Dürr Aktiengesellschaft (DUE) Earnings Call Transcript & Summary

Welcome to the Dürr Conference Call. I will now hand over to Andreas Schaller, Head of Investor Relations of Dürr Group.

Thank you very much, Joanna. Ladies and gentlemen, good afternoon, and good morning to those of you in the U.S. Welcome, everybody, to our conference call, and thanks for joining on such a short notice. We published an ad-hoc release and the related press release today about the simplification of our organization and the strengthening of our core business. With me on the call today, our CEO, Jochen Weyrauch; and our CFO, Dietmar Heinrich. They will give you some more background and insights of the news, and we'll be happy to answer your questions afterwards. The presentation you're referring to is available on our Investor Relations web pages and we assume that you have it in front of you. Please be aware of our disclaimer regarding forward-looking statements on Slide 2. And now, it's my pleasure turn over to our CEO, Jochen Weyrauch. Please go ahead.

Thank you, Andreas. And also, warm welcome from my side. Many thanks for joining at pretty short notice. Yes, let me briefly outline what we're talking about today. We've made an important announcement about a change in the development of the group. In fact, this is one of the most relevant change projects we've been running for a very long time, if not in the history, it may be a bit too much, but for a very long time. The goal of this change is to increase the focus on our core business which, in the end, is automation of production processes with a strong component of sustainability. And we'll get back to that later for a number of targets. At the same time, it is our aim as we had already talked about that we want to reduce the complexity of our setup and make it, especially for the capital market, easier to understand our business. That's the main reason why we decided to focus on only 3 instead of 5 divisions in the future. As a matter of fact, capital market is one thing, but changes only makes sense if they really make sense for the business. And this is where we're really convinced of the steps that we've announced today. First one, very important is the merging of the divisions, Paint and Final Assembly Systems and Application Technology -- because in the end, we will improve significantly our positioning with the customers and consequently, the performance of our products and -- that we serve to the market. So that's one element, and I'll explain you also later on what that specifically means. On the other hand, for our Environmental Technology business, we will be reviewing strategic options including the sale of that business. Through that step, we would realize the value that we've generated by building the business to a market-leading position over the last years, and at the same time, provides the environment to continue on this goals path for this business to continue on this growth path outside of the group. That's the two main changes we will further explore on and explain you why this all makes sense for the group. We believe that these two transformation projects create a win-win situation for our stakeholders and will support us on our path to achieving our mid-cycle EBIT target of 8% before extraordinary effects. As such, we are convinced that this is well in line with our long-term value creation strategy for our shareholders. So if we then have a look at the target structure of the group for a second, you will see, as I mentioned already, in the future, we will have 3 divisions instead of 5. And what will be achieved by integrating, transferring and clearly -- the strategic options? First of all, the integration of APT and PFS defines a new division. We will transfer, and that's very relevant, all activities regarding the battery business, the lithium-ion battery business from CTS to the Industrial Automation division where it actually belongs to, again, I will explain later why this is the next logic step. And then as I mentioned, we will review strategic options for the Environmental Technology part of the CTS division, which is consisting of our Air Pollution Control business as well as our damper business. HOMAG, as such, is not affected at all. Why are we doing this? This transformation really creates a company, the Dürr Group, which is a focused player in automation, while remaining committed to sustainability and profitable growth. What do I mean by automation and sustainability? Everything that we do in the group, besides the Air Pollution Control business and the damper business is automation and is sustainability. And it is that in two ways. Either we produce -- equipment that we provide customers, produces in a sustainable way their products, as an example, would inaugurate this year the first year two neutral paint shop for the production of electric vehicles in Hungary. So our equipment is a sustainable way of creating products. Or on the other hand, our equipment produces sustainable products like if you look at wooden houses, at Walmart, we supply the equipment to reduce this. So everything is automation, everything is sustainability. The way we will set up the group contributes to achieving our mid-cycle target, as I mentioned before, 8% before extraordinary effects and does it by simplifying the structures and increasing synergy utilization within the group, especially between the own emissions, PFS and APT. It creates an enhanced customer proposition by creating a one-stop service offering in automotive. In the past, we've been acting like two companies in the direction of customers and customers who are not well receiving it. We have already within the setup changed the approach to some extent by creating more systems projects. You will see this later. I think we have one chart regarding that data, where you will see that we do much more systems projects. So when a customer awards one contract, which is for PFS and APT combined, and we will more lift on the value of this customer approach going forward by really moving the business together by eliminating further interfaces. So also, we