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Edited Transcript of ZAG.VA earnings conference call or presentation 3-Mar-20 7:30am GMT

Q3 2020 Zumtobel Group AG Earnings Call

Dornbirn Mar 26, 2020 (Thomson StreetEvents) -- Edited Transcript of Zumtobel Group AG earnings conference call or presentation Tuesday, March 3, 2020 at 7:30:00am GMT

TEXT version of Transcript

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Corporate Participants

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* Alfred Felder

Zumtobel Group AG - President of the Management Board & CEO

* Emanuel Hagspiel

Zumtobel Group AG - Head of IR

* Thomas Tschol

Zumtobel Group AG - CFO & Member of Management Board

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Conference Call Participants

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* Charlotte Friedrichs

Joh. Berenberg, Gossler & Co. KG, Research Division - Analyst

* Markus Remis

Raiffeisen CENTROBANK AG, Research Division - Financial Analyst

* Michael Marschallinger

Erste Group Bank AG, Research Division - Research Analyst

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Presentation

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Emanuel Hagspiel, Zumtobel Group AG - Head of IR [1]

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Good morning, everybody. And welcome to our conference call on the first 3 quarter results of the 2019, '20 financial year. I hope that you were able to download the presentation from our website. Today's call will be, as always, hosted by Mr. Alfred Felder, the CEO of the group; and Mr. Thomas Tschol, CFO of the group. Like always, Thomas will start the call and talk you through the financial part of the presentation, and then Alfred will take over and give you a brief overview on the sales development and some other recent developments of the industry.

May I now hand over to Thomas and ask him to start the financial part.

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Thomas Tschol, Zumtobel Group AG - CFO & Member of Management Board [2]

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Good morning, ladies and gentlemen. Yes, I'm going to start by giving you a brief overview on the major developments in the first 9 months of this financial year on Page 2.

The result confirms that we are on the right track as we have been able to close the first 3 quarters of this financial year with a solid improvement in earnings. And however, growth dynamics have deteriorated as the third quarter shows a slight revenue decline of 0.5%. Anyway, the first 9 months, group revenues are up 0.8%, adjusted for FX revenues would be at 0.2%. The top line growth is coming from the Lighting segment, which is up by 1.2%, whereby, we have, in particular, soon a very promising development in the DACH region with a growth of 2.6%. Revenue growth was also supported by EMEA, North America as well as the countries of Eastern Europe. The Components segment is slightly below the previous year level and shows a decline of 0.4%, resulting above all from a continuing price pressure, which is still between 5% to 6%.

On a group level, we have a slight decline of the revenues. And this is of course disappointing to us, but it clearly shows that the change in market environment in Europe we are in. Coming out to positive news, the group adjusted EBIT increased from EUR 23.9 million to EUR 46.9 million, and this is driven by 2 main impacts, which is an increase in the gross profit of roughly EUR 2 million, which is due to the slight growth, particularly in strong margin -- markets like DACH region as well as cost reductions in the COGS and improvement of the cost base, mainly SG&A with EUR 9 million.

The good news here is that the corrective actions initiated in the last financial year are clearly visible in the P&L, and it could substantially lower our operating point. However, needless to say that we will need to continue this effort also in upcoming -- in the coming business year. The total group recorded a net profit of EUR 22.2 million and therefore, we were able to significantly increase in net profit of the previous year of minus EUR 6.1 million. We have recorded one-off costs for restructuring measures of roughly EUR 9 million, and these measures are primarily related to costs arising from a quality problem in the U.K. and some line restructuring measures involving the sales organizations and plants.

The weak economic outlook and macroeconomic uncertainties like the coronavirus have curved our optimism for the fourth quarter of this financial year. Nevertheless, for the financial year '19, '20, we expect an improvement in the adjusted EBIT margin to 3% to 5%. And depending on the further development of the coronavirus, also a slight growth in revenues. Our midterm goal for an EBIT margin of roughly 6% by 2020, '21 also remains intact.

Obviously, we are happy with this improvement of our results with the 3 quarters. However, we remain cautious for the fourth quarter in particular due to the decreased economic projections for Europe as well as risks for our operating business arising from the coronavirus. As you might know, we have canceled a big customer event in Dornbirn, which was launched in plans for this week, the pre-opening of our new Light Forum. This is just one example showing the real impact of the coronavirus in our business activity.

