Slow start to first half in Goods ID and good performance and quality forecasts in People ID

REGULATED COMMUNICATION

Group sales of € 103.2 million 
Stable (-0.7%) compared to H1 2011 
Current EBITDA of € 5.3 million 
(down -41.2% on H1 2011) 

Goods ID: Slow start in difficult environment 
Sales of € 82.6 million (up +6.2% on H1 2011) 
Gross margin of 40.8% of sales 
Current EDITDA of € 2.2 million (down -53.5% on H1 2011)

People ID: Good first half results with increased visibility for the year as a whole 
Sales of € 20.6 million (down -21.3% on H1 2011)
Current EBITDA of € 4.5 million (down -22.2% on H1 2011)

INTERIM MANAGEMENT REPORT

The declaration of conformity is contained in the summary consolidated interim financial statements

I. INCOME STATEMENT

(1) "Current" excludes restructuring expenses and non current income/costs 
(2) Weighted average number of outstanding shares 
(3) Attributable to equity holders of the parent company 

Order taking got off to a slow start in the first half, though for different reasons in the two divisions. The economic downturn placed a brake on investment decisions, especially in the retail sector that is particularly important for Goods ID. In People ID, the sales cycles for the short-term contracts were completed only during the second quarter. In both divisions, recurring revenue items continue to preserve the sales base.  

Group sales were stable (-0.7%) compared to the first half of 2011.  The Goods ID sector grew by 6.2%, primarily due to the acquisition of Zetes South Africa in July 2011. At constant scope, revenue is down 3.3%. In People ID, sales fell by 21.3%, but then the first half of 2011 was marked by very large hardware sales. The total margin is very similar to the first half of 2011: of 43.9% of sales and in absolute terms € 45.3 million, against € 46.0 million a year earlier.

Current Group EBITDA is € 5.3 million, down 41.2% on the first half of 2011, more specifically -53.5% in Goods ID and -22.2% in People ID.

1. Goods ID

Order taking in the division got off to a slow start in the first half of 2012, with deals under margin pressure which impacted the first quarter results. The second quarter saw a steady growth in orders. These orders did not, however, convert totally into sales revenues during the first half of the year.  In times of economic uncertainty, order taking is concentrated at the ends of calendar quarters, making order fulfilment, software development capability utilization and, as a corollary, revenue management, all more difficult.

Zetes continues successfully to profile itself at the cutting edge of traceability. Solutions run from serialization in the pharmaceutical industry to, in particular, Proof Of Delivery for postal and small parcel delivery services.  On the other hand, orders from the retail sector have slowed as the crisis affects private consumption.

The Goods ID business model continues to provide Business to Business solutions permitting significant productivity gains and returns on investment in the short term. After the very slow order taking at the beginning of the year, business picked up at the end of the half-year, underlining our customers' need to invest to maintain their competitiveness.  Readers are reminded that Zetes solutions come with maintenance services and supply of consumables, which provide a volume of recurring revenue to the company.

Development efforts remain significant, both in automatic recognition (ImageID) and in speech recognition technology and specialized terminals. Around € 1 million was allocated for development in the first half.

Performance differs from one region to the next.  At constant scope, all regions are slightly down in terms of sales and gross margin. The differences between regions lie in the margins and in the development of operating expenses.

In a macroeconomic environment particularly affected by the recession, the Southern region was able to win market share, maintain good margins and keep its costs under control.

The Central region was affected by the quite unexpected downturn in order intake during the first quarter. The first half results reflect this. Prospects are improving during the second half; several large orders were taken in the second quarter and will be delivered in the second half. Additionally, a restructuring programme has been introduced to improve the productivity of some units, in particular in the Benelux, where the contribution of the first half was significantly weaker than in the past. Moreover, though not significant in terms of first half results, a higher proportion of these orders are for ‘managed services’, with a long-term aspect.  In this model, customers choose to pay a monthly or quarterly amount for the use of a packaged solution. Depending on the particular case, Zetes opts either to carry the investment in its books or for a transfer of assets to a specialized financial institution. In compliance with applicable IFRS standards, part of the revenue will be taken into income only in the coming years. This further improves the recurring nature of revenues and their predictability, but has an immediate impact of lowering short-term profitability.

In the Northern region, the situation is clearly improving in the United Kingdom even though this is not yet reflected in the figures for the first half. In addition, the programme to integrate the new subsidiary in South Africa is under way. Efforts to convert local teams to Group practices and operating procedures are, for the time being, at the expense of profitability, with South Africa recording a negative performance in the first half of the order of € -0.4 million. This result obviously impacts the ratios of the entire division but does not call into question either the interest or the need for Zetes to be present in Africa with its Goods ID division.