will increase our margin by allowing for an optimal route forward for the environmental business after successful buildup of that business over the last years. When I joined Schenck -- Dürr 7 years ago, I was directly responsible for CTS. Those days, some of you might remember, CTS was EUR 120 million, EUR 150 million business, so too large to die, too small to survive in a way. So we have acquired our biggest competitor, those days, MEGTEC Universal and built a business of around EUR 500 million today. And we believe that now from a position of strength it is the right moment to do this strategic review. And we believe that everything that we do is a clear commitment to long-term value creation for our shareholders. So by merging PFS and APT, we want to especially -- our competitiveness and our customer service. And what does that mean a bit more in detail. Customers will benefit from this merger, especially by, as I mentioned already, us showing up as one face to the customer and becoming more than before a one-stop shop for our customers. Specific example we've been talking about in the last analyst call about receiving this large order from Mercedes as a result from the strategic partnership that we signed last year. And this has only been possible by really merging the strength, both the customer of PFS and APT, and our customer told it we were the only option for them if they would not have gone into a strategic partnership with us, they wouldn't have done one and all because they want to have a strong partner bringing out everything out of one [indiscernible]. We also will benefit from bringing technologies together. We have solutions today like painting the interiors and the anterior -- the outside of the car body, in one box, which nobody else can do that today, and we are only capable to do this with the application technology of APT and defining the right painting booth with a know-how team fast. So in the future, we will see more of those solutions by really finally eliminating the interfaces between the two. Our customers will benefit from better total cost of ownerships. And this really provides as the Mercedes example shows, a good ground for creating more future long-term partnerships in the future -- long-term partnerships with clients on their way of transformation into a CO2-neutral production of goods. That merger also supports our value before volume strategy, which you can see from, for example, the service share that we're showing PFS and APT increasing over time. The bundling further strengthens also our execution capabilities, especially in complex systems projects where today, we had two organizations working on one project. I talked about R&D, service offering. Service becomes more and more relevant for our customers. And you can imagine that joining the capabilities here also will make us benefit and also our customers. And I believe there still APT's has been very strong in catching the aftermarket potential because that is their heritage business. And maybe PFS can learn from that by realizing more after service/spare parts potential with the help of APT looking forward. So that's in a nutshell on the verge of PFS and APT. And if you look at the combined profitability for the year of the two businesses, we're not anymore, very short of the 8%. We're looking forward as a mid-cycle target for the overall. So now look at CTS. This, I explained the journey of CTS, and how we've built a business, on the one hand. On the other hand, I've also been explaining already a little bit why when we sharpen our strategy for automation, sustainability and being involved directly with the value-adding process with our customers, when you really look at this very clearly, you figure out that Air Pollution Control and dampers are in the auxillary. This is not directly in the value-adding process of our customers, and it is not so much -- or it's not at all into automation. So that's why we've decided to explore strategic options, which is part of the portfolio strategy we've been talking about for quite some time. We've been strengthening our growth potential by acquiring the company Teamtechnik, Hekuma, BBS because we believe this offers not only the long-term growth, but also enhanced profitability. On the other hand, we also have to review the portfolio for businesses we believe they don't fit the core business that strongly anymore, and this is why we're reviewing the -- all options for CTS. On the next chart, you can see what that means specifically. I've basically explained it already. That part of the strategic review is the Environmental Technology part of the business combining the Air Pollution Control business and the damper business or like it is explained here, the Acoustical Systems business. Everything around the lithium-ion battery remains part of the core business. We are already very strong in everything that is cell and battery assembly, which comes from Teamtechnik and BBS, and we now add the competence, which is the process step just before of the electrode production, again, serving customers out of one hand, in this case, from our division Industrial Automation Systems. CTS is really a success story. I was pointing that how it already, especially after the acquisition of MEGTEC and Universal. We've really formed by far, the most relevant player in the air pollution control globally. We've successfully integrated the business. We streamlined the product portfolio. If you look at the profitability over the last 2 years, we've constantly improved that profitability by executing the projects seamless by looking at the right projects. And now, this is why now is the right moment for the strategic investigation. It is about bringing the business to the next level by looking at adjacent markets such as, for example, CO2 capture or thermal storage. And this is something where when we look at the business, and when we confirm that those activities are not core of the business, logically, we have to take the decision to evaluate strategic options and we're totally convinced that this business can probably grow with another better owner, faster