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Q3 progress undeniable
15 Jun 16
Solid +4.4% organic growth in Q3 15/16 resulting in sales for 9M up +5.9% to €3,841.8m, with organic growth of +0.4% and a forex benefit of 5.5%. During the quarter, System activities saw a continuing weakness from its Aerosafety business (-7.7% organic decline in Q3 and -6.5% for 9M 2015/16) as the contract from US airports’ arresting systems came to an end, but a recovery is expected in Q4. On the other hand, the Aircraft systems business benefited from strong traffic growth in commercial aviation but growth was dampened by sales falling in Helicopter-related activities as well as in the Business jet segment. The Aircraft interior business also posted a solid quarter with sales up 6.3% on an organic basis and 5.3% taking into account a negative 1.3% forex impact. The Seats business returned to organic growth over the course of the quarter, +3.2%, as Zodiac was able to obtain certification for business class seats and therefore was able to deliver these (Cathay Pacific business class A350 seats). Similarly, Cabin maintained its solid organic growth profile and improved on its organic growth figures (+9.9% in Q3 vs +4.1% for 9M 2015/16). The improvement in the delivery profile for the A350, as well as the acceleration at Embraer and Bombardier, is leading to a positive volume boost. In addition to a solid growth profile during the quarter, Zodiac announced reassuring commercial contracts across all its business units suggesting that its remains well placed in the market and is not suffering significantly from the issues it encountered over the last two years. The announcements include a retrofit contract with AirFrance for its A330 fleet, as well as a significant win from United Airlines which selected Zodiac’s Polaris business class seats. Reassuringly, Zodiac has confirmed its full-year guidance of a flat current operating income. The banking covenant should be respected. This puts an end to the series of profit warnings.
Zodiac turning the corner in H2?
20 Apr 16
Zodiac announced its H1 results with no surprises on the revenue front given that sales were released a month ago, H1 15/2016 revenues are up +7.1% to €2,489.1m; but down 1.7% on a lfl basis. The key information related to its current operating income over H1 15/16 which came in at €80.4m. Looking at the various segments: Together Aerosafety and Aircraft Systems (now called just Aircraft Systems) generated a current operating income of €153m, up from €142m in the previous year, whilst the Aircraft interior segment posted a negative contribution of some €66.3m, hampered by what the company estimates is €110m in excess costs due to issues in the Seats and Cabin business and the structural lower margin on product ramp-ups, while maturing high margin products are seeing volumes tail off. Importantly, the guidance for FY 15/16 has been maintained with the group expecting an improvement in its financial results in H2 and confirming its target of a current operating income for the 2015/16 fiscal year to be close to 2014/15’s (€314m), suggesting a COI of c.€220m over H2 or a margin of 8.2% based on our estimates for FY revenues. Net debt to shareholders’ equity ratio stood at 0.5x and net debt has increased to €1,621.4m vs. €1,423.3m. The group’s financing was reinforced in H1 and the group does not expect to breach its financial covenants at the year-end even excluding the hybrid equity line that management now says will be used to finance an M&A transaction if necessary and, in this case, avoid breaching the covenants.
A collapsing House of Cards?
16 Mar 16
Top-line evolution: H1 revenues at Zodiac are a mixed bag with ramp-ups of large commercial aircraft still very much the growth driver. On the Regional aircraft front, sales are stable meaning that growth at Zodiac is flat. The Business Jets segment, however, is on a downward trajectory given the softness in the market and especially the delays in entry into service of multiple platforms. The demand from the helicopter market continues to fall with the Oil & Gas segment particularly challenging. Aftermarket sales are proving resilient as air traffic remains robust. Overall, H1 revenues stood at €2,488m growing 7.1% but mainly thanks to a favourable exchange rate impact of 8.7%. On an organic basis, growth stood at a negative 1.8% with Aero-Systems (Aero Safety -6% and Aircraft systems -1.4%) revenues falling by 2.8% and Aircraft interior business (Seats -4.2% and Cabin +1.4%) revenues falling by 1.1%. Management attempted to explain the reasons for last month’s profit warning, suggesting that the first four months of the year were in line with the guidance given in December, however January and onwards saw a fall in performance that meant that guidance had to be scrapped. Zodiac was forced to realise that despite no new issues arising in either the seats or the cabin segments, the corrective measures would take significantly more time than first thought and therefore additional costs would continue for a longer period of time. Issues remain: SEATS: The backlog of seats that have been delayed has remained stable since Q1 c.300PAX. The problematic seat shell production remains an issue and Zodiac is incurring significant extra costs (excess production costs and in service support costs). While production has issues due to bad design and specifications and therefore leading to redesign costs, the supply chain is also not functioning effectively, meaning that spare parts are insufficient. The longer term fixes include adding industrial scale, redefining segment governance and responsibilities, hiring new required competencies, overhauling operations and improving the engineering capability both in design and production. The target is now to return to a normal operational performance in the next 18 months. CABIN: With many programmes ramping up fast, Zodiac was insufficiently