Zetes Annual Results 2008 - Regulated communication

Solid results, thanks to very good performance in Goods ID

  • Group sales stable at € 177.6 million
  • Recurrent Group EBITDA of € 15.2 million (- 1.2%)
  • Net profit (share of the Group) of € 6 million (- 4.2%)

Goods ID advances

  • Sales of € 148.3 million (+ 1.9%)
  • Gross margin up 1.8 points to 42.7% of sales
  • Recurrent EBITDA of € 14.3 million (+ 5.3%)

People ID: temporary slowing

  • Sales down 7.1%
  • Continued business development efforts rewarded with new contracts in 2009
  • EBITDA of € 3.8 million, down 22.5%

INCOME STATEMENT

Group sales remained stable in 2008 at € 177.6 million [+ 0.3%), reflecting a 1.9% increase in the Goods ID sector and a 7.1% fall in the People ID segment. Growth in Goods ID was slowed by the fall in the pound sterling against the euro, while People ID sales were lower essentially because certain short-term contracts (of the Build and Transfer type) could not be signed before the end of 2008. These are being carried out in 2009. Effective implementation of various longer-term contracts began in 2008 (passports in the Côte d’Ivoire, identity cards in Portugal) and will continue to develop in 2009 and subsequent years.

The Group’s gross margin has grown significantly, both in absolute value (to € 77.4 million) and as a percentage of sales (to 43.6% from 41.8%). This increase is, as in the past, the fruit of the Zetes Group’s desire to increase the services and software portion in the solutions that it offers to clients.

Finally, operating costs remain well under control, at 35% of sales.

Goods ID

Sales increased by 1.9% in 2008, while recurrent EBITDA rose by 5.3% from € 13.6 million to € 14.3 million. This again demonstrates the pertinence of a business model directed towards high added value services.

Leaving aside the foreign exchange impact (i.e. disregarding the devaluation of the GBP against the EUR), sales are up € 6.4 million, or 4.4% compared with 2007, and recurrent EBITDA is up 9.2% to € 14.9 million.

In terms of external growth, the main change is the integration, for the entire 2008 financial year, of the activities of Interscan (France), which in 2007 was included in earnings for 4 months only. This acquisition has fulfilled all the objectives that Zetes had set, permitting the Group to achieve critical mass in France and generate growth there.

On a constant consolidation scope, we obtain the following advances:

The results of the strategy of focusing on high added value solutions are clearly visible in the above table. This strategy has had the effect of increasing gross margins and profitability, which have been given precedence over expanding the sales figures.

The acquisitions of recent years (Peak, Interscan, etc.) have enabled the Group to take strategic positions in most major countries and to set up organizations with the necessary critical mass to fully implement the Group’s strategy and to offer the level of service that major customers expect.

In seven European countries the Zetes Group has today organizations counting over 60 people and sales in excess of € 15 million, if not € 20 million. The other countries are coupled to larger ones in regional structures in order to benefit from the existing experience and references. Finally, the smaller structures are supported by the Competence Centre, which gathers best practices and the most cutting-edge solutions and also helps the less mature organizations.

The strategy of offering high added value solutions (software and services) demonstrated its full pertinence in 2008. The global crisis is, however, affecting companies’ investment budgets, and this is reflected in slower sales during the second half of the year.

This fall is to a large extent offset by a strengthening of the gross margin because customers are preferring to direct their investment budgets at software solutions which are synonymous with productivity gains, rather than hardware roll-outs.

Thanks to effective cost control, based on having a flexible, decentralized organization, EBITDA has been preserved, and has continued to grow from one year to the next to € 13.8 million (+ 5.6%).

The most investment-ready sector right now is Retail, where productivity gains in the supply chain are a key success factor. Zetes is providing highly integrated solutions with management systems (ERP or warehouse management systems) which offer demonstrable productivity gains, while also reducing order handling and shop-stocking errors. Voice solutions, in which Zetes has invested heavily, remain in strong demand.

Individual contract values are also increasing. During the past 12 months, numerous contracts in excess of one million euros have been signed in France, England, Belgium and Germany.

People ID

“Build and Operate” income in the People ID division has remained stable in 2008. The progressive slowing of the issuance of Belgian identity cards has been compensated by the rising activity of foreign contracts, in particular in Portugal. A small number of key long-term contracts have been signed, and the company has worked hard to win new markets. Zetes has deployed an initial system of biometric and electronic passports in the Côte d’Ivoire. Here Zetes is introducing a complex ‘live enrolment’ system to capture citizens’ biometric data and to code them in the passport’s electronic chip.

