Zumtobel Group AG (ZAG) Earnings Call Transcript & Summary

Good morning, ladies and gentlemen, and welcome to Zumtobel conference call on the results for the first 9 months and the third 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 webpage as well. And with this, I hand over to Alfred Felder.

Ladies and gentlemen, good morning, and thank you for joining us. This is Alfred Felder speaking. What you see in today's result is that despite the difficult market environment, the lack of the key components and the highest inflation rates, we have been able to perform better than expected. We have seen the adjustment in the economic expectations and growth projections at the international European and obviously, on country level since our last results, which show a slightly more positive view. Nevertheless, inflation and the associated impacts on the construction sector is tangible. But what we see in the last 3 quarters that our customers have recognized, partly also driven by the high energy prices, the particular responsibility to invest in more sustainable and energy-efficient solutions and in view of the rise in electricity, the conversion of high efficient LED solutions now play a much faster role in this whole market environment. And that brings me also to a few examples what I would like to share with you in this call, what we completed in quarter 3, 2 out of the 4 are already refurbishment projects. One where we are very proud is the Austrian Parliament where we have seen one of the partners who contributed to the renovation and the adoption of this historic parliament building was the key to meet the future requirements and it took several steps. On one side, the historic rooms were sustainably renovated, while at the same time, their characteristics nature was maintained, and it's about 55,000 square meters of net floor space, 740 windows and 600 historic doors as well as 500 historic chandeliers and luminaire were renovated. Another one, similar but a total different application, the Oslo Airport project. Here, we renewed the airport's outdoor lighting and illuminated the platform of the nearby railway station. And for the outdoor area, we replaced the old installation with new energy-efficient solutions from our Thorn brand, also indicating that the strategy that we are running with Thorn in going into more outdoor application pays off. The new luminaires light up the huge airport and are not only much more energy efficient, but also can be deemed we needed to save even more energy. And based on this national framework agreement we signed several years ago, this is the first platform to believe with our continuous slide line, where Zumtobel is ensuring perfect illumination, additional safety for passengers. And in terms of safety, we have also received positive feedback from the train drivers about the reduced glare. The third one is an overseas project what we did in Macau in Hong Kong, where we are happy to be part of the development of the Islands' District Medical complex, a big complex over several years, which will become the second public hospital in Macau. And here, the entire complex covers an area of approximately 77,000 square meters with a total construction area of 320,000 square meters and this project comprises 7 different buildings. And here, I'm happy to share that we provide lighting solutions from both brands, the Thorn as well as the Zumtobel brand. And last but not least, again, in line with our strategy to illuminate more and more stadium, the Osijek stadium in Slavonia. This is the third quarter project of the stadium. Together with our partner in Croatia, we were modernizing the stadium lighting system, and that means that we have installed a state-of-the-art lighting system and also providing a comprehensive solution for indoor, outdoor and emergency and lighting controls. When this project is completed, it will be the first, full LED stadium in Croatia. As you see in this example, it's not only the floodlight, that is the entry door but also the illumination of the complete stadium. On Slide 4, let me now turn to the results. Zumtobel recorded a 7.7% increase in revenues to EUR 912 million in the first 9 months of the current fiscal year. One of the reasons for this success was that we were able to pass on higher prices to our customers, but also that we have favorable FX rate, you will see it later from Thomas, slightly higher sales volumes and improved availability of components, but that also contributed to this growth. I think we have mentioned this that we are seeing an easing up that semiconductor shortages are getting better, and we will discuss this more in detail. In the first 9 months of our fiscal year, we experienced a further rise of the prices of raw materials and energy as well as an increase of personnel costs very intensified by a higher U.S. dollar exchange rate. Nevertheless, we were able to significantly also increase our EBIT from EUR 52.2 million to EUR 68 million in the first 9 months. And also, our net profit also improved significantly to EUR 43.4 million. Our cash flow from operating activities more than doubled to EUR 84.5 million. And now I'm handing over to Thomas to give you a closer look of the development of our Q3 results.