Let's now move to the next chart to give you more details on the development of each segment. We'll start with the Lighting segment on Slide #3. As usual, you can see our revenue development by quarter on the left-hand side and the adjusted EBIT development per quarter on the right-hand side. Revenues in the third quarter increased by 0.4%. After adjustment for foreign exchange effects, revenues would decrease 0.8%. A slight increase in revenues of EUR 0.8 million was mainly driven by good development in EMEA and Eastern Europe countries. Other countries could not continue the trend of the first half year. In particular, China was suffering a decrease of more than 20%.

Anyway, the industry environment remains very challenging, which is also reflected in many statements from peer companies, particularly in terms of ongoing intense price competition in Lighting business. On the right-hand side, you see that the adjusted EBIT development as a result of the improved cost base. The adjusted EBIT in the third quarter increased slightly to EUR 1.1 million versus minus EUR 0.7 million in the previous year.

Let's move on to Slide #4 of the Components segment. The revenues in Components segment were in Q3, 3% below previous year. After adjustments for FX, the segment was shrinking by 3.6%. The main challenge for the Tridonic top line is still the continuing price pressure, which decreased slightly. However, pressure is still -- the price is still at 5% to 6% on adjusted EBIT level, the profitability improved slightly to 8.3% in spite of the price pressure. However, the third quarter benefited from the income of research subsidies; and other operating results, therefore, increased by EUR 2 million versus comparable previous year period.

Now let's move on to Page #5 to the Zumtobel Group. Yes, here, you see the combined results of the Components segment and the Lighting segment. And yes, as always, there is not much more to add.

And so I think we can move on to the Slide #6 to the group adjusted EBIT bridge. Starting at its prior year, adjusted EBIT for the first quarter of 23 -- of the first 3 quarters of roughly EUR 24 million. The absolute gross profit of the group before R&D increased by EUR 12.3 million and very by -- the increase is mainly coming from the Lighting segment. As mentioned before, it is an impact of the top line increase in margin, strong markets as well as the cost decrease. R&D expenses decreased (sic) [increased] slightly by EUR 1.6 million. And the second important part is that in the functional areas, selling and administration, where we could realize additional cost savings versus previous year amounting to EUR 9 million. And this leads us to an adjusted EBIT of EUR 46.9 million in the first 3 quarters of the financial year.

Yes. Let's move on, on Page #7, our income statement. There is also I think on this slide not much to add. We have -- as I already mentioned, we had special effects that amounted to EUR 8.6 versus EUR 16.8 million in the previous year. And this year's amount is primarily related to the quality issue in the U.K. The financial result improved slightly by EUR 0.5 million. And in the bottom line, this leads us to the EUR 22.2 million in net profit.

Let's move on to Slide #8, the cash flow statement. The cash flow from operating result increased from EUR 45.8 million to EUR 86.2 million. The working capital remained really in the same level. And in comparison with the prior year, the working capital decreased slightly from 15.1% to 15% of the rolling 12 months' revenues. The cash flow from operating activities increased from 42 -- EUR 40.2 million to EUR 71.6 million in the first 9 months of this financial year. And the cash flow from investment activities was lower compared to previous year. It was at EUR 40.2 million versus roughly EUR 50 million the previous year. The increase in cash flow from operating activities and the lower investment activities led an improvement in the free cash flow, which is now at plus EUR 32.7 million versus minus EUR 8.9 million for the first 9 months of this financial year.

Let's move on to Slide #9, our balance sheet. A quick look at the balance sheet data, in particular, our liquidity position. The net debt totaled EUR 177.1 million as of end of January 2020. This is EUR 29.3 million above the value as of end of April 2019. This increase is mainly due to the first-time application of IFRS 16. And on the IFRS 16 effect, we'll provide you with more details on the next slide. Coming back to the liquidity situation, this is backed by a consortium credit agreement with a term ending in November '22 and a maximum volume of EUR 200 million, whereof up EUR 45 million were drawn. Then we have 2 long-term credit agreements of EUR 40 million each with the European Investment Bank, and there was a bullet repayment in September '24, respectively, and February '25. And both credit agreements, they're fully drawn. And we have uncommitted lines of credit totaling roughly EUR 63 million.