prepared to meet the production demands and this means that catching up and delivering on time is significantly impacting the segment’s profitability. The programmes concerned include the A350 lavatories for which the production site in California did not have sufficient capacity, requiring the opening of a second line in Canada, however with some delay. An initial improvement in the production rate as well as the quality was achieved in February (rate 5) with Zodiac targeting rate 8 by August. Zodiac is incurring costs due to the retrofit programme required to fix the already delivered lavatories. On the A320 programme, Zodiac is offering the Spaceflex V2 option which is encountering significant success with airlines and means that Zodiac is looking to add additional capacity in anticipation. Overall, the various costs that are ramping up are: Cost of redesign. Non-quality costs, higher purchasing costs and late delivery penalties. Costs related to the learning curve which is not in line with expectations as a result of required additional training and excess labour. Again, looking at resolving the structural issues, Zodiac is improving the industrial processes and adopting modern enterprise resource planning systems (ERP) which are requiring additional staff training. In addition, production expertise is being transferred from EU sites to the US. Similar to the seats business, the Cabin segment’s management expects a return to a normal operational performance based on quality and on time delivery in the next 18 months. Update on Zodiac’s financial position: Zodiac maintains an overall liquidity position of €2.07bn composed of the following: A club deal from 7 banks of €1.03bn for which Zodiac has extended the maturity by an additional year to 2021. A Euro Private Placement of €230m with a 7 year maturity which will help fund the €133m July 2016 repayment part of the Schuldschein €535m and replace an existing Private Placement maturing in 2018. Zodiac has set up a hybrid financing line of €250m with no fixed maturity which will be recognised in shareholders’ funds. Commercial paper programme of €1bn of which €458m was used at 29/02/2016. The existing banking covenant on the company Club deal remains a net debt/EBITDA ratio of 3x which is tested at the financial year-end. Outlook: Following last month’s profit warning, Zodiac suggests that the 2015/16 operating income should be close to that of 2014/15. More details will be given at the group’s H1 results presentation on 24 April 2016.
Total loss of credibility
02 Mar 16
Zodiac is implementing its Focus transformation plan, a complete revision of the production systems within the whole group. Zodiac has updated the market on its delivery status and suggested that, in its Seats business, no progress has be made since mid-January in terms of delivery delays and that the “transformation and industrial recovery" may take longer than initially planned. Zodiac confirms that this will result in "excess costs remaining at a high level". As a result, the guidance of a 10% operating margin for the FY and the 18-month guidance for c.12% are at risk. In addition, Zodiac, on the basis its revised projections, does not expect to break any of its banking covenant ratios (adjusted net debt/EBITDA), which are calculated exclusively at the end of the fiscal year.
No return to a normative 14-15% margin over the next two years
26 Nov 15
We will not refer to the sales progression in this article as we tackled the subject in our Latest on 16/09/2015. Over the course of the full year 2014/15, Zodiac’s current operating income (COI) fell by 44.6% to €314m. As a result, the group's COI margin fell to 6.4% for FY 14/15 from 13.6% in 2013/14 and 14.5% in 2012/13. Aero Safety saw its COI improve by €6.3m to €118.3m, despite an organic decline of €16.9m. Aircraft Systems saw its COI increase by €29m, mainly thanks to foreign exchange movements which compensated for an organic decline of €39.1m. The two segments will be merged together in the future as part of Zodiac’s reorganisation. The new two division organisation was set up in September and The Focus transformation plan is being implemented to “learn from the seats crisis and strengthen the group's industrial operations”. The Aircraft Interiors activity was mainly responsible for the decline in the COI with its contribution falling to -€6.1m from €285m. The €325.5m in cost overruns versus “Zodiac's budgeted costs” came mainly from the Seats segment. The €325.5m incremental costs split 60% into increased production costs and 40% extra costs. Production costs differences included (c. €200m): • Labour costs, • Raw materials, • Cost of non-quality, • Procurement cost variances, • Inventory write-offs • Temporary workers and consultants While extra costs (c. €125m) refer to: • Penalties • Settlement costs • Logistics costs Zodiac saw its full-year net debt increase to €1,267m from €1.07bn. Zodiac emphasised that its debt covenant had not been breached. The increase of €238m in working capital is the main reason for this increase. With working capital as a percentage of sales representing 37.4% at the end of 2014/15, this represents a 3ppt increase versus the previous year and 8ppts since 2011/12. This highlights that Zodiac has struggled to manage its top-line growth and ramp-ups optimally. Zodiac is set to maintain the dividend flat year on year at €0.32. Finally, the guidance for FY 2015/2016 suggests that Zodiac should achieve a slight growth in revenue with a positive dollar impact and a COI margin of around 10%. This seems conservative and unhelpful given that the CEO said that it would look to do better than that, setting expectations higher already and rendering the guidance instantly obsolete. In addition, the current operating margin should improve in 2016/17, by an estimated additional 2ppts with respect to the 2015/16 fiscal year, i.e. 12% given the current 10% guidance.