Good morning, ladies and gentlemen. Welcome from my side. I would like to start with the Lighting segment on Slide 5. As you see in the headline, we are quite satisfied with the quarter. Revenues in the Lighting segment rose by 5.8% to EUR 215.8 million, driven by price increases and favorable exchange rates. EBIT in the Lighting segment significantly increased from EUR 11.8 million to EUR 15.1 million. The increase in revenue more than offset the increase in other costs and higher warranty expenses. And as a result, our EBIT margin increased from 5.8% to 7%. And if we move to the Components segment, there, we have different picture. The Components segment lost 8.3% in revenue and had sales of EUR 82.8 million in the third quarter. Higher selling prices were offset by the decrease in volume and unfavorable FX range. In addition, Q3 revenues also dropped or mainly dropped to the high inventory levels at our customers. This was the result of overstocking in the past and the current better availability of semiconductors. The decline in revenues on the one hand and higher material expenses, mainly driven by increase in obsolescence provisions and the higher U.S. dollar; on the other hand, had a negative effect on the EBIT development. The EBIT decreased to EUR 4.9 million. The EBIT margin was at 6%. Slide 7 shows the overall result of the group. Our top line rose by 1.9% to EUR 284.4 million in the third quarter. And this is mainly driven, as I said, by higher selling prices. However, these increases in selling prices were completely offset by lower sales volumes, a strong U.S. dollar, high material and energy expenses as well as higher personnel expenses. As a result, the -- our EBIT with EUR 17.2 million is flat compared to prior year. The EBIT margin is at 6%. Slide 8 shows you the main building blocks of our EBIT, starting with last year's EBIT of EUR 52.2 million. The above mentioned increase in prices and favorable FX environment led to a positive effect of EUR 65 million. And this positive effect was, however, partly offset by higher cost of goods sold, mainly to the U.S. dollar appreciation, higher obsolescence provisions and higher energy costs as well as personnel expenses and other SG&A costs. As a result, our EBIT increased to EUR 68 million. Slide 9 provides you with the information on our income statement. I would also like to explain our financial results, which amounted to a negative EUR 12.3 million, where the net financing costs increased to EUR 4.7 million. Other financial income and here its expenses amounted to EUR 4.9 million and results from associated companies were also negative EUR 2.7 million. After deduction of our income taxes, our net profit increased to EUR 43.4 million in the first 9 months. As a consequence, earnings per share rose to EUR 1.01. And let's now move to the cash flow statement. The cash flow from operating results increased year-on-year from EUR 94.6 million to EUR 109.5 million. The change in working capital was substantially positively impacted by lower inventory buildup compared to the first 3 quarters of the last year. Cash outflows from the changes in other operating positions amount to minus EUR 15.5 million and resulted mainly from increases in bonus and holiday payments as well from a decline in guaranteed provisions. Cash flow from operating activities increased significantly to EUR 84.5 million in the first 9 months. Cash flow from investing activities totaled EUR 38.3 million compared to EUR 28.3 million in the previous year. In addition to investments in property, plant and equipment, disposition also includes cash outflows of EUR 6.5 million for capitalized development costs. As a result, free cash flow increased significantly from EUR 1.2 million to EUR 46.2 million in the reporting period. Slide 11 shows you our balance sheet and our financing position. The balance sheet structure has again improved since April '22. The equity ratio increased to 40.8% and net debt decreased to EUR 83.4 million. And the debt coverage ratio is very healthy level of 0.62 and this is the lowest value since we went public in the year 2006, I guess. At this point, I would also like to mention that we were able to extend our syndicated loan by 1 year to a term ending December 27. We have 5 plus 1 plus 1 structure with our banking partners, and they heavily agreed to extend the term to another 5-year [ spend ]. And with this, I hand over to Alfred Felder.

