Management Reports • Apr 16, 2019
Management Reports
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| Business and Financial situation of the Group | |
|---|---|
| ----------------------------------------------- | -- |
| € ( /000) |
2018 | % | 2017 | % | 2018-2017 change |
% change |
|---|---|---|---|---|---|---|
| Sales revenue | 150,642 | 100% | 150,223 | 100% | 419 | +0.3% |
| EBITDA | 29,959 | 19.9% | 30,955 | 20.6% | (996) | -3.2% |
| EBIT | 16,409 | 10.9% | 18,117 | 12.1% | (1,708) | -9.4% |
| Pre-tax profit | 20,960 | 13.9% | 17,804 | 11.9% | 3,156 | +17.7% |
| Profit attributable to the Group | 15,614 | 10.4% | 14,835 | 9.9% | 779 | +5.3% |
| Basic earnings per share (€) | 1.413 | 1.323 | 0.090 | +6.8% | ||
| Diluted earnings per share (€) | 1.413 | 1.323 | 0.090 | +6.8% |
In 2018, the Sabaf Group reported a sales revenue of € 150.6 million, an increase of 0.3% versus the figure of € 150.2 million in 2017 (-2.4% taking into consideration the same scope of consolidation). Profitability continued to be excellent, albeit slightly down: 2018 EBITDA amounted to € 30 million, equivalent to 19.9% of turnover, compared to € 31 million (20.6% of turnover) in 2017, EBIT reached € 16.4 million, equivalent to 10.9% of turnover, compared to € 18.1 million (12.1%) in 2017. Net profit of 2018, equal to € 15.6 million (10.4% of sales), is 5.3% higher than the € 14.8 million of 2017.
The subdivision of sales revenues by product line is shown in the table below:
| € ( /000) |
2018 | % | 2017 | % | % change |
|---|---|---|---|---|---|
| Brass valves | 4,327 | 2.9% | 5,991 | 4.0% | -27.8% |
| Light alloy valves | 37,615 | 25.0% | 39,351 | 26.2% | -4.4% |
| Thermostats | 6,521 | 4.3% | 7,376 | 4.9% | -11.6% |
| Standard burners | 39,368 | 26.1% | 41,070 | 27.3% | -4.1% |
| Special burners | 27,585 | 18.3% | 27,184 | 18.1% | +1.5% |
| Accessories and other revenues | 15,422 | 10.3% | 15,267 | 10.2% | +1.0% |
| Total household gas parts | 130,838 | 86.9% | 136,239 | 90.7% | -4.0% |
| Professional gas parts | 5,331 | 3.5% | 5,079 | 3.4% | +5.0% |
| Hinges | 10,436 | 6.9% | 8,905 | 5.9% | +17.2% |
| Electronic components | 4,037 | 2.7% | 0 | 0.0% | |
| Total | 150,642 | 100% | 150,223 | 100% | +0.3% |
Product innovation continues to support sales of special and professional burners, while more mature products (brass valves and thermostats) show a marked decline. Sales of hinges increased significantly, supported by the positive trend of the North American market and the launch of new supply contracts. Following the acquisition of Okida Elektronik, from September 2018 the Group is also active in the production and sale of electronic components.
| € ( /000) |
2018 | % | 2017 | % | % change |
|---|---|---|---|---|---|
| Italy | 31,579 | 21.0% | 36,523 | 24.3% | -13.5% |
| Western Europe | 12,337 | 8.2% | 11,678 | 7.8% | +5.6% |
| Eastern Europe | 46,301 | 30.7% | 42,824 | 28.5% | +8.1% |
| Middle East and Africa | 12,303 | 8.2% | 13,009 | 8.6% | -5.4% |
| Asia and Oceania | 7,590 | 5.0% | 10,516 | 7.0% | -27.8% |
| South America | 25,461 | 16.9% | 22,938 | 15.3% | +11.0% |
| North America and Mexico | 15,071 | 10.0% | 12,735 | 8.5% | +18.3% |
| Total | 150,642 | 100% | 150,223 | 100% | +0.3% |
The geographical breakdown of revenues is shown below:
The sales analysis by geographical area shows an uneven trend in the various markets in which the Group operates. The best results were achieved on the American continent: sales in North America were sustained by the good performance of consumption; in South America, strong growth rates were recorded in the Andean countries, which more than offset the effects of the crisis in Argentina and a still stagnant demand in Brazil. Satisfactory growth rates were recorded in European markets, thanks to the consolidation of relationships with major customers and the contribution made by the acquisition in Turkey of Okida; only in Italy sales are down due to the sharp reduction in the production of domestic appliances. North Africa and the Middle East have shown signs of weakness, while the Group's presence on Asian markets is not yet sufficiently consolidated.