Zetes is currently working on an ambitious programme to improve margins by more intensive use of the most efficient solutions and a convergence of practices which is synonymous with major productivity gains.

Constant scope analysis

(*): Acquisition excluded

2. People ID

The decrease in sales (-21.3%) comes as no surprise given that the H1 2011 figure was marked by major deliveries of hardware (1500 biometric kits). The decline is also much less pronounced at gross margin level. While the ‘Build and Operate’ contracts have once again brought a great measure of stability and good predictability in terms of revenues and profitability, it was only in the second quarter that significant income was recorded on the ‘Build and Transfer’ contracts.

Production of blank identity cards in Israel, begun in 2010, continues. Card personalization should start by the end of the year. From a technical standpoint, Zetes is ready for this step. 

In Belgium, the production and personalization of ID cards continues, with more than 50% of cards having already been replaced once.

In Côte d'Ivoire, the issuing of electronic and biometric passports and visas is proceeding according to expectations, with Zetes anticipating here a second half in line with the first.

In the first quarter, Zetes concluded a contract to deliver military personnel identification kits and infrastructure in Chad. This small contract, which was fully completed during the first half, underlines Zetes' competence in the biometric enrolment of civilian populations or groups such as civil servants or military.

In the second quarter, Zetes signed a contract with the United Nations to deliver a complete system for the centralisation and biometric differentiation of voters and the delivery of voters’ cards on behalf of Sierra Leone. The first part of the contract, consisting of the biometric system and most of the cards, was executed during the first half and the second part will be undertaken before the end of the year. Zetes also concluded a contract with the Republic of Togo to assist with the preparation of the electoral register: upgrading kits, delivery of new voter registration software and a provincial and central data consolidation system.  Implementation of this contract began in the first half but the lion’s share of the revenue is expected in second half of the year, as the project needs to be completed before the elections. Zetes’ technological expertise and proven methodologies, but also its excellent collaboration with the Election Commissions or the local representations of the United Nations remain the pillars for the successful implementation of these contracts, and guarantee Zetes' reputation in this market segment.

People ID Division continues to enjoy a good geographical diversification and a good balance between long and short-term contracts. 

3. Group

After Corporate expenses (€ 1.5 million), which are down 9.3%, the Group's current EBITDA is € 5.3 million. This is down € 3.7 million from H1 2011 and corresponds to an EBITDA/Sales margin of 5.1%, against 8.7% in the first half of 2011.

Non-recurring charges amounted to € 0.7 million. The two key elements in this heading are restructuring costs (Central and Northern Region) and the external costs associated with the acquisition of InCaptio (see below).

Depreciation of fixed assets (€ 2.4 million) is in line with H1 2011 (up 0.1 million). In Goods ID depreciation is growing in line with the investments made in recent years (ERP / Infrastructure). Depreciation in People ID is proportional to the production volumes under ‘Build and Operate’ contracts, themselves slightly down on H1 2011. The reversal of a value reduction on inventories (€ 0.1 million) reflects the efforts of previous years in procurement and inventory management.  EBIT reached € 1.3 million, which is down € 3.6 million on H1 2011.  The slow start and the ensuing weak performance in Goods ID are reflected in full in the Group's operating profit.

Net financial expenses, at € 0.2 million, are under control.

The tax rate is 35.3%, giving a total tax charge of € 0.4 million. The high tax rate during this first half is due to a concentration of pre-tax earnings on those countries where real corporate tax rates are high, particularly due to the non-deductibility of certain expenses.

Net result for the period (Group share) amounted to € 0.8 million, which is € 2.0 lower than in the first half of 2011.

(1) "Current" excludes restructuring expenses and non current income/costs 
(2) Weighted average number of outstanding shares 
(3) Attributable to equity holders of the parent company 

At 30 June 2012, 184,669 shares were outstanding. To the extent that the weighted average price of the share does not exceed the exercise price, the options issued are not taken into account in calculating the dilution effect.

II. BALANCE SHEET, INVESTMENTS AND CASH FLOW STATEMENT

With equity of € 75.9 million on a balance sheet total of € 155.6 million, the solvency ratio (equity/total assets) stood at 48.8% as against 47.9% at end-December 2011. The various working capital components have evolved in a normal manner, to give a working capital at 30 June 2012 of € 13 million.

