Annual results 2016: TKH ends 2016 with good fourth quarter

Highlights Q4

• Turnover up 5.1% at € 362.3 million, organic turnover growth 4.8%.

• Turnover Building Solutions and Industrial Solutions up 4.5% and 7.6% respectively, turnover decline of 1.7% at Telecom Solutions.

• Increase in EBITA of 15.9%, mainly driven by rise in EBITA Industrial Solutions due to increase in production volume.

• Healthy mix in activities and high turnover level results in ROS of 12.8%.

• Increase in net profit before amortization and one-off income and expenses of 10.3%.

• Visible recovery in order intake in tire building segment (Industrial Solutions) to € 89 million in Q4.

Highlights 2016

• Decline in turnover of 2.5% to € 1,341.0 million, organic turnover decline of 0.8%.

• Decline in EBITA of 3.3% due to lower production volumes at Industrial Solutions in the first nine months.

• Increase investments and R&D spending to strengthen technology base and further expand TKH's leading position.

• Decline in net profit before amortization and one-off income and expenses attributable to shareholders of 5.6% to € 94.4 million; slightly above the previously communicated bandwidth (€ 88 - € 93 million).

• Robust ROS of 10.9% and ROCE of 20.1%.

• The share of innovations in turnover was 19.0%, well above the target of 15%.

• Dividend proposal: € 1.10 per (depository receipt for an) ordinary share, equal to the dividend for 2015.

Fourth quarter results

Full year results

• Amortization of intangible fixed assets related to acquisitions (after tax).

• The one-off income and expenses in 2016 were impairments, on balance, of € 0.2 million (2015: €1.5 million) and tax income of € 3.0 million (2015: € 0.3 million). In Q4 2016, this amounted to, on balance, income of € 2.9 million (Q4 2015: € 0.8 million expense).

Alexander van der Lof, CEO of technology company TKH: 'We were able to close the year 2016 with a good fourth quarter, in which we saw a recovery of both turnover and order intake at Industrial Solutions, in particular in the sub-segment manufacturing systems. Thanks to preparations we had made in the preceding quarters in terms of the organization of the production capacity, we were able to realize the higher production volumes efficiently. Although order intake in China remains low, the order intake from the top five tire manufacturers increased in the fourth quarter. In Building Solutions, important steps were taken in preparation for the targeted growth in our vertical growth markets. We will start production on the first of our larger order in the new plant for subsea connectivity in the second quarter of 2017. In Machine Vision, we made a breakthrough with distinctive 3D technology for producers of consumer electronics of which we made the first deliveries in the fourth quarter. Higher R&D spending had a slightly negative impact on the ROS, but create a good perspective for the realization of the growth in our vertical growth markets.'

Financial developments

In 2016, turnover declined by € 34.2 million (2.5%) to €　1,341.0 million (2015: €　1,375.2 million). Turnover declined organically by 0.8%. The divestment of Parking & Protection resulted in a 0.4% decline in turnover, while acquisitions accounted for a 0.1% increase in turnover. Lower raw materials prices had a negative impact of 0.9% on turnover. On average weaker foreign currencies vis-à-vis the euro had a negative impact of 0.5% on turnover.

Organic turnover in Industrial Solutions was down 3.7% in 2016, while the fourth quarter showed organic growth of 6.8%. At Telecom Solutions, turnover increased organically by 2.4% in 2016, while Building Solutions recorded organic turnover growth of 1.5%. The contribution from Industrial Solutions to overall turnover in 2016 declined to 44.5% from 45.6% in 2015, while the contribution from Building Solutions increased to 42.9% from 42.3%. Telecom Solutions saw its contribution increase to 12.6%, from 12.1%.

The gross margin rose to 47.1% in 2016, from 46.0% in 2015, thanks to an improved product mix and on average lower raw materials prices. Operating costs were 0.9% higher than in 2015. Operating costs as a percentage of turnover increased to 36.1% in 2016, from 34.9% in 2015. This relative increase was largely due to an increase in R&D spending, in particular at Building Solutions to prepare for the targeted growth in our vertical growth markets, combined with lower turnover levels. R&D spending increased to € 50.3 million in 2016 (2015: € 46.5 million). Depreciations came in at € 22.1 million and were € 0.7 million higher than in 2015, due to the higher level of investments.

