Dätwyler Holding AG (DAE) Earnings Call Transcript & Summary

Ladies and gentlemen, welcome to the Dätwyler conference call. I am Sandra, the Chorus Call operator. [Operator Instructions] The conference must not be recorded for publication or broadcast. Please note that the slides for this call are available on the Dätwyler website, datwyler.com, in the submenu Investors and Publications. At this time, it's my pleasure to hand over to Mr. Dirk Lambrecht, CEO; and Mr. Reto Welte, CFO. Please go ahead, gentlemen.

Yes. Thank you very much. Good morning together, and welcome to this conference call. I'm happy that you are taking the time to learn more about Dätwyler's new focus on the Sealing business. I will start with the Slide 2, as you heard, which you can find under our webpage. As communicated with the half year report 2019, Dätwyler has carefully evaluated the strategic options for the distribution business and the Technical Components division. The environment in the distribution business has changed significantly in the recent past. The growing online trend and increasing demand from customers, suppliers and regulatory authorities have shifted fixed costs in critical mass upwards. Dätwyler had recognized this trend and had attempted to achieve critical mass through a strategic acquisition in 2016 with the planned takeover of Premier Farnell. I suppose that all of you have it in mind. Following -- after acquisition of Premier Farnell, there are not enough other acquisition target in the market to reach critical size quickly enough. At the same time, we have established leading positions in the Sealing business in attractive global markets, and the Board of Directors has therefore concluded that Dätwyler can leverage shareholders' capital more profitably in the Sealing business. At the [indiscernible] side, on the 23rd of December, we have announced the sale of our distribution companies, Distrelec and Nedis, to the German company Aurelius. The deal is due to be concluded in the first quarter of 2020, subject to the fulfillment of usual conditions for completion. The parties have agreed not to disclose details of the transaction. For the sale of Reichelt, we are taking the time to evaluate further options to optimize the value. For the time being, the Reichelt CEO will report directly to me but without being a member of executive management. And now our CFO, Reto Welte, will provide you with some further financial information of the transaction. Please, Reto?

Welcome from my side. I'll refer to Slide 3. The divestment of Distrelec and Nedis will result in a loss for the Dätwyler Group of around CHF 670 million, which will have no impact on liquidity. This amount comprises the following positions: some CHF 420 million of goodwill consisting of Elfa goodwill of CHF 300 million, Distrelec goodwill of CHF 30 million and the Nedis goodwill of CHF 90 million. In addition to the CHF 420 million of goodwill, there is some CHF 50 million cumulative currency translation adjustment to be offset against the equity. This is equity for the foreign Dätwyler companies that are disposed of. The CHF 180 million is impairment on assets. And finally, some CHF 20 million one-off costs for the restructuring of the Group are included in the CHF 670 million as a total amount. A significant portion of that CHF 20 million relates to potential contractual IT obligations with regard to the carve-out of the Distrelec and Nedis business. The final figures will be disclosed in the 2019 annual financial statements. As you know, Dätwyler prepares its reports in accordance with Swiss GAAP FER accounting standards and offsets goodwill from acquisitions against equity when the acquisition is made. In the case of a sale of previously acquired companies, Swiss GAAP FER requires the goodwill offset against equity to be taken into account at original cost to calculate the gain or loss charged to income. As this relates to the treatment of past acquisitions in the accounts, the divestment loss has no impact on the cash and cash equivalents of the Dätwyler Group. The inflow of the sales price will increase cash and cash equivalents after the divestment has been processed. Any negative impact on the balance sheet is limited to the impairment on assets and the one-off costs for restructuring. On the slide, you see our balance sheet at midyear 2019. At significantly above 50%, the equity ratio will still be very solid after the transaction has been concluded. Dätwyler therefore has excellent financial resources for implementing the growth strategy defined. With this, I hand back to Dirk.

