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Annual Report 2008

Net profit 2008 TKH € 50.3 million
  • Turnover up by 19.0% to € 997.0 million, organic growth accounting for 6.1%.
  • EBITA improves by 21.7% to € 80.2 million.
  • Net profit before amortisation and one-off tax gain rises by 22.4% to € 51.1 million.
  • Net profit of € 50.3 million in line with expectations (€ 48 - € 50 million)
  • Innovations once again the engine for TKH’s growth, representing 21% of turnover.
  • Market conditions changed substantially since November 2008.
  • Excluding one-offs, EBITA in Q4 2008 matches Q4 2007.
  • Dividend proposal: € 0.66 per (depositary receipt of) ordinary share.

 

 

 

Key annual figures

(in millions of € unless otherwise stated)

2008

       2007

Change (%)

Turnover

         997.0

      837.8

    +   19.0

Operating result (EBITA)

           80.2

        65.9

    +   21.7

Net profit

Net profit before amortisation and tax gain

           50.3

      51.1

        44.8

        41.8

    +   12.4

    +   22.4

Net earnings per ordinary share (in €)

           1.43

        1.30

    +      9.3

Solvency

        40.7%

     40.2%

               

ROS

 

          8.0%

                 

       7.9%

              

 

 

ROCE

 

        17.2%

                 

     15.5%

              

    


 

Alexander van der Lof, TKH’s CEO: “TKH’s activities also felt the impact of the further deterioration of market conditions in the fourth quarter. The downturn in the market will persist for some time and TKH will adapt its organisation where necessary. TKH’s strategy of positioning its activities in various product-market combinations gives TKH a good springboard and limits the risks we face. This strategy gives TKH opportunities for growth in a number of segments, which we will able to grasp thanks to our strong financial position. Consequently, we will be able to further strengthen our robust market positions in the coming years.”

 

 

Financial developments

 

Turnover increased by € 159.2 million (+ 19.0%) to € 997.0 million in 2008 (2007: €  837.8 million). Organic growth accounted for 6.1%. Corrected for the effects of the decrease in copper prices, commencing in the fourth quarter, organic turnover growth came to 8.2%. The remainder of the growth was accounted for by the companies that were acquired since the middle of 2007: CAE, NET, Pantaflex, SecurityWorks, Keyprocessor, AVO Techniek and VDG Security. These acquisitions contributed 12.9% to the growth in turnover. Turnover increased in all three business segments (Telecom, Building and Industrial Solutions), with Building Solutions recording the strongest growth at 22.1%. The breakdown of the turnover among the different solution segments was as follows: Telecom Solutions 18.1%, Building Solutions 33.6% and Industrial Solutions 48.3%.

 

The gross margin as a percentage of turnover slightly improved from 36.9% in 2007 to 37.1% in 2008, despite the negative impact of the decreasing copper prices during the fourth quarter. Through tight cost control and improved efficiency, the operating expenses, excluding amortisation, rose more slowly than turnover at 18.7%.

 

Depreciation costs were € 16.8 million (excluding partial reversal of the impairment on telecom assets), which was higher than in 2007 (2007: € 12.4 million) as a result of the higher level of investment in the last two years.

 

The operating result before amortisation (EBITA) rose by 21.7%, from € 65.9 million in 2007 to € 80.2 million in 2008. The exceptional decrease in the price of copper had a negative effect of € 12 million on the operating result in the fourth quarter. On the other side there was a one-off gain of € 4.0 million from the partial reversal of the impairment charge for telecom assets. Corrected for these effects, EBITA increased by 33.8%, of which 15.7% was the result of organic growth. All three business segments made a significant contribution to the increase in profits.

 

The amortisation charge increased to € 7.0 million in 2008 (2007: € 3.0 million), largely as a result of the acquisitions since the middle of 2007.

 

The financial income and expenses rose from € 6.2 million in 2007 to € 7.8 million in 2008. This increase was mainly due to the higher financing costs of € 3.3 million from the average rise in bank debts in 2008 resulting from investments and acquisitions. This was partially offset by a positive exchange rate effect of € 1.6 million. The tax burden rose to 22.9% (2007: 21.7%). The tax burden was reduced by € 2.5 million in 2008 (2007: € 4.1 million) due to the settlement of income tax returns dating from earlier years. Adjusted for this, the tax burden was 26.8% in 2008 (2007: 28.9%).