The operating result before amortization of intangible assets and one-off income and expenses (EBITA) was down 3.3% at € 146.5 million in 2016, from € 151.5 million in 2015. The EBITA at Telecom Solutions was up 13.3%. At Building Solutions, the EBITA was down 3.5% and at Industrial Solutions the EBITA was 6.3% lower. ROS came in lower at 10.9% (2015: 11.0%).

Amortization costs increased by € 1.0 million to € 32.6 million in 2016, due primarily to higher R&D spending. In addition, TKH recognized impairments of on balance € 0.2 million.

In 2016, financial expenses declined by € 0.7 million to € 7.5 million. This improvement was due to a lower average outstanding net bank debt. Currency exchange rates had a negative impact of € 0.1 million in 2016, compared to a positive impact of € 0.4 million in 2015. The result from participations came in € 0.3 million higher.

The tax rate declined to 18.4% (2015: 20.6%) on the back of one-off tax income of on balance € 2.6 million, due to the recognition of a deferred tax asset as a result of the valuation of previously unrecognized tax losses. As in previous years, the application of the Dutch innovation box rate had a positive impact on the tax rate.

Net profit before amortization and one-off income and expenses attributable to shareholders amounted to € 94.4 million in 2016 (2015: € 99.9 million), a decline of 5.6%. Net result for 2016 fell to € 87.3 million (2015: € 88.3 million). Earnings per share before amortization and one-off income and expenses came in at € 2.25 (2015: € 2.40). Ordinary earnings per share were € 2.04 (2015: € 2.07).

The cash flow from operating activities was € 103.4 million (2015: € 181.6 million). This decline was due to an increase in working capital, while working capital declined in 2015. At year-end 2016, working capital as a percentage of turnover had risen to 13.4% (2015: 11.3%). Net investments in tangible fixed assets were € 45.5 million in 2016 (2015: € 38.5 million). A large proportion of these were investments in production facilities, including an expansion of capacity for the sub-segments vision & security systems, building connectivity systems and manufacturing systems. In addition, we invested €　28.9 million in intangible fixed assets in 2016 (2015: €　25.4 million), largely in R&D, patents, licenses and software. Expenditures related to acquisitions came in at € 0.8 million.

Solvency rose to 46.7% in 2016 (2015: 42.2%). The net bank debt calculated in line with the bank covenants stood at € 166.1 million at year-end 2016, up € 5.1 million from year-end 2015. The net debt/EBITDA ratio came in at 1.0. TKH operates well within the ratios agreed with its banks. At the end of 2016 an amended committed credit facility of € 350 million was negotiated with a group of banks, which was formalized in January 2017, with a term of five years and an option for two one-year extensions. The new facility is subject to the same financial covenants as the previous facility in terms of debt leverage, namely a maximum ratio of 3.0. The interest coverage ratio does not apply any more.

TKH had a total of 5,509 employees (FTEs) at year-end 2016 (2015: 5,387). In addition, the company had 439 temporary employees (FTEs) (2015: 441 FTEs). Based on the growth plans, further growth is expected in the coming years.

Progress realization targets and implementation strategy

The past year, TKH kept a sharp focus on the core technologies and seven vertical growth markets, which are the growth pillars within the three Solutions segments and the basis of our growth targets.

In 2016 innovations once again made a significant contribution to TKH's turnover, at 19.0% (2015: 23.5%), and exceeded our goal of generating 15% of turnover from innovations launched in the market over the past two years.

In 2016, turnover growth in the vertical growth markets lagged somewhat behind expectations.