As you all know, there are 2 financial covenants attached to our financing agreement, this is the debt coverage ratio of 3.55 and an equity ratio of more than 23.5%. These financial covenants are tested end of October and end of April.

On Slide #10, you can see the effects of IFRS 16. As mentioned before, we applied the new standard of IFRS 16 for the first time in this financial year, so starting first of May 2019. What are the effects? The effects are given extension of the balance sheet of EUR 47 million. And this is due to recognition of the right-of-use asset. And also, we have a lease liability of EUR 48 million in parallel. And the impact on the income statement is that EBITDA increased by EUR 12.1 million. In the first 9 months, the EBIT increased by EUR 0.9 million, and there is -- which is the net impact of expenses for rent/leasing minus the depreciation for the right-of-use asset. And we have a decrease of interest result by EUR 1.6 million, and this ends up in the front-loading impact on the net income, which is minus EUR 0.7 million. And what is important to note and -- is that of course there is no change in -- this change in the accounting standard has no impact on the underlying cash flows.

This is all. With respect to the financial development in the first 3 quarters, I think we made good progress on the cost base and handling our liquidity situation. However and needless to say that we need to continue this effort in the challenging fourth quarter of this financial year.

May I now hand over to Alfred to provide you with a brief update on regional sales developments and the outlook for the full financial year. Thank you very much.

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Alfred Felder, Zumtobel Group AG - President of the Management Board & CEO [3]

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Yes. Good morning, everyone. Alfred Felder speaking here, and also, a warm welcome from my end.

If we switch to the Page #11, what you know already, where we have sketched the quarter-by-quarter development versus previous year. You see what Thomas already mentioned that we had a slight decline of 0.5% in our growth. If you look at the pages, the Lighting segment was able to grow slightly 0.4%, whereas the Components segment declined by 3%, still facing the continuous price pressure in the market, what we have in the range of 4 -- 5% to 6% already mentioned by Thomas.

If you look at page number -- so but basically, on Page 11, you'll see that the trend, its impact since we took over basically in quarter 4, '17, '18, and looking at the market environment, when we come to it on the next page, we see already that some impact on the deterioration of the economies in various countries.

On Page #12, you see the different territories, starting with the DACH region. As you know, in the previous calls, we mentioned that was of our drivers, not only in the top line where we put a special focus, but obviously also on the gross profit. What we saw in the quarter 3 is that we clicked at EUR 81.1 million, which was a minus of 1.3% to previous year quarter. Main negative drivers here have been Germany and Austria. Germany, where we see quite a significant amount of projects postponed of larger accounts. What we have in Switzerland is still in a slight growth model also smaller than the previous quarters and flat in Austria. In the Northern and Western Europe, we had a little bit of a change. On one side, I think Thomas mentioned this already. We had the issue on U.K., where with uncertainty, we were not moving forward. And what was basically a flattish development in Europe, we had a couple of delivery issues with our outdoor products, what we have, so we ended up in minus 1.3%.

Here, the different development we see in Southern and Eastern Europe, especially with the strong growth in the Eastern European countries, but also a bounce back in the quarter 3, especially of Italy and France where the corrective actions, what we took a couple of quarters ago are now paying off, which basically leads us in quarter 1 to quarter 3 into a slight growth. It was already mentioned in Asia and Pacific, especially in China, a decline. We saw already first indications over the quarter 3 due to Chinese New Year amounts is always quite weak. But also this has an impact on products that we are shipping into the Pacific region, into Australia and New Zealand. And obviously, here, we believe that the outlook will be even more negative as obviously the supply chain is part -- has been partly interrupted and is currently running at a lower level. And last but not least, the rest of the world, that includes the Middle East and in the Americas where we have been able to continue the growth on a lower level. But you see it also in quarter 3, the EUR 20.8 million, which is a growth of 14.6%. And that leads us to the EUR 871 million which is still a slight growth, but in quarter 3, due to the fact that Tridonic was shrinking with minus 3% to the EUR 267.3 million.