 

The net profit before amortisation and the extraordinary tax gain in 2008 was € 51.1 million, an increase of 22.4% compared with the year before (2007: € 41.8 million). Net profit increased to € 50.3 million in 2008, an increase of 12.4% compared with 2007 (2007: € 44.8 million). Earnings per share came to € 1.43 (2007: € 1.30).

 

Cash flow from operating activities rose sharply to € 53.4 million (2007: € 37.7 million).

 

The company’s net bank debts increased by € 21.8 million compared with the position at the end of 2007, largely as a result of investments and acquisitions. Because spending by clients substantially decreased in the fourth quarter as they scaled down their inventories, working capital declined less strongly than in the preceding quarters. Working capital as a percentage of turnover declined to 19.1% (2007: 20.9%) for the whole of 2008. The solvency ratio improved slightly to 40.7% (2007: 40.2%). TKH is operating well within the financial ratios agreed with the banks.

 

The number of staff (FTEs) at the end of 2008 was 3,882 (2007: 3,577). Of the increase, acquisitions accounted for 143 FTEs.

 

 

Progress in the achievement of goals and the implementation of strategy

 

Once again, significant progress was made in the development of the TKH group. This is reflected in the financial ratios. With an ROS of 8.0% in 2008, the ROS target set for 2009 was already reached during 2008. Corrected for one-offs, the ROS stood at 8.7%, at the upper side of the bandwidth of 8 to 9%. The ROCE also improved significantly to 17.2% in 2008 (2007: 15.5%). If the figure is corrected for one-off effects, the 2009 target for this ratio was also already reached during 2008.

 

The shift to activities with greater added value and therefore potentially higher margins, together with the growing share of activities showing above-average performance, gives TKH the confidence to raise its long-term target for ROS to a bandwidth of 9 to 10%. Given the current uncertain economic conditions, it will not yet specify a deadline for achieving this long-term objective. The company’s long-term goal for the ROCE lies within a bandwidth of 18 to 20%.

 

Innovations accounted for 21.0% of turnover in 2008 (2007: 25.5%). This substantial share once again proves the success of the TKH group. Innovations are an important engine of organic growth in the TKH group.

 

The acquisitions contributed strongly to the growth of turnover and profits in the TKH group in 2008. CAE, which was acquired in 2007, is meeting expectations and with its access to the complete TKH portfolio and ability to develop markets, its future prospects are good. TKH will focus more on securing organic growth in the coming years. Besides introducing its portfolio of technologies in existing branches, new branches will be opened to position the portfolio in new markets.

 

 


Solutions segmentation

 

Since 1 January 2008 TKH has been reporting according to a new structure based on three segments: Telecom, Building and Industrial Solutions. The company has been working towards this new structure since 2003. Solutions are now at the heart of the TKH's strategy and it has evolved into a supplier of systems built on ICT and electrical engineering technologies. TKH adds value to its solutions in the form of engineering, assembly and system integration, while outsourcing more than 70% of the capital-intensive production of components. Consequently, TKH has transformed itself into a highly innovative technology company in the last few years.

The completion of the new reporting structure and implementation of the solutions-based organisation gave an additional boost to the positioning of the various product-/market combinations in 2008. The profitability of each solutions-based segment was further improved by exploiting the synergy between the activities more effectively.

 

 

Developments per business segment

 

TELECOM SOLUTIONS

 

The turnover in the Telecom Solutions segment rose by 16.1% from € 155.6 million in 2007 to € 180.6 million in 2008. The acquisition of CAE in France accounted for € 14.3 million of this total. Organic turnover growth came to 6.9%. The market for optical fibre systems and indoor telecom systems developed positively in the second half of the year. Because priorities shifted from investment in copper networks to optical fibre networks, the turnover in the copper networks segment declined. The growth in the optical fibre systems segment more than compensated for that decline.

 

The EBITA rose by 44.9% to € 27.0 million in 2008 from € 18.6 million in 2007. The growth of EBITA benefited from efficiency improvements and a greater share of high-value systems. Partial reversal of an earlier impairment taken on part of the telecom assets yielded an exceptional gain of € 4.0 million. EBITA before exceptional income rose by 23.4% to € 23.0 million in 2008. Margins were under pressure in the fourth quarter due to the strong appreciation of Asian currencies, since a large proportion of the production costs are incurred in Asia.

