Nedap's revenue up by 8 per cent

Supply chain reorganisation puts pressure on profits

The first six months of 2017 saw Nedap’s revenue rise by 8% to €99.0 million (€92.0 million in the same period of 2016). Operating profit excluding one-off items was up 8% to €7.9 million (€7.3 million in the same period of 2016). Profits amounted to €4.8 million, a 17% drop (€5.8 million in the same period of 2016), which is a result of one-off items related to the supply chain reorganisation. Earnings per share came in at €0.72 (€0.87 in the same period of 2016).

The Healthcare, Identification Systems, Livestock Management, Retail, Security Management and Staffing Solutions business units and the Nsecure subsidiary all helped to achieve this growth, while the Library Solutions and Light Controls business units saw their revenue drop. The business unit Energy Systems – whose activities were phased out as planned in 2016 – did not generate any revenue.

Supply chain reorganisation

In line with the strategy of focusing on activities with high added value, Nedap has embarked on a transition that will see most of its production and logistics operations outsourced to strategic partners. Many Nedap employees are involved in the supply chain reorganisation. These activities have peaked in recent months, creating one-off costs of €2.0 million in the first six months of 2017 (€0.4 million in the same period of 2016).

The first production departments have now closed and the employees who worked there have left the company. Production activities are scheduled to be phased out in late 2017. All of the employees due to lose their jobs as a result have now been given notice.

Buffer inventories have been built up to ensure the transition to the production partners runs as smoothly as possible. Since a significant amount of the current revenue was achieved by products from these buffer inventories, and because the costs Nedap’s production companies had not yet been phased out during the first six months of 2017, the cost savings brought about by the outsourcing are limited at the moment.

One of the strategic partners encountered operational problems and a scarcity of electronics components, which delayed fulfilment of some orders. In order to tackle these delivery problems, production of the items in question has been assigned to another party. The order fulfilment problems led to higher one-off outsourcing costs than expected. Please refer to the ‘Financial highlights’ section for more information on these one-off costs. The delivery problems have not yet been entirely resolved, and are likely to continue to generate additional costs in the last six months of the year.

Despite these challenges, the strategic assumptions underlying the decision to reorganise the supply chain remain valid. The financial benefits of the outsourcing are expected to be fully visible in 2018, and they will already be partially visible in the last six months of 2017.

 

Business unit developments

The Healthcare business unit (automation of administrative tasks for healthcare professionals) achieved a significant growth in revenue in the first six months of 2017. More and more elderly care institutions are turning to Nedap’s software services for support in their everyday activities, while the first organisations in the mental healthcare and mentally handicapped markets have also started using Nedap solutions. Although these two markets still have a limited amount of revenue, they have excellent potential for growth.

 

The Identification Systems business unit (vehicle and driver identification products and wireless parking systems) posted a sound increase in revenue over the first six months of the year, a result which all of the unit’s propositions helped to achieve.

 

Revenue posted by the Library Solutions business unit (RFID systems for libraries) dropped over the first six months of 2017. This business unit is working to refine its product range and ensure the offering is more in keeping with the opportunities available on the market.

 

Over the first six months of 2017, revenue posted by the Light Controls business unit (power electronics and control systems for the lighting industry) was down on the same period of 2016, mostly due to the phasing out of QL and HID products, which commenced in 2016.
Steady progress is being made with the Luxon proposition (light management in the form of software services) in North America and Europe. May saw the launch of the Luxon IoT node, which is a key breakthrough on the lighting market, ensuring that connected lighting becomes increasingly appealing.
Revenue generated by the UV propositions remained stable, while the expected growth in the ballast water treatment segment failed to materialise yet, due to uncertainty about the implementation of new legislation.

 

Revenue posted by the Livestock Management business unit (automation of livestock management processes based on identification of individual animals) was up on 2016. The increase in milk prices and the reinforcement of the business unit’s competitive position enabled revenue growth in the dairy sector, while the pig farming sector maintained its strong revenue from the first six months of 2016.

 

The Retail business unit (security, management and information systems for the retail sector) also posted increased revenue. Following successful implementations for several retailers, interest in the unit’s stock management solutions is growing significantly. Revenue on the North American market is also starting to contribute to the business unit’s growth.

 

The Security Management business unit (systems for access control and security) is benefiting from contracts landed with major European customers in recent years, which has put revenue above that achieved in the first six months of 2016.

