Alexander van der Lof, CEO of technology company TKH: “In 2018 our strategy and focus led to the expected materialization of both turnover and profit growth. Again, innovations account for more than 20% of our turnover. We still faced a number of challenges, which were related to our high level of innovation. It is clear that our focus on vertical growth markets and core technologies has paid off. This quarter was the best quarter in TKH’s history. A clear evidence of TKH’s solid market position and innovative strength. We are on track to realize our medium term objectives.”
Progress in realization of objectives and execution of strategy
TKH has achieved success with the focus on the four core technologies and the seven vertical growth markets. With a strong investment discipline our market position improved further in 2018. We have invested mainly in continued innovation, strengthening our commercial and technical organizations and expansion of our production capacity:
- In mid-2018 we increased our production capacity for 3D smart-sensor technology and further expanded our commercial organization.
- In the fourth quarter, TKH acquired Lakesight Technologies, which further strengthened our position in the vertical growth markets Machine Vision and Tunnel & Infra. We have already launched the first synergy projects and this acquisition will contribute to TKH’s earnings per share as of 2019.
- In December 2018, TKH acquired the start-up Ognios GmbH (Salzburg, Austria), that has a mission critical communications system certified according to the latest technological requirements, for in particular the Marine & Offshore market.
- We modernized and expanded our assembly facility for medical and industrial cable systems in Ukraine (industrial connectivity systems).
- In the third quarter, TKH took into use a new Chinese production facility for high-grade industrial cable systems (industrial connectivity systems).
- We doubled the capacity at our production facility for tire manufacturing systems in Poland, and this was taken into operation at the end of 2018 (manufacturing systems).
- At the end of 2018, we began the expansion of our fibre optic production capacity, which will be completed in mid-2019 (fibre network systems).
This year we will continue to build on the strong strategic foundations we have put in place. We will continue to focus on creating a healthy return on all the investments we have made in our innovations and growth building blocks in recent years. Our innovations have proven to be an effective response to the positive trends in investments in robot systems and the continued need for increased productivity, efficiency, safety and quality among the users of our technologies in the various market segments in which we operate. In a number of technologies, such as subsea cable systems and airfield ground lighting, good progress was made, but turnover and profit will have to materialize further.
Innovations, investments and focus on the vertical growth markets with our four core technologies in 2018 led to strong organic and profitable turnover growth, of 12.0% in the vertical growth markets and 7.4% in the other markets. The innovations we have developed in recent years are not only clearly successful in the seven vertical growth markets, but also in other markets. This resulted in an increase in ROS to 11.3% in 2018, from 10.1% in 2017.
Our economies of scale increases efficiency, which enables us to continue to improve the return through investments in R&D, production capacity and market positioning. The combination of the various strategic steps we have taken means we are on track to realize our medium-term target of a ROS of 12-13% and a ROCE of 21-23%.
Financial developments fourth quarter
Turnover increased by € 43.4 million (11.3%) to € 428.7 million in the fourth quarter of 2018 (Q4 2017: € 385.3 million). Lower raw materials prices had a negative impact of 1.1% and foreign currencies had a negative impact of 0.2% on turnover. Acquisitions contributed to turnover by 2.4%. On balance, organic turnover growth was 10.2% compared with the fourth quarter of 2017. Turnover at Telecom Solutions showed an organic turnover decline of 4.6%, while Building Solutions and Industrial Solutions both realized organic growth of 13.3% and 11.4% respectively.
The operating result before amortization of intangible assets and one-off income and expenses (EBITA) increased by 22.2% to € 51.6 million in the fourth quarter of 2018 (Q4 2017: € 42.3 million). Building Solutions recorded particularly strong growth in EBITA compared to the fourth quarter of 2017, while EBITA at Telecom Solutions declined. Higher turnover increased the cost efficiency of our operations and resulted in lower regular operating costs as a percentage of turnover. The ROS for the TKH group was 12.0% in the fourth quarter of 2018 (Q4 2017: 11.0%).
The net profit before amortization and one-off income and expenses attributable to shareholders increased by 28.4% to € 35.9 million (Q4 2017: € 27.9 million).
Financial developments full year 2018
Turnover increased by € 146.0 million (9.8%) to € 1,630.8 million in 2018 (2017: € 1,484.8 million). Organic turnover growth was 9.4%. Acquisitions contributed 0.9% to turnover. Higher raw materials prices had a positive impact of 0.1% on turnover, foreign currencies had a negative impact of 0.6%.
