Letter to the Shareholders

Dear Shareholders
Dear Ladies and Gentleman

The financial year 2020 went very well for Arbonia, despite certain challenges due to the COVID-19 pandemic. In addition to the investments made in recent years to increase efficiency and productivity, the focus on the Central and Eastern European sales and production markets has also made a significant contribution to this. Other effects, such as the favourable product mix and the variable cost structure, have had a positive influence on operating profitability.

For the 2020 financial year, currency-adjusted revenue growth of 2.1% and in Swiss francs a decline of –1.4% from CHF 1416.0 million to CHF 1396.3 million resulted for continuing and discontinued operations. The measures for a targeted increase in profitability ensured that EBITDA increased by 25.9%, compared to the previous year, to CHF 157.8 million (previous year: CHF 125.4 million, with one-time effects mainly coming from closures and ramping up of production plants). This corresponds to an EBITDA margin of 11.3% compared to 8.9% in the previous year. EBIT benefited disproportionally from this positive development and increased by 84.6% to CHF 73.3 million (previous year: CHF 39.7 million). Despite a lower financial result due to the appreciation of the Swiss franc and a higher tax burden due to the better pre-tax result, Arbonia was able to increase its group result by 71.4% to CHF 44.9 million (previous year: CHF 26.2 million).

Derived from these earnings figures, cash flow from operating activities increased by 26.4% from CHF 111.8 million to CHF 141.3 million and the free cash flow by 527.3% from CHF 8.4 million to CHF 52.5 million.

At the beginning of January 2021, Arbonia announced that it would sell the Windows Division, subject to the required approval by the responsible competition authorities, to the Danish DOVISTA Group. Excluding this non-continuing operation, the Arbonia Group's key figures for the 2020 reporting year are as follows:

Currency-adjusted revenue grew by 2.0% and revenue in Swiss Franc decreased by –1.8% from CHF 1057.8 million to CHF 1038.4 million. EBITDA without one-time effects increased by 6.3% over the previous year from CHF 107.7 million to CHF 114.5 million. EBITDA with one-time effects came to CHF 116.3 million, 15.5% above the previous year (CHF 100.7 million). EBIT without one-time effects reached CHF 52.1 million (previous year CHF 49.1 million, +5.9%), while EBIT with one-time effects came to CHF 53.9 million (previous year CHF 40.1 million, +34.4%). The group result without one-time effects fell slightly by –6.6% from CHF 30.1 million to CHF 28.1 million; with one-time effects, it reached CHF 29.7 million (previous year CHF 22.5 million, +31.9%).

Continuous dividend policy

Based on the positive result for the reporting year, the Board of Directors of Arbonia proposes to the shareholders to distribute a dividend of CHF 0.25 per dividend-bearing share for the 2020 financial year. The Board of Directors will also propose to them to distribute the deferred dividend of CHF 0.22 per dividend-bearing share for the 2019 financial year as well. In total, a combined dividend payment of CHF 0.47 per dividend-bearing share will therefore be distributed to the shareholders after the General Meeting on 23 April 2021. Half of this amount, i.e. CHF 0.235, will be paid as a dividend from retained earnings and CHF 0.235 from capital contributions. As announced, Arbonia thus continues to increase dividend payments by around 10% starting in the 2018 financial year (CHF 0.20).

Market environment 2020

The year 2020 was significantly affected by COVID-19 for Arbonia as well. As an immediate response to the pandemic, Arbonia on the one hand introduced comprehensive concepts for the protection of employees, such as home office, extensive hygiene measures, and significant restrictions on travel, among others. On the other hand, in order to minimise negative cost, production, and delivery effects, it also took immediate measures such as the reduction of temporary employees, the depletion of holiday and overtime credits, the reduction from 3 to 2-shift operation, as well as the insourcing of supplier components and the maintenance of distribution chains through decentralised warehouses. Government-ordered measures to contain the pandemic, such as border closures, had largely no impact on Arbonia's course of business, as the movement of goods was almost unrestricted. The only real effect was the partial closure of construction sites and hardware stores that occurred in France, Italy, and individual Swiss cantons, among other places.

In Germany, Arbonia's largest market, which accounts for over 40% of group revenues, the pandemic only had an insignificant impact on residential construction. At –0.8% in 2020, this declined only slightly. Although there were closures of specialist dealers in the course of the first and second waves and the renovation of occupied living space also became more difficult, construction sites remained open at all times. Construction activity was impaired especially by the already existing shortage of skilled workers and by the restricted entry of Eastern European skilled workers. Due to the increasing economic uncertainties in the course of the pandemic, there was a strong decline, especially in the area of commercial real estate, offices, shopping centres, and hotels. Residential construction, on the other hand, continued to benefit from full order books, low interest rates, the scarce supply of housing in conurbations, and the renovation backlog.

