Alexander van der Lof, CEO of technology company TKH: “In 2017, TKH made significant investments in the roll-out of innovation projects in the seven vertical growth markets. With this, we have laid solid foundations for growth in turnover and profit from 2018 onwards. The vertical growth markets realized a high organic growth of 11.3% in the year under review. However, a large proportion of the innovation projects in these vertical growth markets, which involve disruptive technology, are still in the roll-out stages. For this we incurred high start-up costs and additional costs for the build-up of substantial additional production capacity. This put pressure on the profitability of Building Solutions, but we are positive about the return potential in this business segment.
Our strategic progress is on schedule, which means we can now raise our medium-term targets for returns, the ROS and ROCE. The sizeable innovation projects will now generate additional returns, which gives us a great deal of confidence in the outlook for the years ahead. We have therefore decided to raise the bandwidth for our turnover growth targets specifically for the vertical growth markets Machine Vision and Fiber Optic Networks.”
Progress in realization of objectives and execution of strategy
In the year under review, TKH continued to intensify its focus on core technologies and the seven vertical growth markets.
TKH has defined building blocks based on action plans to realize growth. In 2017, the vertical growth markets recorded above-average turnover growth, while some building blocks are still in the development and roll-out stages and are making only a limited contribution to turnover growth. Growth was driven by the high contribution of 22.2% from innovations in TKH’s turnover (2016: 19.0%). TKH aims for 15% of turnover from innovations that were introduced in the market over the preceding two years.
In 2017, TKH reorganized less profitable activities to reduce operating costs and increase focus.
In addition, activities were terminated that offer no added value for our proposition in the vertical growth markets because they are a poor fit with our core technologies.
In the year under review, TKH achieved some significant milestones from a strategic perspective. We booked a further increase in market share among the top-5 tire manufacturers, continued to increase our market share in consumer electronics with machine vision technology, rolled-out the first projects for the airfield ground lighting (AGL) portfolio based on the disruptive CEDD technology and started up the subsea production capacity. These building blocks have great potential. We have also strengthened the R&D, operational and commercial organizations so we can respond effectively to the expected market demand. We will also continue to invest in the organizations for Machine Vision, Tunnel & Infra and Tire Building in particular on the basis of the growth opportunities we see. However, these investments will be lower than in recent years. We have made preparations to expand production capacity for optical fiber networks and high-grade industrial cable systems in 2018, based on concrete opportunities we have seen in these markets.
Our positions in the vertical growth markets are developing well and we expect strong market growth in the coming years. With this in mind, we have made upward adjustments to the bandwidth of our turnover growth targets for the vertical growth markets Machine Vision and Fiber Optic Networks. For Machine Vision, we have raised the bandwidth to € 250 to € 300 million (turnover 2017: € 127 million) and for Fiber Optic Networks we have increased the bandwidth to € 175 million to € 200 million (turnover 2017: € 127 million). In Machine Vision, we created a breakthrough in the market for consumer electronics with the successful market introductions of our innovations in the field of 3D camera and sensor technology. We are also confident about the potential for our embedded 2D camera technology on the basis of the feedback we received on the introduction.
The number of applications that use 2D and 3D-vision technology for quality inspections and production process monitoring continues to increase rapidly, which has resulted in greater than expected growth in market demand. For Fiber Optic Networks, we noted a continued increase in global market demand, with accelerated growth in Europe. Our successful positioning and strong market positions in the European market means we will be able to benefit from this increase in demand in the coming years.
On the basis of the implementation of our growth plans, in combination with the defined building blocks for growth and related roll-out of new technology, we expect that growth in turnover and profit will further materialize. This provides a solid foundation for our expectation that the turnover in the seven vertical growth markets can increase by € 300 to € 500 million in the coming 3-5 years.
We have raised our medium-term ROS and ROCE targets from 11-12% and 20-22% respectively to 12-13% and 21-23% on the back of the solid strategic progress and the related outlook.
Financial developments fourth quarter
Turnover in the fourth quarter of 2017 rose by € 23.8 million (6.6%) to € 386.1 million (Q4 2016: € 362.3 million). Higher raw materials prices led to a 1.3% increase in turnover, while acquisitions made a contribution of 0.7%. The on average weaker foreign currencies against the euro had a negative impact of 0.9% on turnover. On balance, organic turnover growth was 5.5% compared to the fourth quarter of 2016. All segments recorded a rise in turnover in the fourth quarter. Telecom, Building Solutions and Industrial Solutions booked organic growth of 18.5%, 2.5% and 4.9% respectively.
The operating result before amortization of intangible assets and one-off income and expenses (EBITA) declined by 6.5% to € 43.2 million in the fourth quarter of 2017 (Q4 2016: € 46.2 million). The EBITA at Telecom Solutions was up compared to the year-earlier period, while EBITA in Building Solutions and Industrial Solutions declined. Although operating expenses as a percentage of turnover was down, the fourth quarter still saw high start-up costs for new technology, the expansion of production capacity and market positioning in the vertical growth markets, including Marine & Offshore, Tunnel & Infra and Parking. The ROS for the TKH group was 11.2% in the fourth quarter of 2017 (Q4 2016: 12.8%). Excluding the aforementioned start-up costs, ROS would have been in line with the fourth quarter of 2016.
In the fourth quarter, we recognized € 4.6 million in one-off expenses due to the termination of several distribution activities of commodity products that are not a good fit with our core activities, and the improvement of the returns of a number of activities, especially in Building Solutions.