 

The margin (ROS) rose from 12.0% in 2007 to 15.0% in 2008, including the exceptional gain of € 4 million. The ROS excluding the exceptional gain amounted to 12.7%.

 

 

Indoor telecom systems

The need for further upgrading of networks had a positive effect on replacement demand for peripherals and infrastructure, which was reflected in an increase in the turnover, particularly in France and Germany. There was growing interest in the IPTV solutions, which led to a number of interesting orders. Furthermore, a new solution for small-scale applications in the hospitality market and the health care sector was developed. The activities relating to DECT telephones were largely phased out.

 


Fibre network systems

The global market for optical fibre networks grew by around 11% in 2008. This was a slightly slower rate of expansion than in previous years. The European market, TKH’s most important market in this segment, grew by 20%, which was faster than the world market as a whole. Consequently, turnover did increase. The TKH group secured new positions in Scandinavia and Central and Eastern Europe. The company also started positioning its solutions in France with the acquisition of CAE.

 

The capacity utilisation rate in optical fibre networks and optical fibre cable production improved further.

 

Copper network systems

Investments in copper networks in Europe declined further and are increasingly focused on repair and maintenance of existing networks. A number of telecom operators are investigating the possibilities of upgrading their existing network as an alternative to optical fibre systems. TKH is producing innovative solutions in response to this trend. The organic turnover declined in line with the market by around 5%, although turnover increased in Poland and France.

 

 

BUILDING SOLUTIONS

 

The turnover in the Building Solutions segment increased by 22.1% from € 274.7 million in 2007 to € 335.3 million in 2008. The organic growth of turnover after correction for copper prices was 4.8%. The acquisitions CAE, NET, SecurityWorks, Keyprocessor and VDG together generated growth of 20.5%.

 

The market conditions deteriorated significantly in the second half of the year. As a result, the organic growth in this segment fell from over 10% in the first half of the year to zero in the second half. The biggest change in market conditions occurred in the fourth quarter as many clients heavily reduced their inventories. Turnover in the connectivity segment declined by around 5% in the last six months of the year. By contrast, the security and building technologies segments clearly grew in the second half of the year.

 

EBITA increased by 22.9%, from € 22.1 million in 2007 to € 27.1 million in 2008. EBITA suffered by € 4 million in the fourth quarter from the effects of the sharply lower copper prices. The building technology and security portfolios made an above-average contribution to profit growth.

 

The margin (ROS) rose from 8.0% in 2007 to 8.1% in 2008. Corrected for the effect of copper prices, the ROS improved to 9.0%.

 

 

Building technologies

Turnover in the building technologies segment developed positively. The many innovations in this segment enabled the TKH group to gain market share in a weakening market. Consequently, turnover continued to grow despite the worsening market conditions.

 

Costs were incurred during 2008 to accelerate the market development of health care innovations. There was healthy growth of turnover from structured cabling systems. Flexibility in installation and lower installation costs are leading to more complete systems and solutions. The growing demand for domotics solutions, for example to reduce energy consumption, had a positive effect on growth.

 

Security systems

This segment’s share of turnover increased from 5% to just over 7% in 2008, despite the substantial increase in TKH’s overall turnover. The TKH group is well on the way to achieving its goal of increasing the security segment’s share of the group’s total turnover to at least 20% by 2012. The market for security solutions is expanding in response to a combination of the growing public demand for safety and the need to increase efficiency in the security sector. Among the factors behind the growth of the TKH group’s market share are its stand-out technology in the field of video analysis and the range of integrated state of the art security solutions it supplies. The acquisitions also contributed to the growth. The acquisitions of Keyprocessor and VDG Security perfectly complement the existing technological building blocks in the TKH group. This was one reason why the internal organisation was expanded sooner than planned to secure further international growth and secure new positions. A ‘TKH Security Germany’ organisation is established in Germany and in other countries the group will also be opening new offices to promote further penetration of the security market.

 

Connectivity systems

The margin in this segment improved greatly due to a further shift towards systems and cables with a higher added value. The decreased copper price and the reduction of inventories by clients however had a clear real impact on the growth during the fourth quarter. Although the TKH group still has well-filled order books in its most important market segments, growth weakened significantly in the second half of the year.

