Zumtobel Group AG (ZAG) Earnings Call Transcript & Summary

Good morning, ladies and gentlemen, and welcome to Zumtobel Group's conference call on our first half and the second quarter results of our 2024-'25 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 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.

Yes. Good morning, ladies and gentlemen. Thank you very much for your interest and your participation in today's call on our half year results. We can be quite satisfied with the development of our business for the first half. Above all, we are seeing a slight recovery in the Components segment, which has returned to a growth of 3.4%. And in the Lighting segment, we also have a slight growth of 0.4%, totaling then in a revenue growth of 0.6% or the EUR 577.6 million for the first half year. Looking at the development of our different regions, again, the DACH region, Austria, Switzerland, and Germany, all contributed to the positive development compared to the same period of last year. The sales here increased significantly also in the Northern and Western region, mainly driven by U.K., but finally is back on track with a double-digit growth. In contrast, sales in Belgium was significantly lower compared to previous year. In the Southern and Eastern European region, the sales fell, particularly due to the weakness in the Czech Republic and in France. And in Asia Pacific, the Components segment achieved a growth again in Greater China and the Americas are disappointing mainly with the negative development of America, but a very good positive development of the Middle East. This positive development of the first half year is also reflected in our adjusted EBIT, which rose from EUR 40 million to EUR 41.2 million or 7.1%, and Thomas will cover this in more detail. Before I hand over to Thomas, I would like just to guide you through a couple of highlights what we again achieved in the second quarter. One is from -- starting from the top row into the center, the Basilica of St. Peter, in the Vatican State, we have become since January 2023, the strategic lighting supplier of the Vatican State, and that one of the highlight was in the St. Peter's, Basilica developed an outstanding tailor-made project. So in October '23, we started the project of one of the most important buildings. It will -- in the Vatican State, it will operate at the end of 2025 and another project in the Apostolic Palace will be operated in July '25. Our light fittings were recently installed in the Baldacchino of the St. Peter's Basilica, really the highlight of the year. And here, important design activities are planned for '25, which is the Holy Jubilee year every 25 years in the Christian community. Another highlight is the Hilti Innovation Center in Liechtenstein, where it's one of the typical refurbishment projects, close to 2,000 luminaires replaced and basically minimizing then the CO2 footprint, increasing quality of light. Similar in the insurance company, HUK Coburg, in Germany, an office application logistics, again, a renovation project where here basically the success factors have been the strong network in the aftersales service with this customer. We are continuing with the plans according to the strategy of our stadium illumination, so sports illumination. The latest one was in U.K., Sunderland where we did the stadium. It is a complete refurbishment. It's close to our Spennymoor factory, which is just 21 miles away here. And here, we have been able to deliver locally manufactured cutting-edge solutions for this stadium, not only Thorn, which is basically the floodlight, but also suitable products like the CRAFT and the spotlight. And last but not least, the railway station in Paris was a huge project, again, for renovation of the railway station network around Paris and was initiated 10 years ago. We started to meet with architects, lighting designers and electrical consultants many years ago and to see this is one of the typical projects, how long it lasts partly to do such huge projects in that magnitude. Before I hand over to Thomas on Page 5, I would like to highlight a little bit the motivation, what is behind the restructuring what we had, the current economic and geopolitical situation remains challenging. I guess we come in the Q&A session to that already and especially with the negative impact on our sector, which is the construction sector. Price pressure in the market for the professional lighting solution is tangible in some of our areas, and we are currently seeing a decline in the willingness to invest in professional lighting solutions, especially when it goes beyond the renovation. In October, we announced that our French subsidiary, the Zumtobel Group Europhane was reviewing the discontinuation of the production activities in Les Andelys in France, and the production plant is currently significantly underutilized and structurally unprofitable. And part of this process includes the search for a potential buyer with the aim of establishing new business activities at this site. However, we maintain the group-wide competence center for the outdoor luminaires and the sales activities in that country. So in Les Andelys, we will stay with the whole R&D for this segment. We also have decided to close our assembly plant and logistics center in Sydney, Australia. And going forward, we will focus on profitability by selling high-end projects and optimize sales of mainly European products. In Q2, we had restructuring costs of EUR 9.4 million for both measures. They will help us to be more cost efficient and profitable in the future. And we expect that these measures will generate savings in the middle single-digit million range and will take effect in our next fiscal year. Closures and restructurings are never easy. We make it a priority to evolve the employees' impact and consider their perspective. However, given the current challenges, these measures are essential to strengthen our company's resilience and competitiveness moving forward. While difficult, we see this as an absolute necessary step. And with this, I would like to hand over to Thomas to guide you now to the financial results.

