Zumtobel Group AG (ZAG) Earnings Call Transcript & Summary

Good morning, ladies and gentlemen, and welcome to Zumtobel Group's conference call on the results for the first half and the second quarter of our 2023/'24 financial year. With me on the call are Alfred Felder, our CEO; and Thomas Erath, our CFO. Alfred will walk you through the highlights of the quarter while Thomas 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 downloads 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.

Yes. Good morning, ladies and gentlemen, also from my end. Alfred Felder here. Thank you again for your interest and the participation in today's call. As usual, I would like to show you a couple of highlights for the last quarters, illustrating that despite the difficult market environment, we are continuously driving our strategic technology forward and that's illustrated in a couple of examples. One is that we, meanwhile, are also making inroads into stadium illumination in China. We did the Chongqing stadium with almost 400 high-power units of our floodlights with models up to 1,500 [ watts here ] and really meeting the key requirements for FIFA lighting standards. Another one, what goes into the section of refurbishment is The New York Times office, a fantastic, prestigious project, what we did already back some 20 years ago with T5 fluorescent and we replaced 15,000 units with refurbishment kits without basically taking out the luminaire. So basically, it's a preservation of 85% of the original luminaire and it's a 50% reduction of energy consumption what we did and completed in the last quarter. On the bottom left, you see a prototype project with SPAR. As you know, SPAR is one of our major customers and we did a complete refurbishment of a shop in Lustenau here in our headquarters, where we basically took back our TECTON refurbished parts of it and basically reused it, gave it a second life. And that's basically one prototype example how we could reuse our TECTON luminaires, it's in total 500 luminaires what we replaced without basically throwing them into the garbage bin. A very big highlight is this hospital in Italy going into the section of connectivity and controls, the Galeazzi - Sant’'Ambrogio in Milan where we have sold controllers, 210 pieces, in line with LED drivers of 16,000 from Tridonic sensors. And basically, it's an amount of over 2,500 switching modules. And remarkably, this is the largest single lighting project what we did in our group so far. In the middle, you see the name SiteWorx. This is an investment, what we did, as part of an asset deal where we purchased the rights of the so-called SiteWorx software developed by Digital Lumens. That is one of the pioneers of cloud-based solutions on connectivity -- wireless connectivity. And this IoT system for lighting management comprises the SiteWorx cloud software, the related Tune, Sense and Area applications and uses intelligent devices to measure the energy consumption in lighting solutions and show the use of interior rooms through connected sensors and store and visualize all the associated data. We are currently working on the integration of the software. And this -- we are convinced that this is a significantly asset to us to accelerate the digitalization of our products and services for our customers. As you see again, we have successfully completed a number of projects despite the difficult market environment, what we have in most of our countries, and we will see it later in the presentation. Before I hand over to Thomas, let me share 2 more slides: one, the overview on the figures for the first half. As already indicated in our last call in the Q1 reporting the Zumtobel Group's Components Segment is currently faced with a very difficult economic condition. This was unfortunately also the case in Q2. And in line with our concerns, revenue did not really recover for the Components Segment. So we recorded a little bit lower decline, but still the 22.8% decline in revenues compared to the first half of '22/'23 to EUR 152 million. The Lighting Segment remained strong. It recorded a slight drop of revenue of 1.5% to EUR 454 million. And as a result, the group fell by a total of 8.5% to EUR 574 versus the EUR 627 million what we had last year. Thomas will go into more details. The EBIT total of EUR 30.9 million, which represent the margins of 5.4% and the net profit declined to EUR 21 million. But still, we have a very strong balance sheet and our equity ratio increased to 42.1%. Ladies and gentlemen, the first half -- and now I'm on Page 5, of our financial year was a challenge and we had to tackle the difficult market environment and especially our Components Segment experienced an unexpected decline in revenue. We said this already, it's partly the overstocking of our customers, but partly also reflecting that the recovery of the lighting industry is slower than expected. The construction sector is confronted with a widespread weakness and the forecast now of nonresidential construction, especially in the DACH region, point to a further decline. So what we have done, we have under these circumstances, decided to reorganize the production location in Dornbirn and the goal is to convert the plant from a volume production, what is definitely too expensive, into a Centre of Production Innovation that's then requiring much less people. We will concentrate intensively on robotics and artificial intelligence as well as new products and the industrialization of the production processes for our other brands. With that, we have carried out a reorganization of the plant here in Dornbirn, and this will affect roughly 100 employees of the Components, which is more than 2/3 of the employees that we have in our factory in Dornbirn. Also, at the same time, we looked at our factory of luminaires in Dornbirn and we did also an adjustment of the personnel capacity based on the lower volume, which is affecting roughly 70 jobs. This, in total, 170 employees in the Zumtobel Group will be affected. Obviously, these decisions are painful for everyone, but unavoidable to protect and strengthen the company's competitive position. The related measures led to a restructuring cost of minus EUR 9.1 million in Q2. And in order to show the actual development of Zumtobel Group's operating business in view of the circumstances, we have decided to report EBIT adjusted for special effects beginning with this half year results. This will allow us to isolate this effect of restructuring activities on operating results and provide a transparent view of the company's sustainable operating performance. As a result of these measures, we expect recurring savings in the region of EUR 10 million with initial effect already in fiscal year '24/'25. And with that, I will hand over to Thomas, who will explain in detail the Q2 results to you in more detail.

