Dätwyler Holding AG (DAE) Earnings Call Transcript & Summary

Ladies and gentlemen, welcome to the presentation of Dätwyler Annual Results 2020 Conference Call and Live Webcast. I am Alice, the Chorus Call operator. [Operator Instructions] And the conference is being recorded. The presentation will be followed by a Q&A session. [Operator Instructions] The conference must not be recorded for publication or broadcast. At this time, it's my pleasure to hand over to Mr. Dirk Lambrecht, CEO; and Mr. Walter Scherz, CFO. Please go ahead, gentlemen.

Yes. Welcome to today's call. My name is Dirk Lambrecht, and here with me is Walter Scherz, our CFO. We regret that we cannot meet in person for our annual result conference this year. I do sincerely hope that these things will change in the course of this year and that we will be able to meet in person again soon. I will directly move on our today's agenda. After our explanations, Walter and myself will be happy to answer any questions you may have. As announced 1 year ago, we reorganized our company to strengthen our market focus on our core competencies. The new organization has been implemented successfully and has already proven itself during the COVID-19 pandemic. The increased focus on the respective markets helped Dätwyler to respond in an agile way and quickly to changing market developments and customer needs. During my part of the presentation, I will focus on the continuing business, as shown on this slide. Our CFO, Walter Scherz, will talk about the transition from the former to the current Dätwyler Group. In the pandemic year 2020, we proved that our focus on system-critical elastomer components for attractive global market brings added value. Currency adjusted, the continuing operations generated an organic revenue growth of 1.2%. Walter will provide you more details. The Healthcare business, Food & Beverage and our online distributor, Reichelt business, enjoyed a strong demand throughout the year. The other units had to accept a significant revenue decline during several months. By taking action early, we were able to adapt cost structures quickly. At the same time, the Healthcare business and the online distributor, Reichelt, improved their profitability. As a result, Dätwyler was able to increase its operating result by 10.9% to CHF 148 million. The EBIT margin improved to 14.6%. The net result from continuing operations rose by 20.7% to CHF 118.9 million. Now I would like to comment on the performance of our business area. We will start with Healthcare Solutions. This business area offers high-quality system critical components for containers and delivery systems for injectable drugs and diagnostics for the pharmaceutical and medical markets. The Healthcare Solutions business area increased its sales to CHF 403.4 million. This has been adjusted for the strong Swiss francs impact. This equates to an organic growth of 11.8%. In the fourth quarter, the organic growth was close to 20%. The operating result improved by 24.1% to CHF 79.2 million. This results in a significantly higher EBIT margin of 19.6%. Included in these figures are expenses for managing the impact of the pandemic, start-up costs for new production capacities, higher depreciation and negative currency effects. To meet the strong demand for high-quality products, we implemented several measures to increase our production capacities. That is through further automation, a 24/7 work regime and the installation of additional equipment. The expansion of our facility in India, where we will double our capacity, is continuing. However, unfortunately, the pandemic has delayed the construction work. The new building is now scheduled to be operational in the second quarter of '22 at the latest. I will now switch to the business area, Industrial Solutions. This business area offers customized system-critical components for demanding applications in the mobility, food and beverage, oil and gas and general industry markets. In the business area, Industrial Solutions, we sold the Civil Engineering business in May 2020. Therefore, we present you the figures of the continuing operations of this business area without Civil Engineering in the reporting in the prior years. Due to the substantial negative impact of the pandemic, revenue fell to CHF 427.5 million. This corresponds to a currency-adjusted decline of 11.4%. Thanks to the quick adjustment of the cost structure and the encouraging performance of the Food & Beverage business, the EBIT margin improved slightly to 11.8%. The operating results amounted to CHF 50.4 million. Towards the end of the reporting year, Dätwyler extended its strategic partnership with Nespresso. The new multiyear contract will run until 2030. It envisaged a continued volume and revenue growth. Since the third quarter was also supplied to another customer, to serve the forecast demand, we will invest in the expansion of our production capacities at our Swiss plant in Schattdorf. Besides the 2 business areas that are part of our crop business, the online distributor, Reichelt, completes the Dätwyler Group for the time being. Based on the competent technical support, high availability and short delivery times, Reichelt supplies more than 100,000 electronic products to more than 1 billion -- million -- sorry, 1 million business, government and private customers. Reichelt was able to increase its market share in the reporting years, thanks to its attractive price performance proposition. The online distributor achieved a currency-adjusted growth of 12.7% in a challenging market environment. Reichelt also increased its revenue to CHF 188.8 million. The low-cost base helped to increase the operating result by 16.2% to CHF 17.2 million. The EBIT margin improved to 9.1%. Reichelt benefited from the trend towards online shopping that was boosted by the pandemic. There was a particularly strong demand for electronic devices and accessories for use in a home office or home schooling setting. With this, I conclude my review and hand over to our CFO, Walter Scherz.