Average sales prices in 2018 were 0.2% lower compared to 2017.
The effective average purchase prices of the main raw materials (aluminium alloys, steel and brass) were on average higher than in 2017, with a negative impact of 0.7% of sales. Consumption (purchases plus change in inventories) as a percentage of sales was 38.4% in 2018, compared with 38.2% in 2017.
The impact of labour cost on sales decreased from 23.5% to 23.1%, by benefiting from greater automation of production.
The ratio of net financial expenses to turnover remained low, equal to 0.6% of turnover. During the year, the Group recorded in the income statement positive exchange differences of € 5.4 million, due to fluctuations in exchange rates with the Turkish lira and the U.S. dollar.
The tax rate in 2018 was 24.6% (16.2% in 2017, when the Group recorded the "Patent Box" benefit for the three-year period 2015 to 2017). The main tax benefits enjoyed by the Group are shown in Note 31 to the consolidated financial statements.
| € ( /000) |
31/12/2018 | 31/12/2017 |
|---|---|---|
| Non-current assets | 119,527 | 93,802 |
| Short-term assets1 | 92,111 | 79,314 |
| Short-term liabilities2 | (32,381) | (28,561) |
| 3 Working capital |
59,730 | 50,753 |
| Short-term financial assets | - | 67 |
| Provisions for risks and charges, Post employment benefits, deferred taxes |
(6,387) | (4,034) |
| Net invested capital | 172,870 | 140,588 |
| Short-term net financial position | (9,180) | (5,830) |
| Medium/long-term net financial position | (44,344) | (19,703) |
| Net financial debt | (53,524) | (25,533) |
| Shareholders' equity | 119,346 | 115,055 |
The Group's statement of financial position, reclassified based on financial criteria, is illustrated below:
Cash flows for the financial year are summarised in the table below:
| € ( /000) |
2018 | 2017 |
|---|---|---|
| Opening liquidity | 11,533 | 12,143 |
| Operating cash flow | 25,814 | 22,779 |
| Cash flow from investments | (11,467) | (13,944) |
| Free cash flow | 14,347 | 8,835 |
| Cash flow from financing activities | 21,579 | (6,516) |
| Okida acquisition | (24,077) | - |
| Foreign exchange differences due to translation | (9,956) | (2,929) |
| Cash flow for the period | 1,893 | (610) |
| Closing liquidity | 13,426 | 11,533 |
Net financial debt and liquidity shown in the tables above are defined in compliance with the net financial position detailed in Note 22 of the consolidated financial statements, as required by CONSOB memorandum of 28 July 2006.
At 31 December 2018, working capital stood at € 59.7 million compared with € 50.8 million at the end of the 2017: its impact on pro-forma turnover (i.e. considered the contribution of Okida for the entire financial year 2018) was 38% (33.8% in 2017).
1 Sum of Inventories, Trade receivables, Tax receivables and Other current receivables
2 Sum of Trade payables, Tax payables and Other liabilities
3 Difference between short-term assets and short-term liabilities
The Group's financial debt is mainly medium to long-term, the most widely used form of financing is unsecured loans repayable in 5 years.
In 2018, the Group invested € 24.1 million to acquire 100% of the Turkish company Okida Elektronik; the purposes of this transaction are closely examined in the next paragraph of this report.
The Sabaf Group also carried out organic investments of € 11.5 million: the main investments in the financial year were aimed at the further automation of production of light alloy valves and interconnection of production plants with management systems (Industry 4.0). Other investments were made in the production of presses for new burners. Investments in maintenance and replacement, so that production equipment is kept constantly up to date and efficient, are systematic.
