Stein am Rhein/Kloten, 10 August 2012. Phoenix Mecano, a technology company active in the fields of enclosures and industrial components, saw a slight decline in incoming orders and sales in the first half of 2012. However, income figures were substantially down, owing to various special items relating to growth initiatives, currency effects, the increased tax rate and an unfavourable product mix. As expected, business in photovoltaic inverter components was subdued. In the comparatively profitable industrial business, a degree of customer uncertainty became increasingly apparent over the course of H1. This was due to the sovereign debt crisis in the eurozone. Thanks to its very solid cash flow development and equity capital position Phoenix Mecano can and will continue to consistently implement its long-term growth strategy.
During H1 2012, consolidated gross sales fell by 3.3% from €275.8 million to €266.8 million. Excluding effects from changes to the scope of consolidation, the decline was 4.3%. Corrected for differences in foreign-exchange rates, sales were down by 5.1%. Incoming orders decreased by 3.4%, resulting in a book-to-bill ratio for the reporting period of 101.9%.
The company’s operating result (EBIT) was down by 24.2% compared with the previous year, at €23.3 million, corresponding to a margin of 8.7%. While margins in the Enclosures and Mechanical Components divisions retracted due to the weakening of European industrial markets, the ELCOM/EMS division was able to increase its margin, mainly thanks to a positive change in product mix as well as the disappearance of negative special items from the previous year. In geographical terms, declining sales in the major European markets were offset by single-digit growth in Asia and double-digit growth in North and South America.
Operating cash flow (EBITDA) fell by 15.3% to €34.2 million.
The result of the period after taxes was €16.2 million, compared with €22.8 million the previous year. At 27.6%, the effective tax rate was well above the previous year’s rate of 22.3%, which was influenced by positive special items. Adjusted to take account of special items, the tax rate was approximately 26.6%, around one percentage point higher than the equivalent value for the previous year. This was mainly owing to a changed geographical distribution of income.
Net indebtedness decreased significantly from €34.1 million to €7.1 million, a drop of 79%. This welcome development was made possible by a solid operating cash flow combined with optimisation measures targeting net current assets. At the same time, the company’s capital expenditure programmes were systematically continued. They focused mainly on growth areas such as security marking, touch screen processing with membrane keyboards integrated (both Enclosures) and industrial LED applications (ELCOM/EMS). Further substantial investments are being made in connection with the relocation from Germany to Hungary of various technical functions for the DewertOkin arm (logistics, prototyping, some R&D).
Funds not required for expansion of the operating business will continue to be returned to shareholders. This will be done through dividend payments and via the new share buyback programme instituted on 22 June 2012 for the purpose of capital reduction.
Development of the Group’s divisions
As expected, the Enclosures division was unable to fully match last year’s very strong performance. Key factors underlying the lower operating margin were the direct and indirect impact of the sovereign debt crisis on core markets in Europe (Germany, Switzerland) as well as integration costs for Leveringhaus, a manufacturer of membrane keyboards using conductive silver lacquer, which was acquired at the start of 2012.
Sales were down by 2.1% to €85.5 million and operating result by 26.7% to €14.6 million. Overseas activities (USA, Asia) continued to develop positively, as did sales of explosion-proof enclosures, particularly those for oil and gas applications.
In the ELCOM/EMS division, sales fell by 6.7% to €68.3 million. Declines in the solar sector and in electromechanical industrial components (switches, plug connectors) in Europe were partially offset by new electronic assembly projects (Phoenix Mecano Digital). The improvement in the division’s margin is owing to an optimised product mix (fewer low-margin photovoltaic components), operational measures, and the disappearance of negative one-off items of the previous year. Overall, the environment remains challenging.
In the Mechanical Components division, sales were down by 2% to €113 million and operating result by 35.3% to €6.5 million. In addition to the high basis of comparison from the previous year, a number of factors can be cited to explain this reduction in operating result. On the one hand, an over-proportional decline in high-margin industrial applications in Europe led to a deterioration of the product mix within the division. On the other hand, within the DewertOkin line of business, the European market for electrically adjustable furniture and medical technology applications is declining while the Asia and North America region is experiencing strong growth. Consequently, substantial efforts are needed to ensure that the necessary resources are available in the right geographical markets. This means redeploying capacity from Western Europe to Eastern Europe, Asia and the USA. The costs and inevitable process duplication associated with this transition will be incurred in 2012 and 2013, as already noted in the 2011 annual report. Phoenix Mecano anticipates very attractive prospects for this division in the coming years, combined with over-proportional market and sales growth.
Outlook
In the perception of many market participants, the sovereign debt crisis in Europe continues to overshadow the otherwise encouraging outlook for the global industrial markets. Many players are having to take each day as it comes, making them much more reluctant to invest in major projects. A few market segments are bucking this trend, such as the oil and gas sector and LED applications. Generally speaking, Phoenix Mecano expects its markets to stagnate in the coming months. From today’s perspective, both a slump and a major upturn are equally unlikely. In this environment, Phoenix Mecano is focusing on factors which the company can influence: the integration of last year’s bolt-on acquisitions (Platthaus/transformers, Leveringhaus/membrane keyboards, Aton/LED applications), implementation of the restructuring and relocation programme at DewertOkin and further expansion of the Group’s presence in Asia.
Assuming this package of measures is successfully implemented, Phoenix Mecano can return to growth from 2013, even if the environment remains challenging. Our excellent equity capital levels and very strong free cash flow mean that we are in a position to exploit further strategic opportunities. The Board of Directors and Management are convinced that the right strategy is being pursued to create substantial value for the Group’s shareholders in the medium to long term. Despite the subdued state of the economy, we believe that a result at the lower end of the target range formulated in February 2012 (EBIT of €43-53 million) is still achievable from today’s viewpoint.
A detailed semi-annual report will be available for downloading as a PDF file from our website http://www.phoenix-mecano.com/semi-annual-reports.html from 17 August 2012.