Yes. Thank you very much, Reto, for this explanation, and I would like to continue with Slide #4. With the decision to divest the distribution business, Dätwyler will focus on the fast-growing and high-margin Sealing business for attractive global markets. Based on recognized core competencies, we have become a valued development partner for high-quality, system-critical sealing components in the health care and automotive industries and beyond. Thanks to the successful growth strategy, revenue in the Sealing business has more than doubled since 2011 to CHF 891 million in 2018. Operating profit has tripled to CHF 155 million in the same time period. By expanding existing plants, constructing new plants and acquiring matching companies, we have established a global presence, at the same time, opened up new industries and technologies. All our system-critical components have in common that they make a crucial contribution to the functioning of our customers' systems but account for only a very small portion of the cost of these systems. I continue now with the Slide 5. In the recent past, strong growth of the Sealing business has regained some of the benefits of the merger of the 2 former divisions, pharma packaging and sealing technologies. The size of the organization has slowed down our decision-making processes responsiveness and technological development. In order to strengthen our market focus, boost proximity to our customers, use our longstanding core competencies more efficiently and make the organization more agile, Dätwyler has decided to redefine the Group's organization. We will combine our market and production activities to form 2 business areas: Health Care Solutions and Industrial Solutions. These 2 business areas will be supported by the new Technology & Innovation and Finance & Shared Services service units. In 2018, the business area Health Care Solutions generated revenue of some CHF 390 million. Industrial Solutions achieved a turnover of CHF 500 million. The previous holding functions and the functions of Sealing Solutions divisions will be merged. And now I continue with the renewed executive management on the Slide 6. Thanks to our systematic talent management, we have secured 3 managers with proven records from our own ranks as new members of the executive management. Walter Scherz will succeed Reto Welte as Chief Financial Officer as of the April 1, 2020, in the role of CFO. He will have the new Finance & Shared Services service units. As CFO of the Technical Components division, Walter Scherz successfully developed the division's financial organization from a decentralized, branch-oriented structure to a central organization with a shared service center. Our previous CFO, Reto Welte, has decided at his own request to retire at the end of March 2020 after 10 years at Dätwyler. I would like to express my sincerest thanks to Reto Welte for his loyalty and exceptionally valuable work and wish him all the best in the next phase of his life. The Industrial Solutions business unit will be led by Torsten Maschke. As CEO of Dätwyler Sealing Solutions division, he has successfully developed the division over the past 3 years and played an important part in working out the new organizational structure. The Health care Solutions business unit will be managed by Dirk Borghs in the future. Among other projects, Dirk Borghs was responsible for developing the sector-leading Dätwyler first-line production standard and was previously in charge of all production locations in the Sealing Solutions division. Frank Schön will take over the management of the newly formed Technology & Innovation Group function. Frank used to be responsible for research and development in the Sealing Solutions division. In recent years, he has successfully driven the establishment of the global research and development organization, focusing on digital knowledge management. With the completion of the sale of Distrelec and Nedis in the first quarter of 2020, Neil Harrison will step down from the executive management. The Board of Directors and myself would like to thank Neil Harrison for his hard work and dedication in further developing the distribution business and wish him all the best for the future. Now I will continue with the Slide 7. With the proactive reorganization of the group announced today, we want to preserve the synergies and economies of scale of the previous structure and realize the mentioned new benefits while optimizing our cost structure. The new structure will make our organization much more flexible and agile, speed up decision-making and increase the exchange of information and knowledge. I'm very convinced that the new organization will enable us to implement our strategic priorities more quickly, including driving profitable organic growth, increasing agility and accelerating the digitalization. I now come to Slide #8. With Technology & Innovation there as a separate new service organization unit, we want to make our core competencies and decades of experience available to our customers even better and more beneficially. Our strong market positions are based on our recognized core competencies in solution design, material expertise and operational excellence. In the solution design, our interdisciplinary teams assist our customers with fast prototyping for tailor-made sealing solutions. Our successful track record makes us a recognized co-engineering partner of our customers. Our in-house molding shop with latest technologies provides for industry-leading flexibility and precision. With our long-term material expertise, we are able to develop high-performance materials for most challenging requirements and various applications. Our in-house mixing plants enable us to produce unique compounds. Operational excellence will drive our capability to set industry standards and apply them worldwide. With first-line, for health care components and lean and clean for automotive components, Dätwyler operates industry-leading production standards with 0-defect philosophy and highly automated production cells. It is important to understand that only if those 3 competencies are aligned and productive, you are in a position to offer the best sealing solutions to the market. On Slide 9, you see that the year 2018 marks the peak of our investment program in the Sealing Solutions division. This slide summarizes the strategic investments, projects and acquisitions since 2015. Of the construction projects, only the expansion of the Indian health care plant is still in progress. In the near future, the focus of the investment is more on the modernization and expansion of the ERP software and on digitalization projects. With all these investments, we have created a really strong base for accelerating our organic growth in attractive global markets. Due to some internal delays, the detailed orders by customers and the long lead times on new projects, sales from the listed investments will increase slowly but steadily in the coming years. Slide 10 summarizes now the track record of acquisitions in the Sealing Solutions division, and which is very important to explain it to you. Since 2012, we have successfully integrated 7 companies with more than 3,000 employees and more than 250 -- sorry, CHF 240 million of revenue. With the executed acquisitions, we have expanded in new geographies, as with Zhongding, Hankook, Columbia and Bins; have entered into additional industries, as with Origom and Parco; and have opened up new technologies, as with Ott. Meanwhile, the Sealing Solutions division has approved the M&A process for identifying, acquiring and integrating companies that fit for our strategy and culture. Above all, acquisitions target must support our core competencies, naturally add values and have the potential to sustain profitable growth. We want to continue to support our organic growth, and it's very important for me that you understand that, with selective bolt-on acquisitions, as we have been doing in the Sealing business during the past 8 years. Now with that, I would like to close my short presentation, and thank you very much for your attention. And now we are available for your questions.

