Zumtobel Group AG (ZAG) Earnings Call Transcript & Summary

Thank you, Stuart. Good morning, ladies and gentlemen, and welcome to Zumtobel's conference call on the results for the first 3 quarters of 2021/'22. With me on the call are Alfred Felder, our CEO; and Thomas Erath, our CFO. Alfred Felder will walk you through the highlights of the quarter, while Thomas Erath will discuss Zumtobel's financial performance. After the presentation, both gentlemen will be available to answer your questions. In case you have not a copy of the report and the presentation, you may find both documents for download on our web page. After the call, a playback of this conference call will be available on our web page as well. And with this, I hand over to Alfred.

Good morning, ladies and gentlemen. Thank you for joining us for the Q3 results '21/'22. Before I start on the results, just let me say that the latest developments regarding Russia war with Ukraine are really a shock to everyone of us who believes in the European idea. And we stand for an international understanding and the peace in Europe and around the world, and our thoughts are with the people in the Ukraine with those affected. Obviously, we have an exposure, I will come to that, which is rather limited and/or negligible in content of the overall revenue, what we do. But even in such difficult times, it's also our task to manage the company. Looking into the Q3, we have achieved very good results. As a start, like always, I would like to show you a few projects, what you see on your Slide #3, showing how the strategy develops both for our brand Zumtobel as well as for our brand Thorn. The first one is a typical Zumtobel DNA project, the museum in Norway, which is the National Museum of Art, Architecture and Design. Over a couple of years, we have completed together with the property management developer, Statsbygg, in Oslo. Another example, what shows the progress what we do in the outdoor and in the indoor, the Thorn applications in Brno, the Czech Republic Hockey Stadium, what we did with the light studio [indiscernible] installed in the last quarter. And 2 outside projects, what illustrates the progress what we do with our outdoor luminaires where we have pushed for innovation out of our R&D development center in France here one in China and another one in the Middle East in charge and one of the Emeritas of the UAE what we did in the last quarter. Let me just now switch to the Slide #4 on the highlights, and then Thomas will go into the more details. The group revenues have rosen (sic) [ risen ] to 11 -- by 11.5% to EUR 847 million, which is EUR 87 million higher than last year. And also in the Q3, I think we mentioned this in the Q2 call, we have been able to improve delivery situations versus the Q2 so that we are back on track in a double-digit growth with 8.2% in Lighting to EUR 625 million; and then the Components segment with a strong 21% increase to EUR 266 million. In addition to the general economic recovery and favorable FX rates, this growth was supported by a higher sales volume and also price increases. The group EBIT rose from EUR 27.3 million to EUR 52 million, and the EBIT margin improved by 3.6% to 6.2%. The most important contributions resulted from an increase in volume, a decline in depreciation and amortization, lower warranty cost also here, Thomas will highlight this, and also an efficiency improvement in our direct labor expenses. Unfortunately, the rising cost for raw materials and transportation, combined with the partial expiration of government-supported short-time work models, represented the negative effects. The gross profit margin after development costs improved to 33.6%, but was negatively influenced by a sharp rise of raw materials and transport costs. And the positive effects here resulted from the decline of depreciation and amortization and, again, the lower warranty costs. Selling and administrative costs rose by EUR 18.5 million to EUR 232 million. And here, the main driver was the personnel expenses that followed the expiration of the short-time work programs, but also negative effects in terms of higher custom duties due to the Brexit and also higher transport costs with the increased energy prices. And finally, the net profit significantly increased from EUR 14.9 million to EUR 32.7 million. And with this, I would like to hand over to Thomas. He will provide you more details on the development of those segments and our financial performance.