In the second domestic market, Switzerland, the COVID-19 pandemic hit residential construction that was already stagnating without its impact. The reason for this is the relatively high housing vacancy rate outside the cities and conurbations throughout the country. Consequently, residential construction fell by –3.4 % in the reporting year. With its defensive key industries of pharmaceuticals, chemicals, and trade as well as its robust government support measures, Switzerland weathered the first wave of the pandemic better than many other national economies. Non-residential construction performed better thanks to several large projects.

The Eastern European markets, which in recent years have always developed more dynamically than the more mature Western and Central European markets, were unequally affected by the crisis. In Poland, more residential construction projects were completed in the first nine months of the year than ever before. However, building permits and starts point to a negative development in 2021. In addition, more restrictive lending and labour shortages hampered the economy. The Czech Republic and Slovakia are strongly dependent on export markets, which is why the recovery here is likely to take longer.

Spain and Italy were among the hardest hit countries in Europe not only in the COVID-19 pandemic but also in terms of construction activity. The temporary closure of construction sites and hardware stores had a strong negative impact, while the renovation market, which is very important in Italy, was able to recover surprisingly quickly after the initial easing.

The construction industry in France was also very strongly affected by the pandemic. Construction sites were closed for 55 days net, and productivity dropped drastically after the sites opened again, due to the strict hygiene measures. The French economy is heavily dependent on private consumption, which decreased significantly during the pandemic.

The markets of Belgium and the Netherlands developed differently in the reporting year. While the development of the construction industry in Belgium was affected by the closure of construction sites due to the pandemic, the development in the Netherlands was primarily inhibited by a court ruling. According to this ruling, all new buildings to be constructed as well as those already approved in the vicinity of nature conservation areas must fully compensate for their nitrogen emissions. This has stopped a large part of the construction activity in new buildings, while the renovation market was even able to grow slightly.

Developments of the Arbonia Group in 2020

In the reporting year, Arbonia continued to focus on the relevant drivers of energy efficiency, urbanisation, digitisation, as well as automation. It continued to push the expansion and modernisation/digitisation of its production capacities at all locations.

The strategically most far-reaching decision in 2020 was the sale of the Windows Division to the Danish DOVISTA Group, which was announced at the beginning of January 2021. The transaction was signed on 4 January 2021. The completion, subject to approval by the relevant competition authorities, is expected in the second quarter of 2021. The inflowing funds to Arbonia from the transaction will amount to approximately CHF 350 million, resulting in a strong net cash position. A significant portion of the sales proceeds will be used to further increase the company value by accelerating the further development and strengthening the remaining divisions of Arbonia, both organically as well as through targeted acquisitions. Various strategic initiatives are being considered and some are already being implemented.

The early refinancing of the syndicated loan, which was concluded in November, provided further financial and strategic leeway in the financial year. This new credit line of CHF 250 million replaces an existing agreement on CHF 350 million. The new agreement, with significantly more favourable conditions, has a term of five years and includes the option to extend the credit facility twice by one year each time.

The following overview of the activities of the individual divisions is supplemented by detailed information in the separate division chapters starting on page 14.

The main markets of the HVAC Division were affected to varying degrees by the COVID-19 pandemic. While construction activity in Germany and Switzerland was only marginally affected, the markets in Italy, Spain, France, Belgium, and Russia in particular were hit hard during the first wave of the pandemic due to temporary construction site closures. In addition, in some countries such as Italy and Russia, temporary plant closures were ordered by the authorities during this period, interrupting supply chains to a certain extent. However, thanks to special permits from the authorities due to recognised system relevance, the affected production plants were allowed to resume the corresponding production within a short period of time. This circumstance, together with the implementation of consistent measures, flexibility, and the commitment of the employees, meant that the division was already able to resolve or stabilise the supply situation within a few weeks. The already constant shortage of skilled workers worsened in the reporting year, as the mobility of cross-border workers was considerably restricted in some cases.

The climate packages of the European countries provide for tax depreciation and subsidies for the modernisation of houses and especially heating systems in order to reduce CO2 emissions. For several years now as well as in the reporting year, the HVAC Division has consistently pursued its strategy of being an innovative provider of holistic heating systems and their components: from modern heat generation and optimum heat exchange to energy storage for all types of buildings and application areas, both for the new construction and renovation markets. Corresponding expansions of the product portfolio were realised in all areas.