On Page 12. You know this slide already can proudly show that now we have been able to continuously grow, and we have now our eighth quarter in a row where we have been able to grow our business. But however, as Thomas already mentioned, we are seeing headwinds in the Components segment during the third quarter and a negative effect on our group performance, obviously, mainly triggered to the situation that during COVID, there was an extremely high order intake due to the delivery restrictions. And obviously, we are going back into a more normal setup. Going forward, it will be harder to beat the year-on-year comparison as these reflect the COVID catch-up effects, and we are now operating in a different lighting environment. Let me have a quick look on the revenue development of our region during the first 9 months. The DACH region, strong growth was recorded in Switzerland and in Germany. Revenues in Austria were slightly lower than the previous year, with the exception of the U.K. and Norway. We recorded in the Northern and Western Europe with the largest increases in Denmark and Sweden. Growth in Southern and Eastern Europe were somehow lower. But the Italy increase is particularly encouraging compared to the COVID years where have been a little bit weaker in Italy. The revenue development in Asia Pacific, was below the previous year level. Positive contributions were from Hong Kong were offset by a lower contribution in China. Obviously, I don't need to mention it again with the restrictions that we had for many quarters now in China. This was a difficult market for us. In Hong Kong, we have a couple of those projects, like I mentioned at the beginning, the Macau project also in Hong Kong. The main driver for the significant growth in the Americas and EMEA region was the U.S. primarily from the reversal of the below average development in the country during Q1 and the good results in the other 2 quarters. And now I would like to conclude the presentation with a few words on our outlook. As you know, the current geopolitical and economic environment is still challenging. As mentioned at the beginning, we only expect marginal growth in the commercial construction sector due to the increase of interest rates and the high cost of material and energy, even though they are no longer at extremely high levels. However, we are optimistic that we see the renovation business as a key growth driver with a clear revenue potential. Those 2 examples what I mentioned are coming in now as we are having more and more, let me say, refurbishment kits available for our customers what are tailormade for refurbishing the building without doing several construction effort. And the commercial customers are shifting their investments into refurbishment. We see this clearly in our top accounts, but also in the projects that are coming in on a daily basis. We are now working very closely with our customers and partners to develop the right concept and to save the energy by installing these high efficient solutions what we have. And based on this positive development of our business, the first 3 quarters, our financial year with the [indiscernible] we have stabilized at the high level, and we have a greater visibility. We have decided that we do a slight adjustment of our EBIT margin guidance. Now we expect an EBIT margin between 5% and 7%. And obviously, out of today's perspective, it will be more on the higher end. -- than on the lower end. Our guidance for the revenue development on CapEx remains unchanged, and we are expecting a growth between 4% and 8% and the CapEx of EUR 70 million in '22, '23. I think I mentioned it in the last call that is partly because we have developed a new platform where currently we are installing the manufacturing equipment. That brings me to an end. Thank you so much for listening. And now Thomas and I will be happy to take your questions. Thank you.

[Operator Instructions] The first question is from the line of Markus Remis with Raiffeisen Bank.

Congrats to the strong cash flow. First, I would turn towards the Components segment, the destocking, which is ongoing. If you could put that into perspective also how it shaped up in the fourth quarter so far? And is the destocking, I mean, of course, the volume effect, but do you also see more price pressure emerging on the back of it?