Good morning, ladies and gentlemen. Also a very warm welcome from my side. In the Lighting segment, due to an improved delivery situation, we could achieve an 11.5% quarter-on-quarter increase in revenues to EUR 204 million. That allows us to close the gap and deliver sales above the pre-crisis level in the third quarter of '19/'20. Apart from the good top line development, the result was supported by a decline in depreciation and amortization; lower warranty expense, this was above EUR 6 million; plus efficiency improvements in direct labor. Whilst driving cost for raw materials and transportation combined with the partial expiration of the government-supported short-time work models represented negative effects. EBIT in the Lighting segment increased more than fivefold from EUR 2.2 million in the third quarter of the previous year to $11.8 million. On to the next slide, let's move to the Components segment. The Components segment recorded an increase of 22.8% in revenues to EUR 90.3 million. In addition to the general economic recovery, this positive development was supported by customer read and overstocking. We still see that there is a lot of demand, and we think people are afraid that they don't get the product, and so they overstock. Segment revenues exceeded the pre-crisis level. EBIT nearly doubled from EUR 6 million to EUR 11.4 million in the third quarter. As a result, the EBIT margin rose to very strong 12.6% compared to 8.1%. This development was primarily driven by the high volume, leading to high factory loads as well as efficiency improvements in the direct labor. Of course, we have rising costs for raw materials and transportation combined with the effect that government-supported short-time work models were not effective anymore. So next slide shows the results for the group. We continued our positive development and generated a quarter-on-quarter increase in revenues to EUR 279.2 million. As we mentioned above, the good sales development was primarily driving results. A decline in depreciation and amortization, lower warranty expenses, efficiency improvements offset the rising raw material prices and transportation costs. The partial expiration of government's short-time work models as well as the lack of semiconductors were backsides of the quarter. As a result, our group EBIT nearly quadrupled quarter-on-quarter to EUR 17.3 million. The EBIT margin increased significantly from 1.8% to 6.2%. Let me now explain the building blocks of our EBIT development for the first 3 quarters. Let's start with prior year EBIT of EUR 27 million. The group's absolute gross profit increased by EUR 43 million based on an improvement of around EUR 87 million in revenue over the first 3 quarters of the previous year. Our gross profit was negatively influenced by a sharp price in raw material and transportation costs. Positive effects resulted from the decline in depreciation and amortization and especially lower warranty costs as well as from efficiency improvements in direct labor. The increase in selling and admin expense had a negative effect on our EBIT. This was because short-time work was not available anymore and also, thank God, not needed. Other effects totaled minus EUR 1.2 million. And as we had no restructuring expenses, this year's EBIT totaled to EUR 52.2 million. Coming now to the income statement. Financial results amounted to minus EUR 10.4 million, which is roughly EUR 2 million below the previous year. After deduction of the EUR 9.2 million in income taxes, our net profit increased substantially to EUR 32.7 million. Earnings per share more than doubled to EUR 0.76. Going through the cash flow statement. We have a very strong cash flow from operating results of close to EUR 95 million. And we also see on the other side that working capital increased tremendously to EUR 194 million from EUR 152.5 million on April 30, '21. Especially higher inventory necessities due to supply chain disruptions and higher sales are causing the increase. Cash inflows from the change of other operating position totaled minus EUR 22.5 million. The most important factors here included a reduction of EUR 7.1 million in restructuring provisions, EUR 3 million in pension and termination benefit provisions and EUR 4.6 million in guarantee provision as well as a reduction of EUR 4.4 million in employee vacation accounts. Consequently, cash flow from operating activities declined to EUR 29.6 million in the first 3 quarters. Cash flow from investing activities was above prior year level with EUR 28.3 million. As a result, free cash flow amounted only to EUR 1.2 million. Let me finish in some comments on our balance sheet and our financial position. Net debt increased to EUR 113.4 million. Our debt coverage ratio is very healthy at 0.89. And our equity ratio increased to 34.2%, both more than well in line with our solid financial covenants. In summary, this strong balance sheet protects our liquidity position in difficult times and gives us more than enough headroom going forward. And with this, I would like to hand back to Alfred.

