- Financial commentary of Daniel Wüest (CFO)
- Revenue development and general market environment
- Continued increase in earnings
- Significant increase in cash flow underscores operational progress and performance
- Continuing high equity ratio and low net debt and continuous dividend payment
Financial commentary of Daniel Wüest (CFO)
Revenue development and general market environment
In the 2019 financial year, Arbonia Group achieved a net revenue of CHF 1 416.0 million, which represents a growth of 3.1% compared to the previous year (CHF 1 374.0 million). Adjusted for acquisition and currency effects, growth amounted to 2.0% (organic growth), meaning that Arbonia's organic revenue was slightly below the target of around 3% set at the beginning of the year. The Windows Division was largely responsible for the lower organic growth. Due to a change in the product mix and the more selective acceptance of orders in favour of better profitability, the Windows Division accepted a slightly negative organic growth at the divisional level in the 2019 financial year. In contrast, the three other divisions, HVAC, Sanitary Equipment and Doors, showed significant organic growth, with the Doors Division showing the highest organic growth of 3.7%. On a positive note, organic growth accelerated at the Group level in the second half of 2019, after having stood at 1.4% at mid-year. The increase in organic growth was based on a continued positive environment in residential construction in Arbonia's core markets. In addition to the continuing high level of construction activity in the conurbations of Germany, Switzerland, the Benelux countries and Eastern Europe, which is also supported by the continuing low interest rate environment, numerous Arbonia products are increasingly benefiting from the social and regulatory trend towards energy-efficient and CO2-efficient construction or renovation of buildings.
The achieved growth of over 3% (2% organic) took place in an economically, cyclically and geopolitically challenging environment, in which private and public new construction and, to a lesser extent, renovation activity in Arbonia's core markets (Germany, Switzerland, Eastern Europe, the Benelux countries, Italy and Spain) remained intact, but in which industrial construction activity showed the first signs of an economic slowdown. The geopolitical trade conflicts between the USA and China, the trade sanctions against Russia, the discussions about Brexit and its effects on European trade, as well as the slowdown in the automotive sector contributed to a challenging environment for companies including Arbonia in the 2019 financial year and prevented higher revenue growth.
Arbonia assumes that the market environment will remain challenging in 2020 but that Arbonia is well positioned with its products, its geographical presence and the high productivity of its manufacturing plants. In the 2019 financial year, Arbonia did not make any notable acquisitions/participationsor or divestments.
Continued increase in earnings
At CHF 26.2 million, the Group result for net profit in the 2019 financial year was less than the previous year (CHF 38.7 million), although the previous year's result was positively influenced by an extraordinary profit of CHF 25.7 million due to the sale of real estate not required for business operations. Excluding one-time effects in both financial years, the Group result increased by over 50% to CHF 36.5 million, compared to CHF 23.8 million in the previous year. The one-time effects in the 2019 financial year amounted to CHF 9.5 million net at the level of operating income before depreciation and amortisation (EBITDA), the main items being restructuring costs in connection with the closure and relocation of sites as part of the integration of the Vasco Group, additional restructuring costs in connection with the production relocation at EgoKiefer, closure costs at Wertbau Elemente and the commissioning of the new steel panel radiator factory in Russia. As an offsetting item, a profit of CHF 1.1 million from the sale of real estate (mainly refund of property gains tax) could be recorded. At the level of operating result after depreciation and amortisation (EBIT), one-time effects to the amount of CHF 3.2 million were incurred, which were mainly due to impairments of no longer needed equipment in the HVAC and Windows Divisions.
In the income statement for 2019, slightly decreasing raw material prices in combination with a weaker euro led to a lower material ratio. With and without one-time effects, the personnel ratio increased slightly compared to the previous year, which is due on the one hand to ongoing salary increases, especially in Eastern Europe, the relocations at Vasco (HVAC Division) and EgoKiefer to Wertbau (Windows Division) and the ramp-up of the new factory in Russia. The other expenses decreased slightly as a percentage of net revenue compared with the previous year. Overall, however, the salary increases were offset by price and, to a lesser extent, volume increases as well as a higher productivity in the 2019 financial year.
