Zumtobel Group AG (ZAG) Earnings Call Transcript & Summary

Good morning, ladies and gentlemen, and welcome to Zumtobel's earnings call for the first quarter of '21/'22. Let me remind you that you will find all relevant documents, the report as well as the management presentation on our home page. With me on the call today are Alfred Felder, our CEO; and Thomas Erath, our CFO. Alfred will walk you through the highlights of Q1, while Thomas will discuss Zumtobel's financial performance. After the presentation, both gentlemen will be available to answer your questions. And with this, I hand over to Alfred.

Ladies and gentlemen, very warm welcome. Good morning from my side, and thank you for joining us for the Q1 results. I just would like to start with a couple of highlights, what we have accomplished in Q1. And obviously, we are very proud that after nearly 1.5 years of the extraordinary situation, we are almost back to the pre-COVID level. And before Thomas gives you the details on the financials, I just would like to highlight a couple of those, what you see here on Page #2. Very proudly, we have received an innovation award for an outstanding system from our Tridonic for outdoor illumination with reducing light pollution and also reducing CO2 emission. We have also been nominated for the Austrian Innovation Award, and we are among the 6 nominees. Also, you see a little bit our international efforts. We have been able to penetrate Walmart, which is one of the biggest key accounts in retail, you could imagine, in South America, starting with Chile out of our office. Also, we are back out of the COVID situation in Hong Kong, one of our strong markets in Asia, where we have won 2 projects, one a refurbishment project at the Hong Kong International Airport and another one, tunnel illumination in Central Kowloon, what we have been awarded in Q1. Just to illustrate also a little bit what we are doing now with the new technologies, what -- we have 2 examples out of Switzerland. One was the Swiss Zucker AG -- the Schweizer Zucker AG with the modernization of the factory where we really have been able with our solutions to prove an ideal solution for the challenging conditions of this environment. And the second one is the postal project what we had, where we have been able to equip the center in Härkingen and the partners to develop a benchmark lighting system, what is not only very flexible but also illuminates the areas where they need to be illuminated with the combination of LED solution sensor technologies what we have done. So -- and we have announced that we have put quite some effort in the sustainability where not only we have established a dedicated team to drive us towards the CO2 neutrality 2025, but also that in June, it was announced that Zumtobel Group will remain a member of the so-called VÖNIX, the Austrian Sustainability Index, as one of the 19 Austrian companies listed here and that are leaders in terms of the environment and social actions. We are very proud in that one that we are remaining in this index. Before now Thomas goes into the details, I just would like to share in a nutshell the Q1 results. And you see here, on this side, that we have been able to continue the positive development of the previous quarter. Obviously, quarter 4 was already a strong growth quarter with almost 10% and achieving the results. We have been able to grow 15%, obviously knowing that the Q1 last fiscal year was a low one, and clocked at EUR 289 million, which is EUR 38 million higher than last year. The revenues in the lighting brands rose by 12% to EUR 212 million. And the upward trend continues also from the previous quarter, and the gap to the precrisis level was significantly reduced. It's even better on the Components level where we grew at 26.1% at up to EUR 92 million. And in addition to the general economic recovery, this positive development was also supported by customers who did restocking and basically have higher inventory levels, as obviously from beginning of this year, we saw already with the shortages and the interrupted supply chain partly that this is a trend. And in that case, the segment is already exceeding the precrisis level of Q1 '19/'20. So the development in revenues driven by the different countries were particularly encouraging in Austria, China and Spain. But also the revenues in other countries, they clearly exceeded already the Q1 '21/'22 levels and exceeded also the pre-corona levels. That's also true for markets in Great Britain, France, Italy, where we have been obviously very hard hit by the corona crisis in the previous year. EBIT-wise, we rose from EUR 7 million to EUR 20 million in Q1, and the return on the sales improvement from 2.8% to 6.9%. The gross profit for the Zumtobel Group improved to 34.6% in this period, and the cost of the goods sold was negatively influenced by raising raw material costs and incoming freight charges, what we have to deal mainly since the beginning of this calendar year. Positive effect also resulted from the decline of depreciation and amortization into release of some warranty provisions. The selling and administrative expenses, and Thomas comes to this, is EUR 80 million in Q1. And other negative effects basically included custom duties in connection with Brexit and increased ongoing freight charges. Please take into account that, obviously, we are completely out of the short-time work since January '21, and obviously, we are not anymore benefiting from any short-time work in the quarter 1. Also, the net profit increased significantly from EUR 3 million to EUR 13 million, and the free cash flow declined to minus EUR 9.1 million, primarily to the foreign exchange effect. So with that, I would like to hand over to Thomas, who now guides you through the details of the numbers of the Q1.