Thank you, Dirk. Hello, everyone, and very pleased to have you here. My name is Walter Scherz, and I'm presenting the annual financial results 2020 for Dätwyler Group. I'm thankful for your interest in Dätwyler. As Dirk explained, Dätwyler focuses on the system-critical elastomer components. This has been implemented in 2020. The reorganization, therefore, amongst other items, included the sale of the distributors, Distrelec and Nedis and the Civil Engineering business. This affects the reported results as already communicated a year ago and in the half year results. So this will not be a surprise to you. Dätwyler Group's continuing operations improved but reported figures for financial year 2020 are influenced by divestments. The reported EBIT is minus CHF 315.9 million and reported net result stands at minus CHF 346.3 million. This actually includes a loss of CHF 464.5 million from the sale of these subsidiaries. It is important to note, though, that this loss does not affect Dätwyler's current liquidity and the overall equity position, which I will explain later on. When we start here with the sales bridge, you can see that Dätwyler was able to generate organic revenue growth in this difficult year, but we also see a negative impact of the strength in Swiss francs. Swiss franc. Coming from prior year's CHF 1,360.8 million, this is actually the left side column, our turnover for the whole group reached CHF 1,069.2 million this year, which is the right -- the bar on the left. Excluding the divested businesses, Distrelec, Nedis and Civil Engineering, the 2019 continuing operations turnover was CHF 1,050.5 million, which is the third pillar on this slide. Healthcare Solutions organically grew by 11 point -- by plus 11.8% or CHF 45.1 million, while Reichelt organically grew -- even grew by plus 12.7% or CHF 22.1 million. Industrial Solutions, on the other side, organically lost minus 11.4% or CHF 57.5 million on the top line. Dirk has given you the reasons for this development. All those effects led to an organic increase of plus 1.2% in sales of which the strong Swiss franc took some 4.8%. The Swiss franc further strengthened relative to all currencies Dätwyler is exposed to. This brings me to the profit and loss statement. The consolidated income statement is a functional income statement as in the previous years. It shows continuing operations and discontinued operations, actually, the divestments. This allows you to better assess our operational performance. The continued operations is the basis for the future development. I would like to make 3 remarks to this consolidated income statement. First, the gross profit margin slightly reduced to 24%. The Swiss franc led to a decrease of around 4%, while raw material prices helped to support the gross profit margin. The turnover decrease in Industrial Solutions also affected this ratio. Second, general and administration expense was reduced due to the reorganization and previous year's divestment effects. In addition, some of our IT costs are recharged external, actually to third-parties now, thus resulting in higher other operating income for this year. Third, the lower income tax expense of around CHF 20 million contribute to the weighted average tax rate of 21.8%. The income tax expense dropped again in 2020. One of the reasons is the reassessment in capitalization of tax loss carryforwards, which could be saved operationally. You see the major impact in the detailed reconciliation in the annual report. I will talk about the finance result in a separate slide. Moving on to the EBIT bridge. You will have noticed again that the reported EBIT is impacted by divestments. The continuing operations EBIT 2019, again, the third pillar, was CHF 133.5 million. As you can see, Healthcare Solutions and our online distributor, Reichelt, further strengthened their profitability in 2020. Healthcare Solutions organically grew their EBIT by 30.6% and Reichelt by 20.9%. This actually shows you the operational leverage in these businesses. Industrial Solutions organically declined by minus 12.2%. The EBIT 2020 from continuing operations reached CHF 148 million. This is the basis for the Dätwyler Group going forward. Here, you see the various EBIT margins. Dätwyler's EBIT margin shows a resilient performance in a challenging environment. Continuing operations alone delivered an EBIT margin of 14.6% or CHF 148 million. In Healthcare Solutions, the EBIT margin reached 19.6% or CHF 79.2 million. This actually includes the Middletown result. As you can see in our alternative performance measure document on the Dätwyler website, this is considered as part of the normal business going forward as operations in the U.S. are running. Industrial Solutions adjusted EBIT margin includes the -- excludes the divestment of Civil Engineering, so it results to 11.8% or CHF 50.4 million. This is quite a reasonable result given the massive top line decline in some businesses. Last but not least, Reichelt increased their EBIT to 9.1% or CHF 17.2 million