The lower operating result reduced the net profit before amortization and one-off income and expenses attributable to shareholders by 7.0% to € 28.7 million (Q4 2016: € 30.8 million).
Financial developments full year 2017
Turnover in 2017 was up € 143.5 million (10.7%) at € 1,484.5 million (2016: € 1,341.0 million). Organic turnover growth was 8.8%. Acquisitions contributed 0.6% to turnover. Higher raw materials prices had a positive impact of 1.7% on turnover. The on average weaker foreign currencies against the euro had a negative impact of 0.4% on turnover.
Telecom Solutions recorded organic turnover growth of 14.1% in 2017. At Building Solutions, organic turnover growth was 7.9% in 2017 and amounted to 8.3% at Industrial Solutions. Industrial Solutions’ contribution to total turnover declined to 44.3%, from 44.5%, while the contribution from Building Solutions dropped to 42.8% from 42.9%. Telecom Solutions’ contribution increased to 12.9%, from 12.6%.
The gross margin declined to 45.1% in 2017, from 47.1% in 2016. This was due to higher raw materials prices, changes to the product mix, use of materials for the start-up of the subsea production capacity and one-off costs related to the upgrading of technology for parking guidance systems. Operating expenses were 7.0% higher than in 2016. This increase was largely due to higher production levels. Expenses also increased due to start-up costs for the subsea production capacity, the launch of a new production plant in Poland for tire building systems, the expansion of production capacity in Canada and Germany for Machine Vision and the expansion of the R&D and commercial organizations. These investments, especially those at Building Solutions, were in preparation for the targeted growth in the vertical growth markets. R&D expenses increased to € 59.9 million (2016: € 50.3 million), with around 51% of this amount capitalized as development costs. Acquisitions resulted in an increase of 1.0% in operating expenses. Operating expenses as a percentage of turnover declined to 35.0% in 2017, from 36.1% in 2016. Depreciation amounted to € 24.8 million in 2017, which was € 2.7 million above the level of 2016, as a result of the increase in investments in recent years.
The operating result before amortization of intangible assets and one-off income and expenses (EBITA) was € 150.8 million in 2017, up 2.9% from the € 146.5 million recorded the previous year. EBITA at Telecom Solutions and Industrial Solutions was up 44.8% and 12.4% respectively, while EBITA at Building Solutions declined by 17.6%. The ROS fell to 10.2% (2016: 10.9%).
The program for further focus on core activities and improvement of results, leads to a total one-off costs of € 6.3 million for the full year 2017.
Amortization costs came in € 3.9 million higher at € 36.5 million, primarily due to higher R&D investments. In addition, TKH recognized impairments of on balance € 1.8 million.
Financial expenses fell by € 0.7 million to € 6.9 million in 2017 on the back of improved interest rates as a result of the refinancing agreement signed in January 2017. However, this benefit was negated by negative exchange rate effects of € 1.1 million. The result from other participations improved by € 0.4 million. In addition, a net book profit of € 5.8 million was realized on the sale of our 5.06% stake in Nedap.
At the end of July 2017, TKH agreed a settlement in the squeeze-out procedure involving the former minority shareholders of Augusta Technologie AG. This settlement was lower than expected and therefore resulted in one-off untaxed income of € 2.2 million, due to the partial release of the financial liability. In addition, last year also saw a release of earn-out liabilities. On balance, this resulted in one-off income of € 3.8 million.
The tax rate for 2017 was 19.0% (2016: 18.4%). The release of the squeeze-out and earn-out liabilities and the result from the sale of the interest in Nedap are tax exempt and therefore reduced the effective tax rate. Fiscal R&D facilities, such as the Dutch innovation box facility, also had a downward impact on the total tax rate. However, the tax reform in the US resulted in an increase in taxes of €1.8 million due to a lower valuation of deferred tax assets.
Net profit before amortization and one-off income and expenses attributable to shareholders increased by 2.4% to € 96.6 million in 2017 (2016: € 94.4 million). The net profit for 2017 was € 88.6 million (2016: € 87.3 million). Earnings per share before amortization and one-off income and expenses came in at € 2.30 (2016: € 2.25). The ordinary earnings per share amounted to € 2.08 (2016: € 2.04).
The cash flow from operating activities was € 159.6 million in 2017 (2016: € 104.1 million). This increase was largely due to a decline in working capital, compared to an increase in 2016. At year-end 2017, working capital as a percentage of turnover stood at 11.4% (2016: 13.4%). Net investments in tangible fixed assets came in at € 40.9 million in 2017 (2016: € 45.5 million). A major part of this was related to investments in production plants, including the expansion of capacity for the sub-segments vision & security systems, building connectivity systems and manufacturing systems. In addition, € 35.1 million was invested in 2017 in intangible fixed assets, mainly R&D, patents, licenses and software (2016: € 28.9 million).
Solvency rose to 46.9% in 2017 (2016: 46.7%). The net bank debt, calculated in accordance with the financial covenants, had fallen to € 157.8 million at year-end 2017, a drop of € 8.3 million compared to year-end 2016. The net debt/EBITDA ratio came in at 0.9, which means TKH was operating well within the financial ratio agreed with its banks.
TKH had 5,900 employees (FTEs) at year-end 2017 (2016: 5,509). The company also had 522 (FTEs) temporary employees (2016: 439 FTEs).
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 fiber 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.