Good morning, ladies and gentlemen. Very warm welcome also from my side. Going to the Lighting segment, we can record increases in revenues of 12% versus prior year quarter, and sales totaled to EUR 212 million. The positive trend continued from the previous quarter, and the gap to the precrisis level in Q1 '19/'20 was significantly reduced. Following the good top line development in the quarter, our EBIT more than doubled from EUR 6 million to EUR 16 million in the first quarter '21/'22. EBIT margin followed and amounted to 7.5% versus 3.1% prior year. Let's go to the Components segment. The Components segment recorded a massive rebound of 26.1% in revenues to EUR 92 million. And in addition to the general economic recovery, this positive development was supported by customer restocking [indiscernible] where they already displayed, and the customers take higher inventory levels because of the disrupted supply chain. With this result, segment revenue even exceeded the precrisis level of the Q1 '19/'20. EBIT more than doubled from EUR 4 million to EUR 8.6 million. And as a consequence, the EBIT margin was at 9.3% versus 5.2% in the prior year. If you come to the group, we now show you the combined results of the both segments. As explained at the beginning of the presentation, we continued our positive development during the first quarter with revenues well above and EBIT almost 3x higher than the prior year level. We are very happy with that. As a consequence, our EBIT margin increased from 2.8% to 6.9%. And let me now move to Page 7 to show you the main building blocks of our EBIT development. We're starting with the prior year EBIT of EUR 7 million. The group's absolute gross profit increased by EUR 20 million, which is a result of the EUR 36 million higher revenues versus the previous period. This improvement was partly offset by rising raw material costs and increase in freight charges. As I previously explained, the increase in selling and admin had a negative impact on EBIT. Above all, this was due to short -- to the absence of short-time work in the administrative block. Other operating results, excluding special effects, came in at minus EUR 0.06 million (sic) [ EUR 0.6 million ]. And as we indicated in the last quarter, we will focus our reporting on EBIT starting with this year's first quarter, and therefore, we have to consider special effects of last year's quarter from the bridge of EUR 2.1 million. Consequently, our EBIT totaled EUR 20 million in the first quarter '21/'22. On the next slide, you can see our income statement. There is not much there. I explained pretty everything in the previous pages. The financial result was at the same level as last year at minus EUR 2.9 million, income taxes of minus EUR 3.8 million and our net profit was 4x higher than in the previous year's quarter and amounted to EUR 13.4 million. Earnings per share increased to EUR 0.31. Let's now move to the cash flow page. Cash flow from operating results increased from EUR 24 million to EUR 34 million mainly due to our improved profitability. As of July 31, working capital stood at EUR 176 million versus EUR 153 million the year before. Cash inflows from the changes in other operating positions were not very favorable, totaled minus EUR 12 million, and this is mainly due to foreign exchange measurement effects from intercompany debt consolidation. Consequently, cash flow from operating activities decreased to minus EUR 0.5 million. Cash flow from investing activities basically reflected the prior year level at minus EUR 8.6 million. Free cash flow amounted to minus EUR 9 million and was significantly lower than last year, which is due, what I have explained before, to the changes in other operating positions. Let me finish my presentation with some comments to our balance sheet, which also shows our solid position. Net debt slightly decreased -- increased to EUR 108 million. Our debt coverage ratio is still below 1% at 0.86%, and our equity ratio equals almost 32%, both more than then in line with our financial results. In summary, this strong balance sheet protects our liquidity position in difficult times we are still facing and gives us more than enough headroom going forward. And with this, I would like to hand back to Alfred who will provide you with a brief update on our regional sales development and the outlook.