compared to previous year. As Dirk mentioned, we are continuing to optimize the firm's value. A short word on the finance result. It shows that we paid less interest on bank loans and other finance charges. On the other side, as in the half year, it includes the development of the unhedged currencies, such as Indian rupees, Brazilian reais or Czech korunas. During the corona year, these currencies actually depreciated quite strongly against the Swiss franc. The finance result is basically CHF 2 million higher due to the strengthening of the Swiss franc. With that, I move on to the balance sheet. And you see that the balance sheet overall has shortened by minus 4.7%. However, please be reminded that Distrelec and Nedis balances already have been impaired in 2019. This means that the development you see here on the asset side, at least, is less pronounced, as you might have expected. Trade accounts receivables increased due to the strong development in the fourth quarter. On the liability side, Dätwyler further shortened the current liability positions, mainly by repaying interest-bearing debt. By streamlining the liability side, this further reduced net debt and gearing. While liabilities reduced are proportionate, the equity ratio actually is above 60% again. Our strong balance sheet and liquidity allows us to pursue further strategic opportunities and investments, even beyond these corona times, especially in Healthcare Solutions and Food & Beverage, as Dirk will explain in our future plans and the outlook. You note that the equity ratio increased to 66.4% from previous year's 58.1%. The increase of the net cash surplus, which is the last line, net cash surplus is actually cash less short-term bank debt. The increase to CHF 169.5 million is due to the fact that Dätwyler does virtually not have any short-term bank debt anymore. Our balance sheet is a solid foundation for future growth. The repayment of debt can also be seen in the net debt development, which is actually on the right side on that slide. Net debt, which is liquidity minus interest-bearing debt, further reduced to CHF 35.7 million. On the left side, free cash flow could further be increased and stands at CHF 115.7 million in 2020. The improved cash flow from operations and less investing activities improved free cash flow, which I will show you in the cash flow statement on the following slide. Net cash flow from operating activities further increased to a level of CHF 185.3 million. The team put really good emphasis on the accounts receivable position and the reaching in this special year 2020, as you can read in footnote 11 of the annual report. This positive and increased operating cash inflow was used for investments on 1 side and repayment of debts on the other side. Net cash used in investing activities reduced to CHF 69.6 million, mainly helped by less CapEx in 2019 at disposal of subsidiaries. Net cash used in financing activities, though, increased to minus CHF 132.7 million, mainly due to repayment of debt, as you can see in the development. Overall, the liquidity situation at Dätwyler Group remains solid. Important to mention is the fact that the majority of the investing cash flows are investments into the future that is Healthcare Solutions and Food & Beverage. Capital allocations happen in growth areas. The return on capital employed or ROCE for Dätwyler Group only slightly decreased to 22.1%. As you can note from the individual graphs, the ROCE development at Dätwyler Group is influenced by recent growth investments in Healthcare Solutions, but also the absolute profitability drop in Industrial Solutions. The ROCE varies between these business areas. Healthcare Solutions ROCE of 23.7% is driven by increased absolute EBIT and relatively spoken more increased capital employed. Industrial Solutions ROCE stands at 17.1%, which will increase again with growing turnover and EBIT. Reichelt's ROCE is driven by higher EBIT and only a slight increase in capital employed, mainly related to inventory. The capital expenditure in 2020 is slightly above the long-term average due to attractive business growth opportunities. It is still the midterm goal to reach more or less the level of the depreciation or around 8% of net sales. However, due to investment opportunities based on additional orders and demand in Healthcare Solutions and Food & Beverage, in the coming years, we were and are ready to invest further. Dätwyler allocates its capital into growing markets where we see potential. Last but not least, let me talk about the dividend proposal. The reported net result is negative, as you have seen. However, due to the strong balance sheet and the solid continuing operations net result, the Board of Directors proposes to the AGM an increased dividend of CHF 3.20 per bearer share. The payout ratio stands at 45.8% of the adjusted net result. This is slightly above the normal payout ratio as in previous years. With this, I would like to hand over to Dirk to talk about Dätwyler's outlook for '21 and beyond.