[Operator Instructions] The first question is from Charlie Fehrenbach from AWP.

Is my assumption correct that the -- between the 2 new business divisions, Industrial Solutions and Health Care Solutions, that there's a gap in profitability; that Health Care Solutions is more profitable than Industrial is question one? Question two is dividend. I know that the Board is responsible to speak to dividends, but is the loss -- operating loss for 2019 of almost CHF 0.5 million rather argue against the dividend? Or is it rather the argument better that it's not -- there's no influence on cash, so you could pay a dividend anyway? Question two. And three is acquisitions. You're looking for external growth as well. Is it rather industrial? Or Health Care? Or both?

Yes. Charlie, thank you very much for your questions. Let me come to the first one that is regarding the profitability. Yes, there is a small gap between the 2 business units, that is clear, but please understand that we cannot disclose that today. I will come back to that during the BMK in February. If it comes to the dividend payments, since that we have no negative impact on the liquidity, you can assume that the Board of Directors will define the dividend based on operating results. And therefore, our target level for the dividend, even in the last year, was around 40%. Of course, the final decision will be coming with the announcement in February, but that is the target. With regard to acquisitions, I think it's -- now we have -- first of all, we have to optimize the organization. We have to do all the detail, and I do know would like to do everything in parallel. We have some ideas of further acquisitions. And as you know from the past, of course, we still have a topic in China with Health Care, and we are still trying to identify a company there. And -- however, as we have shown in the last years, wherever we see a chance, we would like to have some bolt-on acquisitions, either in our Health Care or in the Industrial Solutions that will show what opportunities will come up in the market.

The next question comes from Serge Rotzer from Crédit Suisse.

Three questions. First one is the -- many thanks for breakdown of the loss of CHF 670 million. Then you disclosed that the one-off costs have been CHF 20 million. So this is cash, as the other, the remaining part, is noncash. Reto mentioned that there was no impact on liquidity, so this tells me that you got CHF 20 million of cash from the buyer. Is this correct? This would be the first question. The second questions would be on overhead costs. What about the overhead costs today covered by Technical Components, now have to be covered by Sealing Solutions? How much is this? What is the impact going forward? So also on the margin of Sealing Solutions, your second question? The third question is what about the timing? I think you mentioned that when deconsolidation will happen -- I'm not sure whether I got it correctly. First, when does deconsolidation will take -- happen? And secondly, when will be the sale of Reichelt? What's your time frame? Is it 3 months, 6 months, 12 months, or 10 years? This would be then the next one. And with Reichelt, could you confirm your margin of 7% to 8% for Reichelt? Is this true?

Reto, I think you will start.

Yes. As I mentioned, there is no impact on cash, but I did not mention any prices, as this information is confidential. So I would stick to what I stated. Assumption is that there is no impact on cash. The targeted deconsolidation, I will answer the question number three. Targeted deconsolidation should take place by the end of February, that's at least the targeted date. You are aware that whenever acquisitions or divestments are taking place, that there is some regulations to be respected. It takes its time. Therefore, I cannot assure 100% that it will take place by the end of February, but that's the targeted date.

