Q3 20/21

Mar 2, 2021

Thank you. Good morning, everybody, and welcome to our conference call to the 1st 3 quarters of the 2020, 2021 financial year. Like always, you can find the presentation for this call on our website, and the call will be hosted by Alper Felder, our CEO and Thomas for Stol, our CFO. I will start the presentation and then Thomas will give you more details on the financials of the first three quarters. May I now hand over to Alfred to start his presentation? Yes. Good morning, ladies and gentlemen. Alfred Felber speaking. Also warm welcome to our call today on the Q3 numbers. Before I hand over to Thomas Scholl. I would like just to show you on the summary page on Page 2 a couple of highlights for the Q3. Obviously, in our business, with the lockdown, we have been seeing deteriorating numbers, especially in the segments retail and partly also in the office. So we had started the PUSH program on those system relevant businesses, especially on the e commerce, especially on the topics where new investments has been done. And what you see here as an example out of many, we have been able to win a couple of projects in new customers like Amazon, in logistics hall, in the industry halls, where we see a very, very sustainable growth across all Europe. And you see a couple of examples, typically turnkey solutions, what concludes lighting out of our portfolio of the different brands and including the controls like the last one what we did for the South Danish University. It's just an example of many projects what we had, where we have been able to compensate partly the loss what we suffered, especially in the non system relevant retail and lately in a flat development of the office environment with the home office situation. We also started already in Q2 with 2 major programs. 1 is listed here, the focus on sustainability, where we have launched the key initiatives on structure to accelerate not only our drive towards CO2 reduction in neutrality, but also focusing on circular economy. The launch window In March, what we had done this week, to be exact yesterday, already included 2 products that have been designed based on circular design guidelines, and we will accelerate this moving forward. And the second topic is the start for digital initiatives obviously triggered by the pandemic, but then, of course, where we are investing substantial amount of money over the next years in the digitization of our company. I also would like to announce what goes out in parallel with the announcement The Q3 figures that we will have a change in the management board that Thomas Herrad, who is currently the CFO of Tridentic and a long member of the management team in the group, will join the management board effective August 1, 'twenty 1. And Thomas Scholl, who has been with us more than 3.5 years, helping us to transform the company from a loss making company into a robust balance sheet company will, as planned, leave the company by the end of July. This will guarantee, and I think it's also something what is not new to the company, but good for the company in a smooth transition and the handover of the financial responsibility within the group. With that, I would like to hand over to Thomas, who will guide you now through the financial situation, both on the group components and Lumina business. Thank you very much, Alfred. Yes, good morning, ladies and gentlemen. I would like to start by giving you a brief overview on the financial highlights of 1st 9 months of this fiscal year. Obviously, the 1st 3 quarters have been negatively affected The impact of the COVID-nineteen pandemic and the revenues fell by almost 13%. But on a however, on a positive note, we are seeing further progress On the slow upward trend, this is to say that in the 3rd quarter, decline was reduced to roughly 9%. In addition, despite the drop in revenues, we are clearly in the black and closed the 1st 9 months with positive earnings and a substantial increase in the free cash flow. Anyway, as mentioned, group revenues are down by 12.9%. Adjusted for FX, the revenues would be at minus 11.8. The negative currency translation effects resulted primarily from the devaluation of the Turkish lira, the British pound and the U. S. Dollar against the euro, but they were partly offset by the appreciation of the Swiss francs. The top line decline is coming from both segments. Lighting segment is down by 12.2% and the component segment is down by 15.1%, meaning also clearly below previous year level. And just here in the component segment, we have to keep in mind that we had this advanced stock purchases by many At the beginning of the global lockdown, so roughly 1 year ago, and this led to substantially lower order levels in the Q1 of this fiscal year. This is the main reason for this for the components segment being the top line or in the decline below the lighting segment. Anyway, the development was different between the markets. Our Kodak market avoided a double digit decline and was down by 7%. But