Despite the COVID-19 pandemic, the Sanitary Equipment Division managed the exceptional year 2020 very well. Using its sophisticated ERP systems, it was able to keep the supply chain and internal processes stable. As a result, the division was able to improve its earnings situation compared to the previous year. While countries especially such as France, as well as Belgium and Austria, experienced considerable adverse effects from the COVID-19 pandemic due to partial closures of construction sites, the division's domestic markets in particular – Germany and Switzerland – proved surprisingly robust. Only the temporary closure of several plumbing exhibitions of the wholesale trade and the cancelled industry trade fairs hindered the normal course of business. The capacity utilisation in the plumbing trade, which is still very high, also had a limiting effect.

In this environment, the division held its own very well thanks to its broad-based strategic initiatives, such as intensive support for key account customers and the project business, as well as the expansion of international business with a focus on Southern and Eastern Europe.

Despite the challenging environment, the Windows Division can look back on a very pleasing 2020 reporting year, in which a significant improvement in profitability was achieved with constant revenue. In addition to the relocation of all production sites to Eastern Europe, which has now been completed, the significant growth and improved earnings quality in the Swiss market, among others, had a positive impact. Furthermore, the increase in output volume at the production site in Langenwetzendorf (D) as well as the improved operative performance at the Polish production plant in Zambrów also contributed to the positive result.

Arbonia has decided to withdraw from its windows business with the five companies Dobroplast, EgoKiefer, Slovaktual, Webcom, and Wertbau in order to accept a correspondingly attractive offer from a strategic buyer. The buyer is the Danish DOVISTA Group, which belongs to the Danish VKR Holding. Together, the DOVISTA Group and the Windows Division will become an important player in the European window business. With this acquisition, the DOVISTA Group will gain access to the Central European markets of Switzerland, Germany, Poland, and Slovakia, where the Windows Division holds strong market positions. In addition, vinyl and vinyl/aluminium windows will be added to its product portfolio. Under the new umbrella of this strategic owner, the Windows Division will in turn have the opportunity to continue to grow and to strengthen and expand its sales throughout Europe.

In 2020, the Doors Division continued to focus on its multi-year investment programme to increase productivity and expand capacity to improve delivery performance. The investment volume of CHF 48 million went largely into the capacity expansion of the German door plants Prüm and Garant.

At Prüm in Weinsheim (D), the new "production plant of the future" is currently being built. The work for the new frame production plant was started in February 2020, and the foundation stone for building the hall was laid in mid-May. In order to optimise the logistical process handling in the finished parts warehouse and to increase storage capacities in the future, an investment was also made in a second high-bay warehouse at Prüm. The construction measures for this started at the beginning of 2020 and will be completed in the second quarter of 2021.

One focus of the door manufacturer Garant in the reporting year was on increasing capacities. In the middle of 2020, the new special frame production line was installed, which offers a capacity of 945 frames per day in the special area in 3-shift operation. At the same time, installation of a new spraying robot began. This will automate the process when passing through the painting line.

The hall expansion started at RWD Schlatter in summer 2019 was successfully completed in October 2020 with the commissioning of the new spraying robot. The doors produced in Roggwil (CH) are now painted in-house, which significantly shortens delivery times for customers and reduces logistics. Thanks to this measure, the company has one of the shortest delivery times on the Swiss market.

Following these investments, the Doors Division will be able to produce around 900 000 more doors with corresponding frames in 2023/2024 across all locations than before.

Strategic pillars after the sale of the Windows Division

The cash inflow following the completion of the sale of the Windows Division, expected in the second quarter of 2021, will amount to approximately CHF 350 million, resulting in a net cash position of more than CHF 200 million in the group. Arbonia announced at the beginning of 2021 that it would use a large part of these funds to strengthen accelerated growth, but also for acquisitions in the remaining divisions.

Doors Division

The Sanitary Equipment Division with its shower doors and shower enclosures will be integrated into the Doors Division. The strategic logic of the integration lies in the better use of synergies in joint market development in contract sales on the one hand and in procurement on the other. In addition, the product range of the Doors Division with functional and interior doors will be expanded to include shower doors, and in the medium term the glass doors and glass partitions area can be expanded for interiors. The Doors Division is strengthening its position as a solution provider for accessibility from a single source, incl. the keyless KIWI access system.

The integration of the Sanitary Equipment Division will take place on 1 July 2021. The Doors Division will be divided into the Wood Solutions and Glass Solutions Business Units from that date.

The Doors Division will be able to increase its capacities in the wood solutions (wooden doors) area by 40% at the Prüm (D) and Invado (PL) production plants and by 30% at the Garant production plant in Eastern Germany by 2023/2024. The investments in capacity expansion at Invado were completed in 2020.