During the financial year, the Group paid out dividends of € 6.1 million and purchased treasury shares for € 2.4 million; the net financial debt was € 53.5 million, versus € 25.5 million in 31 December 2017.
Shareholders' equity totalled € 119.3 million at 31 December 2018; the ratio between the net financial debt and the shareholders' equity was 0.45 versus 0.22 in 2017.
| 2018 | 2017 | |
|---|---|---|
| ROCE (return on capital employed) | 9.5% | 12.9% |
| Dividends per share (€) | 0.554 | 0.55 |
| Net debt/EBITDA | 1.79 | 0.82 |
| Net debt/equity ratio | 45% | 22% |
| Market capitalisation (31/12)/equity ratio | 1.44 | 2.00 |
| Change in turnover | +0.2% | +14.7% |
Please refer to the introductory part of the Annual Report for a detailed examination of other key performance indicators.
In September 2018, the Group acquired 100% of Okida Elektronik, a leader in Turkey in the design, manufacture and sale of electronic control boards, controls, timers, display units and power units for ovens, hoods, vacuum cleaners, refrigerators and freezers. The acquisition of Okida represents the first step towards the implementation of the 2018-2022 Business Plan, in line with the strategy of expanding the range of products in components for household appliances and the acquisition of e-skills.
Okida was consolidated as from 4 September 2018, contributing € 4 million to 2018 consolidated turnover. The company ended the entire 2018 financial year with sales of € 11.1 million.
4 proposed dividend
The results of the risk identification and assessment process carried out in 2018 showed that the Sabaf Group is exposed to certain risk factors, which can be traced back to the macrocategories described below.
Risks deriving from the external context in which Sabaf operates, which could have a negative impact on the economic and financial sustainability of the business in the medium/long-term. The most significant risks in this category are related to general economic conditions, trend in demand and product competition, in addition to the risks related to Sabaf's presence in Turkey and, more generally, to instability in the emerging countries in which the Group operates.
Strategic risks that could negatively impact Sabaf's short to medium term performance, including, for example: the loss of business opportunities in the Chinese market, risks related to the growth through acquisitions and the protection of product exclusivity.
Risks related to Sabaf's contractual liabilities and compliance with the regulations applicable to the Group, including: Legislative Decree 231/2001, Law 262/2005, HSE regulations, regulations applicable to listed companies, tax regulations, labour regulations, international trade regulations and intellectual property regulations.
Risks of suffering losses due to inadequate or malfunctioning processes, human resources and information systems. This category includes financial risks (e.g. losses deriving from the volatility of the price of raw materials used by the Group in its production processes, from fluctuations in exchange rates or from the management of trade receivables), risks related to production processes (e.g. product liability), organisational risks (e.g. loss of key staff and expertise and the difficulty of replacing them, resistance to change by the organisation), risks related to purchases (e.g. relations with suppliers and contractors) and Information Technology risks.
The main risks are described in detail below as well as the relevant risk management actions that are currently being implemented.
The Group's financial position, results and cash flows are affected by several factors related to the performance of the sector, including:
To cope with this situation, the Group aims to retain and reinforce its leadership position wherever possible through:
Turkey represents the main production hub of household appliances at the European level; over the years, local industry attracted heavy foreign investments and favoured the growth of important manufacturers. In this context, the Sabaf Group created a production plant in Turkey in 2012 that realises today 10% of total production. In 2018, the Group also acquired 100% of Okida Elektronik, a leader in Turkey in the design, manufacture and sale of electronic control boards for household appliances.
With the acquisition of Okida, Turkey represents approximately 15% of the Group's production and more than 25% of its total sales. The social and political tensions in Turkey over the last few years had no effect on the activities of the Sabaf Group, which continued normally. In consideration of the strategic importance of this Country, the management assessed the risks that could arise from any difficulties/impossibilities of operating in Turkey and envisaged actions to mitigate this risk.
More generally, the Group is exposed to risks related to (political, economic, tax, regulatory) instability in some emerging countries where it produces or sells. Any embargoes or major political or economic instability, or changes in the regulatory and/or local law systems, or new tariffs or taxes imposed could negatively affect a portion of Group turnover and the related profitability.
