Letter to the Shareholders

Dear shareholders
Dear ladies and gentlemen

Over the 2016 financial year, the Arbonia Group saw all its key financial performance indicators follow a healthy trajectory. The company increased both its revenue and operating income, and achieved a positive result after tax. After starting a set of restructuring and repositioning measures in the second half of 2015, we have now been able to reap the first rewards in the form of the improvement we have made in our profitability. In 2016, business was affected by a sideways shift that took place on the domestic market of Switzerland, but it also felt the benefits of the more positive conditions in Germany – Arbonia’s second-largest domestic market.

Group revenue rose by 5.7 % compared with the previous year to CHF 995.4 million (2015 figure: CHF 941.4 million). When adjusted for currency and acquisition effects, this represents an increase of 0.9 %. Arbonia achieved a rise in profitability. EBITDA increased to CHF 68.7 million, a result that is more than double that of the previous year (2015: CHF 26.6 million). Without special effects, EBITDA amounted to CHF 66.0 million (previous year: CHF 56.7 million). EBIT with special effects amounted to CHF 29.1 million. EBIT without special effects rose to 2.9 % of Group revenue (previous year: 1.8 %) The Arbonia Group’s operating income after tax during the reporting year also yielded a positive result, amounting to CHF 7.6 million. Group result without special effects amounted to CHF 12.2 million (previous year: CHF – 14.5 million).

Risks and opportunities in the market environment

The reporting year saw a continuation of the Swiss domestic market’s significant competitive pressure that has been leaving an impact on the construction industry for years now. This, coupled with the effects of many different factors such as the strong Swiss franc exchange rate, resulted in the market shifting sideways. Demand was especially weak in the renovation sector.

By contrast, construction activity in Germany remained at a high level, as it had done in the previous year. This positive trend was mainly seen in projects involving new buildings, the renovation market grew at a less dynamic rate. On the whole, the industry experienced a boost from housing programmes for refugees and immigration into urban areas. The continuation of historically low interest rates and a lack of alternative investment opportunities were also factors that further increased investment in new homes. Nevertheless, growth was curbed by the fact that the construction sector is already working at full capacity. This affected the second half of 2016 in particular.

Increasing political and financial instability in certain European markets also affected the investment climate, above all in Italy. This market started the year with great promise, but recorded disappointing results as time went on. The Eastern European markets of Slovakia, the Czech Republic and Poland continued to progress with encouraging growth rates in the second semester.

General activities from Arbonia Group

In 2015, with the income situation having dramatically worsened and limited prospects for growth appearing on the horizon, the Board of Directors took the decision to launch a comprehensive set of measures designed to restructure and reposition the company. The primary objectives that Arbonia is hoping to achieve in this process are to become a leading building supplier for Central Europe and attain a stronger position in key markets, thus creating sustainable growth through profitable business activities with a promising future. With the takeover of the Koralle Group in summer/autumn, and the Looser Group at the end of 2016, Arbonia has leveraged external opportunities to make decisive steps towards achieving its strategic goals. Through the Looser takeover, which reached its conclusion in December 2016, Arbonia’s scale has taken on a whole new dimension. Further information on the Looser transaction can be found here.

During the reporting year, Arbonia also continued its work on three top-priority projects: relocating its production footprint from Switzerland to sites with a more beneficial cost structure; concentrating the divisions' strategies and pursuing internationalisation as part of this; and establishing a lean industrial holding company.

The divisions’ strategies and objectives

How are the three divisions – Building Technology, Windows (formerly Building Envelope) and Doors (formerly Building Security) – contributing to this? This section outlines the key points; for detailed information, please refer to the separate division reports here onwards.

As part of a comprehensive programme of investments to the tune of approximately CHF 45 million, the Building Technology Division is rationalising the existing production lines and logistics facilities maintained by its Heating Technology Business Unit in Plattling (D). Its Sanitary Equipment Business Unit is expanding its production and warehousing space at the same site.

