Zumtobel Group Annual Financial Report 2014/15 1 May 2014 to 30 April 2015 Front cover design: James Turrell This year´s art edition of the annual report has been designed by James Turrell supported by the Californian graphic designers of Green Dragon Office. James Turrell is an American artist primarily conspicuous for his light and space installations. He is best known for the Roden Crater project in Arizona and the Skyspaces built all over the world. Following the publication at the Shareholder´s Meeting on July 24 2015, a PDF version of the report and order details will be available at: www.zumtobelgroup.com/en/ordering.htm Cover image: James Turrell, Flying over the Painted Desert, Arizona, USA, 2003 Photo: © Studio James Turrell 1 May 2014 to 30 April 2015 Five-Year Overview in EUR million 2014/15 2013/14 2012/13 2011/12 2010/11 Revenues 1,312.6 1,246.8 1,243.6 1,280.3 1,228.2 Adjusted EBIT 66.5 47.6 35.7 35.0 78.4 as a % of revenues 5.1 3.8 2.9 2.7 6.4 Net profit/loss for the year 11.9 (4.8) 6.1 15.2 51.3 as a % of revenues 0.9 (0.4) 0.5 1.2 4.2 Total assets 1,086.3 1,006.6 994.8 1,036.3 1,020.5 Equity 322.6 327.6 357.4 370.6 378.7 Equity ratio in % 29.7 32.5 35.9 35.8 37.1 Net debt 148.2 126.2 113.2 141.4 141.3 Cash flow from operating results 103.1 79.5 79.8 88.1 123.2 Investments 76.6 65.6 59.5 57.1 57.3 as a % of revenues 5.8 5.3 4.8 4.5 4.7 R&D total 79.0 71.8 69.1 58.7 48.6 as a % of revenues 6.0 5.8 5.6 4.6 4.0 Headcount incl. contract worker (full-time equivalent) 7,234 7,291 7,162 7,456 7,814 See section 4. Service – Financial terms for the definition of the above indicators. Chief’s Executive’s Review Zumtobel Group AG 1 May 2014 to 30 April 2015 Contents Five-Year Overview 2 Chief Executive’s Review 4 1. Group Management Report 7 1.1 The Zumtobel Group – An Overview ___________________________________________ 10 1.2 General Economic Environment ________________________________________________ 20 1.3 The Zumtobel Group Share ___________________________________________________ 21 1.4 Significant Events since 30 April 2014 ____________________________________________ 24 1.5 Related Party Transactions _____________________________________________________ 24 1.6 Review of Business Performance ________________________________________________ 25 1.7 Human Resources ___________________________________________________________ 33 1.8 Suppliers __________________________________________________________________ 36 1.9 Quality ____________________________________________________________________ 37 1.10 Environmental Protections _____________________________________________________ 38 1.11 Research and Development ___________________________________________________ 39 1.12 Significant Events after the Balance Sheet Date _____________________________________ 40 1.13 Internal Control System ______________________________________________________ 40 1.14 Risk Management ___________________________________________________________ 44 1.15 Information pursuant to § 243a of the Austrian Commercial Code _____________________ 50 1.16 Outlook and Goals __________________________________________________________ 52 2. Consolidated Financial Statements 55 2.1 Income Statement ___________________________________________________________ 58 2.2 Statement of Comprehensive Income ____________________________________________ 59 2.3 Balance Sheet ______________________________________________________________ 60 2.4 Cash Flow Statement ________________________________________________________ 61 2.5 Statement of Changes in Equity _________________________________________________ 62 2.6 Notes to the Consolidated Financial Statements ____________________________________ 63 2.7 Statement by the Management Board in accordance with § 82 (4) of the Austrian Stock Exchange Act ______________________________________ 124 2.8 Consolidation Range ________________________________________________________ 125 Auditor’s Report _________________________________________________________________ 128 3. Corporate Governance Report 131 3.1 Corporate Governance in the Zumtobel Group ___________________________________ 133 3.2 The Austrian Corporate Governance Code ______________________________________ 134 3.3 Risk Management and the Internal Control System _________________________________ 136 3.4 The Corporate Bodies and Committees of Zumtobel Group AG _____________________ 137 3.5 Remuneration Report _______________________________________________________ 144 3.6 Report by the Supervisory Board ______________________________________________ 150 4. Service 155 Chief Executive’s Review Zumtobel Group AG 1 May 2014 to30 April 2015 Chief Executive’s Review Dear Shareholders, The 2014/15 financial year (1 May 2014 to 31 April 2015) was an important period