 

Demand rose in the power cable market in the Netherlands, TKH’s most important market for these systems, but there was also significantly more capacity on the supply side.

 

 

INDUSTRIAL SOLUTIONS

 

The turnover of the Industrial Solutions segment increased by 18.1%, from € 407.6 million in 2007 to € 481.2 million in 2008. The organic growth of turnover for the whole of 2008, after correction for the copper price, was 11.0%. Organic growth remained strong in the second half of 2008 at 10.2%. The manufacturing systems segment made a particularly strong contribution to this organic growth. The growth in the connectivity systems segment levelled off in the fourth quarter as clients in the machine and robot sectors reduced inventories and the level of investment fell. The growth accounted for by the acquisitions of CAE, Pantaflex and AVO Techniek came to 9.3%.

 

EBITA rose by 4.5% from € 33.1 million in 2007 to € 34.6 million in 2008. Corrected for the effects of the sharply lower copper prices, EBITA grew by 28.6% in the whole of 2008 and by 9.3% in the second half of the year. Manufacturing systems made a significant contribution to the improved results as the cost level and the margin normalised in 2008. The cost level was very high in 2007 due to the expense of prototyping innovations, but returned to a normal level in 2008.

 

The margin (ROS) fell from 8.1% in 2007 to 7.2% in 2008. Corrected for the effect of copper prices, the margin rose to 8.7%.


Connectivity systems

The industrial market developed positively for TKH in the first nine months of the year, but the situation changed radically in the fourth quarter. Nevertheless, TKH gained market share as organic turnover grew faster than the market. In the fourth quarter, many clients reduced inventories and investments. Particularly the suppliers of robots to the automotive industry were affected. The machine-building sector also placed far fewer orders in the closing months of the year than in the preceding period. By contrast, the high level of investment in the medical sector was sustained and the developments for TKH were positive.

 

Operations at the newly established plant in Forst in Germany expanded further during the second half of 2008. The newly installed production lines mean that productivity can be increased while at the same time quality standards and the degree of innovation are improved.

 

 

Manufacturing systems

The order intake was at a record level in the first nine months of the year. Tyre manufacturing systems, which account for 70% of the turnover in the manufacturing systems segment, performed particularly well in this regard, with orders in excess of € 150 million being secured in the first nine months. That represented an increase of over 40% compared with the same period in 2007. The priority for our customers was on efficiency investments in order to ease the pressure on margins that had arisen from the change in the market conditions in the last twelve months. The situation clearly changed from November, when many customers shifted their emphasis to cash management and substantially reduced their investments. As a result, deliveries were deferred. At the same time, projects were shelved, resulting in a low level of the order intake in the fourth quarter. At the end of the year, the number of temporary employees was reduced by more than 75% in the tyre building systems.

 

The margin improved over the full year 2008. The large number of innovations in 2007 was followed by the introduction of several new systems again in 2008.

The production capacity in the United States was phased out completely during 2008. Good progress was made with the expansion of capacity in China, which is entirely on schedule.

 

 

Dividend proposal

 

A proposal will be presented to the General Meeting of Shareholders to be held on 28 April 2008 to distribute a dividend of € 0.66 per (depositary receipt of) share (2007: € 0.66). This represents a pay-out ratio of 46.2%. In line with the policy of recent years, it is proposed offering the shareholders the choice of receiving the dividend in cash or as a stock dividend charged to reserves. The pricing of stock dividends will be determined on the day after the expiry of the option period on the basis of the average share price during the last five trading days of that period, which will end on 19 May 2009. The dividend will become payable, in cash or in stock, on 25 May 2009.

 


Appointment members of Supervisory Board

 

During the Annual General Meeting of Shareholders 2009, Messrs H.J. Hazewinkel, A. van der Velden and A.J. Driessen are due to retire from the Supervisory Board based on the re-appointment schedule. Messrs Hazewinkel and Van der Velden are eligible for reappointment and will be nominated for reappointment during the General Meeting of Shareholders 2009.  Mr Driessen is not eligible for reappointment in light of the expiry of the mandate based on the re-appointment schedule of 3 times 4 years. Mr Ph. Houben, CEO of Wavin N.V., will be nominated as a new member of TKH’s Supervisory Board.

 

For the complete press release, including the financials, we refer to the attached PDF document.