and better, being willing to invest or to focus solely on the business and to invest more than we probably are willing to do when we look at options to invest either in our automation or in CTS. So that's pretty much the situation right now. We are talking to you today because we've taken the decision that this would be an announcement, then we can probably see this from the capital market today. We've talked to the Supervisory Board. There is no decision being taken. It is a strategic review only. Nevertheless, as I said, we firmly believe that this has relevance for the capital market. This is why we've been going public by an ad hoc and are talking to you already. So why will we keep, in any case, a lithium-ion battery business? It is a perfect fit for production automation systems, as I had already explained. It's an expansion of the portfolio of automated production lines for solar modules, connectors, batteries, electric drives. So we're building powerhouse here in industrial automation for components that go into the electrification of cars, be it the assembly and testing of electric drivetrains, be it the production of batteries or parts thereof. This is why it is accretive to the growth profile of the division of the group. And I'm reminding that in that respect, especially with also the other small acquisition last year in Ingecal with the aim of realizing even dry coating for the economic production of electrons. So we believe that the focus on automation, sustainability will create long-term value. And you can see on the last chart basically the summary, what I pretty much already explained in the way that we set up the group where we believe that the long-term value can only be achieved by clear positioning and the consistent implementation of the right strategy. That's why we focus on sustainable automation, which is some sort of a new claim for Dürr really representing what we do because we believe that only by concentrating on our strengths we can manage complexity well and capitalize on the growth opportunity. And I really can say automotive in the right setup as we're now doing it is and remains, of course, the backbone of the group. That's why we leverage our leading positions in technology, resource efficiency and partnerships with our customers' ability and benefit in the best-in-class cost of ownership, which is everything that's relevant for our customers because, yes, automotive is the [indiscernible] business. But we're well set up with a record order backlog. We're acting from some position of strength, but we're preparing at the same time for the future. So industrial automation woodworking are based on the same DNA, our first-class understanding of automation. And especially industrial automation provides strong growth opportunities in fast-growing segments in the next years in automotive, as I described, but also in the MEGTEC and the consumer environment. This is why from this division, we serve a variety of industries, and that's why we continue to call it the industrial automation. HOMAG represents a strong counterpart to our automotive business and we have a real chance to grow with the wooden housing market. This will definitely come and establish a leading market position there beyond the position that we already have in the furniture industry. With the three divisions, and the overarching focus on automation, sustainability, we will provide a clear structure with solid margin potential, which we believe is easier to understand for the capital markets. We're not only reducing -- this is the next page. We're not only reducing the complexity of the Dürr Group by focusing on the automation of production processes. We believe that the three -- the emissions as we have defined them benefit from synergies within the Dürr Group and finally give us competitive advantages against stand-alone competitors because economies of scale are important, especially in areas like purchasing, the software development, where we are already well aligned within the group, or even using flexible capacity corridors. Close to the customers with the joint local sales and service centers, which none of our competitors in any of the fields or divisions that is able to do right now. We have, especially the ambition or we have ambitious large customers that really regard us as a supplier due to our scale and financial strength. We see this especially in industrial automation where we attract a totally different fully entailed now for BBS, for Teamtechnik with the backing of the Dürr Group. The integration through automotive division improves the customer focus, flexibility and consequently, competitiveness as it allows really to further drive innovation regarding resource efficiency to the next level. Cost synergies will be there, but they are not the main motivation behind this decision. But of course, when we look at those, if you look at PFS, they -- of course, our ambition is to bring all functions together. This will have effects in the end, not so much with employees, but within the leadership structures. So now what's the Dürr [indiscernible] case in a nutshell? We focus on automation as a driver for profitable growth based on attractive margin and on strong market demand trends. We simplify our structure and free up resources as described to further drive margins and create financial headroom. And at the same time, we increase our transparency. Consolidation of the activities creates synergies and enhances our customer offering, thus, we believe, will further add to top and more important to the bottom line. So as a consequence, we believe that the active portfolio management, which we've been talking about in previous calls, provides incremental contribution to shareholder value. Last, but not least, we confirm all the financial figures, the targets that we've been publishing for 2024 and our mid-cycle target. And we've summarized those again on the following pages for the sake of completeness, but I'm not going into those all along. So this would be my lengthy speech for the moment. And happy to hand back to Andreas who then manages the Q&A.

