more trading goods part of finished goods, what we are importing, we are seeing mainly an increase of the price in the range of 3%, 3.5% due to the higher transportation costs that we have. So the numbers of what you've seen on steel, what we see in -- since quarter 4 calendar quarter 2020, and the outlook is in the range that steel is increasing something in the range of going from January '20, EUR 550 per tonne up to EUR 750 per tonne in January '21. So after 12 months, that's an increase of 35% only on steel.

Okay. Understood. And then you mentioned a couple of new projects that you had in the current quarter, in particular, more projects with Amazon. Can you give us an idea of the size of these projects and how much you're doing with Amazon right now? If I recall correctly, the previous one was around EUR 5 million in revenue.

Yes. We have -- we are with Amazon to name one in the different countries in Europe in the different projects, and the range of the project is always between EUR 500,000 and EUR 800,000. There are more projects in the pipeline. But obviously, Amazon is developing into a range into a double-digit million revenue driver across Europe.

Okay. Understood. And then maybe my final question would be a little bit more broad. What is your general outlook for nonresidential construction for the coming years? What kind of feedback are you getting from your customers at the moment?

Well, as we are part of this Euroconstruct, so the latest number is back from November, and it's, of course, different from the different countries. But it's in the range between 3% and 5% growth on nonresidential construction across the European territory. It's different in different countries. Obviously, if I recap correctly, U.K. had a drop in 2020 of something like 18% or something like this, and it's now recovering a little bit higher than 5%, but not double digit. So if we sum this up, we believe that all in all, the growth path can be and has to be for us in the range of 5%. But obviously, then you can do your math, and we have been shrinking by 12%. So we will not reach the pre-corona level in -- within the fiscal year '21/'22 if this data is correct.

[Operator Instructions] The next question is from the line of Miro Zuzak of JMS Invest AG.

I have just one regarding the provisions that you have on the balance sheet for severance compensation payments, the EUR 51 million. When do you expect those provisions to be utilized? So when will those -- when are we going to see the cash out of the EUR 51 million in which year?

This will be over the years because this -- basically, this amount related to the special leading framework that we have, especially in Austria. For people that joined the company before, I think it was 2001. And at the moment they are retiring, then they get, so to say, this certain payments depending on the tenure that they have had with the company. So this will be over time and will take place. Anyways, you can make the calculation for the last people, that maybe if they joined the company, they have been 20, 20 years ago. So they are 40 today. And if they are still with the company until their retirement, then they are 60. So this would be in 20 years, so over the next 20 years, very roughly.

Okay. So this is very similar to the rest of your pension provision that you have on the...

Yes.

And there are no more questions at this time. I hand back to Alfred Felder for closing comments.

Yes. Thank you very much for attending our Q3 investor call. Thank you also for the interesting questions. If there are no further question, I would like to close the session now. And thank you very much for attending. Have a good morning and a good day. Thank you.