Sabaf has taken the following measures to mitigate the above risk factors:
The Sabaf Group's business model focuses on the production of gas cooking components (valves and burners); therefore, there is the risk of not correctly assessing the threats and opportunities deriving from the competition of alternative products (alternative solutions to gas cooking, such as induction), with the consequence of not adequately making use of any market opportunities and/or suffering from negative impacts on margins and turnover.
In recent years, the Group has launched a number of projects aimed at analysing the opportunities and threats related to competition of products other than gas cooking, including:
With a production of over 20 million hobs per year, China is one of the world's most important markets. After many years of commercial presence only, in 2015 Sabaf started the on-site production of a special burner for the Chinese market.
However, there is a risk that Sabaf's investments in the opening of its Chinese headquarters and the start of production will not generate - at least in the short/medium term - an adequate economic return.
To support the development of the Group's Chinese subsidiary and ensure the economic return on the investments made, Sabaf is carrying out the following actions:
The strategic plan developed by the Group's management includes the possibility of growth through acquisitions, also in related sectors. This strategic choice involves specific risk profiles for Sabaf, due to:
The Group adopted solutions and instruments to mitigate the above risks, such as:
Sabaf's business model based the protection of product exclusivity mainly on design capacity and the internal production of special machines used in manufacturing processes, thanks to its unique know-how that competitors would find difficult to replicate.
There is a risk that some Group products, although patented, will be copied by competitors. Exposure to this risk increased as a result of the opening up of trade in countries where it is difficult to enforce industrial patent rights.
Sabaf developed and maintained a structured model to manage innovation and protect intellectual property. Moreover, the Group periodically monitors the patent strategies adopted/to be adopted based on the assessments of cost/opportunity.
The Sabaf Group is exposed to a series of financial risks, due to:
For more information on financial risks and the related management methods, see Note 35 of the consolidated financial statements as regards disclosure for the purposes of IFRS 7.
The most important research and development projects carried out in 2018 were as follows:
various models of customised burners are being developed mainly for North America;
innovative technical solutions that make it easier for users to clean burners are being tested;
a project is underway to create a multiposition valve.
a damping unit fitted in the oven was developed to provide a soft close effect using just one damping unit for the kitchen;
damping unit fitted in the oven was developed that allows to have both a soft close and a soft open effect;
The improvement in production processes continued throughout the Group, accompanied by the development and internal production of machinery, tools and presses.
Development costs to the tune of € 340,000 were capitalised, as all the conditions set by international accounting standards were met; in other cases, they were charged to the income statement.
Starting from 2017, the Sabaf Group publishes the consolidated non-financial statement required by Legislative Decree no. 254/2016 in a report separate from this Management Report. The non-financial statement provides all the information needed to ensure understanding of the Group's activities, performance, results and impact, with particular reference to environmental, social and personnel aspects, respect for human rights and the fight against active and passive corruption, which are relevant considering the Group's activities and characteristics.
The non-financial statement is included in the same file in which the management report, the consolidated financial statements, the separate financial statements of the parent company Sabaf S.p.A. and the remuneration report are published.
It should be noted that since 2005, the Sabaf Group has drawn up an Annual Report on its economic, social and environmental sustainability performance.
In 2018, the Sabaf Group suffered no on-the-job deaths or serious accidents that led to serious or very serious injuries to staff for which the Group was definitively held responsible, nor was it held responsible for occupational illnesses of employees or former employees or causes of mobbing.
For all other information, please refer to the Non-Financial Statement.
In 2018 there was no:
damage caused to the environment for which the Group was held definitively responsible;
definitive fines or penalties imposed on the Group for environmental crimes or damage. For all other information, please refer to the Non-Financial Statement.
For a complete description of the corporate governance system of the Sabaf Group, see the report on corporate governance and on the ownership structure, available in the Investor Relations section of the company website.
The internal control system on financial reporting is described in detail in the report on corporate governance and on ownership structure.