If we then go to the Page #13. And I also think -- I think Thomas mentioned this already. We continue to confirm our guidance for both this year, between 3% to 5% and also next year, to 6%. Obviously, since our last call, the situation has changed. We are -- and I guess there will be a couple of questions related to that. We are constantly now analyzing our supply chain. As you know, we do have a factory in Shenzhen from Tridonic, what basically was running 2 weeks longer idle after the Chinese New Year, and it's running currently at roughly 50% capacity. Same is the case for a lot of our suppliers, what we have, both on raw materials, partly also for finished goods. And now obviously, the next wave needs to be closely monitored what will happen on the customer base if the virus spread more severely over the European countries.

Obviously, with all the measures that we took, and we are continuing today, we are confident that we are able to stick with the guidance also for 2021 of 6% EBIT with the measures already mentioned in the previous calls, what we are taking, obviously, knowing that it's now the growth path, what we have initiated might be slightly interrupted into the first 1 or 2 quarters due to the situation of the coronavirus.

So that will be all with respect to the presentation. And now I think we can start then with the question-and-answer sessions. Thank you very much for listening.

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Questions and Answers

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Operator [1]

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(Operator Instructions) The first question is from the line of Markus Remis with RCB.

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Markus Remis, Raiffeisen CENTROBANK AG, Research Division - Financial Analyst [2]

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Let me first start the question related to the supply chain. If you could probably give us a bit more granularity on the current situation you see both for components and also eventually parts for the luminaire business. To which extent do you already encounter disruptions in the supply chain or kind of volume reductions? That would be very interesting to hear. And also, regarding your own plant in Shenzhen, what's the scope for kind of ramping up again to higher capacity loadings? So that would be the first part.

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Alfred Felder, Zumtobel Group AG - President of the Management Board & CEO [3]

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Okay. Yes. Thank you, Markus. So on the supply chain, obviously, we have been monitoring this right after we have heard about the coronavirus. Let me start with the Shenzhen plant first. So the Shenzhen plant is roughly now running at 60% capacity. Not to overstress this call, but more or less, we are here and it has been very heavy depending on the health authorities in China, which are basically very digital. So you need to apply for a permit to produce and where you have to submit all the -- not only the documents, but the proof that you're not having a case. And then basically, once this is all approved, they switch on the electricity and you are able to start producing. So in case something deteriorates, they don't announce you, they just switch off your electricity again. So I think this is China at its best. But basically, we have been ramping up. The other thing is, as you know, we do have -- when it comes to purely manufacturing capability, all transferred and have a perfect mirror copy in Niš. So basically, we have there enough capacity to be able to produce most of the parts with a few exceptions also in Niš.

The more challenging was the supply chain on raw materials for the components side as well as for the luminaire side. Here, we see a similar picture. The good news is all our suppliers are basically back to production, not at the full level. The investigation, what we do, more or less daily in the [COO] orbit indicates that we are not seeing a disruption of our delivery and supply chain for the next couple of weeks simply because we have key materials on -- in our warehouses. And also, we are seeing apart from price increases due to the higher transport value, partly, we need to do air transport, partly also certain components that have been in allocation already in the past, again, in allocation where we see higher prices, which automatically elected on the Components level, we have announced price increases also to our customers. But all in all, the supply chain is under control. It's getting better on a daily base. If this stays like this, then we will see most likely beginning of April for some minor products, a slight disruption. And then we are getting back to almost normal when it comes to the supply chain.

On the Lighting brands, as you mentioned that one, we have a couple of products. What we are sourcing as finished goods from -- based on our specification from Chinese manufacturers. Here also, we have a similar situation. All have been coming back to production but not at the full level. And obviously, currently, their house reach is for the next couple of weeks so that we don't see any disruption for the time being over the next, let me say, 6 weeks or 8 weeks for our customers in terms of supply chain. But obviously, this is a daily monitoring what we do and if this situation decorates, that picture will be slightly different. And obviously, as this is the case for all companies who are depending on the supply chain in China.

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Markus Remis, Raiffeisen CENTROBANK AG, Research Division - Financial Analyst [4]

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That was very helpful. And the second question would be on the strategy. You've updated, you've indicated on the postponement of the Capital Markets Day. I'm sure you won't be able to tell us too much. But can you just describe briefly the main focal points of the strategy update? And when do you think you will be ready to communicate to the market?