Yes. Walter, thank you very much for these financial insights. Now I will continue with the outlook. Yes. First of all, let me start with our mission. We materialize ideas for a safer, smarter and more sustainable world. We live in a world of constant change. The demand for powerful and complex technological products is rising. In many cases, our system-critical components are essential and make technological progress possible. We support our customers to efficiently implement ideas and innovations from the idea to industrialization. We develop and manufacture our components in a global network of more than 20 plants. We produce more than 90 million components every day. It is crucial for our customers' success that they have access to our material specialists and engineers in the main economic regions. The components we focus on has a critical impact on the safety or performance of the system. We engage in advanced systems with demanding and complex requirements that can only be fulfilled by a handful of global suppliers. These high-tech components make a decisive contribution to the success of our customers' products. But at the same time, they account for only a small portion of the overall system costs. Some product examples are stoppers and plungers for life-saving vaccines and treatments, amongst other against the COVID-19 virus; smart rubber components with integrated sensors for new active assistance and safety systems in vehicle and other applications; and multi-material components for the electromobility of the future. The base of our value proposition are our core competencies: solution design, material expertise and operational excellence. A series of global megatrends is providing opportunities in existing and new markets. These are demographic and lifestyle changes, an increase in safety and regulations, more efficient use of resources and the digitalization of all areas of life. By applying our core competencies for these global megatrends, we create growth opportunities in existing and future markets. We are able to support customers from the design study and the prototype phase up to the global serial production. Our pharma business is specialized in primary packaging for injectable drugs. The estimated market growth over the next 5 years will increase due to an additional demand for vaccines and therapies to fight the COVID-19 virus. As 1 of the leading players in this market and based on our core competencies, we are able to provide best-in-class quality. Our First Line production standard offers customers the possibility to reduce particle contamination by up to 50%. Our strategic priorities are focused on aggressively growing in the U.S. and in the attractive biotech market; increasing the number of new drug development projects we are involved in; and pursuing opportunities to expand our footprint in China and Latin America. Among other applications, our system-critical components, such as stoppers and plungers, are used to provide the COVID-19 vaccines. We are proud to be able to support the leading pharmaceutical companies in the fight against the pandemic. During the intensive phase of the COVID-19 pandemic in the second quarter of 2020, we proved that we can make an important contribution to our pharma's customer business contingency. This is thanks to our presence with standardized plans on 3 continents. Our mobility business unit is specialized in critical components for the automotive industry. We are well positioned to help our customers transition towards new mobility. Our strong market position is based on the broad technology portfolio and advanced production standards. Both aspects are crucial to manufacture components for electrified and emission reducing systems. We continue to invest in the development of new customer projects. We acquired further new projects for electrified vehicles. Electroactive polymers or smart rubber open up new interesting applications in the field of digitalization in vehicles and driver vehicle interface. Customers achieve higher quality and shorter time to market due to -- on our coengineering approach. For housings, for electrified vehicles, customers benefit from our leading expertise in simulation and in multi-material components. We will continue to focus our strategic priorities in order to drive the success of our organization by driving profitable growth, accelerating the digitalization, increase agility and advancing sustainability. With our focus on increasing agility and accelerating digitalization, we have been preparing ourselves for unforeseen events in the VUCA world. During the corona pandemic, we are benefiting from this groundwork. The progress achieved has shown us that we can react faster and better to unexpected impacts. In the fall of 2020, we added the advancement of sustainability as our fourth strategic pillar. With our unique shareholder structure and more than 100 years of corporate history, sustainability is part of our values. Since 2009 already, we are a member of the UN Global Compact, published a sustainability report according to the guidelines of the Global Reporting Initiative, GRI, and a CDP disclosure. Motivated by the good ratings, for example, from MSCI or EcoVadis, we'll want to take sustainability to the next level. By 2030, we want to achieve carbon neutrality for our own activities at all our sites. To define the milestones, we will use the Science-Based Targets concept. Already today, we purchase 35% of our global electricity consumption from renewable energy sources. This amounts to an annual reduction of CO2 emissions by some 15,000 tonnes. Also, we were able to reduce our relative resource consumption in 3 consecutive years. A good example is our Swiss plant in Schattdorf, where we already produce carbon neutral since 2013. We purchase the electricity from hydropower sources, and the process in heating energy is supplied by a nearby wood-fired heating plant. This brings me to the specific outlook for 2021. Dätwyler expects a significant double-digit revenue growth in the Healthcare business in '21 and a strong development above market average in the following years. Strong demand for high-quality coated components from our First Line production will have a positive impact on the product mix and the average margin. In the business area, Industrial Solutions, some pandemic uncertainty will remain, but we are confident that the recovery of the market in the fourth quarter and good order backlogs will lead to a high single-digit revenue growth in '21. After a strong 2020, the online distributor, Reichelt, is likely to achieve low middle single-digit growth in '21. For the group, we expect the increase in revenue to be considerably over CHF 1.1 billion and an EBIT margin of around 15%. All of these forecasts assume that there will be no additional unforeseen negative impact caused by the pandemic and the current outlook -- and the current lockdown, sorry, will not proceed in the second quarter of '21. To conclude my presentation, let me summarize the 5 elements of our investment proposition. We focus on system-critical elastomer components. We offer superior customer value based on our recognized core competencies. We have leading positions in markets driven by megatrends. We are dedicated to talent development and sustainable growth. And we have a track record of strong performance and financial stability. I'm convinced that we set things on track in 2020 for sustained growth and long-term success in '21 and beyond. Based on our clear focus and strategy, we will continue to lead the way with technology and unlock our potential for future growth. Thank you very much for your attention. We are now happy to answer your questions.