Thank you, Markus, for these questions. So obviously, I think we have mentioned it at the beginning of this fiscal year that the order intake what Tridonic had was more or less having a visibility for over 1 year. That was also partly driven that customers placed orders which were much higher than their demand, simply to get the minimum quantity. As we had a noncancellation policy, obviously, now all these products are delivered, we are still having a relatively high order book, which is decreasing. On the other hand, now we're getting back to a normal business environment, our customers or the Tridonic customers, including us, as a Tridonic customers, we are basically having a high stock level. And we are constantly decreasing so that the new order intake for the short time the order intake is relatively low. However, during the last couple of weeks, we are seeing a positive development on the order intake, which automatically means that we believe that more or less towards the end of this fiscal year, we will get back into a normal level. The destocking effect will take place until then. That's why, obviously, compared to the last year, where I think Tridonic had a quarter of EUR 97 million that will be difficult to beat. But basically, that was also something that was not healthy and that was part of the COVID setup. So I believe with the fact that we are getting into a normal or quite a normal situation on the availability of our raw material, especially the semiconductor chips, be on the normal behavior of the market and the customers we will get back next year, the next -- starting at the 2 quarters with the normal behavior and the possible effect will gone on our customer base, and then we will have a normal visibility of 6 to 8 weeks as this is normal in the lighting industry. On the prices, Markus, yes, obviously, the Tridonic has also a surcharge implemented when the logistic costs have been very high. That basically is gone now because, as you know, transport overseas from our [indiscernible] regions and has come to almost levels prior to corona. But on the other hand, all costs remain high. We have high material costs. We have high inflation costs. And therefore, we believe that the price level can be kept at a reasonable high level with the exception of these extra charges.

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

Yes, sorry, sorry. Yes. So, I'll have a follow-up question on the guidance. And in the last couple of quarters, you always give us a long list of key assumptions to meet the guidance like to rather show up. And I get the feeling when I hear you that most of the headwinds in the past quarters easing now, energy, material prices, availability of ICs and only for the fourth quarter now the...

We lost you.

Mr. Marschallinger, you are still connected?

Can you hear me?

Yes. Now we can hear you.

Sorry this new app here this sorry. Yes. So this -- the headwinds from the last couple of quarters seem to ease and the major concern is got it is, I think, on the components. And so my question is, how is to speak to the guidance? Is -- that the upper end dependent now that components will be maybe faster than Q1 developing again better?

Mr. Marschallinger, I don't know whether I got you right. But for our guidance, there are 2 months remaining. So the future is quite short and we are very comfortable that we end up at the upper end of the band.

Maybe, Michael, if I understood you correctly, obviously, the headwinds, yes, they are still coming from the front, and they are changing a little bit. So obviously, if we would look beyond our quarter 4, then obviously, you are right, energy level has stabilized at high levels. Some materials are a little bit lower in cost, some, unfortunately, again, a little bit higher. ICs are still very high cost because we are using unfortunately, certain ICs what are having a high demand in also other industry, be it mobility, be it consumer goods. And on the other hand, we are seeing already some impact when it comes to headwinds of wage increases in some countries who have started to increase the wages in January. So obviously, as you know, in Austria, we did [indiscernible] and we are expecting now the results, hopefully, by end of April, and then this will have an impact on our next fiscal year. So taking all these parameters into account, I just second that what Thomas said, we are having a very positive outlook until the end of this fiscal year, which is 2 months less with all the negative problems that we had. And also, if we look beyond, we believe that the business, despite the costs that are increasing, we can manage very well also into the next -- starting into the next fiscal year.

Also, we have hedged energy prices. So we know what the energy prices will be for the remaining period. We have hedged quite some of the U.S. dollar exposure we have. So we know our cost base there. So a lot of parameters are much more clear than at the beginning of the year.

Okay. Understood. And maybe to what degree, are you hedged on the energy side for the next fiscal year already?

For the next fiscal year, we have hedged in Austria, which is the main driver for energy, 50% for Q this calendar year. Then we have, I would say, from a volume point of view, we have hedged about 70% of our energy net debt.

The next question is from the line of Markus Remis with Raiffeisen Bank.

Yes. A couple of questions more. I was actually just getting started. Did you say that in Components, you had some provisions in the third quarter. Did I get it right? And maybe you can elaborate a bit on that.