With reference to the "conditions for listing shares of parent companies set up and regulated by the law of states not belonging to the European Union" pursuant to articles 36 and 39 of the Market Regulations, the Company and its subsidiaries have administrative and accounting systems that can provide the public with the accounting situations prepared for drafting the consolidated report of the companies that fall within the scope of this regulation and can regularly supply management and the auditors of the Parent Company with the data necessary for drafting the consolidated financial statements. The Sabaf Group has also set up an effective information flow to the independent auditor as well as continuous information on the composition of the corporate bodies of the subsidiaries, together with information on the offices held, and requires the systematic and centralised gathering as well as regular updates of the formal documents relating to the articles of association and granting of powers to corporate bodies. The conditions exist as required by article 36, letters a), b) and c) of the Market Regulations issued by CONSOB. During the year, the Group acquired Okida Elektronik, a company based in Turkey, and is fully integrating its financial reporting system.
The Organisation, Management and Control Model, adopted pursuant to Legislative Decree 231/2001, is described in the report on company governance and on the ownership structure, which should be reviewed for reference.
During 2018, Sabaf S.p.A. updated its personal data management and protection system, adopting an Organisational Model consistent with the provisions of European Regulation 2016/679 (General Data Protection Regulation - GDPR). Specific projects are being implemented for all Group companies for which the GDPR is applicable.
For the comments on this item, please see Note 35 of the consolidated financial statements.
Sabaf Group companies did not execute any unusual or atypical transactions in 2018.
Neither Sabaf S.p.A. nor its subsidiaries have secondary operating offices.
Sabaf S.p.A. is not subject to management and coordination by other companies. Sabaf S.p.A. exercises management and coordination activities over its Italian subsidiaries, Faringosi Hinges s.r.l., Sabaf Immobiliare s.r.l. and A.R.C. s.r.l.
The relationships between the Group companies, including those with the parent company, are regulated under market conditions, as well as the relationships with related parties, defined in accordance with the accounting standard IAS 24. The details of the intra-group transactions and other related-party transactions are given in Note 36 of the consolidated financial statements and in Note 37 of the separate financial statements of Sabaf S.p.A.
The start of 2019 shows signs of a slowdown in demand in some of the main markets in which the Group operates, including Turkey.
For 2019 the Group estimates that it will be able to achieve sales ranging from € 160 to € 165 million and a gross operating profit (EBITDA %) of more than 20%.
These forecasts assume a macroeconomic scenario not affected by unpredictable events. If the economic situation were to change significantly, actual figures might diverge from forecasts.
| € ( /000) |
2018 | 2017 | Change | % change |
|---|---|---|---|---|
| Sales revenue | 110,065 | 115,687 | (5,622) | -4.9% |
| EBITDA | 13,644 | 17,477 | (3,833) | -21.9% |
| EBIT | 5,543 | 8,050 | (2,507) | -31.1% |
| Pre-tax profit (EBT) | 9,227 | 9,072 | 155 | +1.7% |
| Net Profit | 8,040 | 8,001 | 39 | +0.5% |
The reclassification based on financial criteria is illustrated below:
| € ( /000) |
31/12/2018 | 31/12/2017 |
|---|---|---|
| 5 Non-current assets |
96,495 | 89,361 |
| Non-current financial assets | 5,367 | 1,848 |
| Short-term assets6 | 64,927 | 58,875 |
| Short-term liabilities7 | (25,626) | (23,643) |
| 8 Working capital |
39,301 | 35,232 |
| Provisions for risks and charges, Post-employment benefits, deferred taxes |
(3,278) | (2,637) |
| Net invested capital | 138,885 | 123,804 |
| Short-term net financial position | (12,056) | (15,239) |
| Medium/long-term net financial position | (33,789) | (16,478) |
| Net financial position | (45,845) | (31,717) |
| Shareholders' equity | 92,040 | 92,087 |
5 Excluding Financial assets
6 Sum of Inventories, Trade receivables, Tax receivables and Other current receivables
7 Sum of Trade payables, Tax payables and Other liabilities
8 Difference between short-term assets and short-term liabilities
Cash flows for the financial year are summarised in the table below:
| € ( /000) |
2018 | 2017 | |
|---|---|---|---|
| Opening liquidity | 2,697 | 1,797 | |
| Operating cash flow | 8,796 | 12,554 | |
| Cash flow from investments | (15,219) | (9,319) | |
| Free cash flow | (6,423) | 3,235 | |
| Cash flow from financing activities | 5,685 | (2,335) | |
| Cash flow for the period | (738) | 900 | |
| Closing liquidity | 1,959 | 2,697 |
Net financial debt and the net short-term financial position shown in the tables above are defined in compliance with the net financial position detailed in Note 22 of the separate financial statements, as required by the CONSOB memorandum of 28 July 2006.