Zetes has also devoted major resources to winning new contracts in Israel, the Democratic Republic of Congo and Togo.These contracts were signed at the start of 2009. This explains why the division's sales fell back 7.1% in 2008 to € 29.3 million.

Gross margin has remained constant at 48.2% (-0.1%).

Operating expenses have remained stable, with a continuing high level of business development expenditure. The fruit of this effort will be visible only in 2009, if not 2010 in certain projects.

EBITDA of € 3.8 million is down 22.5% compared with 2007. This figure does not reflect the value generated by the new contracts which were signed in 2009.

The EBITDA/sales margin in 2008 is 12.9% (15.4% in 2007). The delay in certain contract signings explains why this level is lower than the Division's 15% target.

Group

Corporate expenses have remained under control, down 6.4% compared with 2007. The service to customers is based on strong decentralized entities, with the Corporate function playing an essential, but limited role of strategy definition, monitoring the divisions and steering the expansion by acquisition strategy.

Recurrent EDITDA for the Group is € 15.2 million, giving an EBITDA/Sales margin of 8.6%, compared with 15.4 million (8.7%) in 2007.

Restructuring costs of € 0.5 million were charged during 2008. Apart from the necessary redefinition of acquired organizations, restructurings are aimed at adapting organizations’ operating costs to their margin-generating capacity and at achieving their profitability objectives. Only charges related to major organizational changes in the organization in question are taken into consideration at this level. In 2008 the countries concerned were those in which major acquisitions were carried out during the past two years, that is France, Germany, the UK and Switzerland.

After depreciation, amortization and impairment charges which are in line with 2007, EBIT is € 8.5 million, giving an EBIT/Sales margin of 4.8%.

The unfavourable development of the GBP against the other currencies, essentially during Q4 2008, has produced a foreign exchange loss of € 0.4 million (financial charges). Group policy is to cover the majority of its foreign exchange risks with forward foreign exchange contracts. According to internal policy,only major signed contracts are 100% covered. In addition, hedging anticipated sales could place the Zetes Group in an unfavourable competitive position against competitors which do not have hedging policies.

The tax charge is € 1.8 million, giving an effective tax rate of 23%. € 0.7 million of this amount is non-cash (deferred taxes / use of tax loss carryforwards).

Net Group income is € 6million.

BALANCE SHEET, INVESTMENTS AND CASH FLOW

Shareholders’ equity has increased by € 3.3 million over the year, after distribution of the € 1.9 million dividend.

The business activity has produced a cash flow of € 12.9 million. Cash flow generation remains a major item of attention for the entire organization, as it is cash flow which permits the financing of both organic growth (new projects, new investments) and external growth (acquisitions).

During 2008, working capital needs grew by € 5.8 million. -This increase corrects an exceptional situation existing at the end of 2007, which saw a reduction in working capital despite rapid growth, owing to advance payments by large, mainly public, customers at the end of 2007 on contracts carried out in 2008.

An additional working capital need also came from the payment of € 0.9 million of earn-outs on two acquisitions in France and Spain. IFRS rules require here the company to record the best estimate of the total acquisition amount. Where part of the payment is made subsequent to the acquisition date, this amount is accounted for under 'other liabilities".

Finally, the starting up of the electronic passport concession in the Côte d’Ivoire required setting up stocks of just under € 0.9 million and increased the construction contracts by € 0.8 million. Both items influence working capital rather than the investments account.

Capitalization of development expenses represents an investment amount of € 1.1 million.

Investments in Goods ID reached € 1.8 million, in line with Goods ID policy (1% of divisional turnover). The € 1.9 million of investment in People ID relates essentially to the investment in the electronic passport infrastructure in the Ivory Coast.Cash flow devoted to investments reached a total of € 4.9 million.

During the past year, the company paid out € 2.24 million to its shareholders in the form of dividends (€ 1.94 million) and share repurchases (€ 0.3 million). These repurchases took place during the last quarter.<0}

The company’s net cash position at the end of 2008 amounted to € 7.4 million, composed of € 13.0 million of cash and € 5.6 million of bank and leasing debts.

Cash is used on the one hand to finance current operations and on the other to carry out (a part of the) new investments (Build and Operate projects in People ID, for example) and acquisitons. Until used, cash is invested in short term deposits in EUR with several credit institutions.