the markets in Great Britain, France, Italy were particularly hit by the crisis with declines of roughly 23% in U. K. And about scheme percent in France as well as in Italy. The group adjusted EBIT decreased from roughly €47,000,000 to roughly €28,000,000 as the gross profit was €45,000,000 below previous year level as a result of the €1,000,000 below previous year level as a result of the decline in the top line. However, the positive earnings have been supported by cost savings and the utilization to short time work options. And as a consequence, the SG and A costs were CHF 28,600,000 lower than in the previous year, The largest savings really are in personnel costs, interest expenses, marketing and lower transport costs, which resulted from a decline in the revenues and the lower volume in shipments. A good news here is that the development of earnings during the 1st three quarters confirms the strength and stability of the Zumtobel Group due to the measures that have been implemented in the past 2 financial years. And this development also shows the success of our quickly implemented effective crisis management in dealing with the COVID-nineteen pandemic. Below the line, the net profit was at €14,900,000 We have recorded 1 Costs for restructuring measures of €400,000 in the full three quarters, and they were related primarily to costs for the termination of production at the ECB Blankberfort in the U. K. As well as write offs of production equipment and some restructuring of back office activities. And on the other hand, these restructuring costs were partly offset by the release of provisions related to the premature cancellation of a lease contract, also to the restructuring of the Euro Fund, where we had some release of provisions that we have built and also an agreement in a legal dispute that has been closed. The pandemic situation obviously remains uncertain, but we expect full recovery in our business on a year on year increase in revenues during the Q4 of this fiscal year. And so we also assume that the operating results from the group, our adjusted EBIT will be positive in the 4th quarter. Now let me now move to the next chart to give you more details on development of each segment. The Lighting segment, as usual, you can see the revenue development per quarter on the left hand side and the adjusted EBIT development on the right side. As mentioned before, the revenues in 3rd quarter decreased by 8.8%, and after adjustment for FX FX revenues would decrease by 7.4%. And on the right hand side, you see the adjusted EBIT development. And here, The good news is that despite the decreased top line, adjusted EBIT in the 3rd quarter is at €2,400,000 even slightly above the previous year. This is a satisfactory level given the top line development, and obviously, this was achieved with 3 cost control and also by using the short time working options. On Slide 5, the Components segment. Here, the revenues were down by 9.1% in the 3rd quarter, And revenue development was negatively influenced by the devaluation of the Turkish euro. And after an adjustment for FX, the segment was declining by 6.4%. And anyway, the revenues have been, as you can see, they have been stable over the past quarters at around €73,000,000 per quarter. And in the past quarters, we have always been talking about the strong pressure price pressure Tradonic is facing. But however, the price pressures in current fiscal year has been down by only approximately 1% versus previous year. And this was also supported by the logistics surcharge of 3.5% that Tradonic was charging on additional logistic costs they have been facing when the crisis started. So this means mainly during the Q1. On adjusted EBIT level, the profitability fell to 5.1% as a result of the lower contribution that Tradonic was facing. On Slide number 6, the group revenues and the EBIT development. The Slide 6 shows the combined results of both segments, and I think there is not too much there. So Let's move on to Slide 7, the group adjusted EBIT bridge. On the left side, you can see the prior year adjusted EBIT for the 1st three quarters of €46,900,000 And the absolute gross profit of the group before M and D decreased by €45,000,000 What is the result of the €112,000,000 lower revenues versus the previous year period? R and D was slightly increased by €1,500,000 and the SG and A, as I was already mentioning, we could realize significant cost savings versus previous year and amounting to the 28 point €6,000,000 The other operating results, excluding the special effects, Slightly above the previous year level, and this brings us all together to an adjusted EBIT of €27,700,000 in the 1st 9 months of this fiscal year. On Slide 8, you see the income statement. And there also is not too much to add. Maybe the financial results, It improved by €1,600,000 compared to previous year. And the interest expense as a consequence of the lower net debt was down by €1,300,000,000 compared to previous year. And As already mentioned, we