The 2018 financial year ended with a decrease in turnover of 4.9% compared with 2017. The sales analysis by product category shows a marked decrease in more mature products (brass valves and thermostats), while more innovative product families (light alloy valves and special burners) show an improved performance. The decrease in sales had a negative impact on gross operating profitability: EBITDA was € 13.6 million, or 12.4% of turnover (€ 17.5 million in 2017, or 15.1%).
EBIT of 2018 was € 5.5 million, or 5% of turnover (€ 8.1 million in 2017, or 7%).
The impact of the labour costs on sales increased from 24.8% to 25.8%. Net finance expense as a percentage of turnover was minimal, at 0.8%, given the low level of financial debt and the low interest rates.
During 2018, the Company received dividends of € 3 million from the subsidiary Sabaf Immobiliare and € 1.3 million from the new investee Okida Elektronik.
The actual tax burden related to 2018 was 12.9% (11.8% in 2017).
Net profit was € 8 million euro, or 7.3% of turnover (substantially unchanged from 2017, when it represented 6.9% of turnover).
In 2018, Sabaf S.p.A. invested over € 8 million in plant and equipment. The main investments in the financial year were aimed at increasing the production capacity of special burners, at the further automation of production of light alloy valves and interconnecting production plants with management systems (Industry 4.0). Other investments were made in the production of presses for new burners. Investments in maintenance and replacement, so that production equipment is kept constantly up to date and efficient, are systematic.
At 31 December 2018, working capital stood at € 39.3 million compared with € 35.2 million at the end of the previous year: its percentage impact on turnover stood at 35.7% from 30.5% at the end of 2017.
The net financial debt was € 45.8 million, compared with € 31.7 million on 31 December 2017.
At the end of the year, the shareholders' equity amounted to € 92 million, compared with € 92.1 million in 2017. The net financial debt/shareholders' equity ratio was 49.8%, 34% at the end of 2017.
Pursuant to the CONSOB memorandum of 28 July 2006, a reconciliation statement of the result of the 2018 financial year and Group shareholders' equity at 31 December 2018 with the same values of the parent company Sabaf S.p.A. is given below:
| 31/12/2018 | 31/12/2017 | ||||
|---|---|---|---|---|---|
| Profit for | Shareholde | Profit for | Shareholde | ||
| Description | the year | rs' equity | the year | rs' equity | |
| Profit and shareholders' equity of parent | |||||
| company Sabaf S.p.A. | 8,040 | 92,039 | 8,001 | 92,087 | |
| Equity and consolidated company results9 | 15,324 | 113,123 | 7,971 | 74,144 | |
| Elimination of the carrying value of consolidated | |||||
| equity investments | 640 | (83,622) | 682 | (48,596) | |
| Put option on A.R.C. minorities | 55 | (1,818) | (241) | (1,763) | |
| Intercompany eliminations | (8,005) | (427) | (1,497) | (817) | |
| Other adjustments | (256) | 51 | 0 | 0 | |
| Minority interests | (184) | (1,644) | (81) | (1,460) | |
| Profit and shareholders' equity attributable to | |||||
| the Group | 15,614 | 117,702 | 14,835 | 113,595 |
Pursuant to the second paragraph of Article 2364 of the Italian Civil Code, in consideration of the need to consolidate the financial statements of Group companies and to prepare all supporting documentation, the directors intend to use the longer time limits granted to companies required to prepare the consolidated financial statements for calling the ordinary shareholders' meeting to approve the 2018 financial statements. The Shareholders' Meeting will be convened on a single date for 7 May 2019.
9 Figures adjusted to allocate the consolidation difference to the equity of the acquired companies
While thanking employees, the Board of Statutory Auditors, the independent auditors, and the Supervisory Authorities for their effective collaboration, we ask the shareholders to approve the financial statements for the year ended 31 December 2018, with the proposal to allocate the profit for the year of € 8,040,215 in the following manner:
Ospitaletto, 26 March 2019 The Board of Directors
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