Based on this expected and sustainable organic growth, the robust profitability of the Doors Division with the integrated Sanitary Equipment Division as the Glass Solutions Business Unit, and the liquidity of the group, additional inorganic growth is also being sought by means of targeted acquisitions in existing and/or neighbouring markets. This brings Arbonia closer and closer to its goal of becoming the leading door supplier in Central Europe.

HVAC Division

On the one hand, the division continues to focus on organic growth in the product groups of underfloor heating, heat pumps, and residential ventilation, including their patented filter technology, which can also be offered as a system, and on the other hand on consolidation, process optimisation to increase productivity, and cost leadership in flat panel radiators, column radiators, and design radiators.

While the volume in the Western European radiator market will move sideways over the next few years, the division still expects profitable growth in these products through investments in the growth market of Eastern Europe and Russia as well as through the listed measures. In the past, the division has invested heavily in production processes in order to generate sustainably stable margins above the competition. In addition, it actively participates in the consolidation to gain market shares.

For the fast-growing system products such as heat pumps, underfloor heating, and ventilation, air-conditioning, and filter technology, accelerated growth is pursued in order to significantly change the revenue mix of the components and system business into 2025.

The division is focusing its development on the "house of the future": A system solution for heat generation, heat control, and heat storage is to be developed on the basis of photovoltaic systems in a private house.

The heat pump market, which has been growing strongly for years, is also benefiting from the European climate targets and their subsidising of CO2-reducing and energysaving products. For this reason, the HVAC Division is investing in expanding the capacity for energy-efficient systems at its site in the Czech Republic and will build a new production plant there starting in 2021, which will increase the existing production capacity many times over from 2022.

It is planned to support the accelerated organic growth in system products with targeted acquisitions.

From summer 2021, the new Arbonia will thus consist of two similarly large, focused divisions and a lean group management.

Expanded focus on sustainability

Arbonia, with its divisions and as a group, is dedicated to a consistent and comprehensive commitment to sustainability, which is both part of the group's strategic guidelines and part of the operating activities of the companies. The group is aware of its economic, environmental, and social responsibility. It is currently developing its sustainability strategy for the coming years. In addition to the previous objectives of continuously optimising the product portfolio and the production processes, further objectives will follow based on the materiality analysis conducted in 2020. With the new sustainability reporting, which takes up a separate chapter in this annual report (from page 47), Arbonia would like to present a coherent picture of its activities.

Independently of the sustainability chapter, however, the 2020 financial year showed that the strategy adopted with the forced growth in sustainable heat generation and with insulating doors is also paying off financially, as already explained. Arbonia has laid the foundation for these successes by investing in efficient and resourcesaving machines for the production of sustainable building components. It is thus clear that Arbonia has laid an exceptionally healthy foundation for sustainable and profitable growth with the restructuring of the group in the years 2015 – 2019.

Outlook

We currently assume that the situation with the COVID-19 pandemic will improve in the course of the first half-year of 2021 and that normality will slowly return from the second half-year of 2021 at the latest. After the development of the construction industry survived the first lockdowns well and many markets were able to recover quickly afterwards, the second wave of the pandemic should not have an overly negative impact on Arbonia. This is partly due to the fact that the well-known, long-term economic and growth drivers for the construction (materials) industry remain in place: low interest rates, which make real estate a sought-after investment, the trend towards urbanisation, and the high number of flats in need of renovation, and last but not least government subsidy programmes. The development of the construction industry and our group should also benefit from the fact that the COVID-19 pandemic has significantly increased people's appreciation of their own living space, both in terms of living area as well as finishing standards. Financial resources that were intended for consumption or holiday trips will continue to flow increasingly into people's own living space as an investment. In addition, many economic stimulus programmes contain incentives for renovating and upgrading the energy efficiency of living space, which will further accelerate the shift towards energy-efficient residential and commercial properties and thus the demand for the corresponding Arbonia products.

As a counterpart to the positive trends discussed above, raw material prices are rising, especially for steel, aluminium, and glass, which can only be passed on to customers with a time delay and in part.

Due to the economic uncertainty, however, a restraint is noticeable in the area of commercial construction. This particularly applies to shopping centres and other usable space for the retail trade as well as hotels. The orientation of the product portfolio, with a higher revenue share in residential construction and only around 30% in the remaining sectors, ensures that Arbonia is confident about the next financial year despite all the uncertainties. Together with the "EU Green Deal" and further measures of individual countries, there are opportunities for which Arbonia is well positioned with its energy-efficient heating and ventilation solutions as well as insulating doors.

Guidance

After the sale of the Windows Division and assuming that no further significant restrictions due to the COVID-19 pandemic will be imposed in Arbonia's production and sales markets, Arbonia expects an organic revenue growth of 4 – 5% and an EBITDA margin of >11% in 2021.