have a bottom really the bottom line net income of plus roughly €15,000,000 which is, from our point of view, given the circumstances, a very satisfactory level for us. On slide number 9, we come to the cash flow statement. Here is I think we have very positive news. Cash flow wise, the cash flow from operating results fell from €86,000,000 in the first three quarters of the previous year to the roughly €81,000,000 in the 1st 9 months of this fiscal year. And of course, as a result of the lower operating result And regards to the working capital, the working capital totaled €166,000,000 compared to €176,000,000 in previous year. And therefore, we had a slight improvement or slight cash inflow from the working capital in the 1st 9 months. But we had significant inflows from the change in other operating positions that totaled €6,500,000 This is primarily due to a decline in other receivables, in the higher balance of prepayments that we have received. Consequently, the cash flow from the operating activities increased from €72,000,000 to €84,000,000 in the 1st three quarters. And also, the cash flow from investing activities was significantly lower year on year. It was at €24,000,000 and compared to the €38,000,000 in the previous year. Anyway, the free cash flow improved significantly to plus roughly €60,000,000 compared to €33,000,000 in the 1st 3 quarters of the past financial year. Let's move on Page number 10 to the balance sheet data. A quick look at the balance sheet and in particular, our liquidity position. Of course, as a consequence of the strong cash flow, the net debt decreased to €123,700,000 as of end of January. This is more than €40,000,000 below the value that we had at the beginning of this fiscal year. Our liquidity situation is still backed by a consortium credit agreement with the term ending in November 'twenty two and a maximum volume of €200,000,000 thereof only €50,000,000 have been drawn, 2 long term credit agreements of €40,000,000 each with the European Investment Bank. Here we have full year repayments in September 'twenty four February 'twenty five. Both have been fully drawn. And UKVES special firm accredit for large enterprises of roughly €40,000,000 thereof €30,000,000 were drawn. And on top of that, uncommitted lines of credit totaling roughly €63,000,000 To sum it up, strong balance sheet that secures our liquidity position in the current crisis. And regarding our financial coverings, as you know, we have 2 financial coverings attached to the financing agreement, namely the debt coverage ratio of less than 3.55 and equity ratio of more than 23.5. And these initial covenants are stressed, tested end of October and also end of April. And anyway, we see no risk to meet the covenants. This is all with respect to the financial development in the 1st 9 months. I think we reacted quickly to this exceptional situation and have systematically adapted our business activities to meet the changing demand in the various markets. And given the difficult circumstances, I think we can be satisfied with the development of our results and the liquidity position that we have, highlighting once again especially the strong development of the free cash flow and the net debt. However, needless to say that we will need to continue the good effort in, in particular looking ahead into the challenging Q4 and the upcoming financial year '21, 'twenty two. Now I will hand over to Alfred to provide you with a brief update on the regional sales developments and the outlook for the next fiscal year. So on Page 11, you see the curve over the last fiscal years in the quarters. And obviously, what you see here, as Thomas mentioned it already, If you take this quarter 1, what was the worst drop May, June, July, we are slowly but constantly on our way up with minus 13.9% in Q3 in Q2, sorry, and 8.8% in Q4. And you see that will continue when we took the outlook, and we believe that quarter 4 will be above quarter for last year, knowing obviously that we have been suffering in the last month of quarter for last year quite substantially with a drop in revenue, especially on the lighting brands. If you go to Page number 12, you see how especially the Q3 numbers developed in the different territories. Again, as part of our strategy, a special focus has been given on the DACH region where we have the high margin businesses, and we clocked here at 79.1%, which in quarter 3 was only a drop of minus 2.5% or cumulated Q1 to Q3 minuteus 7% here, to say. Austria and Switzerland are almost on pre corona levels here, where Germany is slightly behind and in the recovery mode also here. A little bit of different picture in Northern and Western Europe, where we have Benelux, Nordic and UK in there. UK obviously suffering on both the final Brexit situation as well as the COVID. Nordic, with the different rates, especially in Sweden, where we have seen in a later development, especially Q222 and Q3, a quite significant deterioration of the business, with then minus 14.5 