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Alfred Felder, Zumtobel Group AG - President of the Management Board & CEO [5]

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Yes. First of all, I have to apologize that we have to postpone this obviously now, almost looking at the corona, everything would have been postponed automatically. And we have -- especially when it comes to the sustainable future of our Components business, we have a couple of developments towards the strategy where we believe we are not ready for March as a couple of discussions are still going on. But obviously, I hope you understand. I cannot share right now. So this is more or less to have a sustainable future for our Components business, this was one.

And the second one is -- that's a little bit attached to that what we announced that we took back our factory in outdoor into our orbit of the footprint. And what automatically is the new parameter, how to reestablish into position our outdoor business. So that has been the main 2 drivers for -- but it takes us a little bit more time, and we will be ready for that by September time frame.

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Markus Remis, Raiffeisen CENTROBANK AG, Research Division - Financial Analyst [6]

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Okay. And the last question relating to the German market. I think in the last call, you said that the kind of the -- or at least I took away that these short-term prospects are quite, I should say, attractive. I think you referred to a very good pipeline also for the second half of the year. You indicated that Q3, you saw some project postponements. Will that already materialize in the fourth quarter? Or is that something which will be postponed longer? So into the next year, and I mean how sizable are these postponements at the moment?

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Alfred Felder, Zumtobel Group AG - President of the Management Board & CEO [7]

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Yes. To be honest, Markus, it's a little bit difficult now to answer with the latest development. I think the [patient] we have been at the biggest fair on -- for retail on EuroShop . And more or less, where we had discussions with all our major retail customers for the [ALDIs] of this world and the [lilies, and the spa and the rivers]. And with the corona impact, these companies reacted extremely fast in basically forbidding their people even to travel or -- and that we see already that projects that are in the pipeline are not, let's say, moved, but more or less the progress in saying do we get together, when do we execute is -- has slowed down significantly during the month of February. So that we believe that we have a slowdown already slightly in quarter 4. But the higher impact, we are expecting in the first quarter if the situation stays like it is. That's more or less for our big accounts where we have a better visibility.

On the area of sales, with projects currently, we are doing business as normal. It's not that we are growing rapidly, but we are not shrinking, but this is the amount of small and midsized projects. And what we also see that in Germany as we are having quite a significant amount with our wholesalers. Also, our wholesalers are struggling, especially in Germany, to do their business. So it's a mix. Prior the corona, there have been certain projects, we saw a little bit of a slowdown of the investment behavior of key customers. And now with the corona, it's even a little bit of a more irrational behavior of itself and projects are simply not executed because people are not meeting or not allowed to come and to travel and to discuss this in detail, and not everything can be done via telephone calls and via Internet.

And that, by the way, is also -- if you allow me, the bigger concern, what we have, I believe the supply chain will be bumpy. The supply chain needs special efforts, but that can be executed and can be managed if the situation stays as it is. But the more concerned we do have in certain areas where we do business, obviously, Italy and especially, the Northern part of Italy is like a core part territory for us where we believe is now customers are not accessible. And our people are not able to visit customers regularly, that we see a midterm impact on the order intake. Currently, it's still normal. But that's, I think, something what is currently the case.

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Operator [8]

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The next question comes from the line of Michael Marschallinger with Erste Group Bank AG.

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Michael Marschallinger, Erste Group Bank AG, Research Division - Research Analyst [9]

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My first one would be on the outlook. So just to confirm this lower range to 3% adjusted EBIT, in which it would imply negative results in the fourth quarter. So what's the rough case in your view that have to happen that this 3% would materialize in the fourth quarter? And could you also comment on the development in the end markets in U.K., Austria, Swiss. Similar trends as you just talked about in Germany? Or do you see any different developments here?

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Thomas Tschol, Zumtobel Group AG - CFO & Member of Management Board [10]

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The guidance obviously -- we just kept the guidance from 3% to 5%. This doesn't mean that we expect to see a result of 3% in our -- because this would effectively mean a negative EBIT adjusted in the fourth quarter, and we do not expect the negative EBIT adjustment in fourth quarter. So we expect it's between 4% and 5% on a full year level.

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Alfred Felder, Zumtobel Group AG - President of the Management Board & CEO [11]

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Okay. On your second question -- this is Alfred, on the different markets. So for example, on Switzerland, we are still seeing a very solid market development. But in Switzerland, we have been growing far above the market. In the first 2 quarters, we are still growing, but more in the range between 0.5% and 1%. Market is still solid, and we believe, assuming that the supply chain will not be further interrupted, that we will meet the numbers as budgeted there.

