Zumtobel Group AG (ZAG) Earnings Call Transcript & Summary

Good morning, ladies and gentlemen, and welcome to Zumtobel's conference call on the results of the first half and the second quarter of our 2022/'23 financial year. 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 the 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 today for the half year results of the Zumtobel Group. Given the current economic environment, this half year results clearly exceeded also our own expectations. So that -- as you could see from the November 10 announcement on the preliminary figures for the last half year, the Zumtobel Group has developed better than expected in the recent months. You will -- this is very positive from our end, and we provide more detail through Thomas in a second. Just on this Page #3, I would like to highlight that a couple of representative projects what we did in Q2 to see and to show you how we are making progress with our strategy. First one was the Expo Fair in Dubai, where we really created a wow factor among the visitors the lighting concept of the bottles what had to be carefully planned and it's about 900 luminaires equipped with Tridonic drivers, what illuminates this architecture. The second one is the Malinas Retail Park in Belgium. That's a park what went back a decade of planning and is considered the most sustainable park in Belgium. You see also here we were selected also with our solutions in following the international Dark Sky Association fixture approval and this illuminates luminaires help to protect the surrounding environment at night and fewer lanterns were needed, thanks to the required spacing. The third project is a project in Denmark, the Christiansbro Copenhagen also here the client together with him, we developed a sustainable lighting solution for the office complex in Copenhagen on these buildings and our high-tier products create a good indoor climate as well as helping to save energy, even prior the high rising energy costs what we have right now. And last but not least, I mentioned it in a couple of previous calls, we are making progress in the new segment of stadium and sport arena illumination. We equipped the air arena of the VfB Stuttgart in Germany, and it's an additional example of Bundesliga stadium where the club decided to modernize the lighting system or choose us as a partner. We will have this discussion moving forward. But on the Page 4, you'll see here that due to the increased interest rates and the rising cost of construction materials, energy the commercial construction is only expected to generate marginal growth. But we do see that the renovation business as an alternative both also triggered by the fact that the European Union will ban some of the classic illuminations, especially the fluorescent tubes by September 1, 2023. And the customers are shifting their environment, their investments into refurbishment, and that means more energetic renovation of existing buildings. So we are seeing a momentum here, what might help us moving forward in the next quarters here. We have a close cooperation with our customers and partners who are developing the right concepts to save the energy to light, and we are helping here with our high efficient LED solutions. More or less the 3 pillars here, less energy consumption, the payback of an investment goes down, down to almost -- yes, 10 to 12 months with the current energy costs. We are using our most sophisticated light control in addition to the high efficient LEDs, what helps another 20% of cost savings. And last but not least, obviously, with the LED, the customer gets a much better quality of light and the illumination of the space as he wants to illuminate. With that, let me turn on the Slide 5, before I hand over to Thomas. We, as Zumtobel Group recorded a double-digit growth in revenue during the first 6 months, revenues rose here, as you can see from Slide #5 by 10.6% to EUR 628 million, and both segments improved their contribution. One of the reasons for the success was that we were able to pass on higher prices to our customers, especially in the project business, which not so easy, but also that we have a payable FX environment, especially from Swiss franc also from the dollar on a smaller amount, higher sales volume and improved availability of components that contributed to this growth. In the first half of our financial year, we experienced a further rise in the prices for raw materials and energy as well as higher personnel costs, which were intensified by a higher U.S. dollar exchange rate. Thomas will come to that which obviously is impacting the P&L heavily on the components level. Nevertheless, we were able to significantly increase our EBIT from EUR 35 million to EUR 50.8 million for the first 6 months and our net profit also improved significantly to almost EUR 34 million. And with that, I will hand over to Thomas who gives you a closer look in the development of our Q2 results.