If you look at now on Slide #11, you notice already the sales development over the quarters. And you see we have been able to continue the upward trends from the very low of Q1 last fiscal year where we, as already mentioned, had a growth of 15.4%, of course, based on a very low Q1. But nevertheless, we see already since the different quarters that we are now in a very positive trend and the global economy comes back and has helped us in the key markets where we are in. However, the crisis is not over, and that means there's a certain degree of uncertainty. We have it currently again with lockdowns in Asia, where it starts again in New Zealand and in Australia partly. But nevertheless, the global economy continues to grow. And on the other hand, we have the situation, I mentioned at the beginning, on the raw materials, what remains difficult since beginning of the year for all the producing companies. And especially, it's the shortage of semiconductors and raw materials like steel, aluminum what created challenges for us. This limited availability was also responsible for a reduction of capacity utilization at the Zumtobel Group production facilities, and now we are confronted again with the rise in transport costs, what we have to deal with. If you look at the next page, then you see again our regions with the D/A/CH region, the strongest region, growing by 4.8% here. We have to say that the D/A/CH region was better managed, let me put it that way, during COVID. We did not have this big shrinkage like in the others. But also here, we have a significant growth of 5% led by Austria and then by Germany and Switzerland. In Switzerland, we had an extremely strong quarter 1. And this year, the projects are phased, we are expecting the shift towards the quarter 2 and the quarter 3 in terms of revenue. Very strong bounce back in the Northern, Western and Southern, Eastern East Europe with 24% and almost 27% growth. In Northern Europe, it's mainly U.K. and France what came back extremely strong. And in Southern and Eastern Europe, it's the Eastern Europe market what suffered a lot, especially in the second half of last year where we have a strong bounce back. Same in Asia. That was coming out first also with quarters in last fiscal year with growth, again, of 37%. And the critical is the rest of the world, which is the EMEA region, which is still basically out of the UAE, somehow in a stalling investment mode with Qatar, UAE. And basically, the focus here is on Saudi Arabia. And especially in the Americas, it's the U.S. where we had a very weak quarter, and that results in a minus 35% of degrowth. So nevertheless, we believe that we had an extremely good start into our fiscal year, and we are confirming the guidance what we have. The corona crisis is not over. The material shortage will impact a little bit our delivery situation. But however, we, as the Management Board of the Zumtobel Group, confirm the outlook for the current fiscal year, meaning that we still expect a year-on-year increase between 4% and 7%. We have -- we see the catch-up effect of the pandemic, and we also see, like we do it also in our company, a trend towards high energy efficiency and carbon neutrality. And we have, I think, developed, especially over the last 2 years, the highest efficiency products, the complete systems where we help our customers also to meet their CO2 requirements. Same on the EBIT. But again, I just would like to take into consideration that we reported an EBIT margin of 4.2% in 2021. But keep in mind that out of this 4.2%, 2.7% came from one-off effect like the short-time work, lower marketing and almost 0 travel expenses during the COVID-19 pandemic, and these effects are no longer present. So if we deduct the 2.7%, the margin start is at 1.5%, and we expect the top line giving us between 2% and 2.5% and another 0.5% following further efficiency measures what we will continue, even knowing that we have done the main restructuring. But that's, let me say, the issue what we have to face in efficiency gains also given the circumstances we are in with materials and with price increases on raw material. So we -- as also explained, the companies have shifted their CapEx spending due to the corona, and also we have done so. But now in view of the situation, we are planning to invest between EUR 50 million and EUR 55 million in '21. And it's a part what is maintenance activities, what we have in all our operations, but also quite a substantial part, which is the investment what has been shifted during COVID-19. With that, I would like to finish the presentation but also with a reminder, an invitation. We have communicated during our Q4 results that we will plan to held our Capital Markets Day on October 12, '21, where we will give you a comprehensive overview on our revised strategy called FOCUSED. Here, my colleagues and I would be more than happy to welcome you in person at our new Light Forum here in Dornbirn where we showcase our full brand spectrum and potential as an international lighting group on the area of 4,000 square meters. But the Capital Markets Day should be a great opportunity to learn more about us as a group, the midterm strategy and the latest trends and developments in the lighting industry. Not knowing how the situation develops, we plan to organize this as a hybrid event, meaning you may either join in person or online. You will receive the invitation, including all the organizational details today. So if you haven't received the invitation to our Capital Markets Day, please contact Eric Schmiedchen, our Investor Relations Head, and he will be more than happy to send you the registration details. With that, I would like to close our presentation. Thank you very much for your attention. And now Thomas and myself are happy to take your questions.