Yes. Thank you very much, Jochen. And Joanna, we can now start with the Q&A session, please.

[Operator Instructions] And the first question is coming from Nicolai Kempf from Deutsche Bank.

Nicolai Kempf, Deutsche Bank. My first one would be on the Clean Tech that you might want to sell. Obviously, I'm asking what could this worth? Or what could be the minimum price you would accept for this business? And then a follow-up on this is what would you do with the money?

Thank you, Nicolai, for very good question. We are at early stages. We have just decided to look into strategic options. We have no decision from the Supervisory Board. We have not decision -- taking the decision ourselves. That's why I hope you can introduce that we can also not talk about minimum price at this time. The second part of your question, what we'd do with the money? Probably too forward potentially, first, we've said that after the acquisition of BBS, we want to reduce our debt leverage to below 1, 1 or below. So that would be one element. The other element, maybe not immediately, but whenever the opportunity arises, we would again create flexibility in for further strategic growth, maybe a small or some sort of an acquisition, but nothing that is relevant to talk right now. In the first step, really is about bringing our leverage down from currently what is it 1.5x , 1.6x or so to [indiscernible].

Okay. Got it. And one follow-up. At the last CMD, you have presented a strategy that you would kind of reduce your auto exposure from, call it, 45% to 30% by the end of this decade. I mean, is this still something you target? Or is this maybe now postponed or not focused anymore to postpone the -- or to reduce the auto share?

Yes. Thank you. No, no change. It might look momentarily such that because most of, obviously, the CTS business today, we're looking at in case we would decide to divest. The share of the automotive business there is below the share of the automotive business overall. This is why technically, momentarily then, our share of the automotive business would go up. But by the end of the decade, we stick with the strategy because the other growth businesses that we have, especially -- and HOMAG coming back, then would outgrow that share.

Okay. Makes sense -- I think this sounds like a good move to make the stretch a bit more easy for investors and analysts.

Thank you very much for your comments.

And the next question is coming from Christian Cohrs from Warburg Research.

First of all, on Clean Tech, the division has posted a 50% plus ROCE last year. So I assume that the Air Pollution Control was a very big contributor, maybe even above the divisional average. Is that right? And that would then actually mean that the intended divestment would be, not massively, but directional ROCE dilutive. Is that a fair and correct assumption? Secondly, regarding timeline, do you have internally any target on the timeline? When do you intend to have the new structure in place, the potential divestitures executed? And then playing the devils advocate admittedly. But the merger of APT and the paint shop business is actually a reversal of the steps taken by your predecessors. I think it was back in 2010. So do you think that this was actually a bad decision back then and that you had untapped potential over the past 2 years? Or do you simply think that the industry landscape has changed?

