Leoni makes significant progress in the implementation of VALUE 21 in 2019 – significant burden from Covid-19 pandemic expected in 2020
– Leoni generates sales, earnings and free cash flow in line with forecast
– In 2019, sales amount to EUR 4.8 billion, EBIT before exceptional items as well as before VALUE 21 costs at EUR -66 million
– Positive free cash flow development in the second half of the year
– Consistent implementation of the VALUE 21 performance and strategy programme; first positive effects visible
– Expert restructuring opinion confirmed Leoni’s course
– Significant burden from Covid-19 pandemic expected
“Our most important success from the past financial year was the stabilisation of our business. This was driven in particular by the significant progress made in the implementing the VALUE 21 performance and strategy programme. The positive free cash flow development shows that we are overall on the right track,” says Aldo Kamper, CEO of Leoni AG. “Nevertheless, we expect significant challenges in the current financial year in connection with the rapid spread of Covid-19. We have reacted quickly and have already implemented a number of measures in recent weeks to contribute to the continuation of business operations,” Kamper added.
Challenges in the first half of the year weigh on consolidated earnings in 2019
The decline in sales to EUR 4.8 billion in financial year 2019 (2018: EUR 5.1 billion) is primarily due to weaker demand from the automotive industry which led to volume reductions for both wiring systems and automotive cables. Business with specialty cables and cable systems for the industry sector also declined. The negative EBIT before exceptional items as well as before VALUE 21 costs of EUR -66 million (2018: EUR 157 million) is not only due to declining demand in the automotive and industrial sectors, but also to operational burdens, particularly from the ramp-up of a project in Mexico at the beginning of the year.
The reported Group EBIT amounted to EUR -384 million (2018: EUR 144 million). In addition to costs for VALUE 21 of EUR 86 million (2018: EUR 2 million), this figure also includes non-cash write-downs of fixed assets and provisions for expected losses on existing contracts that could affect liquidity over a period of several years. Further exceptional items resulted from measures in connection with the refinancing and preparations for the carve-out of the Wire & Cable Solutions division.
The VALUE 21 performance and strategy programme strengthened the company over the course of the year and is on track to achieve annual gross cost savings of EUR 500 million from 2022 onwards.
The progress made in the implementation of the programme resulted in higher costs in 2019. Simultaneously, measures such as the significantly improved receivables and inventory management led to a positive free cash flow development in the second half of the year. For 2020, the company expects costs related to VALUE 21 of approximately EUR 35 million.
WSD: Earnings burdened by exceptional items
Sales in the Wiring Systems Division (WSD) in 2019 fell by about 4 percent to EUR 3.0 billion (2018: EUR 3.2 billion). This decline was caused by the generally weaker automotive industry, which led to lower uptake from various major customers, as well as the expiration of a major project in the first half of the year. This was offset by several project start-ups and project ramp-ups, with the result that the overall decline was less pronounced for Leoni than it was in the overall market.
EBIT before exceptional items as well as before VALUE 21 costs amounted to EUR -118 million (2018: EUR 92 million). This was due to lower sales volumes, scheduled increases in ramp-up costs for new projects, significantly higher wage levels, especially in several Eastern European countries, increases in the price of various raw materials and, above all, the now resolved problems at the Mérida, Mexico facility, which opened in 2018.
Reported EBIT of the Wiring Systems Division amounted to EUR -370 million (2018: EUR 80 million). The implementation of a majority of the initiatives from the VALUE 21 performance and strategy programme resulted in costs of EUR 50 million. The exceptional items related mainly to provisions for potential losses of EUR 119 million, including around EUR 80 million in the fourth quarter for a major project, and unplanned write-downs of EUR 57 million. The unplanned, non-cash provisions and write downs are mainly due to the reassessment of the order portfolio and market prospects as well as the stronger focus on strategic customer relationships.
Within the framework of VALUE 21, Leoni selects and aligns projects more closely with cash flow and earnings criteria and limits growth in the Wiring Systems Division to the level of market trends. This realignment in project acquisition has enabled WSD to deliberately limit order intake to about EUR 2 billion in the past financial year, thus enhancing operational and financial stability.
WCS: Result slightly below previous year
In 2019 the Wire & Cable Solutions Division (WCS) generated sales of EUR 1.8 billion (2018: EUR 1.9 billion). In the automotive and industrial business, organic volume declined slightly.
The segment EBIT before exceptional items as well as before VALUE 21 costs amounted to EUR 51 million (2018: EUR 67 million). Reported EBIT for WCS in the financial year 2019 was EUR -14 million (2018: EUR 66 million). The planned implementation of numerous VALUE 21 initiatives resulted in costs of EUR 36 million. Amongst other things, the exceptional items of EUR - 29 million include write-downs of fixed assets amounting to EUR 20 million.