If you look at the Page #12, we look at the development of our sales. We are used to this graph already. And we are continuing to deliver encouraging results. Obviously, you see, the last year, first, second and also the third quarter was still negative in terms of growth impacted by the COVID-19 on the global economy. But since quarter 4 last year, we have been able to record positive development, especially Q4 with 9.6%, close to double digit. I mentioned this already, the 5.1% in Q2 was a result of the situation on the allocation of semiconductors, especially on the Lighting brand side on the high-end luminaires. And thanks to the corrective actions what we have done, we have been able to improve the situation significantly now in Q4. We also have been able to partly pass the higher cost of our customers, especially on the component level, a little bit less successful on this luminaire level, simply that the business is in project business and projects we ship over in the last quarters have been partly designed in a year or more ago with older costs. The limited availability we saw in the second quarter, we see that we overcame and with a solid growth now again in Q3 of 14.6%. If you look at the regions and that you see on the Page #13, the revenue in the D/A/CH region, which is Zumtobel Group's largest markets, were slightly higher year-on-year in the first 3 quarters. Especially if you look at the quarter 3 here, we have -- we saw a significant improvement. The very good performances here out of Austria, Germany and Switzerland, slightly above -- and especially Switzerland, it's still due in COVID very strong previous year. A quarter-on-quarter comparison shows that the revenue grew by nearly 10% to this good development [ overall ] increase. Also, we see in revenues in Northern and Western Europe, substantially with 14.5% to EUR 209 million, especially due to a strong increase in the U.K., a strong bounce back after COVID and then continuing to drive the revenue strongly in that territory. Also in the Southern and Eastern Europe, we rose significantly by 22% to EUR 234 million. Here France, Spain and Italy reported largest increases. But also at this point, I wanted to highlight that our direct risk to the group revenues from sales in Russia and Ukraine is not very high. It's a total of EUR 8 million. Asia and Pacific generated 7.6% revenue growth to EUR 95.4 million. And the rest of the world, which includes the Americas as well as the Middle East, dropped by 12% to EUR 43 million, but also show a very strong bounce back in the Q3. Slide #4 (sic) [ #14 ] is just illustrating how the Ukraine conflict affects that Zumtobel Group. And I would like to share a little bit more what this means for us. But let me distinguish here between the short-term and the long-term implications. As I already mentioned, the direct sales risk is not very high, around EUR 8 million for both the Components and the Lighting business, Russia and Ukraine. We do not have any direct supply relationships with Russia and Ukraine. So we are not depending here. Most of our suppliers, especially for aluminum, steel do not have direct relationships as well. And so we are not seeing and expecting a huge impact here. But on the long term, this is of course now a huge uncertainty and, therefore, viewed from our end with caution. And as a result of the conflict, there might be a decline of production and the shortage of raw materials and intermediate products, which may lead also to rising prices. You see it already on the energy costs, but since basically January has reached astronomically high values already, and obviously, the addition that shortage might also basically lead to a shortage of the supplies of semiconductors because there are essential materials coming from those countries for the production of semiconductors. And last, but not least, obviously, the effect on transportation, what basically is affecting and impacting further the cost of transportation. What we do not know at this point in time is how the neighboring Eastern European countries might react with a lower investment ability in a very close distance to the Ukraine. Well, with that, I would like to conclude the presentation and have the outlook into our guidance. Obviously, we mentioned already in the past calls, and that continues. We welcome the increased orders that represented, on one side, a great challenge, given the current raw materials situation. We are still negatively affected by the shortage of this raw materials, especially on the semiconductors, also with the limited transport capacity, what will not improve now with the conflict. And this rising cost for materials transport, and in the mean time, especially energy can only be passed in part to our customers. From a company's viewpoint, the current market environment is almost more challenging than it was at the beginning of the corona pandemic. And therefore, our current priority is to protect the delivery capacity for our products and the high service quality to our customers. We expect that raw material shortage will influence the development of the revenues in the Zumtobel Group fourth quarter. The uncertain situation in Ukraine conflict also adds further uncertainty. Even though we have only an exposure of EUR 8 million, we do not know how this affects our CEE region, which is one of the growth region and was also driving the growth the first 3 quarters of this year. Nevertheless, in view of the sound development of the business during the last 3 quarters, we confirm our forecast for '21/'22, where we expect the revenue increase between 4% and 7% and the EBIT margin between 4% and 5%. We're obviously -- after 3 quarters, the management, Board and we believe the results, we will reach the upper end of the given range. And these expectations could even be exceeding, depending obviously on the ability of the required materials, especially on the semiconductors. Our guidance for CapEx spending as well as on working capital is unchanged and although our working capital line is very challenging under the current circumstances. With that, I would like to thank you for your attention, for listening. And now Thomas and myself will be happy to take your questions. Thank you.

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

The first one would be on the guidance. And I couldn't hear you, my line was interrupted. So did I get it right that if the situation remains the same and especially the semiconductor situation doesn't worsen, you expect the upper end of the guidance range?

Correct. With the current situation, what we see, we are expecting the upper range. Obviously, if this can be improved, and we are working really in a hand-to-mouth principle, we could also be exceeding this range.

Okay. Then the second question on the semiconductors. When you put it on the Slide 14, what are the longer-term implications, saw that -- how are you seeing the situation right now? Also, does this slide imply now in the short term to medium term, you expect it to be more stable and not further deteriorating? And, how do you define long term here?