Yes, Christian, I will start with all your questions about equity. On one side, as the product contracts is [indiscernible] quite good. That supported very wealthy development last year, especially in the second half of the year and this year as well. And you could see that accordingly, the royalty of the division was very high, yes. So there is a bit of dilution impact but we should also consider that compared to the total amount of our business, that's a small -- a minor part actually. And regarding the timeline, we are just at the beginning of the process, so we need to see -- we need to do our own preparation. We are giving the information today at an early point inside, but we need to do our homework first and then see how the process unfolds. As Jochen already said, it's a review of strategic options -- this is implying that there are a couple of different scenarios in there and we need to do the homework first before we quantify it online. And on your -- the last part of your question on our predecessors, the two routes. I'm not challenging the decision those days because the competitive landscape was different those days and the approach also by customers. What we now see is with the move towards sustainability, CO2-neutral production and change in the competitors landscape, that the amount of business, as I described before, where 10 years ago, less than 1/4 of the business that we had within PFS and APT was systems orders. Now it is 3/4 because more and more customers approach us and approach projects, and we can differentiate much better when we join forces. We believe that at this point in time, it is the right decision to handle the business under one hand, avoid interfaces and lift growth synergies.

And the next question comes from Sven Weier from UBS.

And sorry, if you mentioned that earlier, I could only join the call a bit late. I was just wondering the size of the environmental technology business within CTS, if you could quantify that?

Yes. So it's somewhere -- it's between EUR 400 million and EUR 450 million so pretty much in the middle, I think, currently. So EUR 420 million, EUR 430 million is the business is concerned. The remainder of the business after the total volume of roughly EUR 500 million at this point is the business that would stay with the world in case we sold Air Pollution Control and the damper business.

And from a margin perspective, I guess given it's really the vast majority of the [indiscernible] and the margin of the business shouldn't be that much different from the divisional level. If anything, maybe a bit better?

Yes. That's a fair assumption.

[Operator Instructions] And the next question comes from Holger Schmidt from DZ Bank.

The first question is on the underlying synergy potential, assuming or now that you are targeting to merge PFS and APT. I mean the underlying cost base is rather large here. And we have I think EUR 1.9 billion in terms of costs. Could you quantify the underlying synergy potential? That's the first question. And the second question is around the Clean Tech business. I mean, it's by far larger than the competition. And if you like to sell the business, who could be a potential buyer and have also the financial ability to buy it?

Thank you, Holger, for your two questions. We cannot, at this point, specify underlying synergies. We are still working also on the [indiscernible]. But for us, after we've done the restructuring, especially of PFS and also APT 4 to 5 years ago, we have reduced capacities already. So again -- but we're acting from a position of strength. So our approach is more to increase efficiency, maybe be able to accept 1 or 2 more large orders rather than significantly cutting costs. As I also mentioned, I cannot say that there is no potential in the leadership strategy. That's probably where we might see some synergies, but also there to specify. You [indiscernible] had a question -- the question [indiscernible]. Yes. Look, also we have nothing that we can say right now because we're not even at this point yet. However, when we do at least as well as regional, that's different by universe -- There's competitors, there's maybe large industrials, there is maybe [indiscernible]. But all of this, again, it's too early to say. [indiscernible] Are you going to have further questions?

No, I'm done.

[Operator Instructions] At the moment, there seems to be no further questions.

Thank you very much for opening our call today. If you have further questions, please do not hesitate to contact the Investor Relations team. Obviously, we will keep updated regarding the development. And yes, otherwise, thank you for joining, and we wish you nice rest of the day. Bye-bye.