[Operator Instructions] The first question is from the line of Michael Marschallinger from Erste Group.

Congrats to really strong first quarter results. My first question would be on the guidance. Given this really strong first quarter results, in my view that the guidance seems very conservative, this 4% to 5% EBIT margin. So maybe can you provide us some more -- some guidance on the second quarter? Given this semiconductor shortages, do you maybe expect certain production stops in the plants -- in your plants similar to automotive OEMs or any major capacity utilization reductions in the second quarter? And my second question would be on the orders. At the beginning, you mentioned you acquired Walmart with 50 stores. Can you give us some indication for sales volume for such an order? And also going forward, do you expect any follow-up business with Walmart in other countries?

Yes. Thank you, Michael, for the questions. On the guidance, let me just put up front, I think we have discussed this a couple of times already. We, as a management team, and there's no change since the second Thomas is now our CFO on board, we have the intention to deliver what we promise. So obviously, you are absolutely right, the Q1 was, in that sense, outrageously good because sub-4% to 7% is less than 15% in the quarter. But you mentioned already rightly, we are seeing quite some impact on the shortages of semiconductor materials. Let me explain what this means. So that's true for the components what we saw for the lighting brands from Tridonic but also from other suppliers. There are certain ICs what go into the high-end drivers. That only affects that one. But unfortunately, these are the high-end products, what a lot of customers are buying. And we believe we can handle this in guiding the customers to buy other products to do the similar job. And we are also designing around that we can replace the semiconductors. But we are in the good phase that we are not, basically, like the automotive industry, in a position to close or interrupt production. But we have done selectively for those products where missing parts are there short-time work to basically bridge the time. So looking forward, we believe that the Q1 will be more challenging in terms of being able to supply, not in terms of being -- of not having the order book because our order books, both on component level and lighting brands, are full. And we believe that the next 2 quarters will be a little bit more challenging, followed then hopefully by a quarter 4, what is again back to a semi-normal issue. But you are also, I guess, witnessing what is out in the industry. The pessimistic view on the industry says that this allocation situation will last until the middle of next year, which would be beyond our fiscal year. So taking all this parameter into account, we believe that we can manage this, but we would rather stay with a conservative approach for the 4% to 7% growth, potentially then that we are closer to the 7%. We are not believing that we can ship everything what we have currently in our order book. The second one, on the orders. So the Walmart deal, the 50 stores, is in the range of EUR 3 million. And here what we do, Walmart obviously is a target for us, which is a different dimension compared to the Lidls, Aldis, what we do in Europe. And we are basically, of course, seeing this as a first inroad. We are doing business in Mexico. And we also are targeting to penetrate this in the U.S. But that is one of our target accounts that we would like to sell our high-end [ action ] solutions.

Next question is from the line of Markus Remis from RBI.

First question relates to the pricing versus volume bridge. I think in the last call, you indicated that the bulk of the increase into this year should stand up from volumes, but prices should be rather stable. Is that still the case? And how do you consider your pricing policy against the backdrop of this, yes, quite substantial cost inflation you're seeing? So is there scope for price increases as we move into the next quarters?

Thank you very much for this question. You are absolutely right. The major increase in gross profit came through volume and not very much came in through higher prices. But the increased prices are out. It just takes a little bit until they take effect as we have arrangements with customers for -- really for 1 year that we have quotes which are valid for 3 months. But the price increases are necessary. In the Components Segment, we increased prices roughly by 5%. And in the lighting brands, there will be an even higher price increase in the coming months. But it takes time until it gains momentum.

Maybe in addition to that, what Thomas said, obviously, the customers are facing the challenges not only from other suppliers but from everywhere where material prices increased. But as Thomas said, we have a couple of framework contracts where we have [ funnel ] contracts, where we are obliged to keep the prices. And now we expect that the different price increases, what we have already published to the market, are paying up and we are seeing the results in the quarters to come.

All right. So is it fair to assume that, I don't know, maybe then in your Q3, there will be an initial impact and that then builds into Q4 and early next year? Is that...

We are expecting it already soon because, obviously, what we have done, as I said, this price increase -- so the raw material price increase we see already since the end of the calendar year. And we have done the first increase already in April time frame, what partly is showing some small effects now, but we are expecting that now within this quarter 1, we are seeing the effect and then a higher effect in 3 and 4.

