Alexander van der Lof, CEO of technology company TKH:
“We were able to close the year 2015 with a positive result, despite the negative impact of the low order intake from China since Q4 2014 in the sub segment manufacturing systems. The substantial increase in the result of Building Solutions created more balance in TKH’s overall result. Herewith we have succeeded in giving substance to our goal to reduce the cyclicity of the total result. The benefits of the investments we have made in recent years to structurally improve the result of Building Solutions, have clearly borne fruit. This success is largely the result of good acquisitions, focus on the vertical growth markets and R&D investments. The solid progress we have made in the strategic development of TKH enabled us to realize our ROS target within a year and we have therefore decided to once again raise the medium-term bandwidth for our ROS target to 11-12%. It is extremely important that we keep the right balance in the realization of the margin on the one hand and the necessary investments in R&D to safeguard TKH’s continuity and the development of value creation in the long term, on the other hand.”
In 2015, turnover increased € 29.5 million (2.2%) to € 1,375.2 million (2014: € 1,345.7 million). Acquisitions contributed 3.1% to turnover. Lower raw materials prices had a negative impact of 0.2% on turnover (2014: 0.7%), while stronger foreign currencies compared with the euro had a positive impact of 1.9% on turnover. On balance, organic turnover declined by 2.6%. This was partly due to the deliberate cut-back of less profitable turnover, in line with TKH’s strategic focus.
Building Solutions booked strong turnover growth of 16.9%. Turnover at Telecom Solutions declined slightly, by 0.8%, while Industrial Solutions recorded a decline of 7.8%. For the full year 2015, Industrial Solutions’ contribution to turnover dropped to 46% from 51%, while the contribution from Building Solutions increased to 42%, from 37%. The contribution from Telecom Solutions remained stable at 12%. Innovations once again made a sizeable contribution to turnover, accounting for 23.5% of turnover in 2015 (2014: 22.8%).
The gross margin was up at 46.0% in 2015, from 42.8% in 2014, thanks to the acquisition of the Commend-group and an improved product mix. The operating costs (excluding one-off pension income in 2014) as a percentage of turnover rose to 34.9%, from 32.7% in 2014. That increase was largely due to higher in-house production and therefore reduced outsourcing to third parties, plus an increase in R&D costs. Spending on R&D rose to € 46.5 million in 2015 (2014: € 41.9 million). Depreciations came in at € 21.4 million, this was € 1.6 million higher than in 2014, due to the higher level of investments in recent years.
The operating result before amortization of intangible assets and one-off income and expenses (EBITA) increased 12.1% at € 151.5 million in 2015, from € 135.2 million in 2014. At Building Solutions, EBITA was up 49.9% due to the acquisition of the Commend-group, a rise in turnover in vision & security systems and connectivity systems, together with a related improvement in efficiency and utilization rates at TKH’s production plants. EBITA at Telecom Solutions was up 8.8%, while EBITA at Industrial Solutions declined by 7.4% compared to 2014. ROS rose to 11.0% in 2015 (2014: 10.0%) and was therefore at the higher end of the medium-term ROS target TKH had communicated (bandwidth of 10-11%) previously.
Amortization costs increased by € 5.4 million to € 31.6 million due to the acquisition of the Commend-group and higher investments, especially in R&D. In addition, we recognized an impairment of € 1.8 million from depreciations on capitalized R&D projects and a release of financial obligations for earn-out and put-options of € 0.3 million, which on balance resulted in a one-off charge of € 1.5 million.
In 2015, financial expenses declined € 1.2 million to € 8.2 million. This improvement was due to lower interest rates and reduced credit spreads, as well as interest swaps that matured in 2014. Currency exchange effects had a positive impact of € 0.4 million, compared to a negative impact of € 0.9 million in 2014. The result from participations improved by € 0.5 million.
The tax rate remained stable at 20.6% of the pre-tax profit. The application of the Dutch innovation box facility similar to last years had a positive impact on the tax rate.
Net profit before amortization and one-off income and expenses attributable to shareholders was up 15.7% at € 99.9 million in 2015 (2014: € 86.4 million). Net profit for 2015 increased to € 88.3 million (2014: € 85.5 million). In 2014, TKH’s results included one-off net pension income of € 9.4 million. Earnings per share before amortization and one-off income and expenses came in at € 2.40 (2014: € 2.23). Ordinary earnings per share were € 2.07 (2014: € 2.14).