Correct. We have provisions according to turn rates of inventory. So if you have a very high inventory, your formula devaluates your inventory automatically. And this is reversed as soon as you sell it. The issue is in the Components segment, every supplier sends us the goods. We have to order the goods, maybe 8 months to 1 year in advance, and nobody wants to keep the stock used. In the past, you were able to contact your supplier and tell him, okay, I don't need it now and send it in 4 months at a time and not now. But now everybody is keen on getting rid of their products, and we have very high inventory levels. And so we have, due to our formulas high inventory provisions which might not result in a scrapping, but in a release of inventory provision in the following months.

Okay. Very clear. And then on the dollar sourcing, would you say that in Q3, you had, say, the peak headwind that as of Q4 is getting a bit easier for you or will Q4 then be....

Exactly. The Q3 was not very good, and Q4 is much better with U.S. dollars.

That basically was partly for a couple of months or weeks at least on parity with the euro, and I think it's already [indiscernible] 700,000 to 800,000 on our EBIT [indiscernible] components.

Yes. And the bookkeeping question would be what's the current exposure? Is it still this, if I'm not mistaken, $150 million? That's still the magnitude we are taking about?

The remaining of the year, we have only 2 months left. So you can take the [ 0.17 ] of $150 million, and these are hedged out at the level of 106 probably.

Okay. But it's about, on an annual basis, $150 million.

Yes, of course.

When I look at your balance sheet, you're slowly running into a luxury problem -- reducing debt to equity ratio looking much better gearing down. I mean, how should we think about the capital allocation? You've voiced M&A as an optionality, any inroads there? Any thoughts on stated dividend. I know it's early, but anything you can share on this topic?

Well, maybe on the dividend, Thomas can share, it's a little bit too early to say. But obviously, in the M&A, we are currently evaluating a couple of options. But just maybe to share with you, we will revisit based on the results that we have today. Our strategy moving forward, and we are currently working on a plan how the next couple of years will look like an M&A is part of that, like we mentioned already in our Capital Markets Day end of '21 and most likely we will have something in '24 to share how we move forward. Obviously, the lighting industry, we do see a clear dynamic there that not everyone came out healthy out of the COVID situation. And it obviously will open opportunities for us. But as I said already, it's not our aim to integrate businesses what require, again, restructuring to have help businesses because, as you know, we have done restructuring by ourselves for a long time.

Okay. I mean, staying on the cash side, I think the most recent CapEx guidance of about EUR 70 million. I mean, this requires quite an uptick in the final quarter. Is that still realistic?

Well, it will be a little bit less than EUR 70 million. But everything is based on phasing of our machinery when the machinery is actually delivered or tested. And so we can say we have some uncertainty between April and May, and we can't exactly say how much cash out.

Okay. So rather say, a reporting date issue than...

Exactly, yes.

Than lower underlying spending. Okay. Very clear. Just staying with the business before I get back into the line. I mean, what's your perception of the pipeline of larger projects? I mean, not talking about the -- say, that [indiscernible] business, but more larger-scale projects. Do you still see that at a healthy level? And then on a kind of staying with the energy efficiency tailwinds that you perceive? Is there a deviation on a country-by-country level, you said you would have some refurbishment catered that rolled out across your operations? Or are there some countries ahead of the curve?

Yes. So maybe on your first question, as you know, we have a couple of key accounts, what are larger accounts where we have based on the [ frame ] contract, a healthy pipeline. What we are seeing is obviously a momentum. And I think it's across those countries who have high energy prices. So we are not seeing it that much in, let me say, in Australia and New Zealand or in the overseas market, so in Middle East, but across Europe, that's the case. And that pipeline is improving and getting better. As I believe, in the second half, assuming that the energy prices will stay high or will stay at this level, just payout time is as low as possible close to 1 year or slightly above 1 year. And that is extremely attractive for customers who did not in the past even think about doing refurbishment. And in addition, don't forget in September '23, the fluorescent tubes are banned in Europe, which we believe will create additional momentum. And as we have a large customer base, we have then 12 years ago, we installed conventional businesses. Obviously, we have the data. And proactively, we are going back to that. So the pipeline is healthy. And obviously, we believe that we can compensate this what is going down from the new build and shifting more towards the refurbishment. It's slightly different in the different countries where we have the visibility. Definitely DACH is one of those territories where we see a very healthy trend in going into that. And I'm happy because that is also profit-wise our strongest region.