Thank you, Alfred. Good morning, ladies and gentlemen. Let me start with the Lighting segment. Revenues in the Lighting segment amounted to EUR 229.5 million and were slightly below the previous year's level. The decline in sales was mainly related to CEE in France, whilst on the other side, we had a solid performance in the U.K. and positive currency effects. Nevertheless, the positive effects were not able to offset the negative ones. While revenues were almost flat, a negative inventory valuation effect, higher personnel expenses and the phasing of the research bonus in the amount of EUR 1.8 million into Q3 instead of Q2 last year had a negative impact on our adjusted EBIT. Adjusted EBIT in the Lighting segment decreased from EUR 26.9 million to EUR 17.8 million. Our adjusted EBIT margin stood at 7.8%. Let's now move to the Components segment. Revenues in the Components segment rose by 2.5% to EUR 77 million. Sales growth was achieved primarily in the U.K., the DACH region, but partially offset by price pressure and negative currency effects. Despite the challenging market environment, the Components segment recorded an increase in both sales and margin. In combination with strict cost discipline, lower material costs and the revaluation effect -- in Q2 last year, we recorded an inventory write-off of EUR 1.5 million and this quarter, the effect was positive at EUR 0.3 million. Adjusted EBIT in the Components segment rose from EUR 3.2 million to EUR 6.5 million in the second quarter. The adjusted EBIT margin increased to 8.4% without having received the research bonus of EUR 1.8 million. Slide 8 shows the overall results for the group. Our top line development was flat. Revenues amounted to EUR 288.6 million. With flat revenues, the phasing of the research bonus into Q3 and the increased personnel expenses, our adjusted EBIT decreased from EUR 25.5 million to EUR 21 million. The adjusted EBIT margin stood at 7.3%. Let me now explain the main building blocks of our adjusted EBIT development for the first half year. Let's start with prior year's adjusted EBIT of EUR 40 million. Development in the Lighting segment was slightly positive. Volume growth in the Components segment was offset by price. Overall, we had a positive effect of EUR 0.3 million. Looking at our COGS, a positive inventory revaluation effect and lower material costs were slightly offset by higher personnel expenses. We recorded a positive effect of EUR 11.3 million. SG&A and research costs were impacted by higher personnel expenses due to wage and salary increases. Together with the phasing of the mentioned research bonus into Q3, the negative impact was at EUR 10.5 million on our result. Based on these factors, our adjusted EBIT increased to EUR 41.2 million. Slide 10 provides you with information on our income statement. As previously indicated, our adjusted EBIT increased to EUR 41.2 million. Special effects were negative EUR 11.2 million and include provisions connected with the lighting plant in Les Andelys as well as in Lemgo and the assembly plant in Sydney. After the deduction of these special effects, our EBIT stood at EUR 30 million. Our financial result amounted to minus EUR 9.5 million. Our net financing costs amounted to minus EUR 5.2 million. Other financial income and expenses amounted to minus EUR 4.3 million and included the interest expense for the pension obligations as well as currency and hedging effects. After the deduction of income taxes, our net profit for the first half year amounted to EUR 18.4 million. As a consequence, earnings per share stood at EUR 0.43. Let's now move to Slide 11, the cash flow statement. Cash flow from operating results fell year-on-year from EUR 60.4 million to EUR 58.1 million. The cash outflow from changes in other operating items amounted to minus EUR 13.4 million, mainly due to payment of variable salaries, reduction of vacation entitlements and guarantees. Restructuring provisions counteracted this effect. Cash flow from operating activities fell to EUR 33.7 million in the first half year. Cash flow from investing activities amounted to minus EUR 20.6 million in the reporting period. In addition to investments in property, plant and equipment, this also included investments in capitalized development costs of EUR 6.4 million. As a result, free cash flow amounted to EUR 13 million. Cash flow from financing activities amounted to minus EUR 20.6 million in the first half. The change compared to the same period of the previous year is mainly due to the repayment of the loan to the European Investment Bank in the amount of EUR 30 million. Offsetting effects resulted in the increased utilization of the syndicated loan amount in the amount of EUR 5 million. Let me finish with Slide 12 and some comments on our balance sheet. The balance sheet structure remains stable and strong. Equity ratio improved slightly to 43.6%. Net debt decreased to EUR 89.5 million, and debt coverage ratio is very healthy at 0.86. And with this, I hand back to Alfred.

