Zumtobel Group AG (ZAG) Earnings Call Transcript & Summary

Good morning, ladies and gentlemen, and welcome to Zumtobel's conference call on our results for the first 9 months and the third quarter of our financial year 2023/'24. With me on the call today 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 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 it over to Alfred.

Good morning, ladies and gentlemen. A warm welcome also from my end. Today, we are calling you from Frankfurt, not from our headquarters, as this week, we are participating in the World Global Light and Building, the leading fair in Frankfurt. This is an international branch event focusing on many different trends in lighting, electrification, digitalization of home and building systems and the integrated safety technology. Before we dip into the Q3 results, I just wanted to share a few highlights out of the fair. Already on the first day, we had the reason to celebrate as we have been awarded with the Sustainability Exhibition Award for the most sustainable spend at The Light and Building out of a couple of hundred applications who have been submitted and evaluated. And furthermore, we are demonstrating our highly professional lighting expertise with our Ceiluma. You see it here in the picture, in the middle, a light ceiling illumination, measuring over 200 square meters, where we also set the Guinness World Record for the largest continuous light ceiling at Light and Building. This product is unique in the lighting industry, and we are doing it together with a long-standing manufacturing partner typical also being in for back in our headquarters. And it measures 45 meters in length and 4.5 meters in the width. Absolutely worth seeing it, and it was also a magnet of attracting many visitors to come to our group. Keyture is the Zumtobel Group's new cloud-based connectivity and IoT ecosystem. Its intelligent key feature support the optimal use of both the Zumtobel and the [indiscernible] in a professional sensor supported lighting system to enable the operations with maximum energy efficiency. In this way, the system makes an important contribution to the decarbonization of the buildings because they facilitate the cost efficient and intelligent operations of the lighting in the different properties, be it retail or industry or office. The modular structured multifunctional software suite is based on intelligent sensors and includes solutions to maximize the energy savings based on the control and provides the necessary information for maintenance or monitoring sustainability goals, optimize the space in real time. And it identifies and follow objects like locating assets in a building. As reported at the half year, the [ Zumtobel ] Group acquired the rights of the site works, IoT Software, developed by the company Digital Lumens in autumn 2023 with the exclusive rights for Europe and has now successfully integrated the software in the product offering of the smart building solutions. Keyture will be available to customers starting in autumn '24 after the first presentation Light and Building and will form the core portfolio of the Smart Building solutions. The consequence [indiscernible]. This is also reflected in our recently announced ecosystem partnership with Siemens and its Enlighted subsidiary. This strategic partnership is designed to bundle the know-how from smart buildings and jointly offer innovation -- innovative solutions. The focus of this partnership lies above all in the following verticals: commercial buildings, higher education and smart hospitals. With the integration of Keyture and the new Siemens partnership, we will present the market that we have not developed today, in particular, with the focus of wireless IoT solutions. As you know, we have quite a significant portfolio on wire, but not on wireless IT solutions, and the current forecast point a double-digit growth for this market in the coming years. Let's have now a look at the results on Slide 4. The market and the general economic environment remain difficult, and this climate is also reflected in our numbers. The third quarter brought a further decline in revenue, which fell by 7.9% to EUR 840 million and in the first 9 months of this fiscal year. Lighting segment remained silent with a slight drop of 2.1%, resulting in a revenue of EUR 663 million. But, however, the Components segment recorded a 20.4% decline in revenues compared to the first 9 months of the previous year to EUR 222 million despite a slight recovery in the third quarter. And as a result, the adjusted EBIT declined by 32.5% to EUR 45.9 million, which represents an EBIT margin of 5.5% and remains within our forecasted range. All things considered, we were able to report a net profit of EUR 21.4 million, and we have a strong balance sheet, Thomas will guide you to that one. Our equity ratio increased to 43.4%. And with that, I will hand over to my colleague, Thomas, who will give you another detailed overview on the figures in quarter 3.