Okay. Very clear. And kind of a concern that with this kind of callouts we've seen on gas prices, again, that this would slow down the momentum, that's not something you will see at the moment that kind of the margin topic gets a bit back into the background, it's still very dominant.

We still -- don't forget, I mean, the energy price, we are happy that the energy prices are not that anymore that closed than everybody of us got a heart attack but it's still low that we are basically in normal medical treatment, if you allow me to this expression. So it's not so that we are back on holiday mode here. So we are still having prices, what I explain be high. And we believe that will stay for a while. And we also believe that the inflation will stay for a while. That's why combining the cost, the energy prices, the inflation, we believe we can maintain the prices. We believe we can convince more customers to drive towards refurbishment that overproportionately we earn projects, and that will drive us the next, I would say, 18 to 24 months, I believe.

So we have another question from the line of Roland Konen with Value Holdings.

Most of them are already answered. Just one left. When I look at the segments and there are the reconciliation line, we see a much lower number for the quarter and also for the 9 months figure. Do we have a special explanation for that? Or what is behind its decrease of this number?

Well, I have to look at it myself. Sorry. But usually, it's about the inventory level. We cross-sell and services we provide from Zumtobel AG. So there is nothing special in there.

Okay. I mean not the sales level, I mean the EBIT level.

Yes, we are looking -- Sorry, I can't answer this question right now. I have to come back to you.

And congrats for the figures.

[Operator Instructions] The next question is from the line of Stockli with Quaero.

Laurent Stockli, Quaero Capital in Geneva. Well done for the figures for the publication. I was wondering if you could give us some detail on the profitability guidance. Can you give us the split lighting and components, please? Thank you.

Thank you for your question. Do you mean for this year -- for this quarter, right, for the 3 quarters, sorry.

So the split lighting and components for the EBIT margin guidance for this year, this fiscal year. And also if you have a target for the next fiscal year, we would appreciate.

While someone is looking up for the next fiscal year, we are not having a guidance right now. We are currently in the middle of our budget signing, and we will do this after the quarter 4 results. But maybe Thomas can share you where we are on the guidance from components, hedged...

As you can see, with lighting brands, we are at 7% in Q3. And in Tridonic or Components segment, we are at 6%. and this will be very similar. So we see there's only 1 percentage point away from each other. And in the Q4, even mathematically, you will see that we are above 7% right now. So we need to come down a little bit to be ending at 7% in total.

The next question is from the line of Markus Remis with Raiffeisen Bank.

Yes. My final question, I promise. I'm just looking at your tax rate and in all 3 quarters, that's exactly 22%. Is that also the guidance for the full year?

As every year, I'm telling you we will be better than our average tax rate until the third quarter because these were tax are done probably on a very accurate level only for year-end. And this will give us a positive effect on our tax rate. But in the future, our tax rate will worsen because of the minimum tax requirements of all countries [indiscernible]. So we will have to pay 15% minimum tax in all jurisdictions, which we paid towards the state authorities, but this will worsen our tax rate in total.

Okay. To which level of bandwidth would you consider sustainable?

1 to 2 percentage points at most.

For 2024?

I would say we will end up at 20% this year, and then it will be 22%.

There are no further questions, and I hand back to Alfred Felder for closing comments.

Yes, ladies and gentlemen, thank you so much for listening to us today. Thank you for the interesting questions. Just to summarize, I think we're in a good path towards the end of this fiscal year despite all the challenges what we have. But as I said already last time, it's almost now that we are used to be in a constant, let me say, emergency mode, starting to become fun already. And we are looking forward to a good quarter 4 and then also to our complete fiscal year. You will see and hear each other then when we do the June results for the entire year. Thank you so much for listening, and have a great day.