Before I guide you through the outlook of the second half, on the Page 13, you see the latest update on the market outlook for the non-residential construction. It's brand new from December, and this confirms, if you look at the 2024 that we are still under pressure heavily, especially with the new build and as reflected also in our projects, a slight positive development on the renovation. And basically, this confirms the weak construction prospect for the entire year 2025. However, if we look now into the '25, we do see a slight recovery in both segments, turning now first time again to positive, which means we expect a growth across our sectors, while the office and the industrial will face limitations and the storage building will be back to the normal level. In summary, while we faced a challenging calendar year '24, which also will include and includes Q3, the outlook is a little bit more promising and anticipated in most of the sectors. But please be aware that we are late in the cycle. So we are still having a legacy of '23, '24 moving forward into our '25 fiscal year. Our strategic focus will be leveraging the [ futility ] of renovation and maintenance as well as positioning ourselves to capitalize on the recovery of non-residential construction. And with this in mind, let me now finish with the outlook of '24-'25 financial year. Despite the recovery in the Components segment and adjusted EBIT in the first 6 months that is above our guidance for the full year, we are nevertheless remaining very careful optimistic for good reasons. The current situation is more than dense and the consequences of the global economy are again very, very difficult to predict. And this makes it difficult to anticipate also our economic development for the second half and therefore, we are leaving our guidance unchanged. For the '24, '25 year, we continue to expect sales to be at least slightly above the previous year and the level on adjusted EBIT margin between 3% and 6%, whereby we expect to reach the upper end of this range. Our CapEx spending is expected to be around the EUR 60 million as we guided also last time. And with this, thank you so much for listening to both of us. And now Thomas and myself will be more than happy to take your questions. Thank you for listening.

[Operator Instructions] The first question comes from Markus Remis from RBI.

A few questions, please. The first one relates to the top line outlook in the second half. What gives you the confidence to generate growth in the second half with weak end markets. It seems that price pressure is intense. So where is that slight growth coming? And then staying with the guidance, when you say you expect the EBIT margin to be at the upper end of the range, does it mean the upper half of the range or truly, I don't know, towards the top end of the range? That will be the first one.

All right. Thank you, Markus, for the questions. Yes, top line outlook, we have to differentiate. So first of all, on the Tridonic side, you're absolutely right. The price pressure is there, but that was already there since the beginning of the fiscal year. And as you have seen, we are continuing to grow and also the order intake, what we see and the price perspective, what we see makes us confident that also the second half will be with a slight growth compared to previous year. On the lighting side, we are mainly in the project business, both refurbishing and new, as you know. And the project pipeline, what we have, first of all, is indicating that we are able to continue the prices. Some of the projects, as you know, have been designed in 6 months -- 12 months ago. And basically, we believe -- we believe that we can basically also continue this for the second half of the year. In some markets, we are growing better than expected. U.K. is one of those. Switzerland is one of those. Interestingly also, we are compared to the economic situation, slightly better than previous year also in Germany, and we plan to be [indiscernible]. But it will be a slight growth, and it will be a challenging second half. The second question will be answered by Thomas.