percent or in total for the key countries, minus 18.6%. Here, I have to say, since beginning of Q3, so November, December timeframe, we are seeing a constant positive development in UK, and that is also continuing now even at a stronger pace in the Q4, where with the higher vaccination rate as well as the outlook On better planability, we see that budgets are released, and we are seeing this in our order intake already, especially here in that territory. Southern and Eastern Europe, different ways, While Italy and also France was recovering in Q3 compared to the Q2 and Q1 numbers. It's different in Eastern Europe, mainly affected by the heavy Infection rate, especially in the Czech Republic and the neighboring countries, what makes it more difficult to bring goods into install the goods, in the Czech Republic. At the moment, we are completely locked out and suffering here. A different picture in Asia Pacific, where over the last quarters, we have almost been able to get back On the pre corona levels, you see Q1 to Q3, minus 5%, where the Q3 is already positive. We are now waiting of the lockdown release, especially in South Asia, which is the remaining territories where we have difficulties, but that also shows a positive trend. And last but not least, the Americas, where obviously South America, even though that was not a big revenue driving business, is more or less since almost 3 quarters on a 10% to 20% level in the different countries we are operating. And especially Q3, was extremely difficult also for the U. S. As this infection rate was exploding. So all in all, minus 8.8% in Q3 accumulated, like Thomas said already, the 12 0.9%. So on the last page, Page 13, we do see that there are Challenging market environment, but difficult different in different countries. What we also see since January, an increase of raw material, especially on copper, steel and aluminum and also partly a 3.5 times higher freight costs, especially for shipment, what are coming either via sea or via air or via rail from Asia. And in addition, due to the, let me say, Bounce back also on the automotive, especially the E car industry. On the components level, we are partly suffering on our location for certain semiconductors that are simultaneously used in the car industry, even though up to now everything is perfectly under control. Nevertheless, we do see the positive trend in our business. We do see in a lot of countries the investment volume coming back, also partly with larger projects what are in the pipeline. So that we believe that the Q4 of This basically will be above 1. Now you might say, well, that's not so difficult because your Q4 in last year was already a shrinking quarter. That's true when we it's part of the lighting brand. On the Tridonic, the Q4 was perfectly In fact, because we had mainly an issue where customers were allocating parts from Tridonic, and Pradoniq was suffering mainly in Q1. But nevertheless, we believe that we will be having a quarter which is above the last fiscal year. On the EBIT number, you see the lower edge, what basically indicates a EUR 28,000,000 And on the top line, the minimum would be that the EUR260,000,000 is exactly the Q4 results, what we have achieved in 2019 2020. So with that, we would like to come to a conclusion on the general presentation and now are open to your questions on the Q3 numbers and beyond. The first question is from the line of Marcus Ramirez of RBI. Please go ahead. Yes, good morning, gents. Thanks for taking my questions. Let me start with one related to the FX effect On the cost side, you elaborated on the top line, but how did currency movements impact your Cost base, I'm particularly thinking about U. S. Dollar sourcing. So yes, I'll have them 1 by 1, please. Yes, of course, the U. S. Dollar had a positive impact As we purchase our raw materials in the component segment in U. S. Dollar, and This compares positively to previous year and also to budget. And the overall Effect compared to budget is around €3,000,000 to €4,000,000 Thanks. Then coming to the input cost Inflation you've mentioned. I mean to which extent do you think you will be able to somehow compensate this via price increases, Also thinking about the logistics surcharges you've introduced for components. I mean, is there any way You can pass this on to a larger extent. And how would you think about I mean, this is apparently is a topic for the whole industry. How Disciplined, do you think, are your competitors in this respect? Yes, a very good question. So obviously, we exited already on both businesses due to the fact that Trilonic has a large showing setup in China. And also we, on the lighting, are sourcing some of the Luminess based on our specifications from third party sources. We have increased the prices for those products and have set a surcharge of 3.5% logistic cost for both businesses, what we have rolled out already to our customers. In addition, what I mentioned due to the upcoming increases of raw materials on copper, steel and