Alexander van der Lof, CEO of technology company TKH: "The consequences of the COVID-19 pandemic had a clear impact on the results in the 2020 financial year, and we expect to continue to feel this impact in the first half of 2021. The health of our employees and the continuity of our business remain our priority.
The impact of COVID-19 on our business eased somewhat from the third quarter of 2020 onwards, although capital expenditure still lagged, resulting in a low order intake in Industrial Solutions over the first nine months. This recovered in Q4 with a high order intake, especially within Tire Building. There were also activities that showed healthy growth in 2020. This applied to both our Machine Vision business, where we saw the effects of innovations introduced for consumer electronics and medical applications, including a COVID-19 vaccine analysis tool, plus our connectivity solutions that respond to the high demand for the upgrading of energy networks.
The strength of TKH’s strategy is shown in the development of our ROS, which despite the sharp decline in turnover over the course of the year, remained at a good level of 10.5%. This was primarily due to the refinement of our strategy via the Simplify & Accelerate program. The implementation of this program is well on track. The share buy-back program we announced in November further underlined TKH's confidence in its strong financial foundation. But above all, the confidence in our strategy and potential to realize growth through our many innovations, which show a good progress, both in terms of technology and market penetration. At 21%, turnover from innovations was again at a high level in 2020. Our product launches and the orders we have acquired provide a strong basis for growth, and we are positive on our value creation potential in the medium term".
Since the outbreak of the pandemic, COVID-19 has had a negative impact on both TKH's turnover and result. For one, the stricter measures in various countries in the course of the year had a substantial impact. The (temporary) easing of restrictions, especially in the summer and autumn, did restore opportunities for deliveries, but these did not recover to previous levels.
TKH has taken a large number of measures to minimize the impact of COVID-19 on its business operations. It is difficult to quantify the impact of COVID-19 on the 2020 results with any degree of accuracy. For the financial impact of COVID-19, the following elements had an impact on our results:
- The health of our employees and the continuity of our business were our main priority. By taking measures at an early stage, we were able to limit the impact on our business operations. The measures taken, aimed at providing a safe and healthy working environment, resulted in a significant drop in productivity and coverage at our production companies. In addition, demand was lower due to the fact that our customers had problems in the realization of projects. Investments were reduced or postponed in some segments. This was particularly applicable for investments for airports, car parks, shipbuilding and the industrial sector.
- TKH made limited use of the available COVID-19 government support, mostly consisting of schemes to retain jobs or a form of short-time working. This led to a temporary reduction of personnel costs of € 6.8 million. TKH did not make any use of government aid in the Netherlands.
- TKH introduced various cost-saving measures, but we did not incur any significant reorganization costs directly related to COVID-19.
- TKH evaluated additional scenarios in its impairment assessment, which resulted in the recognition of an impairment loss of € 2.0 million, mainly due to COVID-19.
- Delayed deliveries of various projects, particularly in the Industrial Solutions segment, due to lockdown situations at customers, have increased working capital by an estimated € 10 million at year-end 2020. On the other hand, deferrals of tax payments had a downward impact of € 22 million. This deferred tax will be paid in the first half of 2021. TKH’s increased focus on working capital management also led to a substantial reduction in working capital in the fourth quarter of 2020.
- Important investment programs, such as ongoing R&D programs, have been continued. TKH has limited other investment levels where possible.
Progress in the realization of targets and strategy
COVID-19 led to a sharp decline in turnover and a related decline in profit. This had a negative impact on the return on sales (ROS), despite the fact that this remained at a good level. ROS stood at 10.5%. The perspective of our medium-term ROS target of at least 15% remains unchanged. This will be supported by the solid progress in innovations and the ongoing execution of our Simplify & Accelerate program.
The year 2020 saw the following significant strategic developments:
- Machine Vision – First large order for 2D-embedded vision technology for COVID-19 vaccine analysis.
- Machine Vision – Expansion of market share with 3D vision technology and confocal inspection technology within consumer electronics.
- Tire Building – Breakthrough for the UNIXX, the ground-breaking new technology for car tire production, with first serial production at a launching customer.