The continued reluctance to invest within the Tire Building Industry in China and a decline in investments in the Marine & Offshore sector, had a negative short-term impact on our growth. Over the past year we took numerous steps to bolster the foundations for growth. With the introduction of new technologies and strengthening our market position in combination with further internationalization, we increase our future market share within the vertical growth markets. Thanks to these steps, the perspective for growth remains positive and we confirm the previously communicated expectation that growth will materialize from 2018. Based on our defined plans and the progress we have made, we expect to record turnover growth of €　300 to €　500 million in our vertical growth markets over the next three to five years.

We are on track to realize our medium-term ROS and ROCE targets of 11-12% and 20-22% respectively, which we increased in early 2016. Although this year the ROS and ROCE came in at the lower end of the bandwidth, the ROS of 12.8% in the fourth quarter confirms TKH's potential.

Developments per solutions segment

Telecom Solutions

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 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.

Key figures

Turnover in the Telecom Solutions segment increased by 1.4% to € 168.5 million. Organic turnover growth stood at 2.4%, while currency effects had a negative impact of 1.0% on turnover. The organic growth came from the sub-segment fibre network systems. Demand for optical fibre network systems in the Netherlands and Poland was down, but this was more than offset by growth in Germany and strong demand for optical fibre in China.

EBITA increased by € 2.1 million on the back of higher capacity utilization and efficiency improvements in production. ROS improved to 10.6%, from 9.5%.

Fibre network systems - optical fibre, optical fibre cables, connectivity systems and components, active peripherals - turnover share 7.4%

Turnover in this sub-segment saw organic growth of 7.4%. The decline in demand for copper networks was not yet compensated by the construction of optical fibre networks in the Netherlands. In Poland, a decline in European subsidies had a negative impact on the willingness to invest, while an increase in turnover was recorded in Germany and in China. There was scarcity in the field of optical fibre on the Chinese market resulting in growth with healthy margins. The high capacity utilization and the ensuing efficiency had a positive impact on our result.

Indoor telecom & copper networks - home networking-systems, broadband connectivity, IPTV software solutions, copper cable, connectivity systems and components, active peripherals - turnover share 5.2%

Turnover in this sub-segment fell by 4.0%, largely due to a continued decline in investments in passive components for copper networks and a continued shift in the priority to invest in optical fibre networks. The margin improved on the back of an improved product mix.

Building Solutions

Building Solutions connects the core technologies vision & security, communications and connectivity in comprehensive solutions for security and communications applications in and around buildings, in medical applications, as well as for inspection, quality, product and process control. Building Solutions also focuses on efficiency solutions to reduce the throughput-time for the realization of installations within buildings, and on intelligent video, mission critical communications, evacuations, access (control) and registration systems for a number of specific sectors, including care, parking, marine and offshore, tunnels and airports.

Key figures

Turnover within the Building Solutions segment fell by 1.2% to €　574.9 million. However, the segment booked organic growth of 1.5%. The divestment of Parking & Protection had a negative impact of 1.0% on turnover. Acquisitions had a positive impact on growth of 0.4%. Exchange rate effects had a negative impact of 0.9%. Lower raw materials prices also had a negative impact of 1.2% on turnover. A reluctance to invest resulted in a decline in turnover in China and Poland. In the fourth quarter of 2016 Building Solutions recorded an organic turnover increase of 4.5%, mainly driven by the sub-segment vision & security systems.

EBITA came in 3.5% lower at € 62.4 million. The start-up and development costs, largely for subsea cable systems, airfield ground lighting systems and the new machine vision portfolio, had a negative impact on the results. ROS fell to 10.9% in 2016, from 11.1% in 2015.

Vision & security systems - vision technology, systems for CCTV, video/audio analysis and detection, intercom, access control and registration, central control room integration, care systems - turnover share 26.3%

Organic turnover growth in this sub-segment was 1.8%. TKH recorded a strong organic growth in the vertical growth market for parking technology. The order book stood at a record high ultimo 2016. In the Machine Vision vertical growth market, we realized a number of significant milestones in the development of the 2D and 3D portfolio. The breakthrough in our positioning with a number of large manufacturers of consumer electronics had a positive impact on the turnover as of the fourth quarter of 2016. Organic turnover growth in the sub-segment vision & security systems in the fourth quarter came in at 7.3%, mainly from the vertical growth markets Machine Vision and Parking. We increased R&D spending to further extend the lead we have in the field of our technology and to realize our growth objectives.