[Operator Instructions] The first question comes from the line of Mr. Michael Foeth with Vontobel.

Two questions from my side. On your margin, in the first half 2020, you showed a 21.7% margin for Healthcare on an adjusted basis. Now my question is what was that margin in the second half? Somehow, it looks a bit weak considering the 19.6% margin that you show for the business in -- for the full year. So I struggle to understand what the dynamic is there. And that brings me to a question on your guidance for the margin as well. Your 15% group margin guidance also here, it seems a bit conservative to me considering that your highest margin business is obviously also growing fastest in 2021. And so I would have expected a little bit more upside on the margin there. That's the margin question. And then I have a follow-up on the Healthcare business after that.

Yes. Michael, thank you very much for your questions. First of all, with regard to the Healthcare margin development of the -- in 2020. In the second half year, of course, we have seen an improving margin and -- which resulted in higher margins in the fourth quarter, finally. Due to the fact, as you may remember that we had not so strong half year in 2020, but the second half year was much stronger. So what we can -- what I can say today is that based on the orders, what we have in hand, that we will see some further positive to lower margin in '21, which is as well driven by the First Line concept what we have. That means that our products, what we are bringing to the market, is going in this direction more and more and this First Line products having a higher margin overall.

Okay. So is it correct to assume that your margin should move above 20% in Healthcare in 2021?

Yes. That is -- I think that is a fair statement, yes.

Okay. And then the second question would be also regarding your Healthcare business. Were you able to gain any new customers in Healthcare as a result of the COVID-19 situation and the demand for stoppers and plunges for vaccines and other medics? And are those market share gains maybe helping you also for the First Line business?

Yes. I think that is -- that was always our target. As I said some minutes before, that we -- of course, we are striving more and more in this biologic markets. And of course, COVID is helping us in this respect here. We have every year new customers on board. But the most important point is that we would like to increase our market share with the leading pharmaceutical companies over the years. And the First Line concept will help us here, and that is what we can see in the strong orders in hand what we have already today.

Your next question from the telephone comes from Richard Frei with ZKB.