- Infrastructure – Strong growth in the market for energy cables as a result of the investment impulse driven by the energy transition for which additional investments in production capacity have been initiated, that will be operational from Q3 2021.
- Infrastructure – Acquisition of substantial order for Airfield Ground Lighting (CEDD/AGL technology).
- Marine & Offshore – Order intake of subsea cable systems that will enable growth to more than € 40 million turnover in 2021.
- Care – Breakthrough in North America for the Indivion, an innovative medicine dosing and distribution system.
- Divestment of ZTC in China – Production of commodity data cables with low margins.
- Divestment of Cruxin in the Netherlands – System integration activities with insufficient alignment with TKH strategy.
- Integration of TKH’s Dutch cable production activities at one location and closure of Ittervoort production facility.
- Termination of unprofitable industrial cable production activities.
- Introduction of cost ratio program, part of the Simplify & Accelerate program, with a more short-term focus on financial returns.
Thanks to the fact that we are winning orders for our innovations, TKH is confident that it will realize our medium-term turnover targets in our vertical growth markets. We are also seeing a rise in the willingness to invest among our customers.
We expect that the implemented integration projects and return improvement programs will have a positive impact of € 7 million a year from 2021 onwards. The one-off expenses related to this amounted to € 8.9 million in 2020.
The Simplify & Accelerate program includes a targeted divestment program for activities with limited value creation in the TKH environment. TKH has now realized € 260 million of the targeted € 300 million to € 350 million turnover in divestments. The divestment of the remaining activities has been put on hold in 2020, as the return on these activities, as well as the calculation multiples, would not result in the targeted proceeds due to COVID-19. We resumed our divestment activities in the fourth quarter of the year.
TKH underlined its confidence in its strategy and its strong financial position in November by launching a € 25-million share buy-back program spread over four months. The fact that TKH had realized a net debt/EBITDA ratio of 1.6 at year-end 2020, confirmed that the company had sufficient headroom to finance this share buy-back program, but also to pay out a dividend, taking into account the uncertain circumstances due to the impact of COVID-19.
Financial developments second half of 2020
Turnover declined by 17.1% to € 610.4 million in the second half of 2020 (H2 2019: € 736.4 million). TKH recorded a 12.5% organic decline in turnover. Higher raw materials prices had a positive impact of 0.5% on turnover, while exchange rates had a negative impact of 0.5%. Acquisitions made in 2019 increased turnover by 1.0%, while divestments resulted in a 5.6% decline in turnover. All segments recorded an organic decline in turnover, although this was minor at Building Solutions.
The gross margin increased to 49.5% (H2 2019: 49.0%).
The operating result before the amortization of intangible non-current assets and one-off income and expenses (EBITA) dropped 29.9% to € 66.5 million in the second half of 2020, from € 94.9 million in the second half of 2019. Industrial Solutions saw the strongest decline of 48.3%, as a result of lockdown situations at customers due to COVID-19. The EBITA at Telecom Solutions and Building Solutions also declined by 27.1% and 12.0% respectively.
The ROS improved to 10.9% in the second half of 2020, from 10.2% in the first half (H2 2019: 12.9%) due to lower cost levels.
Amortization expenses fell by € 0.2 million. The amortization of purchase price allocations declined, while the amortization of development expenses increased due to the high investment levels in recent years. TKH recognized an impairment of € 2.4 million in the second half, partly due to the impact of COVID-19.
The financial result fell by € 1.4 million, largely due to a lower result from associates, which were affected by the impact of COVID-19.
The tax rate increased to 25.8% in the second half of 2020, from 23.2% in the second half of 2019, largely due to divestments and lower profits at companies with a lower tax rate.
The net profit from continued activities before amortization and one-off income and expenses attributable to shareholders declined 42.2% to € 34.4 million (H2 2019: € 59.4 million).
Financial developments full year 2020
Turnover declined by € 200.3 million (-13.4%) to € 1,289.4 million in 2020 (2019: € 1,489.6 million), largely due to the impact of COVID-19. TKH recorded a 9.9% organic decline in turnover. Acquisitions made in 2029 contributed 1.9% to turnover. On balance, raw materials prices had a minimal impact on turnover, while currency exchange rates had a negative impact of 0.4%. Divestments led to a 5.2% decline in turnover.