Thanks, Alfred. Good morning, ladies and gentlemen. I would like to start with the Lighting Segment. The revenues in the Lighting Segment amounted to EUR 230.3 million and was slightly below the prior year's quarter. The decline in sales volume and the negative exchange rate development were largely offset by efficient price management and increased sales in high-margin countries. This proves the resilience of the business in the Lighting Segment. Adjusted EBIT in the Lighting Segment increased from EUR 24.9 million to EUR 26.9 million. Deducting this year's Forschungsprämie, this research subsidy, which we received in Q3 last year of EUR 1.8 million, our adjusted EBIT is still increased to EUR 25.1 million. The slight decline in sales, negative FX effect and the increase in fixed costs were compensated by higher sales volume, as said, in higher-margin countries. As a result, our adjusted EBIT margin increased from 10.6% to 11.7%. Let's move to the Components Segment. The Components Segment lost 20% in revenues and recorded sales of EUR 75.1 million in the second quarter. The key factors were limited demand as a result of still high customer inventories and the low momentum in general customers. Due to the difficult market environment, adjusted EBIT in the Components segment fell from EUR 8.9 million to EUR 3.2 million, which is a result of the drop in sales and the unfavorable FX effects. Similar to the Lighting Segment, the Components segment also received this research subsidy amounting to EUR 1.7 million in the second quarter. The adjusted EBIT margin declined to 4.3%. Slide 8 shows the overall results of the group. On our top line, our top line declined by 8% to EUR 288.9 million due to low momentum in the Components segment. The decline in revenues, negative FX effects and increases in personnel costs were, to a significant extent, compensated by higher sales volumes in high-margin countries and lower material and transportation costs as well, as earlier said, this research subsidy. As a result, our adjusted EBIT fell from EUR 31.7 million to EUR 25.5 million. Adjusted EBIT margin reached 8.8%. Let me now explain the building blocks of our adjusted EBIT. Let's start with the prior year adjusted EBIT of EUR 50.8 million. As already mentioned, our negative volume development, especially due to the low demand from customers in the Components Segment had a negative effect of EUR 29.2 million. Looking at our costs, efficient price management and increased sales in high-margin countries in combination with lower material and transportation costs had a positive effect of EUR 19.2 million. Higher personnel expenses due to wage and salary increases as a result of merit [ round ] increases were almost offset by the earlier payment of this Forschungsprämie. Based on these factors, our adjusted EBIT declined to EUR 40 million. Slide 10 provides you with information on our income statement. I have already indicated that adjusted EBIT reached EUR 40 million. As Alfred mentioned in the beginning, due to our restructuring measures, we recorded special effects of EUR 9.1 million. They are EUR 6.3 million for personnel expenses and redundancies, EUR 0.8 million for depreciation and EUR 2 million for annual expenses. After deduction of these special items, our EBIT stood at EUR 30.9 million. Our financial result amounted to minus EUR 7.4 million. Our net financing costs increased to EUR 5.3 million, mainly due to higher interest costs for current loans and finance leases. Other financial income and expenses amounted to negative EUR 2.1 million and included the interest expense for pension obligations and earnings effect from exchange rates and hedging valuation. After the deduction of income taxes, our net profit for the first half '23/'24 financial year amounted to EUR 21.2 million. As a consequence, earnings per share stood at EUR 0.49. Let's now move to Slide 11, the cash flow statement. Cash flow from operating results fell from EUR 78.3 million to EUR 60.4 million, mainly due to the decline in volume. The changes in working capital improved compared to last year. As a result, cash flow from operating activities stood at EUR 45.4 million and was, therefore, slightly above the previous year. Cash flow from investing activities totaled EUR 22.3 million compared to EUR 27 million in the previous year. In addition to investments in property, plant and equipment, disposition also includes cash outflows of EUR 4.5 million for capitalized development costs. As a result, free cash flow came in at EUR 23.1 million in the reporting period compared to EUR 17.2 million last year. Let me finish with Slide 12, and I'll comment on our balance sheet. The balance sheet structure remained stable and strong. The equity ratio was left at 42.1%. Net debt increased to EUR 93.2 million. And the debt coverage ratio is still at very good, 0.77. And with this, I hand over to Alfred.