aluminum, we have done the same also, especially on the lighting brands. Your question regarding our competitors, we do see across globe that obviously this is affecting everyone in the market and that we are seeing that also our competitors are doing the same as those increases are so substantial. And currently, we are having for both businesses a price increase out in the market, and we are also seeing an understanding of the customers. Okay. Do you think this will Cover the entire cost inflation? Or will there be some kind of residual margin squeeze left? Well, I think it's when we talk about logistic costs, obviously, when everything will ease out again, we have to remove this. Same would be then on the raw material. But we believe, and I think we have mentioned it in one of the beginning slides, that the whole, let me say, price decrease has been reduced to a minimum on the tridonic level, it was over 3 quarter 1%. And obviously, we believe that, that will then result in a slight margin increase in a tight market where we aim. All right. Okay. Then my third question relates to the topic of free cash flow. I mean, CapEx has That's been contained at a very low level. I think your most recent guidance was something around €45,000,000 for The entire business year, I mean, is that still plausible? Will we see this Pickup then in the Q4 and also related to the working capital, I mean, how much More can be done in Q4? Or put differently, what level of net debt do you expect at year end? Of course, the with regards to CapEx, We have been on average around €8,000,000 per quarter, which is very low and related really to this CapEx control, it will be higher in the Q4. Also, since The program that is in place in Austria to support on CapEx spending with 7% to 14% reduction or in the state. So I would expect between €35,000,000 and at the upper end €40,000,000 With respect to CapEx, but again, the free cash flow also should be positive in the 4th quarter. And with regards to the net debt, I will expect a slight decrease again compared to the value as of end of January. But we have to keep in mind that we have to reevaluate our IFRS 16 assets. This is the right of use Of all the lease contracts that was necessary to implement 2 years ago, and every 2 years, You're obliged to review the contractual situation that you have, and then this is review The ROU, the right of use assets are going up and also the liability is going up. And this directly goes into the net debt. And here we expect around €10,000,000 to €15,000,000 just out of this reevaluation of the IFRS 16. And Hopefully or that, of course, the goal is that we can compensate this by positive operating free cash flow so that the net debt, the real net position is still going down. Very clear. And then can I just ask you on the order book At the end of the Q3 and then how did it develop then into February? I mean, is I think you mentioned something about some positive trends in the UK, for instance. And also you said Austria and Switzerland Almost at pre crisis levels, which I don't we just struggle to reconcile. Is that Current order book? Or is it kind of the expectations where we're moving to? Yes. What we are seeing in the order book, so basically, let me explain first with the last one on Switzerland and Austria. In Austria, at the beginning of the fiscal year, so at the beginning of the crisis compared to the year before, we had developed a couple of larger projects, but fortunately for us, have not been canceled or postponed. And that means that we are having we had at the beginning of this fiscal year a higher order book compared to the beginning of the fiscal year 2018, 2019. In addition, we have in Austria a couple of key customers what are in the retail system relevant, if I may ask Rhebe, Spa in those and Aldi and Lidl, who basically were investing more than the normal. So that was the situation in Austria in Switzerland. The situation was that Switzerland was until, I would say, the last lockdown, more or less open all time. That was with the exception of 1 Cantonese, the scene is close to Italy, Almost no restriction in the way of operating. So the electricians, the projects were online. Which you are just seeing now a little bit of a shift of the project, especially in starting in Q3 3 and Q4 here. When you ask about the order book, we do see that our order book since, let me say, September time frame is increasing and is currently and we are proud of that one above the previous year. So entering and that's already until, let me say, now, yes, Calendar week 10 was the first effect that we saw, so 2 weeks from now. It's all pre corona. And here, we are quite confident that this is the case. What I said about U. K, in the U. K, it's very transparent because since December timeframe. And we are seeing a constant development of the order book what made us believe that it is now first time something what is a little bit more sustainable. As you know, with the different waves that I'm not counting