Alexander van der Lof, CEO of technology company TKH: “The past year was a turbulent one, due to geopolitical and social developments, which resulted in a reluctance to invest in a number of market segments. We booked good progress in our strategic transformation program 'Simplify & Accelerate'. We are now better positioned to take advantage of economies of scale and synergies. We are also well on track to achieve our return targets and to take our value creation to a higher level. TKH realized a ROS of 12.9% in the second half of the year, despite the headwinds we faced in a number of end markets, which means it is moving firmly in the direction of our ROS target of at least 15%, a target we raised mid-2019. Macroeconomic uncertainties have increased in recent months. So far, the impact of the coronavirus seems limited for TKH. This also applies to the nitrogen and PFAS crisis in the Netherlands and possible international trade barriers. It remains difficult to predict possible future consequences. The order book of the entire TKH Group provides a strong basis for further value creation, as a result of which TKH is well positioned for the medium term.”
Progress in realization of objectives and execution of strategy
In the year under review, we took an important step with the introduction of our 'Simplify & Accelerate' program. TKH sees the execution of the program as a high priority and it has broad support across the organization. The divestment of activities with limited organic growth potential is on track. We have already realized € 250 million of the intended € 300 to € 350 million turnover in divestments. In addition, TKH has reduced the number of operating companies through integration with a focus on economies of scale. This has resulted in a simplified organizational structure with fewer companies and a focus on activities with higher value creation potential.
The execution of the program resulted in one-off expenses of € 18.3 million in 2019 and an impairment of € 5.0 million. These expenses are related in particular to:
- The proposed decision to relocate the cable production in Ittervoort to Haaksbergen and the discontinuation of the poorly performing activities in the industrial connectivity portfolio.
- Integration of security activities and portfolio under the brand name TKH Security, the merger of the activities in Singapore, and the integration of our Parking activities and portfolio.
- Phasing out of the Dutch system integration activities.
- Integration of 2D vision activities and portfolio and increased commercial cooperation between 2D and 3D Vision.
- Implementation of cost-saving measures in the French and German Building connectivity activities.
- Integration of the TKH Airport Solutions organizations in the Netherlands, Germany and Denmark.
- Integration of Ognios (mission critical communication) in the Commend organization.
- Costs of the divestment of the Chinese operating company ZTC, manufacturer of copper data communications cables.
- Costs for the acquisition of Commend AG, ParkEyes, SVS-Vistek and FocalSpec.
The integration projects and improved returns will have an estimated positive impact of € 7 to € 8 million annually on the results from 2021 onwards. We expect to realize around € 5 million of this in 2020.
We also made good progress with our innovations in terms of both technology and market penetration. These now account for 20.5% of turnover. Key new developments include innovations in machine vision for 5G smartphone manufacturing systems, UNIXX tire building technology, subsea cable systems and CEDD/AGL connectivity technology. The new product launches and the contracts we acquired provide a strong basis for growth and continued value creation.
Financial developments second half of 2019
Turnover increased by € 6.6 million (0.9%) to € 736.4 million in the second half of 2019 (H2 2018: € 729.8 million). Acquisitions contributed 4.5%. Lower raw materials prices had a marginal impact of 0.1% on turnover, while exchange rates had a positive impact of 0.4%. On balance, we recorded an organic turnover decline of 3.9% compared with the second half of 2018. Industrial Solutions realized the largest organic decline (7,0%) as a result of disappointing market conditions. Building Solutions recorded an organic decline of 3.4% in turnover, while Telecom Solutions saw turnover increase by 2.8%.
The gross margin increased to 49.0% (H2 2018: 47.4%). However, operating expenses increased by 3.8% compared with the second half of 2018 as a result of acquisitions.
The operating result before amortization of intangible assets and one-off income and expenses (EBITA) increased by 5.5% to € 94.9 million in the second half of 2019 (H2 2018: € 89.9 million). Telecom and Building Solutions recorded particularly strong growth in EBITA compared to the second half of 2018, while EBITA at Industrial Solutions declined. The ROS for the TKH group was 12.9% in the second half of 2019 (H2 2018: 12.3%).
In the second half of 2019, financial expenses were € 3.1 million higher than the previous year. Interest expenses increased due to the application of IFRS 16 and a higher average outstanding bank debt. In addition, adverse currency effects had a negative impact of € 0.4 million (H2 2018: € 0.7 million gain).
The effective tax rate in the second half of 2019 was 23.2% and virtually unchanged from the first half of 2019, but higher than in the second half of 2018 (20.5%).
Net profit from continued activities before amortization and one-off income and expenses attributable to shareholders increased by 0.3% to € 59.4 million (H2 2018: € 59.2 million).
Financial developments full year 2019
Turnover increased by € 31.9 million (2.2%) to € 1.489,6 million in 2019 (2018: € 1,457.8 million). TKH recorded an organic decline in turnover of 1.9%. Acquisitions made a 3.9% contribution to turnover. Lower raw materials prices had a negative impact of 0.2% on turnover, while currency exchange rates had a positive impact of 0.4%.