Thank you, Alfred. Good morning, ladies and gentlemen. Let me start with the Lighting segment. Revenues in the Lighting segment amounted to EUR 208.9 million and were slightly below the previous year. The decline in sales volume was largely offset by efficient price management and increased sales in high-margin countries. Adjusted EBIT in the Lighting segment decreased from EUR 15.1 million to EUR 11.5 million. Please remember that the Q3 result does not include the payment of the research bonus. This payment of EUR 1.8 million was received in Q2 this year. The decline in sales and increase in fixed costs were partially offset by higher sales volumes in high-margin countries. As a result, our adjusted EBIT margin decreased from 7% to 5.5%. Let me move now to the Components segment. The Components segment lost 14.8% in revenues and recorded sales of EUR 70.5 million in the third quarter. The key factors were limited demand as a result of still high customer inventories and low momentum in general with customers. Also unfavorable FX effects and price pressure impacted the results. Due to this difficult market environment, adjusted EBIT in the Components segment fell from EUR 4.9 million to negative EUR 1.4 million. The decline reflected the above-mentioned drop in sales and price pressure. Similar to the Lighting segment, the Components segment also received this year's research bonus of EUR 1.8 million in the second quarter. Adjusted EBIT margin declined to negative 1.9%. Slide 7 shows the overall result of the group. Our top line declined by 6.6% to EUR 265.5 million, mainly driven by the low momentum in the Components segment. The decline in revenues and early payment of the research bonus in Q2 had a negative impact on our results into Q3. As a consequence, our adjusted EBIT decreased from EUR 17.2 million to EUR 5.9 million. The adjusted EBIT margin reached 2.2%. Let me now explain the main building blocks on Slide 8 of our adjusted EBIT for the first 9 months in more detail. Let's start with the prior year adjusted EBIT of EUR 68 million. As already mentioned, our negative volume development, especially due to the low demand from customers in our Components segment had a negative effect of EUR 40.7 million. Looking at our COGS and efficient price management and the shift in sales to high-margin countries in combination with lower raw material costs had a positive effect of EUR 23.8 million. Higher personnel expenses due to salary increases and the result of [indiscernible] increases had a big negative impact on our results. Based on these factors, our adjusted EBIT declined to EUR 45.9 million. Slide 9 provides you with the information on our income statement. As I previously indicated, our adjusted EBIT reached EUR 45.9 million, special effects at a negative EUR 9.1 million, including EUR 7.4 million for personnel expenses, EUR 0.8 million for depreciation and EUR 0.9 million for higher expenses. After deduction of these specialty effects, our EBIT stood at EUR 36.8 million. Our financial results amounted to minus EUR 13 million. Our net financing costs increased to EUR 8.2 million, mainly higher -- to higher interest costs for current loans and finance leases. Other financial income and expenses amounted to minus EUR 4.7 million and included the interest expense for pension obligation as well as negative effects from exchange rate changes and hedging valuation. After the deduction of income taxes, our net profit for the first 9 months of '23/'24 amounted to EUR 21.4 million. As a consequence, earnings per share stood at EUR 0.50. Let's move now to Slide 10, the cash flow statement. Cash flow from operating results fell year-on-year from EUR 109.5 million to EUR 78.5 million, mainly due to the decline in revenues. The change in working capital improved compared to last year. Total cash flow from operating activities were EUR 58.6 million. Cash flow from investing activities totaled to EUR 29.7 million compared to EUR 38.3 million in the previous year. In addition to investments in property, plant and equipment, this position includes also cash outflows of EUR 6.1 million for capitalized development costs. As a result, free cash flow came in at EUR 28.9 million in the reporting period compared to EUR 46.2 million last year. Let me finish with Slide 11 and some comments on our balance sheet. The balance sheet structure remains stable and strong. Equity ratio slightly increased to 43.4%. Net debt rose to EUR 94.3 million, and the debt coverage ratio is a very healthy 0.86. At this point, I would like to inform you that all participating banks in our syndicated loan have extended the consortium credit agreement for another year. And with this, I hand back over to Alfred.