this anymore in the different countries, the moment government released, Let me say the lockdowns we were seeing after 2 or 3 weeks a recovery, especially on our daily flow goods business. And now it looks like in UK, this is the first time a little bit more sustainable, what make us believe that this will hold on not only for quarter 4, but also for the upcoming quarter. All right. Very clear. Thank you very much. But as I said, above previous year. The next question is from Charlotte Friedrichs of Berenberg. Please go ahead. Hello, good morning and thank you for taking my questions. There's three questions. Firstly, following up on the raw material price topic. Can you give us an idea perhaps What percentage of your bill of materials is affected by the price increases? And roughly what magnitude of price increases you are seeing? All right. So obviously, what we see in our bond, we have direct Materials like copper, steel and aluminum or the indirect water castings, profiles, batteries and metal parts, We are seeing here, if you look into that, a price increase in the range of 5%. When it comes more on the component level, like drivers, modules, LED, we are still believing that we can stay flat or partly can also have a slight reduction. On the more Trading goods part, so finished goods, what we are importing, we are seeing mainly an increase of the price in the range of 3%, 3.5% due to the higher transportation costs what we have. So the numbers of What we have seen on steel, what we see in since quarter for calendar quarter 2020. And the outlook is in the range that steel is increasing something in the range of going from January 20, €550 per ton up to €750 per ton in January 2021. So after 12 months, that's an increase of 35%, all wheel steel. Okay, understood. And then you mentioned a couple of new projects that you had in the current quarter, in particular, More projects with Amazon. Can you give us an idea of the size of these projects and how much you're doing with Amazon right now? If I recall The previous one was around €5,000,000 in revenue? Yes, We are with Amazon, to name 1, in the different countries in Europe, in the different projects, And the range of the project is always between 500,000,000 and 800,000. There are more projects in the pipeline. But obviously, Amazon is developing into a range into a double digit million revenue driver across Europe. Okay. Understood. And then maybe my final question would be a little bit more broad. What is your general outlook for non residential construction For the coming years, what kind of feedback are you getting from your customers at the moment? Well, as we are part of this Europe construct, so the latest numbers is back from November. And it's, of course, different from the different countries, but it's in the range between 3% 5% growth on nonresidential construction across the European territory. It's different in different countries. Obviously, if I recap correctly, UK had a drop in 2020 of something like 18% or something like this. And it's now recovering a little bit higher than 5%, but not double digit. So if we sum this up, we believe That all in all, the growth path can be, it has to be for us in the range of 5%. But obviously, then you can do your math. We have been shrinking by 12%. So we will not reach the pre corona level within the fiscal year 'twenty 1, 2022, if this data is correct. Okay, understood. Thank you very much. You're welcome. The next question is from the line of Mir Rosyvak of JMS Investoge. Please go ahead. Good morning, gentlemen. Thank you for taking my question. I have just one regarding The provisions that you have on the balance sheet for severance compensation payments, the EUR 51,000,000, When do you expect those provisions to be utilized? So when we will when are we going to see the cash out of the €51,000,000 in which year? Thank you. This will be over the years because this basically, this related to the special A leading framework that we have, especially in Austria, for people that joined the company for I think it was 2,001. And at the moment, they are retiring, then they get, So to say, this certain payment, depending on the tenure that they have at the company. So this will be over time and will take place. Anyways, you can make the calculations So the last people that maybe if they joined the company, they were happy 20 years ago. So they are 40 today. And if they are still with company until their retirement, when they are 60. So this would be in 20 years, so over the next 20 years, very roughly. Okay. Thank you. So this is very similar to the rest of your pension provision? Yes. Okay. Thank you. And there are no more questions at this time. I hand back to Alfred Belter for closing comments. Yes. Thank you very much for attending our Q3 investor call. Thank you also for the interesting questions. If there are no further questions, I would like to close the session now. And thank you very much for attending. Have a good morning and a good day. Thank you.