Let's have a look at the sales development on Slide 13, you know this slide already. Basically, you see we are having a slight recovery from minus 9% to minus 8%, but mainly driven by the downturn of the Components business. I guess, we are coming in the Q&A session with we do see a slight recovery in order intake on the Components Segment, but we also see that the pressure on prices is increasing again with the low demand, especially on the new construction of nonresidential construction. Going forward, we still expect environment to be challenging in our market. On Slide 14, you see the breakdown into the different regions with the strongest region, DACH, with a slight decline in Q2, but still with a slight growth in H1 mainly driven by our markets in Switzerland and Austria. With Germany, obviously, with the difficult environment, struggling. In the Northern and Western territory, the growth was mainly in Belgium, but we are still having difficult times, especially in the U.K. In one of our key markets in South, we have declines in Italy. Very disappointing the sales development both in Asia Pacific and Americas, again, where we are significantly below our targets. Before I come to the outlook, let me just briefly show the environment where we are in. And the data, what you have on Slide 15, you see on the right and on the left, they come from the latest Euroconstruct forecast that it's really 2 days old. So the very actual forecast what we have received some days ago. As you can see, in the nonresidential construction sector, it's a very difficult economic framework where only 8 out of 19 countries expect to grow in '23, what we see here in countries like Finland, like Poland. But in our major countries, we have either a fragment or negative growth. And what you see on the right-hand side, and that was a big change from the data what we had back in June, that the new construction for '24 is negative. It was seen a quarter ago still positive. Whereas the renovation, which obviously is our key focus, continues to grow a little bit. Renovation is representing our focus point and we see it in the different countries with the tendency not replacing complete luminaires, but the refurbishment kits where we meanwhile have a broad portfolio, not only for our products, but also for competitive products where we can -- we will -- we expect a certain momentum. But all in all, the market environment in our key markets remains very, very challenging. I would like to conclude the presentation with a few words on our outlook. As already said, the economic situation remains tense. We do expect that in the second half, with construction index low, we expect a higher price pressure. We see this already in our Components Segment, but we also believe that it will spill over to the luminaire segment. We also see that the recovery of the components is starting but very slow, and therefore, we expect a decline in revenues in the mid-single digit for the '23/'24 financial year. In view of the previously communicated restructuring measures, together with the resulting reintroduction of the EBIT adjusted and the related financial indicators, we have decided to focus on the adjusted EBIT margin in the future. And this reorientation is intended to improve the comparability and reflects the efforts to isolate the effects of restructuring activities on operating results and to provide a transparent view of the operating performance. For the fiscal year '23/'24, we expect an adjusted EBIT, excluding the special effects of 4% to 6%. With the CapEx spending, we remain unchanged around EUR 60 million. And with this, thank you very much for the attention. And now Thomas and I will be more than happy to take your questions. Thank you for listening.