Good morning, ladies and gentlemen. Let me start with the Lighting segment on Slide 6. Revenues in the Lighting segment rose by 13% to EUR 235 million mainly as a result of price increases and positive foreign currencies effects. EBIT in the Lighting segment more than doubled from EUR 11.1 million to EUR 24.9 million. The increase in the revenue offset more -- we're offsetting material prices, energy prices and transportation costs as well as personnel expenses. As a result, our EBIT margin increased from 5.3% to 10.6%. Coming to Slide 7. Let's move to the Components segment. The Components segment recorded an increase of 12.5% in revenues to EUR 93.9 million in the second quarter. Despite the U.S. dollar appreciation, higher material costs and higher personnel expenses, EBIT increased to EUR 8.9 million. The EBIT margin improved only slightly to 9.4%. Slide 6 -- Slide 8 shows the overall result of the group. We generated a 13% increase in revenues to EUR 314.1 million in the second quarter. The increase in selling prices, favorable FX environment and higher sales volume more than offset the significant increases in material, energy and personnel costs. The strong U.S. dollar development and the higher selling and administrative expenses. As a result, our EBIT more than doubled from EUR 14.9 million to EUR 31.7 million. The EBIT margin reached a double-digit 10.1%. Let me now explain on Slide 9, the main building blocks of our EBIT development for the first half of our financial year. Let's start with the prior year EBIT of EUR 35 million. The above mentioned increase in prices and favorable FX environment and higher revenues led to a positive effect of EUR 54.7 million. This positive effect was, however, partially offset by the higher costs and higher SG&A costs. As a result, our EBIT increased to EUR 50.8 million. Slide 10 provides you with information on our income statement. Let me focus on our financial results, which amounted to a negative EUR 7.5 million. The decrease in earnings attributable to associated companies and the impairment loss on associated results from Inventron AG. This negative effect was partially offset by lower interest expenses for pension obligations as well as earning effects from FX exchange valuations and valuation of hedges. In more detail, you can see it in our P&L in our half year report. After the reduction of income taxes, our net profit increased to EUR 33.7 million. As a consequence, earnings per share rose to EUR 0.78. Let's now move to Slide 11, the cash flow development. Cash flow from operating results increased significantly year-on-year from EUR 63.2 million to EUR 78.3 million. Cash outflows from the changes in other operating positions amounted to minus EUR 18 million and resulted mainly from an increase in bonus and holiday allowance payments. Cash flow from operating activities increased to EUR 44.2 million in the first half -- half year. Cash flow from investing activities totaled EUR 27 million (sic) [ minus EUR 27 million ] compared to EUR 16.8 million (sic) [ minus EUR 16.8 million ]. In addition to investments in property, plant and equipment, this position includes cash outflows of EUR 9.6 million for capitalized development costs. As a result, free cash flow increased from EUR 6.7 million to EUR 17.2 million in the reporting year. Let me finish with Slide 12 and have some comments on our balance sheet and our cash position. The balance sheet structure has remained nearly unchanged since the end of April. The equity ratio equaled 38.9%. Net debt amounted to EUR 106.1 million, and the debt coverage ratio is very healthy at 0.78. And with this, I would like to hand back to Alfred again.