Maybe I can add some sentences. If you look at the Tridonic development, you saw in the last year an EBIT margin of above 14%. Now it came down to 9%. And also on the inbound raw materials, we have a delayed effect. So it takes also 3 months that the price increases we are facing are coming to our P&L.

Fair point. And broadly speaking, I mean we're hearing from a couple of companies that they perceive kind of the cost inflation as peaking, so not kind of reversing already but kind of plateauing, if you want. Is that an observation you would subscribe to?

I would also say the cost inflation is at its peak. If nothing major changes in the economy, which you never know, we would think that prices will erode a little bit in the coming months. Especially, we expect that also the freight rates are coming down, but we are expecting this now for some months.

So if we just look into that, what -- we received some information and an indicator from the automotive industry, it looks like that in China, what is the trend that I hear, the peak has already been reached and we are seeing a start of the erosion or start of cancellation of orders, which is an indicator, a very early indicator that maybe this allocation comes to an end. But the fact is today that we have to deal at least until the end of quarter 1, which is almost our fiscal year quarter 4 with the situation that we're in.

Okay. And then just a clarification on this on the semiconductor shortage. So you said you specifically are impacted on the high-end drivers where you basically had to -- that just some production stand still, but this is more of kind of in certain product pockets, if I understood correctly. Is that the message?

Yes. Correct.

Okay. So there's no broader-based impact on your production schedule?

No. But -- so basically, if customers do only want some good light, high-quality light, high-efficiency light with the simply switch on, switch off, we are not having the shortage. The semiconductor, what are in those drivers, are all controllable drivers where it needs to be dimmed, connected with sensors and stuff like this. And here, we have the shortage on semiconductor. So obviously, the teams are now trying to convince their customers does not need all this to supply them with other ports what we have -- where we have no shortage. So they -- also the short-time work is only for those components where we have this shortage, not for the rest.

All right. Okay. And then just a technical question on your depreciation level, which was quite low from my perspective as against the run rate of the preceding quarters. I know in Q2, Q3, we had some impairments in there, but is there a specific reason why it came down strongly? And is that the run rate we can pencil in for the next quarters? In Q4, it was EUR 18 million. And in the first quarter, it was just EUR 13.5 million.

Well, I think we had some write-offs in last year, in the fourth quarter. And I would say this depreciation and amortization level is more accurate than last year.

In the fourth quarter, you had -- okay, because I thought it was only Q2 and Q3. Okay, but I'll take that as a run rate.

Next question is from the line of Charlotte Friedrichs from Berenberg.

Just one follow-up. Can you give us an update on how the Components segment is doing now in the second quarter? Do you still see much stocking behavior on the client side? Or has this now reached a level where clients feel comfortable with their level of inventories?

It has reached a normal level. It's still on the high end of order intake. So obviously, we had a big -- when you do price increases and you announce it to the customers, they still have the chance then to place orders for lower prices, what they did. So we saw this peak. And then it went down significantly and now it has stabilized to a normal level but also indicates that the market is still healthy and the customers are needing their components. So to answer your question, we believe that the Q2 will be not that strong like the Q1 in terms of the bounce back. Depending on how much we are able to ship, it will be, let me say, a normal quarter. The order book is extremely healthy because we have a lot of backlog to work off, but the order entry is back at normal levels.

Understood. And the backlog that you have roughly with the current situation, how many months of production is that worth?

It's now a difficult question, how many -- so basically, the interest is...

In terms of roughly.

Now -- it's now that we have orders visibility what goes into January because the customers have placed orders what last to secure their supply for 6 to 9 months. And I think we have now a backlog what lasts at least into the next calendar year.

[Operator Instructions] There are no further questions at this time, and I would like to hand back to Alfred Felder for closing comments. Please go ahead.

Yes. Ladies and gentlemen, thank you very much again for listening to us, to our Q1 results, also for your questions. Just one more time, the invitation for the Capital Markets Day either online or physically. Of course, we would love to host you here and show you on site what we have to offer. Thank you very much, and have a good day.

Ladies and gentlemen, the conference has now concluded, and you may disconnect your telephone. Thank you for joining, and have a pleasant day. Goodbye.