Acquiring the Koralle Group in autumn 2016 has made it possible to create a stronger market position in the DACH regions. Integration activities are continuing to run on schedule and are set to reach their conclusion by the end of 2017. Integrating the Koralle Group is opening up a variety of opportunities for tapping into synergy effects, and maintaining Kermi, Koralle and Baduscho as three established brands will allow us to penetrate the market more effectively.

At the end of July 2016, the Air-Conditioning and Ventilation Technology Business Unit took over its French distribution partner Sabiatherm. The acquisition of Sabiatherm and the route into direct sales that accompanies it will enable the Air-Conditioning and Ventilation Technology Business Unit to extend its value chain, and result in more intensive development and penetration of the HVAC markets in France and Luxembourg.

At one of the world’s leading trade fairs, ISH 2017 in Frankfurt, the Air-Conditioning and Ventilation Technology Business Unit will be showcasing its new residential ventilation products for the very first time. These are creating an addition to the business unit’s existing range of products, which currently covers industrial ventilation and air-conditioning. Among the key features of this latest development is its A+ energy efficiency class.

Beyond this, the division will continue to invest in growth markets for residential ventilation and underfloor heating systems.

The Building Technology Division has also completed the relocation of special radiator production from the Swiss Arbon site to Stříbro (CZ), a process that was begun in the previous year. The first radiators were produced at the start of February 2017 in the new Czech production halls built specifically for this purpose.

In 2016, the focus of the Windows Division was on maintaining its leading market position in Switzerland and, in parallel with this, completing the extensive process of relocating production. This involved transferring the production of vinyl and vinyl / aluminium windows from Villeneuve (CH) to Pravenec (SK). In addition, the division invested significant efforts in developing a German market organisation, something that was carried out alongside the process of integrating the company Wertbau, acquired in 2015.

Another area of focus for the division’s restructuring activities was on transforming national subsidiaries that had previously been run as independent entities into a Europe-wide business unit with central operation and an organisational concept based on functions. Thanks to this new organisation, 2016 has already seen considerable savings – particularly in the area of purchasing – and more efficient production.

The Slovakian production plant has also set up a line for triple-layer insulating glass. Featuring state-of-the-art technology and full automation, this new line – plus a glass warehouse with automatic feeding to the cutting system and a glass sorting system – will be integrated seamlessly into the process cycle, eliminating any need to depend on supplies from elsewhere. Production is likely to commence in autumn 2017.

For the first time, the companies EgoKiefer and Wertbau joined forces to develop a new wood / aluminium window that takes the form of a modular construction system. This new, shared platform, designed for Germanspeaking markets, will create synergy effects to be exploited in the areas of development, procurement, production and processing.

During the reporting year, it was the Doors Division that experienced the greatest change. The Looser takeover at the end of 2016 was accompanied by not only a significant surge in growth, but also some excellent additions to the product range for the doors business, plus geographical expansion and new opportunities for market development. This significant strategic step forward has resulted in a leading European door manufacturer and full-service provider for interior doors, with a strong market position in Germany and Switzerland as well as outstanding potential for other countries within Central Europe. The integration process began once the transaction was completed on 13 December 2016. Its aim is to create a strong business unit with an organisational concept that is also based on functions, and to tap into the synergy effects that unfold from this in the years to come.

In 2016, the Forster Profile Systems Business Unit achieved some key objectives relating to streamlining its product range and developing new products. A package of measures for saving costs and improving the operating result were introduced in 2016 as well, and are already having an impact.

Acknowledgements

The 2016 financial year was extremely challenging for Arbonia’s employees and management alike, and required them to be highly flexible. Not only were there significant cost reduction measures to contend with, but it was also necessary to plan and execute large-scale takeovers, as well as quickly start the integration process. On behalf of the Board of Directors and Group Management, we would like to thank all those involved for their outstanding dedication. We would also like to thank our customers and most notably you, our dear shareholders, for your trust in our strategy.

Arbon, February 2017

Alexander von Witzleben

Chairman of the Board of Directors and CEO

Felix Bodmer

CFO