Yes. Then I will come to the question #2 and 4. #2 was regarding the overhead costs, if I understood right. And of course, we have currently some overlapping functions which we have talked quite in detail how we deal with that. And finally, our target is to reduce overall costs after we have finalized the new organization, so that these overhead costs will not dilute this margin of -- from Sealing Solutions. And if it comes to Reichelt, it will not take 10 years, it's what I can tell you for sure. But I can't tell you whether in the short term, in the next couple of months or maybe it will take 1 or 2 years. For us, it's more important that we have here the best and a good price for this good, profitable business. And as you know from format, you know that Reichelt is on a higher single-digit range, but we will tell more about that when we have our BMK in February, okay?

Yes. A follow-up question, if I may?

Yes.

If I'm not wrong, the goodwill of Reichelt is CHF 70 million. Is this correct? And then secondly, do we have to expect further CTAs also for Reichelt? And what's about the net costs for the investments of Reichelt? What do you expect?

The goodwill dimension for Reichelt is correct, as you can see in the annual report. What was the other question?

CTAs.

And CTA, yes, the CTA, of course, there will be a CTA. If you remember, when we bought Reichelt, that was in 2010, of course, euro currency at that time was at completely different level. And in case of a potential divestment, there would be a CTA. Dimension, I cannot mention you upfront because that will depend on the closing currency situation.

The next question comes from [ Christian Wolf ] from MainFirst.

First question, again, it was a bit fast at the beginning, can you just give us the separate items of the CHF 670 million loss? I just got the CHF 30 million distribution; Distrelec goodwill, CHF 90 million; Nedis goodwill. Can you just remind us on the remaining figures, the details? Second question might be how will be the reporting below the sales line going forward in the Sealing division? Will we get EBIT, cash flow numbers, ROCE numbers like the moment? And the last question will be on the dividend strategy. As you say, you will have a lower investment CapEx need going forward. Will there be probably a change in the use of cash?

Coming back to your first question, details of the CHF 670 million is CHF 420 million goodwill in total. The Elfa goodwill for CHF 300 million; Distrelec, CHF 30 million; Nedis, CHF 90 million. Then I mentioned CHF 50 million currency translation adjustment; there's CHF 180 million impairment on assets and CHF 20 million one-off costs for the restructuring of the group. Your second question regarding reporting structure, you know that we are reporting according to Swiss GAAP FER, and there is some minimal requirements regarding the segment information that we give, so you will at least get sales figures. The rest, we'll have to decide.

Yes. And if it comes to the dividend strategy, as I said before, now we have announced last year -- yes, last year, that we have around 40% of the net result, and I do not see any need for change currently. But however, that is up to the business, how that is running. And let us discuss that at a later point of view, yes? Maybe we come back to that with the BMK in February. I think that answers your questions, right, [ Christoph ]?

The next question comes from Michal Lichvar from Bank Vontobel.

First one would be, you mentioned the peaking CapEx cycle. Can you mention maybe what do you plan to spend as a percentage of sales going forward for the next 2, 3 years? Then a second question. Just in terms of Sealing Solutions, do you plan to also develop some new markets? Do you see some kind of wide gaps that you would like to fill? And then a third question. Can you maybe tell us how the net working capital will change after the divestment of Nedis and Distrelec?

Okay. Let me start to answer the questions one and two, and I'm asking Reto to answer question three. If it comes to the CapEx for the next couple of years, please give us some more time to go back with that answer beginning of February. As I said already before, I think the CapEx, the investment level will be now down for the next couple of years because the major investment at Sealing Solutions we have now done in the last couple of years. However, nobody knows if we have some great ideas for the future. Maybe we have to invest, and we will do that then. So -- but for today, I can only tell you that according to what we have said before, we will over the time reduce investment. And in the detailed level about that, I will explain to you in our BMK. If it comes to new markets, new technologies, of course, we're always driving forward to identify new markets or maybe new technologies that will help us, let me say, to improve -- to give a better service to our customers. And that is one of the reasons why we are looking for bolt-on acquisitions which are able to support this. On the other hand, that is one of the reasons why we have decided to build, let me -- and service unit with Technology & Innovation because one of the main tasks is that we would like to accelerate the innovation process for new product lines which are developed internally. And we have some great product lines already, let me say, under development, and I hope that we can announce something in the next 12 months, which would help us to grow from the organic direction here. So that is what is coming up in the next couple of months. And then I'm looking forward to give you more information about that later on, yes? Reto, can you go on with...