On Slide 13, you see again the development of our quarter-on-quarter sales. And you see that we have been able to grow the quarter to now by solid 13%. And then you see we are continuously delivering encouraging results with the Q2 of 13%. We delivered the next positive quarter. Reason for that, I mentioned at the beginning, we were able to pass on the prices to the customers, especially in the different project business what we had. And we also -- as we discussed it also during the last call but also, we had positive volume effect in addition to the price in the FX exchange rates. If you look into Page 14, you see again the different regions. The D/A/CH region had again a strong growth recorded in Switzerland and also in Germany. Revenues in Austria were slightly below last year. Also, I have to mention that last year, we had a couple of very big projects to be completed what we were not able to compensate the year up to now. The revenues were higher in almost all of the countries of the Northern and Western European region. Above all, Sweden reported biggest increase compared to the previous year. Also here, factor was that one our key account customer, IKEA was a rather very positive business development, what was a major factor here. Southern and Eastern Europe also reported moderate revenues growth and the development in Italy was positive, but declines were recorded, for example, in Hungary, and slightly also in France. Very nicely compared to last year, the regions of Asia Pacific basically grow. And here, we had a positive contribution, especially from our major city there in Hong Kong, who offset a little bit the lower contribution from China where we also were suffering due to the constant lockdowns in China. Substantial improvement in the very weak region from last year in the Americas and MEA resulted primarily from the reversal of the below average development in the U.S. during Q1 and the good Q2 results. So clocking into that a total of EUR 700 -- EUR 628 million. Now I'd like to conclude our presentation with a few words on our outlook. As we already communicated in our [ half ] release, we have adjusted our outlook for revenue growth and EBIT margins for the '22/'23 financial year. Based on the positive development of the first half, we are now expecting a revenue growth between 4% to 8% and an EBIT margin from 4% to 6% for the entire financial year. However, this outlook is made in [indiscernible]. So we have the bandwidth very challenging market environment. [indiscernible] that China have shown, and that is the assumption that we will continue to see sufficient gas supply in Europe. At the end, a steady rise of energy prices, no further deterioration and the availability of input products and no, hopefully, further escalation in the Ukraine. What we are seeing, and I mentioned this at the beginning, is that we have only a marginal growth in commercial construction. We have received the latest survey on Euroconstruct, what foresees really a very moderate and partly shrinking development of the new construction based on the increase of interest rates and the rising cost of construction materials and energy. But however, we are carefully optimistic that explained an alternative, the commercial customers are shifting their investments into refurbishment. We are now working very closely with all our customers and partner to develop the right concepts to save energy by installing using highly efficient lighting solutions, including the control. And we do see already a clear revenue potential in this area. On the CapEx. The spending is estimated to be around EUR 70 million for the '22/'23 remains unchanged as we are still moving full speed ahead with our digitalization offensive as well as launching and investing into key new lighting solution products. And at this point, I would like to mention that our midterm CapEx guidance is still intact. This means we are expecting an average annual CapEx of around EUR 55 million up to '24, '25. Yes, with that, I would like to come to an end of our presentation. Thank you very much for listening. And now Thomas and I will be happy to take your questions. Thank you.

[Operator Instructions] We have the first question from Markus Remis from RBI.

First question relates to the topic of energy savings and how you can capitalize. I mean you gave a bit of an say flavor, but can you provide a bit more granularity? I mean, are there any markets where you make a special effort? Anything you can tell us about kind of the heat rate and how this -- the order intake has developed. So a bit more granularity on kind of your success on this topic.

Thank you, Markus, for your question. This is Alfred again. Yes, obviously, as you know, we do have in our D/A/CH territory, especially where we have relatively high market shares in Austria and in Switzerland, a very solid customer base where we have started key initiatives in each of those 2 countries, for example, to approach the customers, telling them what they would save as we know what kind of light they have if they would use and they switch now into, let me say, an LED solution and we offer basically 2 options. The easy one is refurbishment kits where we more or less only change the old, let me say, luminaire type with the LED solution or a complete replacement of the entire picture. So refurbishment kits on one side and new installation on the other side. And we have a very clear calculation of -- in tools where we can show the customers how much he can save and based on the current energy prices, how short the payback time will be. And that's valid for all our key products what we have. And looking at the customer base. So our key account customers in the retail, they have already switched more from new build to refurbishment. So the total amount of refurbished of shops with new LED solutions are remaining constant, but it has been shifting from less new builds and more refurbishments. I, for example, one example [indiscernible], is another example how we do that. And we have started this in the D/A/CH territory. We have a lot of customers who are already engaged in that one. It's too early to disclose the results because that's the middle of the progress, and we are currently launching this offensive also in all the other European countries. And by the way, the same goes with Tridonic. So also they are having an offensive in approaching the customers and their luminaire makers with solutions to replace conventional bulb and length with LED modules and with LED drivers.

Okay. Okay. So would you say that this is something where momentum is kind of strongly building up?

We believe so. We do see a little bit here in this sale in German [indiscernible] let me say, the new energy. So we are seeing also from our distribution partners that people are heavily investing into heat pumps. They are heavily investing into solar panels. They are heavily investing into new equipment to save energy. And with light we are in that regime, knowing that light is only roughly let me say, between 12% and 15% of the total energy consumption, but for big consumers, that's quite a significant amount. And we're seeing here the momentum.

Then next question relates to the kind of perception of the construction industry. I mean, okay, slowdown, I guess, is now a common sense, especially residential, but also other pockets. I mean, is there anything from past cycles that you think is applicable to the current development in a sense how long it will take until you feel waning demand because of lower construction activity. Anything you can maybe prepare yourself.