The cash flow from operating activities rose to € 181.6 million in 2015 (2014: € 94.9 million) thanks to a substantial reduction in working capital whereas 2014 showed an increase. At year-end 2015, working capital as a percentage of turnover decreased 11.4% (2014: 13.8%). Net investments in tangible fixed assets in 2015 stood at € 37.2 million (2014: € 33.7 million). A considerable part of this was related to investments in the production plants, including the expansion of capacity for the sub-segments building connectivity systems, manufacturing systems, vision & security systems and fibre network systems. In addition, TKH invested € 25.4 million in intangible fixed assets, primarily R&D, patents, licenses and software (2014: € 22.5 million). Expenditure related to acquisitions was € 49.7 million and was primarily related to the acquisition of the Commend-group. In addition to this acquisition, TKH acquired a 49% participation in Commend Australia and the outstanding minority third-party shareholding in Commend Benelux and Schneider Intercom. In addition, in 2015 TKH acquired the remaining minority interest in Augusta Technologie AG in a squeeze-out procedure. The acquisition of the minority third-party shareholding resulted in expenses of € 25.2 million in 2015.
Net bank debt, calculated in accordance with the bank covenants, declined by € 3.8 million year-on-year to € 161.0 million at year-end 2015. The solvency ratio increased slightly to 42.2% (2014: 41.9%). Herewith TKH operates well within the financial ratios agreed with the banks. The net debt/EBITDA ratio stood at 0.9 and the interest coverage ratio at 22.5.
At year-end 2015, TKH had a total workforce (FTEs) of 5,387 and employed a further 441 (FTE) temporary employees. The increase in employee numbers was largely due to the acquisition of the Commend-group and the further bolstering of the organization in the field of R&D and commerce in Building Solutions.
Progress realization targets and execution strategy
TKH once again devoted considerable attention to its strategic development in the year under review. The focus on our core technologies and the seven vertical growth markets helps us to pursue ambitious growth targets. The turnover targets in our vertical growth markets have resulted in a well-organized implementation of a several growth plans, which has resulted in an acceleration in the realization of our ROS and ROCE targets. On that basis and on the basis of the potential we see in our seven growth markets, we have again decided to adjust our targets upwards. For the medium term, we have adjusted the ROS target to a bandwidth of 11-12% (from 10-11%) and the ROCE target to a bandwidth of 20-22% (from 18-20%).
The perspective for the growth scenarios per vertical growth market on the medium-term continued to improve. The overall growth in the vertical growth markets in 2015, excluding the tire building industry, was € 60 million. In the tire building industry our turnover was negatively influenced due to a reluctance to investments in China, where we realized more than 60% of order intake in 2014, compared to less than 10% in the year under review. However, the targeted turnover growth in the tire building industry for the coming years is on track thanks to amongst others the positive development of our position with the five major tire manufacturers.
The share of the vertical growth markets in TKH’s total turnover has meanwhile increased to € 697 million (50.7%). In light of the fact that the average margin in these vertical growth markets is higher than the TKH average, this will be an important driver for the development of ROS within TKH. Based on the technology roadmaps and the proposed roll-out of the related new business, we expect organic turnover growth in this area to be somewhat limited in the vertical growth markets in the next two years, however, growth will materialize from 2018. Based on the defined growth plans and progress we have made, we expect turnover in our seven vertical growth markets to increase by € 300 million to € 500 million in the next 3‑5 years.
Innovations accounted for 23.5% of TKH’s turnover in 2015, which is again at a very high level and once again exceeded our target of 15% of turnover from innovations introduced in the market over the past two years. These innovations helped TKH to increase its market share in 2015.
Developments per solutions segment
Telecom Solutions develops, produces and supplies systems ranging from basic outdoor infrastructure for telecom and CATV networks through to indoor home networking applications. The focus of the business is on the delivery of completely worry-free systems for its clients, thanks to the system guarantees it provides. Around 40% of the portfolio consists of hub-to-hub optical fibre and copper cable systems. The remaining 60%, consisting of components and systems in the field of connectivity and peripherals, is deployed primarily in network hubs.