U.K. is a little bit like the soccer game, after the game is before the game. So we are still seeing that with the negotiations of EU with the U.K. There are still some work to do. We see a stabilization in the business. We see -- what I think I mentioned also in the last calls that national initiatives, especially the program, what Mr. Boris Johnson initiated on education is -- we are seeing results. We have a couple of initiatives running where we see projects are coming here, but it's still -- it remains the uncertainty how at the end of this calendar year that Brexit will end up. And that is basically hindering a little bit -- a lot of additional investments moving forward.

As I said, Italy, I mentioned a little bit, very nice recovery, after a weak start in the first 2 quarters. Let's see how the outlook looks like. Same for France where we are moving solidly into a slight growth mode. Eastern Europe, very well developing and obviously, in the northern part of Europe, in the Scandinavian parts especially with the control back of our factory, which was the major issue of not meeting our targets. We believe in the second half, we are able to move forward here.

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Operator [12]

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(Operator Instructions) The next question is from the line of Charlotte Friedrichs with Berenberg.

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Charlotte Friedrichs, Joh. Berenberg, Gossler & Co. KG, Research Division - Analyst [13]

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The first one would be around the fourth quarter and also the outlook. Can you comment maybe a little bit around what your order book looks like right now for us to understand how to quantify this?

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Alfred Felder, Zumtobel Group AG - President of the Management Board & CEO [14]

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Okay. What we are seeing is until -- let me say, at the end of last year, we had an order book, what was slightly above previous years. We have a dip this week, what we are currently analyzing. I hope it's not the beginning of a dip. But currently, the order book is healthy, slightly above previous year, but is in line with our forecast. But as I said, Charlotte, this is difficult now to predict what we have yet. We are monitoring it on a daily base. So we are seeing a weaker order intake in Italy, a weaker order intake also in Germany, but it's the case. And last week, first time, where we are currently analyzing the rest. So year-to-date, the order book looks healthy enough to -- that we can confirm that we will be able to slightly grow. But this is of course now a difficult situation to get a more solid answer to your question.

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Charlotte Friedrichs, Joh. Berenberg, Gossler & Co. KG, Research Division - Analyst [15]

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Okay, understood. And did I understand correctly in your prepared remarks that you mentioned the pricing pressure for Tridonic was a little bit less than...

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Alfred Felder, Zumtobel Group AG - President of the Management Board & CEO [16]

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Yes. I think we mentioned this already in the last calls. So it's still a 5% to 6%. And it's still on the higher end when it comes to LED modules, right? But we do see that the price pressure on certain components is getting slightly less. It's not anymore 7% to 8%, but it's more 5% to 6%. But it's still quite a significant price erosion. Obviously, the volume still went up significantly, especially with the transfer of key products from either our factories in Dornbirn, spending more on Shenzhen to Niš with a better cost position. But the volume growth was not able to eat up basically the shrinkage of the cost and the price erosion.

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Charlotte Friedrichs, Joh. Berenberg, Gossler & Co. KG, Research Division - Analyst [17]

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And about the comments that you made earlier about being able to move from Shenzhen to Niš, how easily is that achievable? Would you have to think a particular ramp-up cost in relation to that? How quickly...

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Alfred Felder, Zumtobel Group AG - President of the Management Board & CEO [18]

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No, that's already done. I think we mentioned this. When we opened the factory in September '18, we moved our factory location in Shenzhen to a new location with a smaller factory because 50% of the components production in Shenzhen was reexport to Europe. So that volume is already, since a year, in our factory in Niš. So the challenge what we have, there are certain products that we only manufacture in Shenzhen, also for other markets, for the Asian markets and partly for the European where we don't have currently the second source. Currently, we are safe because this is exactly the focus for the team up with a 60% capability of manufacturing those products, whereas the other products that we can manufacture in Niš already, we have a higher volume output there.

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Operator [19]

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(Operator Instructions) There are no further questions at this time. I hand back to Alfred Felder, CEO, for any closing comments.

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Alfred Felder, Zumtobel Group AG - President of the Management Board & CEO [20]

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Yes. Then ladies and gentlemen, thank you very much for listening to our call. Thank you for the questions. That brings us to the end of this call. Wish you a very nice and successful day, thank you.