Yes. Typical, Markus, in the construction industry, in the commercial buildings, it's, let me say, the shortest period is from projection and planning into the time when light needs to be installed is a time frame of 2 years. Typically, it's 2 to 4 years. Here, obviously, we do see and the Euroconstruct numbers indicate is also that the amount of new builds have been going down quite significantly. And obviously, we would feel this earliest to say, towards the end of '24 out of today's perspective. On the other end, there is still a commercial building under construction, what has not come to stop. So the major constructions are moving on and the buildings will be completed. So to answer your question, obviously, if this new construction will last for a longer period what obviously is difficult to imagine because there's a strong need of building, then we would see this in -- would have an impact towards end of '24, '25 of our business.

Right. Okay. Yes. Then two, Yes, sorry. One question relates to pricing. I mean, which has been heavily supporting obviously. I mean, I think you had kind of transportation surcharges applied to your pricing now with transportation costs going down. Again, I mean, how sticky are they in general? I mean, several cost items have come down markedly at least from the intra-year peak. So how is your perception of your pricing power and maybe also going into calendar year 2023, what can you tell us about your pricing policy?

Yes, if you mentioned the transportation surcharge. This was mainly applied on the components level because we have a significant amount of drivers coming in shipped from China. Obviously, you're right, the transport costs for container has come down and the surcharge most likely will be either completely reduced. But on the other hand, customers are fully aware that other input factors will rise. The biggest driving force will be from next calendar year onwards, there substantial wage increases what we are expecting in our markets. And so all in all, we believe that we can maintain the current price structure also given the fact that we are not out of the allocation of certain semiconductor components, which means not all products are available. Obviously, if allocation comes to an end, what out of the day is not foreseeable, given the fact that we have still the boom on the ECA and the e-mobility especially on a couple of key components and more products are available, then the price pressure might come back here. But the outlook what we have at least into the first 2 potentially 3/4 of the next calendar year will be that the prices what we have out in the market can be maintained potentially also be slightly increased once the wages go up.

Right. And that would also applied to the luminaires not only the components?

Absolutely. But as you know, we had the discussion on the luminaire side, the projects what we are quoting today are already taking this into account that we are having and we are expecting higher input factors. So once those projects are ready to be shipped, let me say, if we win a project today, and we ship it in September, the price is the price of today, even if the price goes down. We were suffering a little bit in the past because we had old projects with old price commitments and we had to sell at lower prices despite the fact that the costs were rising. So I think that will help us this time in a positive way.

Okay. Very clear. Final question, more of a bookkeeping one. When I look at the reconciliation line in the segment reporting, the EBIT was just minus EUR 2 million, that's quite below the run rate of the past, a couple of quarters. Was there anything behind that or just, I don't know, fluctuation with no particular reason.

No. Currently, the main effect is that intercompany profitability is significantly lower than last year. There is a delay in pricing from the Components segment to the Lighting segment.

The next question comes from Patrick Steiner from Kepler Cheuvreux.

Congratulations on the strong results. My question would be about your current EBIT margin guidance, which seems a bit conservative if you look at the results of the first 2 quarters. Can you give us some information with what you expect to see in terms of demand and cost? I mean you've talked about pricing already, what would you see within the next couple of quarters that lead you to that margin assumption?

That is very true. As you know, we have been very conservative in our guidance is over the last couple of years or the last 2 or 3 years. But I have also to say there are so many uncertainties. Of course, our run rate, as you can see, now is much better than what we guide. Nevertheless, there is a significant amount of uncertainty in the whole remaining year. We also saw some strong declines in order intake in September, which leveled out now in November and December is improving compared to last year, at least on the lighting segment. And in the Components segment, we have a very strong order book. Nevertheless, there are factors like the U.S. dollar, which significantly impacts the profitability of the Components segment. And also energy prices, we are currently on the spot market, and the fluctuations there are also significantly. In 1 day, you can have 50% or 70% increase of prices. So we want to guide very conservatively and we want to promise what we think we can really deliver.

Okay. Perfect. So you don't really see a significant worsening of the current run rate, but it is probably more conservative in some kind of wait and see position at the moment, is this right?

As said, we see some clouds in our order intake, but no storm currently.

[Operator Instructions] We have a question from Mr. Michael Marschallinger from Erste Group.

Just one question from my side on the EBIT bridge on Page 9. How big of [indiscernible] was the FX effect in different amount number.