Connectivity systems - specialty cable (systems) for shipping, rail, infrastructure, wind energy, as well as installation and energy cable for niche markets, structured cabling systems and connectivity systems for wireless energy and data distribution - turnover share 16.6%

Organic turnover growth in this sub-segment amounted to 0.9%. Market volume was lower due to a reduction in the number of large-scale projects in the construction and infra sector. Turnover in energy and data cable systems increased. Turnover in the vertical growth market Marine & Offshore declined as a result of the reluctance to invest in the oil and gas sector, which also affected the ship building industry. The higher order book ultimo 2016 on the back of growth in market share we realized and the focus on the offshore wind industry provides a good perspective for growth. The start-up and development costs for the launch of a new plant for subsea cable systems, as well as the airfield ground lighting systems and associated CEDD technology, had a negative impact on our result. Serial production of subsea cable will commence in the second quarter of 2017. The roll-out of the CEDD technology is scheduled in 2018.

Industrial Solutions

Industrial Solutions develops, produces and delivers solutions ranging from specialty cable, plug and play cable systems to integrated systems for the production of car and truck tires. The company's know-how in the automation of production processes and improvements in the reliability of production systems gives TKH the differentiating potential it needs to respond to the increasing desire to outsource the construction of production systems or modules in a number of specialized industrial sectors, such as tire manufacturing, robotics, medical and machine building industries.

Key figures

Turnover in the Industrial Solutions segment fell by 4.8% to €　597.6 million. Exchange rate effects had a negative impact of 0.1% on turnover. The on average lower raw materials prices led to a 1.0% drop in turnover. Turnover declined organically by 3.7%. The turnover decline was entirely due to the sub-segment manufacturing systems and was related to the previously communicated reduced order intake due to reluctance to invest in China. Turnover and order intake recovered in the fourth quarter.

Although order intake in China remains low, the order intake from the top five tire manufacturers increased in the fourth quarter.

EBITA declined by 6.3% across the year, but was up 37.3% in the fourth quarter when compared to the same period of 2015. Effective cost management, improved efficiency and more in-house products meant we were able to limit the decline in ROS. ROS came in at 13.3% in 2016 (2015: 13.5%).

Connectivity systems - specialty cable systems and modules for the medical

, robot, automotive and machine building industries - turnover share 18.3%

Organic turnover growth was 6.2% in this sub-segment. This turnover growth was realized in the medical and robot industries. The investments in R&D, which enable TKH to come up with the most effective response to the trend towards miniaturization and increase the life of cable systems for advanced production systems, are clearly paying off, enabling TKH to capture new market positions. In addition, TKH benefited from a strong increase in demand for robot systems.

Manufacturing systems - advanced manufacturing systems for the production of car and truck tires, can washers, test equipment, product handling systems for the medical industry, machine operating systems - turnover share 26.2%

This sub-segment saw an organic turnover decline of 9.7%. This was due to the lower order intake and the effect of a relatively large proportion of engineering activities prior to production which were the result of the newly developed technology and a further breakthrough among the top five tire manufacturers. We continued to increase production capacity towards the second half of the year to meet the expected rise in production levels. Turnover recovered in the fourth quarter, with growth of 8.1% compared to the same period of 2015. Lower production volumes in the first half of the year had a negative impact on results.

The reluctance to invest in China is still having a clear impact on the order intake. However, order intake in the fourth quarter did increase to € 89 million on the back of projects previously announced in the tire manufacturing industry outside Asia, plus an increase in order intake among the top five tire manufacturers. The cumulative order intake in 2016 amounted to €　281 million. The order book was well filled ultimo 2016 and a large number of projects for investments in the tire building industry have already been announced. We therefore expect capacity utilization to be high in the coming quarters. There is considerable market interest in the MILEXX, the new generation of systems for truck tire building. In addition, we booked solid progress with the UNIXX project. We will build a prototype in the course of 2017 and we expect to deliver the prototype to a launching customer in 2018. The start-up of the operations in Poland during 2016 went well and completion of the construction of the new plant for tire building systems in Poland is scheduled for 2017.