At Telecom Solutions, organic turnover growth was 3.1% in 2019, while Building and Industrial Solutions saw declines of 2.7% and 2.8% respectively.
The gross margin rose to 48.2% in 2019, from 47.3% in 2018. This increase was partly due to a changed product mix, the normalization of start-up costs for new technologies and lower purchasing prices.
Operating expenses before one-off expenses increased by 6.0% compared with 2018, mainly due to acquisitions (+5.2%) and currency exchange effects (+0.6%). R&D expenses, 55.5% of which were capitalized as development expenses (2018: 49.6%), increased to € 63.2 million in 2019 (2018: € 60.8 million), due to the acquisition of technology companies. Operating expenses as a percentage of turnover increased to 36.6% in 2019, from 35.3% in 2018. This increase was mainly due to the expansion of production capacity in 2018 and lower production levels in 2019 for subsea and industrial cable systems. In the course of the year, we maintained capacity at a higher level than required in the short term, in view of the medium-term growth perspective. Depreciations amounted to € 45.3 million in 2019, up € 19.2 million when compared with 2018. This was due to the depreciation expense resulting from the capitalization of right-of-use assets as a result of the implementation of IFRS 16 Leases as of 1 January 2019 (+ € 16.1 million), as well as a higher investment levels than in previous years.
The operating result before amortization of intangible assets and one-off income and expenses (EBITA) amounted to € 172.5 million in 2019, down 1.5% from the € 175.0 million recorded the previous year. EBITA at Telecom and Building Solutions was up 9.5% and 8.5% respectively, while EBITA at Industrial Solutions declined by 11.8%. ROS dropped to 11.6% (2018: 12.0%).
The ‘Simplify & Accelerate’ program and the acquisition costs together resulted in one-off expenses of € 18.3 million (2018: € 4.2 million) for the full year 2019 and an impairment of € 5.0 million (2018: € 1.5 million).
Amortization costs were € 10.0 million higher at € 50.1 million, primarily due to acquisitions (+ € 6.8 million) and high R&D investments in recent years.
Financial expenses increased by € 3.8 million to € 10.1 million in 2019, due to the application of IFRS 16 and a higher average outstanding bank debt. Currency effects also had a negative impact of € 0.9 million (2018: negative impact of € 0.2 million). The result from other associates was € 1.5 million lower due to lower volumes and prices of preforms at associate and preform producer Shin-Etsu in China, while one-off expenses are still having a downward impact on the contribution from the new minority interest in Cable Connectivity Group.
The effective tax rate was 23.1% in 2019 (2018: 21.8%). Fiscal R&D facilities, such as the Dutch innovation box facility, had a downward impact on the overall tax rate. Non-deductible impairments increased the effective tax rate by 0.5% in 2019.
Net profit from continued activities before amortization and one-off income and expenses attributable to shareholders declined by 7.8% to € 105.3 million in 2019 (2018: € 114.2 million). The divestment of the majority of TKH’s industrial connectivity activities, recognized as ‘discontinued activities’, resulted in a gain of € 45.2 million (2018: € 10.8 million), including a net book profit of € 38.9 million.
Net profit for the full year 2019 amounted to € 113.9 million (2018: € 108.7 million). Earnings per share before amortization and one-off income and expenses amounted to € 2.51 (2018: € 2.72). The ordinary earnings per share amounted to € 2.72 (2018: € 2.58).
The cash flow from ordinary operations was € 182.2 million in 2019 (2018: € 126.7 million). In 2018, a significant increase in working capital had a negative impact on cash flow, while 2019 saw only a minor change in working capital. At year-end 2019, working capital as a percentage of turnover had declined to 13.0% (2018: 13.9%), and remained within the bandwidth set of 12-15%. Net investments in tangible fixed assets were lower than in previous years at € 30.6 million in 2019 (2018: € 40.0 million). A major part of this was related to investments in production facilities. Investments in intangible fixed assets for R&D, patents, licenses and software increased to € 40.4 million, largely due to the acquisition of the technology companies (2018: € 35.2 million). Total spending on acquisitions was € 65.5 million in 2019 (2018: € 116.2 million). The divestment of the majority of TKH’s industrial connectivity activities generated proceeds of € 83.5 million. On the other hand, TKH acquired a 41.5% minority interest in Cable Connectivity Group for € 16.4 million.
Solvency improved slightly to 43.7% in 2019 (2018: 42.4%). TKH’s net bank debt, calculated in accordance with the financial covenants, had declined to € 300.6 million at year-end 2019, down € 26.1 million compared to year-end 2018. The net debt/EBITDA ratio stood at 1.5, which means TKH was operating well within the financial ratio agreed with its banks.
TKH had 5,980 employees (FTEs) at year-end 2019 (2018: 6,533 FTEs). Divestments reduced the total number of employees by 606 FTEs. Acquisitions accounted for an increase of 161 FTEs. The company also had 310 (FTEs) temporary employees (2018: 482 FTEs).
Development per solutions segment
Telecom Solutions represents the core technologies connectivity, vision & security and mission critical communication. TKH develops, produces and supplies systems ranging from basic outdoor infrastructure for telecom and CATV networks through to indoor home networking applications. 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.