The FX effect was exactly EUR 10.6 million. EUR 10.6 million.

EUR 10.6 million. So this means stripping that FX effect out, you could cover this cost inflation.

Well, I can also tell you, I mean, the selling price increase of 6.8% or EUR 38 million.

The next question is from Roland Könen from Value-Holdings.

Also from my side, congrats to your good results. First question goes to the associates line where you're talking about the Inventron impairment. Could you elaborate a bit more on this company? How big is the risk I see the balance sheet a remaining number of EUR 1.5 million. But could you please elaborate more on this company? And the second question would be on some words from your outlook that you're talking about acceleration maybe in the consolidating of the lighting industry. Could you elaborate a bit more on that? Where is the position of Zumtobel there is more active. So do you think about M&A in the next future? Or do you think some would be maybe more on the passive side in this consolidation?

Well, Inventron is a quite small investment we have in Switzerland. It was previously a partner for the Lighting brands in designing luminaires and making small batches of luminaires. And this was acquired 5, 6 years ago. It's, as I said, a very small company. And unfortunately, most of the management left with this company, it's a company about with about 35 to 40 employees. And then you are in significant trouble. It's not that there are processes like in a big company where it does not matter as much when you lose some key people. But here, it was significant. And we have a very cautious view on this company. And so we adjusted the value of the investment according to the future outlook of earnings of the company. We are doing -- we are putting a lot of effort into this company more management attention that you would like to have for a company with EUR 8 million or EUR 9 million in turnover. But we do whatever we can, and we are quite confident that we can turn around this company. It might take some time that it is really improving and coming to the levels which were there 5 or 6 years ago.

And maybe in addition, what Thomas said, Inventron in combination which has set up what we have in Switzerland, which is one of our strongest countries, both in profitability as well as in top line. It's a combination where the high-end construction requires very often next to the standard products are fast solution of tailor-made products. And that's why we have this investment in Inventron. And obviously, as Thomas said, we are building up the management team right now and we believe it will take a while, but we also believe that we will be able to turn this around. The second question, maybe I can answer. Yes, absolutely right on the consolidation. But you will see, if you study the industry, is that neither corona nor now, let me say, the fact that we have extremely high input factors on cost has resulted in a major, let me say, insolvency chain of weak companies. But we do see that the market is becoming more active. And as we announced back in our Capital Markets Day end of '21, we are active and currently planning to look into the different possibilities. However, I would like to say that obviously, as we as a Zumtobel Group has been going to the restructuring, it's not our intention to basically buy out of an insolvency situation companies. We are more looking into a healthy companies with solid balance sheet or what helped us to increase market share in weaker countries or companies who are basically driving innovation on new technologies. And that's what we are doing. And if we are able to continue like we do right now, then you will also see that we are becoming more active here.

Great. Maybe a third question on your energy bill as you were talking about that you are now buying on the spot market. Could you give us some comparison to your energy bill in the first half of '22, '23 against the prior year? And what is your expection -- expectation for the full year and the next year.

Well, for gas and electricity, we expect this year to be EUR 8 million more than last year. We are hedged in some countries like Serbia, Germany, and we are protected by the government in the U.K., which implemented a price break for electricity and gas. In Austria, we are going with day-to-day market, the spot market. And we are not hedging currently for next year. Hedging levels are roughly about EUR 0.35 per kilowatt hour for next year. And we expect that in spring next year, we will get more favorable hedging rate than currently.

To maybe in addition, we are not -- we are dependent, but not that much dependent on gas because gas we need only for our process heat, let me say, for the pain shop and for the heating of our building. So the impact of the gas is there, but not as big as Thomas mentioned on the electricity.

There are no further questions at this time, and I would like to turn back to Alfred Felder for closing comments.

Yes. Thank you very much, ladies and gentlemen, for joining us today. Thank you very much for the interesting questions. With that we are coming to an end of the Q2 results. And as I said already, we are carefully optimistic despite the different environments that we will be able to manage also the second half with the bandwidth of the guidance what we gave if we continue to be like that it's more on the upper end than on the lower end of this guidance. And with that, thank you so much for listening. Have a great year-end Christmas break ahead and talk to you then again in March, I think, when we have the Q3 results. Thank you.