Yes. This is a very good question, Michael. So basically, let me just explain where we came from. The Q2 result, the relatively low growth on the luminaire segment was driven that we were really seeing a huge shortage of semiconductors, which obviously go into the high-end driver, especially for more or less the entire portfolio for Zumtobel. And the effect was that we were missing more or less 3 or 4 key parts of semiconductor drivers. I think we mentioned it last call, the Tridonic people have -- engineers have redesigned this and we have been able to partly replace it by drivers, by ICs who have been available. And that was looking quite promising towards the end of the year, and that resulted also in the better performance in being able to deliver in our Q3. Since the Christmas time and after that, the situation, unfortunately, deteriorated again and you read it in the different industries on shortages. And the current outlook is that at least until the end of '22, we will have to face with those challenges, with the uncertainty of not getting the necessary quantity of semiconductors. And that's the situation we are in. And we believe that this affects us, especially now in Q4 and will affect us hopefully less severe in the next quarters to come in the next fiscal year.

Okay. And then more question, on the call, you mentioned that people are afraid not to get the products, and that's the reason why they overstock. So do you expect this trend also in the fourth quarter?

We see, especially what Thomas mentioned on the components level, the stock levels, what we have do not reflect the real demand, what the lighting industry is seeing. And we are seeing here the stocking effect. But on the other hand, since the order books of the components level are extremely high and we see a moderate lower order intake, we believe that the stocking effect might now reach in the peak.

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

The first one would be, did I understand correctly that the improved delivery situation in Q3 was partly due to you reengineering some products to work around the semi shortage? And related to that, is there any scope to also do that now in the fourth quarter?

Yes, the first question is, you're absolutely right. The improvement what we have been able to do is partly to the effect that we replaced, as I said before, [ up and quickly ] semiconductor components by others who have been available. But on the other hand also that a combination of other raw materials what we combined in order to be able to fulfill the needs of our customers. So it was a combination of both the availability of more drivers due to better availability of semiconductors and also the better combination with other raw materials [indiscernible] for our finished products.

Maybe I add one remark to this. In order to day-to-day side for these semiconductors. UPS [ partially ] can shut down your [indiscernible]. Our Components division did an excellent job in designing out certain ICs, but -- and go to other suppliers of these products. But if you think, you are over this -- the crisis in others [indiscernible] on shortage. So the visibility for the future is very, very limited because as soon as you think you have solved the problem, you are getting from other suppliers into a shortage situation.

Okay. Understood. And then the second question would be, if you could give us an update on where your energy cost is at the moment, perhaps as a percentage of sales roughly, so we get an idea?

Well, I could tell you what we have spent on energy last year. On gas and electricity, this was around roughly $5 million. If -- I mean we are unhedged until 30th of June. But our estimation, and this is based on the prices of last week in our [indiscernible] of about EUR 5 million. So energy costs would have doubled if we had hedged out the quantity we are making for the end of the financial year, next year.

Okay. Understood. And then -- yes?

For this year, we have a maximum between EUR 1.5 million and EUR 2 million.

Okay. Understood. And then how much of your revenue roughly comes from Central and Eastern Europe?

That's roughly basically, including Russia, it's close to EUR 80 million. So this Eastern Europe -- that's why we are very careful. It's one of our growth regions where in most countries, including Russia, we have a high double-digit growth, and that was supposed to come to about close to 9.5% of our total Lighting brands revenue. The majority is Lighting brands here.

And then one clarifying question in the end. So based on what you're seeing right now with the cost situation, if conditions remain the same, you are likely to reach the upper end of your EBIT guidance? If things improve from here, you may come in above, is that correct?

That's correct. Yes.

[Operator Instructions] Next question comes from the line of Markus Remis from Raiffeisen Bank International.

A couple of questions, please, firstly on the energy bill. Sorry, I did not get the figure. You said EUR 5 million would be the headwind year-on-year, is that the interpretation?

No. The -- if we had hedged out our energy for the coming financial year last week, it would be doubling our energy bill, from EUR 5 million this year to EUR 10 million next year. We have not hedged up.

Right. Okay. So you had -- EUR 5 million was gas and electricity bill last year or in the current?

In the current year.

In the current year, okay. That's clear. What's your -- what's like the general forward buying strategy, can you elaborate on that? Are you kind of consistently rolling over the energy purchases?

No, we have done some long-term hedges in some subsidiaries. And for the biggest plant, we have hedged out until the 30th of June this year. But after 30th of June, we are not hedged anymore. And we are not hedging on today's basis because we think energy prices must go down, and hopefully, we are not wrong.

Right. So for next year, you're basically fully exposed to the spot market?

Exactly.

Okay. Very clear. Then on the currency side, I mean, we've seen a strengthening of the U.S. dollar. I mean if I'm not mistaken, you had some tailwinds in the last 12 months coming from lower purchasing costs because of the dollar. Can you remind us of the current exposure? And also maybe you can elaborate a bit on the -- if you expect that to turn into a headwind on the purchasing bill?