Telecom Solutions recorded organic turnover growth of 2.0% in 2018. At Building Solutions, organic turnover growth was 9.7% and 11.4% at Industrial Solutions.
The gross margin increased to 45.5% in 2018, from 45.0% in 2017. This increase was the result of a changed product mix and the normalization of start-up and replacement costs for new technologies.
Operating expenses were up 7.3% compared to 2017, which was largely due to the higher production level. We also expanded the production facility for tire manufacturing systems in Poland in the course of 2018 and took into operation a production facility in China for high-grade specialty cable systems. On the other hand, the start-up costs for new technologies and the strengthening of the organization were higher last year. R&D expenditure, of which 49.6% was capitalized as development costs (2017: 51.2%), was up slightly at € 60.8 million (2017: € 59.9 million). Acquisitions resulted in a 1.7% increase in expenses. Operating costs as a percentage of turnover declined to 34.1% in 2018, from 34.9% in 2017. Depreciation amounted to € 27.9 million in 2018, which was € 3.1 million higher than the level of 2017, due to the higher investment level in recent years.
The operating result before amortization of intangible assets and one-off income and expenses (EBITA) was € 184.6 million in 2018, up 23.5% from the € 149.4 million recorded the previous year. EBITA at Telecom, Building and Industrial Solutions was up 8.7%, 29.8% and 21.2% respectively. The ROS increased to 11.3% (2017: 10.1%).
Amortization came in € 3.8 million higher at € 40.3 million, primarily due to the acquisition of Lakesight Technologies and higher R&D investments in recent years. In addition, TKH recognized impairments of on balance € 1.5 million.
Financial expenses fell by € 0.4 million to € 6.4 million in 2018 due to the lower interest rates. However, TKH recorded a negative exchange rate effect of € 0.3 million in 2018 (2017: € 1.2 million). The result from other participations improved by € 0.9 million.
A partial release of the provision for earn-out and put-option obligations resulted in an income of € 0.5 million. In 2017, we recognized tax-exempt income of € 9.6 million, largely due to the sale of the share-interest in Nedap and the settlement in the squeeze-out procedure with the former minority shareholders of Augusta Technologies AG.
The tax rate for 2018 was 21.4% (2017: 18.9%). The tax rate in 2017 was impacted by the relatively high tax-exempt income as described above. In 2018, fiscal R&D facilities, such as the Dutch innovation box facility, also had a downward impact on the total effective tax rate.
Net profit before amortization and one-off income and expenses attributable to shareholders increased by 26.7% to € 121.1 million in 2018 (2017: € 95.6 million). The acquisition of Lakesight Technologies made no contribution to the result in 2018 yet, as the acquisition costs were higher than the result included in the consolidation over the relatively short remaining period of 2018. The net profit for 2018 amounted to € 108.7 million (2017: € 87.5 million). Earnings per share before amortization and one-off income and expenses came in at € 2.88 (2017: € 2.27). The ordinary earnings per share amounted to € 2.58 (2017: € 2.05).
The cash flow from operating activities stood at € 126.7 million in 2018 (2017: € 159.6 million). This decline was largely related to an increase in the working capital, compared to a decline in 2017. At year-end 2018, working capital as a percentage of turnover increased to 13.9% (2017: 11.4%), but remains within the targeted bandwidth of 12-15%. Net investments in tangible non-current assets came in at € 42.5 million in 2018 (2017: € 40.9 million). A major part of this was related to investments in production facilities. The investments in intangible non-current assets, mainly R&D, patents, licenses and software, amounting to € 35.2 million, more or less remained equal (2017: € 35.1 million). We spent € 116.2 million on acquisitions (2017: € 5.8 million), the majority of which was related to the acquisition of Lakesight Technologies.
Solvency declined to 42.4% in 2018 (2017: 47.0%) due to an increase in the balance sheet total as a result of the dividend payment, acquisitions and investments. The net bank debt, calculated in accordance with the financial covenants, increased to € 326.6 million at year-end 2018, an increase of € 168.8 million compared to year-end 2017. The net debt/EBITDA ratio stood at 1.5, which means TKH was operating well within the financial ratios agreed with its banks.
TKH had 6,533 employees (FTEs) at year-end 2018 (2017: 5,900). The company also had 496 (FTEs) temporary employees (2017: 522 FTEs).
Developments per solutions segment
The core technologies connectivity, vision & security and mission critical communication are represented in Telecom Solutions. TKH 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.