The Group has unused credit lines for financing its working capital needs, and framework arrangements for financing takeovers of other companies.

ACQUISITIONS

Several acquisitions opportunities were examined during the second half of 2008. None of these led to concrete action, as the necessary conditions did not exist in the Zetes view.

Zetes remains convinced, however, that the consolidation in the sector needs to continue, to the benefit of customers and of the critical mass which needs to be achieved in each location.

OUTLOOK

In Goods ID, the economic recession is reducing company investment budgets. Business companies are tending to reallocate their budgets towards projects with a higher software component. This is a field where Zetes is well ahead of most of its competitors. Most large companies, in particular in Retail, are out looking for savings and greater efficiency in their supply chains. Zetes offers savings-generating solutions with payback periods of at times less than one year. Customers continue to be interested in such projects.

Finally, both in its historical companies and through its targeted acquisitions, Zetes has established a significant installed base, to which it provides maintenance services and to which it delivers consumables throughout the life of the equipment. This ‘recurring business’ is a guaranteed source of income and of significant gross margin year after year. This part of the business is largely insensitive to economic slowdowns.

The deteriorating economic context has created takeover opportunities for Zetes. In January 2009, Zetes acquired the Print & Apply (P&A) activities of Bopack Systems. The newly acquired team of 35 persons in Belgium and the Netherlands designs, produces and installs label appliers in production chains. These solutions extract production data from the management information systems and print them onto the labels which are applied to the produced objects at the end of the production line. These labels ensure the traceability of the goods produced. Such installations have a place in all production environments (beverages, food processing, industrial, etc.). A particularly strong demand is developing in the pharmaceuticals industry where new regulations are calling for traceability and identification at individual package level.

The recurring business is also an important component of the P&A business model.

P&A installations are undertaken far upstream, at production level. This positioning is highly complementary to Zetes’ traditional activities. The purchase of Bopack Systems rounds off, in northern Europe, the P&A facilities which were already introduced in southern Europe. (acquisition of Powersys and the activities of MD in Spain)

In People ID, the beginning of 2009 saw the announcement of the Israeli electronic ID card. For this project, Zetes is working in partnership with an Israeli securitized printer.

The Israeli government has tasked this partnership with producing and personalizing 5 million electronic identity cards, with features very similar to those of the Belgian ID card. This joint venture will need to set up a manufacturing and card personalization plant. The investment will be made in 2009, with the income flows expected between 2010 and 2014.

The long-term contracts in Portugal and the Côte d’Ivoire are continuing.

In Belgium, remaining nationals will be provided with new ID cards in the course of 2009. This is likely to bring about a slowing in the second and third quarters, before picking up again in the fourth quarter, with the replacement of ID cards produced in 2005 and which will be reaching their 5 year expiry dates. Issuance of residence permits for European non-citizen residents and for non-European residents is continuing and is compensating the gradual reduction in the number of Belgian citizen ID cards. Finally, the Interior Ministry has just announced the generalization of the ‘Kids ID’ for children.<0}

Several major Build and Transfer contracts were signed at the start of 2009.Those for the electoral census in Togo and the updating of electoral rolls in the Congo will be executed in 2009 and offer clearly visible income streams

In this still expanding market, it is important to continue to invest in business development. In the longer term, with the increasing number of long-term contracts, the impact of this financing effort will weigh less heavily on the profitability of this division.

Based on the information available and given the impact of the economic crisis on the Goods ID division, as well as the contracts which have been recently signed by the People ID division, the Company believes that it can achieve in 2009 sales and earnings of the same order of magnitude as in 2008.

RISKS AND UNCERTAINTIES

Investing in Zetes shares has risks attached. These were described in the 2007 annual report and remain valid.

DIVIDEND

Confident in the solidity of the company and in line with its dividend policy, the Board of Directors will propose to the Ordinary General Meeting that it declare a gross dividend of € 0.36 per share.

DRAWING UP OF ACCOUNTS

The financial statements presented here represent a summary of the annual report, which will be available on 24 April 2009. These accounts are in euros and are drawn up in conformity with the IFRS standards as adopted by the European Union.

WORK OF THE STATUTORY AUDITOR

The audit of the annual accounts is under way. The Statutory Auditor has confirmed that his auditing work, which is essentially complete, has not revealed the need for any significant correction to the accounting information contained in the press release.

CALENDAR

Annual General Meeting: 27 May 2009 Brussels, 24 March 2009