You know the Slide #12 already, what shows the developments over the quarters. And as we have already explained, you can see here that we are working, again, our way step by step towards positive territory. However, it's much less steep than the decline was. And we are now working in really a challenging market environment in different countries. But we also do see light at the end of the tunnel, especially on the Components segment, as we are finally seeing increasing order intake with the fact that the high inventory levels at customers are really basically now back at normal levels. Slide #13, let's have a quick look at the revenue development in different regions during the first 3 quarters compared to the above-average performance in the same period of the previous year, declines were recorded in all regions, particularly due to the drop in the Components segment that was slightly down. Main drivers, with good performance has been in Austria and especially in Switzerland and the sizable decline in Germany. However, in the Northern and Western Europe, we have a decline especially led by the U.K., which, as you know, is one of our big markets here. The construction, basically, they collapsed more or less with a decline of 31% in last year, and we feel this now in our revenues. Southern and Eastern Europe were below the previous year's level, with particular market decline slightly in Italy, but also in Spain and the Czech Republic. Asia and Pacific also suffering with a high exchange rate impact, a negative 1, where we have declines in Australia and in China, and the same is valid for the Americas and Middle East. I would like to conclude our presentation now with a few words on our outlook. Obviously, it's clear that the environment remains difficult and had already the appropriate negative influence commercial construction sector. The demand [indiscernible] segment still ends and the business in the Lighting segment is also not so easy with now everyone out of the allocation and less projects available in the market. Considering this situation, we do continue to expect a decline in revenues in the mid-single digit range for the entire '23, '24, where we assume that will come out of the end -- at the upper end of the absolute terms. For the entire financial year, we expect therefore an adjusted EBIT, excluding special effects, of 4% to 6%. And we have also adjusted the CapEx picture. We are now expecting spending of EUR 50 million compared to the previous one of EUR 60 million. And with that, thank you so much for your attention. Now Thomas and I will be more than happy to take your questions. Thank you for listening.

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

A few questions, please. Firstly, regarding the top line outlook. Maybe you can elaborate where you see the border between mid-single digit and high single digit revenue decline. So where would it be for you the threshold?

Marko, thank you for your question. The critical part is the Tridonic part. We are seeing now quite an improvement on the order intake. And obviously, we do have a short visibility. It's much more stable here, but we will see the lower threshold in the range of 4% and the higher one in the range of 7%.

Okay. And then staying with the Components segment. I mean we're now at EUR 70 million of revenues in the quarter. I mean is that like the bottoming out? I think you read in the last call indicated that there are some green shoots on the order intake, I mean, interpreting your statement now? It seems as the bottoming out is seen. So should we expect the normal seasonality in Q4, meaning it's a bit higher than -- again than Q3?

Yes, the normal seasonality we see. So basically, the order intake or the orders placed are now back to normal level that we have to ship between order intake and shipment between 2 and 3 weeks, which obviously you can imagine with factor is not completely full. It's not an issue at all. So we are going in that direction. However, we are seeing since November a slight increase of the order intake, and the order intake is currently in the range of EUR 6 million to EUR 6.5 million, which is EUR 1 million up from that was in the back and continuously growing. But it's slower growing than we expected. So with that, we believe if this continues, we will have then a much better start in the Q1, but Q4 will still remain tense.

Okay. And then a question kind of relating to the material expenses. I mean, of course, staff costs are going up. I mean looking into the next couple of quarters, what would be your assumptions regarding the material expenses? Is it stagnant on a cumulative basis? Or do you perceive either headwinds or tailwinds actually?

Well, we don't see the big momentums of the past. There will be no 6% to 8% material price reduction. But 2.5% material price reduction we would see in the future months.

And your final question would be regarding the working capital and then our net debt development that you perceive until year-end. I Mean you've got the guidance for CapEx. So I understand this is mostly a shift into next year. But anything you can shed in terms of the expected working capital development or what kind of a bracket way you would expect net debt to be at year-end?

Well, I would see an improvement in net debt as in the fourth quarter, we always generate quite some cash as we don't have the big impact, double salaries, bonus payments and things like that in the fourth quarter. So our net debt should improve.

Okay. And a bookkeeping question. Any further restructuring charges in the final quarter?

Not significant ones. Everything below EUR 1 million.

Markus, the big adjustment we did already back in November with move of 2/3 of the production from [indiscernible] Components to cost-effective locations.

The next question comes from the line of Patrick Steiner with Kepler Cheuvreux.