Well, in the U.S. dollar, we have a shortage of about EUR 140 million.

That's a dollar or euro terms, 140 million in dollar or in euro terms?

We need EUR 140 million; in dollars, $160 million. But this number is also fluctuating depending on our volume. So U.S. dollar for next year, I would guess it's between $150 million and $165 million, which we need, where we are short. We have partially hedged this, but with the big chunk, we are on the spot market.

Okay. Sorry, I just have to take that down. Okay. Then next question would be on the guidance actually. I mean looking at the top end of what you've lagged sales in the fourth quarter would be down by about -- sorry, 5% year-on-year. I mean just trying to get a sense of what you have baked in? I mean there must be a pricing effect still helping you in terms of top line, which -- I mean [indiscernible] implies that you have penciled in quite a volume drop then for Q4. I mean I understand the current uncertainty. But at the same time, I'm reading here that you have significantly expanded the range of suppliers on the semiconductor side. Yes. I mean do you have any indications as of now -- February has already gone. I think you should have a reasonable visibility on recent weeks. Do you have any indication that there's a more kind of aggravated shortages on the chips around the corner? Or anything else I'm missing here?

No, you're absolutely right, Markus. I think what Thomas mentioned already, if we just compare the shortage situation what we had in Q2, then I would say the shortage situation has deteriorated for Q4, even though we have designed around because we are having partly a supply situation where at a very short notice our suppliers call us and say you are only getting for the next 6 weeks, 8 weeks half of the volume. That's one effect. So we have to face this uncertainty. This is one effect. The second one is the last quarter 4 was already close to 10% growth. And obviously outperforming that is a challenge. On the prices, you're right. That's true for the components level, which is, in that sense, a little bit easier to adjust the prices. But as I said before, on the luminaire level, due to the fact that even since January our prices for all our costs went up another high single-digit number, we cannot follow so quickly with our project business those prices. So the nice pricing effect, what we have accomplished in, let me say, Q2 and now in Q3 is already again evaporated with the costs, what have been risen so dramatically. So therefore, we are careful. The biggest lever would be if we are getting much more allocation of chips, what we are fighting every day, obviously, will exceed this guidance.

And for April, you know that we have for 2 or 3 weeks an under-delivery of one component, which we can't substitute by another one.

So [indiscernible] it might even be that the last week in April, out of today's perspective, we might not be able to produce at all drivers.

In Tridonic, in the Components business.

Okay. Okay. That's very helpful. Last question would be...

On the other side, if this -- this is why we say if the delivery situation improves, we can beat our guidance. We just don't know it. It's a weeks game, whether you get some components, 1, 2 or 3 weeks in -- more in advance than expected or communicated by the supplier. So it's really tough to give a guidance.

Okay. I fully understand. Final question on Q3. I mean did you digest any kind of extraordinary effects in the quarter?

Yes. As I said, we had EUR 6 million lower warranty costs than in the previous year, that's the biggest one; and EUR 2.5 million in subsidies, which we recorded in the last year in Q2. These were about the major effect. But of course, we have a lot of counteracting effects with transportation and raw material prices.

Just one correction to Charlotte Friedrichs' question on CEE. I was not 100% correct. The EUR 80 million revenue, what we do in CEE for the Lighting brands, and there is an additional EUR 30 million for Components. So the complete exposure to the CEE market is not EUR 80 million, but EUR 110 million for the group. Sorry for that.

[Operator Instructions] Next question is from the line of Roland Könen from Value-Holdings.

Nearly all of them are already answered. Only one housekeeping question concerning the tax ratio. I didn't get if you did some elaborations on that. The tax ratio was nearly 22%. Is this also the guidance for the full year and the next year? Or what is the guidance for the midterm?

Well, the midterm tax ratio, I have not looked at, but I expect that the full year tax ratio will be better than the current tax ratio, will be maybe 4 to 5 percentage points better. The full and detailed calculation on deferred taxation is done at the full year. So there might be some effects come only in the full year.

There are no further questions at this time, and I would now like to hand the conference over to Alfred Felder for closing comments. Please go ahead.

Yes, ladies and gentlemen, thank you very much for listening to us and for the interesting questions. I hope we could answer those questions correctly and in line with that -- what you wanted to know. Obviously, it's very clear that we plan ahead with all the uncertainties, what we had. And let's cross the fingers that the situation in Ukraine is not further deteriorating. And then we are looking forward to a very good development of our business in the next quarters to come. With that, I would like to close, and thank you very much for your time today. Thank you. Bye.

Thank you.