[Operator Instructions] Our first question today is from Markus Remis from Raiffeisen Bank International.

The first question relates to the restructuring. Is there more to come then in the second half in terms of one-off costs? And if so, where does this come from? Which parts are still being tackled?

Thank you, Markus. Thank you for the question. Basically, what you have seen, we reacted and we had to react on our Components business with the restructuring. We believe with what we see, we can live with that. But obviously, if this continues, it might be necessary to do some more adjustments moving forward. What we are not seeing is how this will affect the luminaire business at the moment. And in case this is further deteriorating, especially moving into the '24/'25, where the construction seems to be even lower than in '23/'24, we then need to adjust. But out of today's perspective, nothing is planned.

Right. Okay. So that's an optionality. I mean, if rating persists like this or what are the conditions for more restructuring? Would it then be more head count related? Or are you also considering changes to the [ industrial.. ].

Yes. Markus, Thomas has said it already. I think especially on the Lighting Segment, we have done a tremendous good job in the last 2 years up to now and it's continuing to basically being able to hand over higher costs with higher prices to our customers. And up to now, luckily we are in the project business, it's working very well and you see it from the results that despite a slightly decrease of the revenue, we are still having a higher EBIT in the Lighting Segment than last year. What we are seeing right now is on the Components level and this is always an early indicator that the price pressure increases. So there are current renegotiations going on with key customers for their volumes in '24, so calendar year '24. And it's clear that the price pressure increases and the high prices, it will be difficult to keep here. On the other hand, we have on the Lighting segment and on the Components, obviously, but also in Lighting segment, despite the only slight lower revenue, a much larger decrease of the volume because, obviously, the volume demand is lower. So if that is continuing that we have a price decrease and a low volume, then it might be necessary to adjust the volume again. And obviously, that might affect also some FTEs again.

Okay. Very clear. So the adjusted EBIT, that is something that, at least for the foreseeable future, will stay. But into fiscal year '24/'25 in...

Well. The thing is the outlook is very unclear, but what's very clear is, I think, wage increases and salary increases, depending on the volume, we need to reduce these costs. If the volume comes, it's more comfortable. And so I would say, at least also for next year, it's much better to show the operational performance net of onetime effect than to stay with reported.

Yes. Okay. Point taken. Yes, I mean, I guess [ it's apparent ], which is [ selective agreement ] at Austrian production hubs are increasingly losing their competitiveness. So...

Yes, Markus, maybe also a comment from my side. This is exactly one of the things in Austria and that's why we reacted now, we had to absorb now and most likely the third time something what is either high single digit, or even like last year, double-digit salary increases. And the gap between our other locations, what we have, even gap between U.K., for example, and Austria, is widening. So we had to react on that one. And I believe that in next year, we can expect again something what is either high single digit here in the range of 8% to 9%, and that is a huge increase. And that's why looking forward, at least for the next year, we will keep the EBIT adjusted like the reporting.