Investments: Increase in capacity to secure contracts already won
The investments in property, plant and equipment and intangible assets rose to EUR 357 million (2018: EUR 343 million). Of this amount, EUR 244 million (2018: EUR 205 million) was attributable to the WSD Division and EUR 107 million (2018: EUR 114 million) to the WCS Division, where first sections of the Factory of the Future were put into operation as planned in the past financial year.
Of the Group’s total capital expenditure, EUR 86 million was attributable to additions from rights of use that stem from the conclusion of new lease agreements (first-time application of IFRS 16).
Financial and asset situation: Free cash flow significantly improved in second half of year
The negative result and a further high investment volume led to a free cash flow of EUR -308 million in 2019 (2018: EUR - 140 million, restated). Free cash flow improved significantly over the course of the year and was positive in the second half at EUR 74 million. This exceeded the target of a largely balanced free cash flow development in the second half of the year and reflects the stronger cash flow focus. The positive development was mainly based on the significantly improved receivables and inventory management. As of December 31, 2019, due to a significantly reduced cash outflow in the course of the year, available liquidity amounted to EUR 624 million. Approximately EUR 480 million was related to undrawn credit lines and EUR 144 million was cash. Bank guarantees amounting to EUR 74 million (2018: EUR 89 million) must be deducted from freely available liquidity at year end.
Outlook 2020: Covid-19 pandemic burdens Leoni
As communicated in an ad hoc announcement on 23 March 2020, in view of the increasing economic uncertainties at the end of March in connection with the spread of Covid-19 and the resulting challenges, particularly for the automotive industry, burdens on Leoni’s sales, earnings and liquidity are becoming apparent. Leoni has already implemented various measures to respond to the burdens caused by the Covid-19 pandemic.
“The actual impact of the spread on our business cannot be reliably determined at this point in time, as new developments occur daily. The further development of the financial year will depend to a large extent on how long our customers’ production restrictions will continue and at what speed the production will subsequently return to the expected levels,” says Ingrid Jägering, CFO of Leoni. “Together with our Chief Restructuring Officer Hans-Joachim Ziems, we will continue to drive forward the stabilisation of Leoni”, Jägering adds.
Excluding the impact of the Covid-19 pandemic, due to several project ramp- ups, the Board of Directors previously expected Group sales would be moderately above the previous year’s level (2019: EUR 4.8 billion), that Group EBIT before exceptional items as well as before VALUE 21 costs would improve to a positive mid-double-digit million euro amount (2019: EUR- 66 million) and that free cash flow would come to a negative figure in a high two-digit to low three-digit million euro amount (2019: negative EUR 308 million). Since the actual burdens relating to the Covid-19 pandemic cannot be reliably quantified at the present time, Leoni currently assumes significant negative deviations from the original planning.
At the end of March Leoni implemented swift measures to ensure the continuation of business operations. These include temporary plant closures in Europe, North Africa and America and the introduction of short-time work in Germany as well as similar measures at other European sites. The rapid implementation of these measures will significantly reduce both material and personnel costs. In addition, Leoni will take up the offer by the Federal Government and is well advanced in the process of applying for financial aid to ensure the continuation of its business operations in this extraordinary situation.
Leoni Performance Overview
|Group key figures||FY 2019||FY 2018||Change|
|Sales [€ million]||4,846||5,101||(5.0)%|
|EBITDA [€ million]||(179)||303||> (100)%|
|EBIT [€ million]||(384)||144||> (100)%|
|EBIT before exceptional items(1) as well as before VALUE 21 costs(2)(3) [€ million]||(66)||157||> (100)%|
|Consolidated net loss / net income [€ million]||(435)||73||> (100)%|
|Earnings per share [€]||(13.30)||2.31||> (100)%|
|Free cash flow [€ million]||(308)||(140)||> (100)%|
|Capital expenditure [€ million]||357||343||4.1%|
|Equity ratio [%]||17.7||31.2||-----|
|Employees (as of 31 December) [number]||94,928||92,549||2.6%|
(1) Exceptional items comprise significant impairment of goodwill, intangible assets, property plant and equipment as well as other assets, material expenses for contingent losses on customer contracts, costs in preparation for carving out the Wire & Cable Solutions Division (excl. internal costs), refinancing costs (incl. consultant, bank and solicitor fees; apart from the costs that are attributed to interest expenses) as well as other expenses incurred by strategic decisions.
(2) Costs for the VALUE 21 programme comprise all the related restructuring and severance costs as well as external consultant fees.
(3) The figure “EBIT before exceptional items as well as before VALUE 21 costs” represents the adjustment of EBIT for extraordinary one-off effects in order to improve comparability between periods and the interpretation of operating performance.