The net cash position (€ 5.5 million) was down compared to December 2011 (€ 8.0 million), but this is after returning nearly € 3.4 million to shareholders in the form of a dividend (€ 2 .9 million) and treasury share purchases (€ 0.5 million). This net cash position consists essentially of a cash position of € 10.6 million, cash pledged of € 0.7 million and bank and leasing debts of € 5.8 million.

Zetes generated cash flow from operations of € 4.9 million in the first half, against € 7.6 million in H1 2011. This breaks down into an income statement cash flow of € 3.3 million (vs. € 6.4 million in H1 2011), down € 3.1 million, and € 1.6 million improvement in working capital requirement (as against an improvement of € 1.2 million in H1 2011).

Zetes has credit lines to finance working capital needs and framework agreements with its bankers to finance long-term contracts and acquisitions.

People ID Division continues to invest (€ 0.7 million) in improving its production facilities. These are ongoing investments that allow Zetes to maintain the highest level in computer security, quality and productivity.

Investments in the Goods ID Division (€ 1.7 million) focus on infrastructure and security, improving ERP systems and acquiring assets for the ‘managed services’ business model. In addition, € 1.0 million of development expenses were capitalized. Capitalized developments relate to software products and specialized mobile terminal marketed by Group companies, as well as through external channels (autoID equipment suppliers). Zetes is working on centralizing the development work of its Professional Services teams to improve productivity.  These developments are the essence of Zetes' value added and a critical business differentiator for the Group.

III. ACQUISITIONS

At the end of June 2012, Zetes acquired 100% of the Czech company InCaptio s.a.r.l.o., which specializes in Goods ID, for € 0.9 million. This is one of the best autoID companies on the Czech market, a team of fifteen people and annual sales of the order of € 2 million. This acquisition enables Zetes to meet the requirements of multinational clients seeking support on the Czech and Slovak markets. This company is included in the consolidated accounts at 30.6.2012. This acquisition did not impact the income statement for the first half 2012. It has generated additional goodwill of € 0.4 million, which is included in the balance sheet at 30 June 2012.

IV. OUTLOOK

In Goods ID, developments continue to reflect the difficult economic environment. However, order taking improved in the second quarter and continues satisfactory in the third. A project has been launched to improve margins by standardizing solutions and methodologies. The results in terms of profitability are expected from 2013 onwards.

The upgrading of the new subsidiary in South Africa to Group standards is under way. This is absolutely necessary to secure profitable business growth in Africa. Results are expected to improve from the fourth quarter onwards.

In Goods ID, based on orders received to date, Zetes expects a significant improvement in results in the second half as compared to the first half, with figures in the range of those recorded in the second half of 2011. 

In People ID, the contribution of 'Build and Operate' contracts will be complemented by a good contribution from recently-signed short-term contracts, including with the United Nations in Sierra Leone and with the Republic of Togo. In the second half, the services component of these contracts will remain very sizeable, which should translate into high margins. Based on contracts already signed and still to be executed, second half results should be slightly less than the equivalent half of 2011. The 'Build and Operate' (LT) and 'Build and Transfer' (ST) project pipelines both remains well filled.  Some of these projects, if signed within a reasonable time, could result in supplementary sales and additional earnings in 2012 still.

In conclusion, in Goods ID, the first half was marked by the slow start of our customers' investments as a result of the economic crisis affecting Europe and slowing consumption. The second half is expected to grow and should end with results of the order of those recorded in the second half of 2011. In the longer term, the work of improving productivity through greater standardization of methodologies and solutions will bear fruit from 2013 onwards.

In People ID, the strength of the business model is confirmed half-year after half-year.  While sales levels are influenced by the hardware component of the short-term contracts, profitability is becoming increasingly stable.  Zetes is a recognized player in this market and the references it has accumulated allow it to continue to grow and expand into new projects. In return, the Division needs continue to invest in advanced software solutions and business development.

Barring further deterioration of the economic environment, the Group expects to achieve a current EBITDA of the order of € 9 million in the second semester.

The Group continues to generate significant cash flow, allowing it to pay a dividend of € 0.55 per share in June. During the past half-year Zetes also acquired its own shares for an amount of € 0.5 million. The Company will continue its share repurchase programme in the coming months.

V. WORK OF THE STATUTORY AUDITOR

The auditor has undertaken a limited review of the interim financial information of Zetes Industries for the six months ended 30 June 2012. The text of the Auditor's report following the limited review is given in the pdf.

VI. CALENDAR

2012 Results: 22 March 2013
2012 Annual Report: 29 April 2013
Ordinary General Meeting: 29 May 2013

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