Industrial Solutions recorded the biggest organic decrease in turnover, with a decline of 20.2%. Telecom and Building Solutions recorded declines of 8.4% and 2.9% respectively.
The gross margin increased to 49.4% in 2020 from 48.2% in 2019. This increase was partly driven by divestments and acquisitions within Building Solutions and the higher turnover share of Machine Vision.
Operating expenses before one-off expenses fell by 8.0% compared with 2019. The integration programs, cost savings and lower sales costs as a result of COVID-19 accounted for a significant part of the lower expenses. However, as a percentage of turnover operating expenses increased to 38.9% in 2020 from 36.6% in 2019. This relative increase was related to the divestments made in 2020, as well as lower productivity and coverage in TKH’s production companies as a result of COVID-19. Depreciations, excluding one-off results from divestments, amounted to € 45.5 million, € 0.1 million higher than in 2019.
The operating result before the amortization of intangible assets and one-off income and expenses (EBITA) declined by 21.4% to € 135.5 million in 2020 from € 172.5 million in 2019. EBITA in the Telecom and Industrial Solutions segments fell by 25.0% and 41.8% respectively. Building Solutions recorded a 2.4% rise in EBITA. The ROS fell to 10.5% (2019: 11.6%).
For the full year 2020, TKH recognized a one-off expense totalling € 6.9 million (2019: € 18.3 million) and an impairment of € 4.0 million (2019: € 5.0 million). These were primarily related to the execution of the Simplify & Accelerate program and the impact of COVID-19.
The amortization expense was € 3.7 million higher at € 53.7 million, due to the high R&D investments in recent years.
Financial expenses fell by € 0.8 million to € 8.4 million in 2020, due to lower interest rates. The effect was cancelled by the negative impact of exchange rates of € 2.0 million (2019: negative impact of € 0.9 million). The result from associates increased by € 1.9 million, largely due to a book profit on divestments. The operating result from associates was lower due to the impact of COVID-19 and one-off expenses.
The effective tax rate stood at 24.5% in 2020 (2019: 23.1%). The higher tax rate was related to divestments and lower profits at companies with lower tax rates.
The net profit from continued operations before amortization and one-off income and expenses attributable to shareholders fell by 33.2% to € 70.3 million in 2020 (2019: € 105.3 million).
The net result for 2020 amounted to € 47.5 million (2019: € 113.9 million). The divestment of the majority of TKH’s industrial connectivity activities, accounted for as ‘discontinued operations’, resulted in one-off income of € 45.2 million in 2019. Earnings per share from continued operations before amortization and one-off income and expenses amounted to € 1.69 (2019: € 2.51). Ordinary earnings per share were € 1.14 (2019: € 2.72).
The cash flow from operating activities amounted to € 187.8 million in 2020 (2019: € 182.2 million). In 2020, the cash flow was boosted by a decline in working capital, while there was little change in 2019. At year-end 2020, working capital as a percentage of turnover had fallen to 12.1% (2019: 13.0%), and therefore remained within the bandwidth target of 12‑15%. The cash flow from investments in and divestments of property, plant and equipment amounted on balance to € 25.6 million in 2020, and were lower than in recent years (2019: € 30.6 million, partly due to the divestment of business premises held for sale). The investments in intangible non-current assets related to development costs, patents, licenses and software fell to € 39.2 million in 2020 (2019: € 40.4 million). TKH spent € 0.5 million on acquisitions (2019: € 65.5 million). Divestments boosted the cash position by € 21.2 million (2019: € 83.5 million).
Solvency fell slightly to 42.3% (2019: 43.6%). Net bank borrowings, calculated according to TKH’s bank covenants, fell by € 38.8 million from the level at year-end 2019 to € 261.8 million at year-end 2020. The Net debt/EBITDA ratio stood at 1.6, which means TKH is operating well within the financial ratio agreed with its banks.
At year-end 2020, TKH employed a total of 5,583 FTEs (2019: 5,980 FTEs). Divestments reduced the total workforce by 248 FTEs. In addition to this, TKH had 121 (FTE) temporary employees (2019: 310 FTEs).
Developments 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 – turnover share 14.2%.