Yes. Regarding your last question regarding the net working capital levels for the remaining group, I can assure you that basing on the Sealing Solutions business and including the Reichelt business, the net working capital level in percent of sales will further be reduced on the time line. We are constantly working on optimizing our net working capital levels. And with this divestment of the Nedis business and the Distrelec business, there will be a positive impact on the -- as I said, the percentage of the net working capital compared to sales as the Distrelec and the Nedis business are quite heavy regarding net working capital. Reichelt, on the other hand, is very well managed and very well organized net working capital level.

The next question comes from Daniel Koenig from Mirabaud.

Yes. I had one similar question on CapEx. I want to rephrase the previous question, and how much CapEx did Nedis and Distrelec have in 2018? Can you give me some kind of indication how much that was so I can readjust it going forward?

Well, Nedis and Distrelec did not have very big amounts. We are actually talking a couple of million, below CHF 5 million in total CapEx in 2018, you asked.

The next question comes from Rolf Renders from Helvea.

Just to follow-up. You mentioned the focus on bolt-on acquisitions. In which enterprise value range should we think for these kind of acquisitions?

Rolf, can you please repeat? It was not very clear. What is regarding the bolt-on acquisition? Can you repeat it, please?

Yes, of course. So for bolt-on acquisitions, which size enterprise value are you hinting there or looking?

Okay. Yes, okay. The one thing is the enterprise value, the other thing is the bolt-on size, yes? That depends on the [indiscernible] and how the net profits of the business is. What we are looking here is when we are talking about bolt-on acquisitions, currently, I'm looking forward for acquisitions which we can, more or less, easily integrate, as long as they -- and that is very important to understand and I would like to repeat it here, as long as this acquisition fits to our core competencies and to the cultural fit of our organization. And let me say, the turnover what we are looking for, is up CHF 50 million, CHF 60 million. But at minimum, it should be at around CHF 20 million. And of course, the enterprise value, it could be different ones and depends on the quality of the business, yes.

Okay. And do I then understand right that the chance is small that you will look to buy something large?

I think based on what -- on our experience in the last couple of years with Sealing Solutions, I think we managed it quite well with integrating this bolt-on one. I do -- and I would like to exclude that we have maybe an acquisition in the future, which is larger, maybe around CHF 200 million, something like that. But we do not have something in our portfolio, which is what we are looking for currently, which is in this size. So we are focusing on the smaller ones, which is bringing our especially benefit to the existing business, yes.

Okay. And then looking at the strength of your balance sheet, going forward, how would you ideally like to run the company?

Reto?

We have a certain limitation regarding the equity ratio. The Board of Directors clearly stated that there is a minimal target of 40% equity ratio. So as you realize, there is, of course, still some potential, and we would like to level -- to leave the -- level out this potential, but that's the situation.

All right. And on these acquisitions, what are your financial return requirements?

So first of all, I think with regard to the acquisitions, it's important that an acquisition, a bolt-on acquisition, is bringing us forward. That means adding some further competencies to our organization, et cetera, fitting to other, aligned with our customer portfolio or technology. And therefore, I think we are having an individual look to every acquisition, and then we are looking for what is the internal rate of return for that.

Maybe I didn't hear that. What -- did you mention the financial criteria or not?

I said regarding the financial criteria, we're looking more if this acquisition is in the long-term perspective as a state acquisition, and that is very important for us. And therefore, we will always have an individual look to the acquisitions, and then we will having a calculation of that, what is needed to get us the result. That means, of course, every acquisition should have some benefits as well then.

Our next question comes from Richard Frei from ZKB.

Just regarding reporting of Reichelt, you have mentioned that there is direct reporting line to Dirk. So what can we, as public, expect? So what will be shown to us? And secondly, just to be -- to make sure that I'm on the right weight, as the timing or the closing of the deal is expected by end of February 2020, am I right that the divestment losses will flow into the 2020 numbers? Or do we need to consider something for 2019 as well?