of strategic reorientation and the implementation of necessary restructuring measures for the Zumtobel Group. The goal was to bring our new structures to life, eliminate past inefficiencies and leverage the growth and cost synergies resulting from our multi- brand approach to create a stable foundation for future profitable and dynamic expansion. The first positive results from the adjustment of production capacity, the merger of the previously separate Zumtobel and Thorn sales organisations and the Group-wide bundling of purchasing activities are already clearly visible in our financial figures for the reporting year and make me very optimistic for the future development of the Zumtobel Group. Sound development of revenues and earnings Ulrich Schumacher Revenues rose by 5.3% year-on-year to EUR 1,312.6 million in 2014/15, which represents the highest level ever recorded in the Group’s history. This growth was supported, above all, by the fourth quarter with revenue growth of 9.0%. Once again, our LED business was the most important driver for this success. With an increase of 55.9% to EUR 653.3 million, the technology shift continued to accelerate. The LED share of Group revenues rose to 49.8% in the reporting year (2013/14: 33.6%). This confirms the Zumtobel Group’s strategy to invest directly in the expansion of its innovative LED product portfolio. An analysis by segments shows that our late cyclical Lighting Segment (Thorn / Zumtobel) benefited from modest growth in the commercial construction industry in Europa, the first positive impulses from the new multi-brand sales structure and a strong increase in the key account business. Revenues in the Lighting Segment rose by 5.5% to EUR 989.9 million (2013/14: EUR 938.4 million). The Components Segment continued to make sound progress in transforming its business to LED technology. Revenues from the sale of LED components rose by an impressive 79.6% to EUR 212.3 million and completely offset the declining demand for electronic ballasts as well as the revenues lost by the exit from magnetic technology and the sale of the connecting clamp business. Segment revenues exceeded our expectations with an increase of 2.4% to EUR 393.8 million (2013/14: EUR 384.5 million). The increase in revenues and the first positive effects from the restructuring measures led to an increase of 39.7% in Group EBIT adjusted for special effects to EUR 66.5 million (2013/14: EUR 47.6 million). That represents a return on sales (adjusted EBIT margin) of 5.1% (2013/14: 3.8%). Both the Lighting Segment and the Components Segment recorded a year-on-year improvement in adjusted earnings. Group net profit amounted to EUR 11.9 million, compared with a loss in the previous year, even though financial results were negatively influenced, above all, by the increase in the Swiss franc versus the euro. Outlook: increasing optimism and confirmation of goals for 2016/17 The extensive restructuring in 2014/15 created a solid foundation that will support further growth and the realization of cost synergies from the strategic reorientation of the Zumtobel Group in 2015/16. Activities will also focus on the continuous evaluation of additional opportunities to optimize structural costs. Tailwinds from In the European construction industry, the signs of a trend reversal from the longer period of declines to restructuring, slight market growth were confirmed during the reporting year. This positive trend has been strengthened in construction industry the professional lighting industry by the technology shift to LED, and has currently disengaged demand in the and technology shift professional lighting industry from new commercial construction to a certain extent. Our multi-brand strategy gives us very broad market access, extensive know-how in lighting applications and a strong technology position. All this and the complete coverage of the value chain place us in an outstanding position to realise above-average benefits from the growth impulses in the industry. We are also investing specifically to develop our expertise and capacity in intelligent controls and data management, Chief’s Executive’s Review Zumtobel Group AG 1 May 2014 to 30 April 2015 services and other innovative business models. In the future, lighting with its increasingly digital components will become more integrated in the Internet of Things (IoT). For the 2015/16 financial year, we expect an increase of approx. 5% in revenues and adjusted EBIT of EUR 90 to 100 million (FY 2014/15: EUR 66.5million). That also places us on target to gradually raise the adjusted EBIT margin to roughly 8% to 10% by 2016/17. The Management Board will therefore make a recommendation to the Supervisory Board and subsequently to the Annual General Meeting of Zumtobel