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AFG Arbonia-Forster-Holding AG returns to profit
Net revenues were up 0.4% to CHF 628.6 million - EBIT showed a pronounced increase of CHF 27.2 million to CHF 15.2 million - the Group result improved to a profit of CHF 1.3 million
The healthier income statement was accompanied by further strengthening of the balance sheet. Net indebtedness continued to follow a positive trend. At CHF 254.5 million it was much lower than the previous year figure of CHF 378.1 million, and only just higher than the CHF 239.7 million recorded as of 31 December 2009. The better result allowed the Group to reduce its leverage ratio (net indebtedness divided by EBITDA) substantially from -3.18 as of 30 June 2009 to -2.15. The cash flow statement as of 30 June 2010 shows a seasonally normal free cash flow of CHF -23.4 million (CHF -26.8 million).
AFG's Chairman of the Board of Directors and CEO Edgar Oehler is cautiously optimistic about the traditionally stronger second half of the year: "Barring unforeseeable events, we believe there will be slightly higher net revenues and a significant improvement in profitability for the year as a whole."
Varied performance by the individual divisions
Net revenues in the Heating Technology and Sanitary Equipment Division fell only slightly (1.7%) from the previous year's CHF 264.5 million to CHF 260.0 million. After adjusting for currency effects it posted growth of 1.7%. Though conditions on the market were still challenging, and despite rising steel prices, the division managed to post a respectable EBIT of CHF 19.2 million (previous year CHF 1.9 million). This represents an improvement of CHF 17.3 million, though it should be noted that the previous year result was impacted by the CHF 15.5 million goodwill impairment charge of Aqualux. Excluding this exceptional charge, the yearonyear rise in EBIT for the period under review comes to CHF 1.8 million. Once again, the division was able to rely on its two home markets of Switzerland and Germany, while the Eastern European markets remain weak. UKbased Aqualux performed much better, but still did not turn a profit. This prevented the division from achieving an even better result.
Net revenues at the Kitchens and Refrigeration Division were down 5.4% at CHF 113.7 million compared with the same period last year (CHF 120.1 million). EBIT fell to CHF -5.8 million (CHF -2.9 million). While Swiss brands Piatti and Forster and the refrigeration business performed well, the kitchens business struggled because of a further decline in exports by Warendorf and related capacity utilisation problems. The change in brand name from Miele Kitchens to Warendorf, which was announced some time ago, is progressing as planned, but the division's continuing unsatisfactory performance means that comprehensive structural and personnel measures are required to ensure sustainable growth in revenues and earnings. These have already been initiated. Current Head of Division, Hansgeorg Derks, has been relieved of his duties with immediate effect and has left the company. Under the leadership of CEO Edgar Oehler, the three general managers of Forster Kitchens and Refrigeration, Piatti und Warendorf have taken over management of the division on an interim basis. Definitive arrangements will be announced at a later date.
Thanks to a strong domestic market, net revenues in the Windows and Doors Division improved by 1.0% to CHF 159.4 million (CHF 157.9 million), though EBIT declined slightly by 6.6% to CHF 7.8 million (CHF 8.4 million). In the windows and doors business, competition has become noticeably more aggressive, with pricecutting and heavy pressure on margins. The division is still partly suffering from project delays as a result of the unusually cold winter months at the start of 2010. It has not yet been possible to make up for these completely. As a result, RWD Schlatter finished the first halfyear with net revenues slightly down compared with last year's figure, while in the windows business, EgoKiefer, which focuses on the Swiss market, achieved higher net sales than previous year with capacities fully utilised. In Slovakia, Slovaktual suffered, like the Heating Technology and Sanitary Equipment Division, from continued flat demand in Eastern European markets.
The Steel Technology Division, which is more dependent on the automotive industry than any of the other divisions, benefited from the surprisingly fast worldwide recovery in the automotive sector. It managed to increase revenues by 12% to CHF 67.6 million (CHF 60.3 million), and improve operating results from CHF -6.3 million in the prioryear period by an impressive CHF 11.5 million to CHF 5.2 million. The division was previously managed by Edgar Oehler in addition to his duties as CEO. At his request, the Board of Directors appointed the longstanding head of the steel tubing business, Christian Mayer, as the new Head of Division and member of Group Management. Christian Mayer, who has 15 years of experience in the industrial steel products business, will take over his new role as of 1 September 2010.
As expected, the Surface Technology Division, which is strongly dependent on the printing machinery industry and highly focused on exports, was able to work its way out of the difficult situation caused by the dramatic fall in demand from the printing industry. The crisis in the industry is still not completely over, but the recovery so far has been better than expected. The performance of the other business areas, especially Marine and Aeronautics, has remained below expectations, but the level of incoming orders suggests that the decline in even these areas has bottomed out. The division saw first halfyear revenues increase by 8.7% to CHF 28.0 million (CHF 25.8 million). As announced earlier, it has still not managed to achieve positive operating results, but the loss at EBIT level was practically halved as planned, reducing by CHF 3.5 million from last year's CHF -7.9 million to CHF -4.4 million.
Balance sheet further strengthened
The already solid balance sheet improved in parallel to the income statement. The equity ratio fell from the last year's 43.0% to 40.5%, but this decline was due to the high level of liquidity generated by the CHF 200 million bond issue in April this year, and to the currency effects booked through equity.
Net indebtedness continued to follow a positive trend. At CHF 254.5 million it was much lower than the previous year figure of CHF 378.1 million, and only just higher than the CHF 239.7 million recorded as of 31 December 2009. The better result allowed the Group to reduce its leverage ratio (net indebtedness divided by EBITDA) substantially from -3.18 as of 30 June 2009 to -2.15. This ratio is now close to the Group's target corridor of -1.00 to -2.00. All covenants on all credit agreements have been met. The cash flow statement as of 30 June 2010 shows a seasonally normal free cash flow of CHF -23.4 million (CHF -26.8 million).
Cautiously optimistic outlook
Widespread uncertainty about economic developments in Europe, combined with the difficulty of predicting the effect of the end of state subsidy programmes in many countries, makes it hard to come up with reliable forecasts about the second half of the year. AFG is working on the assumption that overall there will be a long and slow fundamental recovery in its markets. It intends to use this time to remove operational and structural weaknesses and correct individual deficiencies. This will put the Group in a position to cope with any further economic downturns, but also to benefit more than most from a resurgent upswing. AFG will also be investing again, though much more modestly than in the past. As part of a longterm future strategy coordinated with its most important client, a global market leader, the Surface Technology Division began construction on a stateoftheart coatings plant in the Shanghai area a few weeks ago. This will provide a platform for exploiting the exceptionally attractive potential of the Chinese and Asian markets.
The decision to centralise sourcing means that AFG will realise synergies worth several million francs per annum year by coordinating purchasing throughout the Group. On the other side, the market environment remains highly competitive for all divisions, so it is unclear how much of the increase in energy and raw materials prices it will be possible to pass on to customers. The price of steel is particularly important to AFG, and it certainly will not be possible for all business areas to pass on the recent sharp increases. AFG will have no choice, therefore, but to find further efficiency gains going forward.
However, the company remains cautiously optimistic about the second halfyear and the year as a whole. "Barring unforeseeable events," says Chairman of the Board of Directors and CEO Edgar Oehler, "we believe we will see slightly higher net revenues and a significant improvement in profitability for the year as a whole."
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