Due to the operational improvements, which resulted in a higher productivity, EBITDA without one-time effects increased to CHF 134.8 million in the 2019 financial year (previous year CHF 115.1 million). As a result, the EBITDA margin increased from 8.4% to 9.5%. Due to the first-time application of IFRS 16 (accounting for lease liabilities), additional EBITDA of around CHF 13 million was incurred in 2019. Taking one-time effects into account, EBITDA was slightly less at CHF 125.4 million in the 2019 financial year than in the previous year (CHF 130.5 million). All divisions contributed to the margin improvement to 9.5% (excluding one-time effects), with the Windows Division making the relatively highest contribution (increase in EBITDA margin from 4.4% to 7.6%). The Doors Division and Sanitary Equipment Division were also able to increase their margins compared to the previous year, while the HVAC Division had to accept a slight percentage decrease, mainly due to currency effects. The EBITDA margin was well above 10% in all three divisions, except for the Windows Division. Higher depreciation and amortisation and the missing contribution from properties sales (CHF 25.7 million in the previous year) meant that the EBIT of CHF 39.7 million for the 2019 financial year turned out to be lower (previous year CHF 61.0 million). Without one-time effects, Arbonia achieved an encouraging increase in EBIT to CHF 52.3 million (previous year: CHF 47.8 million), while the EBIT margin increased to 3.7% compared to the previous year (3.5%).
The net financial expense figure substantially decreased in 2019 from CHF 11.2 million to CHF 5.4 million, which is due on the one hand to lower interest costs and the absence of currency losses on intercompany loans not denominated in CHF. The continued low interest rates combined with Arbonia's moderate level of debt had a positive impact on the interest expense as an element of the financial expense in the 2019 financial year.
Income tax expense decreased slightly to CHF 8.1 million (previous year CHF 11.1 million) due to the lower consolidated earnings before taxes (EBT) in the 2019 financial year. The effective tax rate of 23.6% (previous year 22.3%) increased slightly, which was due to the fact that a higher proportion of profits was generated in "high-tax countries" in 2019.
Significant increase in cash flow underscores operational progress and performance
The free cash flow (cash flow from operating and investing activities) amounted to CHF 8.4 million in the financial year (previous year CHF −53.8 million). The positive development is due to a highly gratifying, sustained increase in cash flow from operating activities, which rose by more than 60% to CHF 111.8 million (previous year CHF 69.6 million) in the reporting year. In addition, investments decreased from CHF 134.7 million in the previous year to CHF 113.0 million in 2019, which also had a positive effect on the free cash flow. In the 2020 financial year, investments will be in the order of CHF 100 million, with the objective of reducing the investment ratio (maintenance investments) to a maximum of 4% in relation to revenues, starting in the 2020 financial year.
Continuing high equity ratio and low net debt and continuous dividend payment
The total assets of Arbonia as of 31 December 2019 increased only negligibly to CHF 1 534.4 million compared to the previous year (CHF 1 511.9 million). The shareholders' equity also remained virtually unchanged at CHF 873.3 million (previous year CHF 887.7 million). The slight decrease in shareholders' equity is due to the first-time payment of a dividend from capital contribution reserves for the 2018 financial year and currency translation differences resulting from the depreciation of the euro against the Swiss franc on the balance sheet date. In addition, the first-time application of IFRS 16 resulted in an increase in total assets. As a consequence, the equity ratio as of the end of the 2019 financial year decreased slightly from a
high level of 58.7% to 56.9%.
The net debt increased slightly by CHF −11.2 million to CHF −128.0 million as of 31 December 2019 (previous year CHF −116.8 million) or CHF −180.6 million taking into account CHF −52.6 million due to IFRS 16. The net debt ratio (net debt / EBITDA) increased to −1.1x (previous year −0.9x), which is still a very good figure and provides Arbonia with sufficient strategic and financial scope. This means that all key financial figures of the credit agreement clauses have also been met. In addition, Arbonia intends to refinance the syndicated loan of CHF 350 million due in 2021 ahead of schedule in the 2020 financial year.
The solid balance sheet structure as well as the increasing profitability allowed Arbonia to pay out a cash dividend of CHF 0.20 per registered share from capital contribution reserves for the 2018 financial year to shareholders for the first time in many years.
Due to the further increase in profitability in the 2019 financial year, the Board of Directors will propose to the Annual General Meeting that a 10% higher dividend of CHF 0.22 per Arbonia registered share be paid for the 2019 financial year.