The first one would be, I mean, in the light of the current full year '23, '24 guidance in place, what are your expectations on Q4 sales and EBIT margins? And how confident are you in achieving the full year EBIT margin target of 4% to 6%? And the second one is more about the regions. I mean Northern and Western Europe has performed quite badly compared to DACH, which has held up much better. Do you expect the DACH region to somehow catch up with the negative development, so to say, to get worse going forward?

Let me start with the question number B first, so the second one. We do see in the DACH territory, a continuous good momentum, driven with Switzerland and Austria. But also in Germany, despite the fact that the economy is really not looking very promising. We believe that DACH will continue to perform. On the Q4, as I said, we believe that we stay within the guidance regarding the EBIT. The challenge on the top line for Q4 will mainly come from the components business. If we continue like this, then we will more be in this lower threshold but obviously, the uncertainty remains. And with the adjusted EBIT margin guidance, I'm very confident that we will reach this.

The next question comes from the line of Michael Marschallinger with Erste Group.

Basically, I have just one left on the [indiscernible] pricing pressure in the Lighting segment. You said on the last call you expect to pick it up. So I would like to know what degree that you saw. And was it in line with your previous expectations and what we expect now also for the fourth quarter?

Mr. Marschallinger, can you repeat your question, and please, slowly because the line is very bad. Is it regarding price?

Sorry. Is it better?

Yes, yes. It was the price pressure in the Lighting segment. That was the question?

Yes. And On the second quarter call, you already mentioned you expect pricing pressure in the Lighting division to increase. So what degree did you see now in the third quarter? Was it in line with your previous expectations? And what do you expect for the fourth quarter in this division?

So in the Lighting segment, luckily, yes, we are seeing slight indications, but currently, the prices are stable. And in some countries, even we are able still to increase prices. so I think that's good here development. In the Components segment, especially with larger accounts, there is a price pressure. And as I said, we are here at the Light and Building, and we are having a very good, let me say, analysis now on the different players and the intelligence, I think that will be there, but it's slightly better than I expected. But nevertheless, the market is not really showing tailwinds in certain economies where we are operating. And that automatically means with an oversupply, what is there, that price will be an issue moving forward. But currently better than we expected. That's why also Thomas said, is not very concerned about the EBIT.

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

Yes. I wonder whether you can -- you talked about a reduction in CapEx. Can you tell us a little bit about your industrial organization between Austria and Serbia, how things are moving there in terms of changes?

You mean on CapEx, what we spent, where, Laurent?

Sorry, I didn't get that.

Laurent, just a question -- Alfred here. Your question was how is the CapEx expenditure distributed among the different locations. How much, let me say, in headquarters and how much in Serbia?

No, not figures on CapEx. Just to get a better idea of how you are evolving your production capacity between Austria and elsewhere, where is increasing, where is reducing?

Yes. As you know, we basically have reduced the capacity in Austria, mainly on the Components segment. But also we have adjusted and reduced 70 headcounts in the Lighting segment attached to that. Those products have been moving mainly through Serbia. We also have adjusted slightly the capacity in Lemgo and moved some products there into Serbia. And in the U.K., in the other locations, we are pretty much constant, no change.

Let me add one sentence. We -- in our trunking system, we have developed a new trunking system. And to the CapEx -- system now, this is our main product. And this is very capital intensive. So a big chunk of this CapEx goes to [ Dornbirn ] to highly -- very highly automated machinery and equipment for the new trunking system.

And can you help us understand what the impact of this increased production in Serbia in your very automated factory will have on the sort of gross margin or profitability of the business going further out?

Well, the thing is we are confronted with high inflation, as everybody knows, and high pay rises. And this helps to mitigate this effect of other locations and bring it to close to a 0 impact from an inflationary point of view with -- of course, with direct and indirect workers.

So This will serve just to combat inflation, but will not improve the profitability of the business?

Not significantly.

[Operator Instructions] There are no more questions. I will hand it over back to Mr. Felder for any closing remarks.

Ladies and gentlemen, thank you so much for listening today and for your questions. And with that, then I will conclude the session and go back to the waiting customers what we have here at Light and Building. Thank you so much for listening.