Can I start?

Yes, please.

Your first question regarding the reporting for Reichelt, I can answer a similar way as I did already for the Sealing Solutions business. There is minimal requirements in Swiss GAAP FER, which, for the Reichelt business, are it would be a separate segment with regards to this perspective. We would at least have to give you the information on sales. Whether we will do additional information, we will -- you will see. But minimum requirement is sales. As you correctly said, the closing is targeted by the end of February 2020. Now in the case of the deconsolidation by the end of February, the goodwill will turn into the profit and loss and the CTA will turn into profit and loss. As we already, and I mentioned that, are confronted with impairments on assets, this impairment plus the restructuring cost, as you might imagine, will have to be taken into account in the annual report 2019 already. So there is a separation of the CHF 670 million into CHF 200 million roughly that will have to be taken into account in 2019, and the rest with the deconsolidation will then be shown in 2020.

[Operator Instructions] The next question comes from Sebastian Vogel from UBS.

I have a couple of questions on the tech side of things. From previous discussions, I recall that here in the past that if you keep some part of the business until the year-end 2019, you will see some positive tax impact for your 2019 numbers. Is that something that could eventually lead to a situation where you see a tax rate that is below the numbers or below the rate that we have seen in 2018? And then, of course, with regard to the whole situation, as you discussed a minute ago, about the -- partially of the amount getting into 2019, partially in 2020, how should we think overall on your tax rate because of the whole transaction? And of the CHF 670 million, and that's the last question, that's post tax? That would be my 3 questions.

The CHF 670 million, starting with your last question, is actually on EBIT level and it's also post tax. Tax rate will not be -- will not see a big change compared to 2018. And also for the future, there is no big impact out of this loss because, as I mentioned, it actually turns just from equity into the P&L, mainly the goodwill and the CTA, and they do not have tax effect.

The next question is a follow-up question from Serge Rotzer from Crédit Suisse.

Again, you have been guiding for an equity ratio of 50%, so this reduction of CHF 170 million of the equity, this is about -- or is equal to the impairment of the assets, so that's fine. But looking forward, with the net working capital change, is this now a real guidance because we should expect a reduction of the balance sheet, isn't it? So with that -- through the net working capital reduction, so with that, the equity ratio should be clearly higher. So what is the guidance including the net working capital optimization of the equity ratio? And the second question would be, do you expect further transaction costs in 2020 for Elfa and Reichelt -- for Elfa and Distrelec or Reichelt?

Starting with the second question, we are trying to take into account all the transaction costs in the 2019 annual report, so there should not be further restructuring or transaction costs out of the sale of the Distrelec and Nedis business. And for the guidance of the equity ratio, just like finish all the effects -- let's see all the effects out of the divestments. And as I said, we can give you a first guidance that the equity ratio, even after the transaction, should be higher than 50%, not taking into account further improvements on net working capital, at least as a first answer.

Okay. So but this is conservative. 50% equity ratio would be conservative ratio?

That's your judgment. I just give a first indication on that. The level should be higher than 50%.

Okay. Reto, it's really a pity that you're leaving the company. I liked you really very much.

The next question is a follow-up question from Mr. Michal Lichvar from Bank Vontobel.

It's just one. I just want to know how does the civil engineering fit into your new organization. Does anything have changed? Is it still a noncore asset? Or did you reevaluate this also?

Thanks for the question, Michal. I think that is as before as it's noncore. And we're still trying to find the right solution for the civil engineering, which is approximately CHF 14 million of sales in 2018. So that means that is -- we are still trying to find a solution for that.

Gentlemen, so far, there are no more questions.

Okay. Then I think, thanks a lot for all your questions, and I wish you all a further good start in the year 2020, and I'm looking forward to see and to hear you. And in February, you will have the [ analyst ] media conference, and we will have some further information there for you. And thanks for your attention today, and I wish you a good rest of the week, and looking forward to see you again. Thank you very much from my side to all of you.

Ladies and gentlemen, the conference is now over. Thank you for choosing Chorus Call, and thank you for participating in the conference. You may now disconnect your lines. Goodbye.