 

The Staffing Solutions business unit (digitised work schedules and timesheet processing) also posted higher revenue. A fully redesigned version of the unit’s flagship software system PEP Flex was launched in May, providing even greater ease of use and more powerful functionality for temping agencies and companies that use temporary/contract workers.

 

The Energy Systems business unit’s activities were phased out in 2016 and no longer generate revenue. A small group of employees is focusing on complying with existing warranty and support commitments.

 

Revenue posted by the Nsecure subsidiary (innovative security solution services) was up on the first six months of 2016.

 

Financial highlights

The structure of the statement of profit or loss was updated in the 2016 annual report, and this new structure is also used in the present half-yearly report. The comparative figures for 2016 have been changed to bring them in line with the new definitions.

Nedap’s revenue was up 8% over the first six months of 2017 to €99.0 million (€92.0 million in the same period of 2016).

Added value (revenue less cost of materials, outsourced work and inventory movements) amounted to €61.3 million, i.e. 62% of revenue (€58.2 million, or 63% of revenue, in the same period of 2016). The drop in the percentage was mainly caused by a loss of €1.1 million resulting from losses at Nedap production companies, due to a volume reduction caused by the supply chain reorganisation.

Employee costs were up €3.1 million to €36.6 million, mainly because additional software developers and sales staff were hired. This line also includes an amount of €0.5 million for one-off costs relating to the supply chain reorganisation. Nedap had 775 employees as of 30 June 2017 – 12 more than on 30 June 2016 (775 at the end of 2016).

 

Other operating costs were up €1.6 million to €14.7 million, primarily as a result of increased marketing and sales costs. This line also includes an amount of €0.4 million for one-off costs relating to the supply chain reorganisation.

Depreciation in the first six months of 2017 was down €0.2 million on 2016, while amortisation dropped by €0.3 million.
On balance, the supply chain reorganisation has created one-off costs of €2.0 million in the first six months of 2017 (€0.4 million in the same period of 2016). The operating profit excluding these one-off costs amounts to €7.9 million, which is 8% of revenue (€7.3 million or 8% of revenue in the same period of 2016).
The operating profit including one-off costs is €5.9 million, or 6% of revenue (€7.0 million or 8% of revenue in the same period of 2016).

 

Amounting to €0.1 million, net financing costs were at the same level as in the first six months of 2016. Our associate Nedap France S.A.S.’s share of profit dropped by €0.1 million to €0.1 million.
Taxation in the first six months of the year amounted to €1.1 million (€1.2 million in the same period of 2016).
Result dropped by 17% to €4.8 million in the first six months of 2017, which amounts to 5% of revenue (€5.8 million or 6% of revenue in the same period of 2016).

 

An ‘Assets held for sale’ line amounting to €0.2 million has been added to the balance sheet. It relates to subsidiary Inventi B.V.’s assets, which will be sold over the next few months as part of the supply chain reorganisation.

The balance sheet total was up €8.9 million on year-end 2016 to €125.5 million. This growth is largely explained by the trade and other receivables item, which rose by €7.2 million following sound sales figures in June.

As stated previously, a large inventory is consciously being maintained at this time in connection with the supply chain reorganisation.

Short-term provisions decreased by €3.2 million, mainly because all employees due to lose their jobs as a result of the supply chain reorganisation have now been given notice. The resulting obligations have been added to the ‘Trade liabilities and other payables’ item.

The current accounts with the banks item is up €10.4 million on year-end 2016, mainly due to the dividend payment of €9.4 million.
The overall bank debt was €36.5 million as of 30 June, which is well within the available headroom of €47.7 million.
The solvency ratio (shareholders’ equity divided by the balance sheet total) was 41% (43% on 30 June 2016).

 

Outlook

The Board of Directors is positive about the developments over the last few months and expects revenue in the last six months of 2017 to be up on the same period in 2016, unforeseen circumstances notwithstanding. The size of the growth depends on developments on certain markets and orders from individual customers, as well as the general economic climate. The result in the last six months of the year will not only be affected by these factors, but also by the progress and impact of the supply chain reorganisation.

The main risks are described in the Corporate Governance section of the 2016 annual report.

The interim report on the last six months of 2017 will be published on 16 November 2017.

Download: report on the first six months plus the 2017 half-yearly financial statements.