Nominations for appointments Supervisory Board

During the General Meeting of 3 May 2017, Messrs H.J. Hazewinkel and P.P.F.C. Houben will step down in line with the prevailing retirement schedule. Mr. Houben is eligible for reappointment. Mr. Hazewinkel is not eligible or reappointment, as the maximum term on the board of three four-year terms has passed. Given that in 2018 the position of Mrs. M.E. van Lier Lels will also become available as a result of the expiry of the statutory term of office, the Supervisory Board has decided to nominate two new members. This way the expertise and thus the continuity within the Supervisory Board is safeguarded.

The Supervisory Board has decided to nominate Mr. Houben for reappointment and nominate Mrs. C.W.　(Carin) Gorter and Mr. J.M. (Mel) Kroon as new members. Mrs. Gorter is professional supervisor and in the past amongst others Senior Executive Vice President, Head of Group Compliance, Security & Legal at ABN Amro. Mr. Kroon is chairman of the Executive Board of TenneT Holding B.V. Both nominees have Dutch nationality. These appointments will temporarily increase the number of members of the Supervisory Board to six.

In view of the resignation of Mr. Hazewinkel, the Supervisory Board also announces that as of the end of the upcoming General Meeting of Shareholders, current member of the Supervisory Board Mr. A.J.P. De Proft will be appointed as chairman of the Supervisory Board.

Dividend proposal

At the Annual General Meeting to be held on 3 May 2017, TKH will propose the payment of a dividend of € 1.10 per (depositary receipt for a) share (2015: € 1.10). Based on the number of outstanding shares at year-end 2016, this amounts to a pay-out ratio of 49.2% of the net profit before amortization and one-off income and expenses attributable to shareholders and 53.1% of the net profit. TKH will propose the payment of a cash dividend to be charged to the reserves. The dividend will be payable on 10 May 2017.

Outlook

The global economic outlook is generally positive. At the same time, uncertainties such as the geopolitical developments, the economic developments in China and low oil prices continue to have a negative impact on the willingness to invest in certain sectors. In order to respond to the market developments, we decided in the course of 2016 to further increase our R&D efforts and focus on acceleration of the growth programs within our vertical growth markets. This has created a strong foundation to safeguard our growth ambitions for the coming years.

Based on the implementation of our growth plans, together with the defined building blocks for growth and associated roll-out of new technology, we see a better starting position for growth in 2017 compared to a year ago. The expectation is that growth will materialize from 2018. The steps taken in 2016, provides confidence that we are on the right track. This creates a solid basis for our expectation to again increase turnover in the defined seven vertical growth markets of € 300 million and € 500 million in the coming three to five years.

Barring unforeseen circumstances, we expect the following developments for the year 2017:

Telecom Solutions

We expect a further increase in investments in optical fibre networks in Europe and China. Due to our investments in market penetration within Europe in recent years, TKH's growth potential will be focused primarily on Europe. The scarcity of optical fibre in the Chinese market will decline in the course of 2017, which may result in pressure on margins.

Building Solutions

We expect the reluctance to invest in the oil and gas industry to continue. At the same time, we do see growth in the Marine & Offshore segment given the start of our subsea cable systems activities. In addition, the technological developments in the Machine Vision portfolio will enable TKH to further expand its market share with advanced technology.

Industrial Solutions

Investments in the industrial sector combined with robotization and automation are increasing, which means we expect to be able to realize growth in the sub-segment industrial connectivity systems. There is continuing reluctance to invest in China in the sub-segment manufacturing systems, but we see a large number of projects outside China that we expect to come to realization in the coming year. The order book at the start of 2017 is filled better than it was a year earlier, and on balance, we expect higher order intake in 2017 compared to last year.

As usual, TKH will give a concrete outlook for the full-year 2017 profit at the presentation of its interim results in August 2017.