Growth crisis continues with a governance review now required
16 Sep 15
Zodiac announced its full-year 2014/15 sales, tainted by a somewhat weaker Q4, resulting in a weaker than average organic growth of 2.6% for the group, with organic growth in its exclusively aerospace products falling to 3.2% (normally 4-6%). Revenue growth stood at 18.1% so that revenues reached €4.93bn (2.6% organic, 3.8% scope and 11.7% from forex). From a divisional standpoint: Aircraft interiors saw revenues grow by 23.2% to €2.83bn (4.4% organic, 5.9% scope and 12.9% from forex). Aircraft systems saw revenues grow by 12.4% to €1.46bn (0.8% organic, 2% scope and 9.6% from forex). AeroSafety saw revenues grow by 10.4% to €635m (-0.9% organic, -0.8% scope, +12.1% from forex). Following the company’s struggles in its Seats business, Zodiac has announced that it expects operating income to fall by 40% compared to 2013/14 (€566m 2013/14) and that its margin, which stood at 13.6% in 2013/14, would be impacted by roughly 500bp. Based on our estimates, this would result in an operating income of c. €385m in 2014/15. In addition, the net debt position of the firm at the end of August will have increased to €1.3bn, which should not breach the company’s net debt/EBITDA covenant. Zodiac has guided for a return to normalised organic growth in 2015/16 of c.4-5% for the group but has only committed to “progressively absorbing the excess costs relating to the seats business delays during the course of 2015/16” and has effectively failed to curtail the issue to 2014/15 as management had strongly indicated it would do in its Q3 sales conference call.
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Fighting the waves
25 Oct 16
Management action in response to a tough trading climate and falling profits should contribute to a sound recovery in profits next year. Following share price weakness, the group is valued at a substantial discount to both the broking market leader Clarkson and to other peers. Meanwhile, if the dividend can be held, the shares offer a well above-average yield, pending an eventual improvement in trading conditions.
21 Oct 16
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N+1 Singer - Morning Song 21-10-2016
21 Oct 16
Xaar has announced that its FD, Alex Bevis, will be leaving to pursue other opportunities after almost 6 years with the group. A search is underway for his replacement and Alex will remain with Xaar until 24th March 2017. While Alex’s departure is disappointing, Xaar’s strategy remains on track, with new product launches expected to drive near term organic sales growth and a target of £220m sales by 2020. This reflects stronger leverage of Xaar’s innovative technology into a broader spread of end products and markets, with the £220m expected to be composed of broadly equal contributions from ceramics, packaging & product printing, Thin film/P4, and partnerships/M&A. Prospects for the group are exciting, with positive news flow on product launches and end markets anticipated over the year ahead.
FY17 expectations unchanged. Interim dividend maintained
25 Oct 16
Interims reflect tough markets which impacted Technical. Shipbroking delivered a resilient result and Logistics has performed well. The interim dividend has been held at 9.0p. The group anticipate an improvement in H2. The Board’s expectations for the year are unchanged based upon the strength of the order book due in H2, its ongoing market coverage and the benefits of action taken previously. We have retained our FY2017 PBT forecast of £8.7m and a maintained dividend. We reiterate our Buy and adjust our TP to 450p.
N+1 Singer - Morning Song 20-10-2016
20 Oct 16
A highly disappointing update from Senior reports a number of issues adding up to the Group being behind expectations. Following the Flexonics issues over the past 12 months, there are now issues on the Aerospace side which are affecting the outlook. In a period when some stability was required, this is disappointing. We have downgraded FY16 EPS by 6.8% and, whilst we see Senior remaining a US takeover target, we move from Buy to Hold (target price down from 262p to 196p) until more clarity is available on the direction of the Group.