Yes, Markus. The second question is with regards to the EBIT margin. We expect or the probability is, in our view, much higher than it is in the higher upper half than in the lower upper half.

Okay. Okay. Very clear. Can we stay with the cost development because to me, it looks as if material cost and you outlined this in the presentation that they give you quite a tailwind. Maybe can you shed some light which aspects of the material cost bill are particularly favorable? And if there is maybe even an increased, say, deflation than in the second half, if your guidance is to be understood that way? And also related to that, I mean, on a -- sorry, on a divisional basis, when I look at the Components segment second half, even stripping out this inventory revaluation effect on slightly lower revenues, you've been able to increase the EBIT quite substantially. So on my numbers, like first quarter, excluding revaluation, EUR 1.7 million, now second quarter around EUR 6 million. So is that the material still that is driving this increase?

Let me start with the Components segment. In the result of the Components segment is about EUR 3.3 million inventory revaluation as positive effect. Then we had a settlement with one of our suppliers in the range of EUR 1 million. And the rest is by better performance and lower material costs as well as...

Sorry, this EUR 1 million was in the second quarter then.

Yes.

Okay. That explains part of the outperformance.

Then material costs are decreasing, you are right, but this is very fluctuated. Steel is going down, aluminum is going down. Copper is slightly going down. Polycarbonates are going down, but we have also freight -- increased freight costs and resin another substrate is also going up. So in total, we have a positive effect, but you can't predict this. It's so fluctuated all the time. Every semi news on the wars going on drives the prices for our raw material.

Okay. But what's kind of the base or the budget for your confidence to get to the higher upper end of that range? What's kind of the scenarios?

Well, for the second half, we have a good portion of our inventory already in our books. They have a quite long lead time. So we are confident that we can reach the upper end.

And also on the top line, Markus, and as I mentioned before, we do know the prices on the Components business. Obviously, here, this is a short-term business with the orders come in very short and need to be delivered. And on the luminaire side, we are in project business where a large amount of projects, not the orders already taken, but based on the quotes what has been sent out, what will be turned into orders, we see already what the price range are. And based on this information, we are confident also that the margins, what we will achieve on the luminaire side will be guiding us to the upper end of the -- in addition to that -- light, yes.

That's the advantage for us that we are not so much dependent on wholesale or on this business where the pressure is much higher. We are much more -- especially with renovation, the kits, what we have, the renovation kits of our luminaires and also competitor luminaires are more or less standardized now, and that is not something what can be easily replaced by somebody who is fresh in there because it takes time. And that's why we are quite confident.

Okay. Then if I could follow up regarding the restructuring from those measures that you have announced, Lemgo, Les Andelys and Sydney. Is everything digested now in the first half? Or are there some legacy costs? I mean not talking about minor numbers, but anything of relevant size still to come in the second half?

You mean on these restruct -- Les Andelys restructuring measures.

Yes. Sorry, if there's anything that you still have or any plans that are in your draws for...

As you know, we are consistently looking at our costs. And if we find something which is in our view, necessary to do or bringing a high return on the investment, we will do this. But for the moment, these are our restructuring measures we have found and we have started.

Markus, your question is if there's anything else on those 3 topics. You mentioned Lemgo, you mentioned Sydney. This is already all in...

Adjusted. Okay. Very clear. And then a final one regarding the impairment, you had EUR 1.4 million of impairment charge in the second quarter. Is that part of this EUR 11.2 million of restructuring charges?

Yes. These are assets of the restructuring.

Yes. Okay. That's what I thought. All right. That's it. Now sorry one more. Regarding the workforce development, I was actually a bit surprised to see that there was an increase in the second quarter compared to the year-end and Q1 development. Can you shed some light on what was going on, on the staff number?

We have -- so basically, we have invested in a few countries where we believe that we can generate more sales. And then we have shifted a couple of FTEs to our low-cost countries, but -- and some have been just replacement. So it's not really a substantial increase of our FTEs. It's also a little bit fluctuating because in some of the countries, we are also having now retirement cases. We are also hit by the demographic change. And we have a couple of people hired who take over the functions of those who are going into retirement.