All right. Okay. So let's hope that we can then return again to report these figures because, I mean, those people following the stock for quite some time, they will remember that there have been -- that there is one cost raise in history, I would say so -- right. Can we stay with the Components, please? And is it fair to assume that the inventory cycle is bottoming out when you say, okay, markets are weak, but you still see a slow recovery volume-wise? Would that kind of induce that destocking effects are ingested?

Yes and no. So what we do have is, obviously, I think we discussed this last couple of times already. The good news is that Tridonic does still have a reasonably high order book was the result of this commitment, what Tridonic did with its customers to guarantee the shipments. And that's basically scheduled now until the end of this fiscal year, where the -- let me say, the inventory of Tridonic will go down based on the level what we have. On the other hand, what we are seeing the last 6 weeks and not longer, so I don't know if this is already a representative time frame, but we do see a slight recovery. But the recovery is not in that magnitude that we can say that we are back on levels prior that way prior to corona, we have to say, because during corona, we had so many rollercoaster effects what is difficult to compare. But the stocking in a couple of countries is still very high, but in others we are seeing slightly to ease it out. And it's now difficult to tell, also depending our competitors here, customers of Tridonic are also in the same environment, how successful they are in the market in selling their products. And therefore, it's difficult to predict whether after the next quarters we are really seeing now the ramp-up. I can only tell that now it's a little bit better than it was in end of Q1 that we are seeing a slight recovery in the last 6 to 7 weeks.

All right. Okay. And the magnitude of the price pressure, what are we talking about currently? And is it kind of aggravating, so pressure is increasing or...

Currently, we are talking about -- around about 2% in the Components business.

Okay. Okay. So pretty much comparable to pre-pandemic period, so to say.

Pre-pandemic, it was much higher. But also the cost for the components deteriorated much faster than they are now.

As you mentioned, the competitiveness, Markus, maybe also to compare, right, so if we look into our production now if we compare other European sites, we are still having high material costs across Europe, we have high energy costs and relatively high wage increases. If you look at our friends from the Far East, they have low inflation. They have basically same energy costs as there have been prior -- go with the prior, in our case, the Ukraine war. And they have, similar to us, and that's guess, also empty capacities or a lot of free capacity to produce. And we are expecting that both on luminaire side as well as on Components side, there will be more shipments coming from Far East, what will also not be very helpful on our prices.

Okay. That's very clear. Final question before I get back to the line, on the buyback that you've recently announced, just to get your general view. I mean, balance sheet is very solid. Should we see the, I think, it's 1 million shares, as a kind of initial step like dipping the toe into the water and more to come on a maybe opportunistic basis? Or what's kind of the stance to it? And is it fair to assume that the shares will be canceled?

Well, your first part of the question, we have a huge problem with our daily trading volumes. We need roughly a year to buy this 1 million. And in a year's time, we have the authority of the annual general meeting to buy up to 10%. We will see. But as it takes so much time, it would be not -- [ only to say ] we continue it, we don't continue, we will see. As we said, our balance sheet and our cash position is very comfortable and we can afford the shares, especially with the share price. We will ask and discuss with the Supervisory Board in a year's time.

We have up to the 10% approved from the general annual shareholder meeting. And as Thomas said, the 1 million is taking us a year and then after that we will see how we continue. And as some shares already on stock, 330,000 roughly about that, that shares we will cancel. The other ones we will decide what to do. Thank you, Markus.

[Operator Instructions] It seems to be no further questions at the moment, and I hand back to Alfred Felder.

Yes. Then ladies and gentlemen, thank you so much for listening. Just the last statement from my end. The next quarterly meeting in March, we will do exactly in the week where for us the big Light + Building event will take place in Frankfurt. So obviously, if you would be interested to be around in Frankfurt, let Eric know. I would be delighted to have a chat with you and also show you what innovations we have because I think we have a lot to show based on our strategy to give you a feeling how we plan to move forward with the different solutions, including the IoT. So if you are interested, let Eric know and we can organize an event here. Yes. With that, thank you so much for listening, and have a great day.

Thank you.