First of all, also Healthcare, looking at the medical segment, which was declining. I guess most of it was due to FX, I guess. Still there was not huge growth left organically. And as I have in mind, you once put the attribute of an attractive growth potential into that segment. So may you shed some more light on what is going on in this still small segment? And secondly regarding mobility. When it comes to the transition from combustion to e-mobility, may you help me a bit on understanding what your potential there is. So is the business more or less the same size? Or are there bigger growth potentials ahead when it comes to that transition?

Yes. Richard, thank you very much for your questions. First of all, with regard to the performance of medical solutions, you are right. That is mainly by the FX exchange rates. As well in 2020, we expect that we will see some further increase in '21. But as you know, this product is what we are having here and this segment is -- or the business unit is mainly delivered into the hospitals. And of course, due to the COVID crisis, a lot of hospitals have to reduce, let me say, their treatment of the patients. So that means, overall, there was not a high demand as what we have experienced in the last years before. But we expect that during the course of 2021, that we'll recover in this direction and that we'll see a slightly increase of growth here as well. With regard to mobility, I think, as we said, the electrification of the cars is still at the beginning. What I can tell you is that the content, the value per car, what we have today, we see that as well in the future for full electric vehicles. For some hybrid versions, we see a higher content in the future. But overall, the growth will depend on the number of cars, which were sold to the market. That is -- let me say, that is where we are in, and we believe that we can grow with the market. Yes?

[Operator Instructions] The next question comes from the line of Serge Rotzer with Crédit Suisse.

Congrats for the results. I have a question on the Healthcare. Basically, I'm a little bit puzzled because last year in the slide presentation, you mentioned an adjusted EBIT margin for Healthcare of 20.9%. Now you disclosed 16.8% for 2019. The same is true for Industrial Solutions. Last year, you mentioned 13.3% and now it's 11.9%. Can you help me to understand this? This will be the first question.

Yes. Serge, this is Walter. It's basically coming from the adjustments. Also before maybe Michael's question on why did it actually decrease to 19.6%? It's not a decrease. Keep in mind that until half year 2020, we adjusted for the Middletown loss. At half year, it was CHF 8.1 million. In the 19.6% that we see right now in the margin, actually, that loss is included. It's obviously still a loss. But nevertheless, we still believe that in the fourth quarter '21, that operation, that U.S. facility, will actually be at the breakeven point. So that means going forward, it will get better and better. And obviously, it will also help the margin improvement. Same actually for the Civil Engineering part there. Continuing operations actually exclude the -- oh sorry...

Industrial Solutions.

Industrial Solutions part, sorry. There actually, the Civil Engineering divestment is adjusted. You see that in that document, alternative performance measures, where you see the reconciliations.

Okay. I will have to dig again. But this would mean that Civil Engineering has been very profitable, and I believe that this was not true or effort that this was not true.

No. Civil Engineering was certainly below the market -- or the Dätwyler Group's EBIT range.

Yes, clearly below the...

It's not crystal clear yet but I will call you later again in that case. Then the next question would be on the CapEx in Healthcare. You mentioned that you increased production facilities. Can you tell us how much CapEx do you spend there? Or how much incremental sales potential you will build up there?

Please understand, Serge, that we would likely not disclose such figures. But as I said, we will be in the position to grow over the next couple of years in the double-digit range. Organically, on the 1 hand, that means independent of COVID. And with COVID we are currently seeing some additional tailwind. And what we have prepared with our facilities around the world, we will be able to cover that with an over-proportional growth in the First Line sector.

Okay. And can you give us an update on F&B about the new customer, about the sales development and also of the margin level where we are currently?

Which -- are you talking about Healthcare?

No, Food & Beverage, sorry, F&B, Food & Beverage.

Okay. Sorry. Okay. No problem. First of all, we are not disclosing any special customer figures here. But overall -- and maybe this question is coming up. I think we will see as well in this sector a good growth in the next couple of years. They are based on this existing contract what we have, this new contract until 2030. It was our biggest customer, Nespresso. And on the other hand, this new customer already started in the fourth quarter. But we are constantly increasing our capacity in the next couple of months, so that we'll have constantly an increase of sales there as well. And the margin is in the average of that, what we have with our existing customers. So that is what we are striving for. So what happened for this area, Food & Beverage is very good. And so we see there as really strong growth over the next years.