Okay. I mean we're not talking about big numbers, but I was just surprised by the buildup a little bit...

Yes, something like 80 people up. I can say not to forget, speaking on behalf of our COO, we have, of course, for some of the product categories also a higher demand on Tridonic level, obviously, you mentioned the price erosion, which automatically means we have a higher volume. And that means, I think as far as I know, also in Shenzhen, we have a couple of more shop floor workers more what most likely is the majority of this increase.

[Operator Instructions] The next question comes from Miro Zuzak from JMS Investment AG.

Can you hear me?

Yes, yes.

I have a question relating to the questions of Markus before. So the EUR 9.5 million and EUR 11 million, respectively, were they all booked in the COGS line? Or were other P&L lines affected?

Well, if you look at our financial report, you should see in which lines they are recorded -- which page it is. You see on Page 6 of our half year report, the adjusted position. So it's not booked in one line, it's booked on various lines.

Okay. And the EUR 3 million inventory write-up you had in the Components segment, that was booked in the COGS, right? Because you don't adjust for that, obviously.

Booked in the COGS, but this is not a special effect according to our accounting principles.

Yes. And the EUR 1 million settlement gain like this one was also booked in the COGS.

Yes. Settlement in ICOGS.

Say it again, please, sorry. Settlement in?

In ICOGS, in COGS for you, yes.

Both were booked in COGS. Okay. Good. Then the next question I have regarding, let's say, the management focus right now. It seems like -- I mean, obviously, you have now the closure that you want to do in France and in Australia. You had Lemgo. Are there other construction side within the company that you have? Or is this basically the remaining bit of this larger refocusing of the company, which is basically ongoing since 10 years?

No. We are having -- as Thomas said, we are monitoring very closely, obviously, the cost development, what we have. And when it comes to Austria, where we have 1/3 of our population -- of our workforce with constantly increasing cost, we have now depending on wage increases result, what we will see at the beginning of the year, wage increase over the last 4 years for close to 30%. And we need to see what of these products we can still manufacturing in Austria and what we would need to move to other lower-cost countries. And based on that, we are evaluating that and then seeing whether we need to take some additional actions.

[Operator Instructions] The next question is a follow-up from Markus Remis from RBI.

On the cost development, labor-wise in Austria, we are now seeing the results of the collective bargaining agreements in a couple of sectors. What's kind of your assumption for '25 for your workforce?

Yes. Basically, you have seen Markus, the handle. So the retail has now closed for 3.3%. And also we have again this famous [indiscernible] formula. If this goes, we are expecting something between 3.8% and 4.5%, to be honest. So the negotiation is going on right now. But that's basically, if you take this into account average inflation in the last 12 months plus the efficiency gain formula, then you are in that range, 3.8% to 4.5%.

Right. And your kind of sector is -- I don't know what's called in English, but the electro...

The electrical...

Call it [indiscernible] drag that is when to be concluded?

1st of May.

1st of May.

25, so exactly at the beginning of our next fiscal year.

Rather late just as with the banks.

[Operator Instructions] Next question is a follow-up from Miro Zuzak from JMS Investment.

I was just looking at Page 6, as you indicated before, I see adjusted SG&A, EUR 88.1 million and reported SG&A, if I take the 2 lines together is EUR 90.3 million. So we're talking about EUR 2 million, which were adjusted. Can you tell me the component of the EUR 2 million, please?

Yes. On the spot, I can't. I have to send you this information via e-mail.

Ladies and gentlemen, there are no more questions at this time. I would now like to turn the conference back over to Alfred Felder, CEO, for any closing remarks. Please go ahead.

Yes. Ladies and gentlemen, thank you very much for listening and also for the interesting questions. Obviously, in a summary, we remain cautious in our outlook, as I have indicated, but carefully optimistic on the development. And with that, I'm looking forward to talk to you again after our Q3 results in March. Thank you so much.