Dätwyler Holding AG (DAE) Earnings Call Transcript & Summary

Ladies and gentlemen, welcome to the presentation of Dätwyler Interim Report 2021 Conference Call and Live Webcast. I am Paolo, the Chorus Call operator. [Operator Instructions] The conference is being recorded. [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. Thank you. Hello, everybody, and welcome to our today's call. Here with me on the call is our CFO, Walter Scherz. As you all know, we will provide you an overview and outlook on our business. After this, we will be happy to answer any questions you may have. I will start with the business review on group level. Compared to the pandemic rising prior year period, we achieved a dynamic revenue growth of 20.8% to CHF 590 million in the first half of 2021. For a change, the currency effect was close to 0. As you can imagine, the pandemic was still an issue, namely strict hygiene and conduct rules and a lot of employees working from home, but our markets and our players were significantly less effective than in the prior year period. Thanks to the strong recovery in demand and our leading positions, we were able to achieve a double-digit sales growth in almost all the markets we serve. Thanks to the high capacity utilization and cost discipline, we could increase our EBIT by more than 50% to CHF 98.9 million. As a result, the EBIT margin improved by more than 3 percentage points to 16.8%. The net result increased by more than 70% to CHF 74.5 million. This corresponds to a net result of CHF 4.38 per barrel share. All these figures and comparisons are for continuing operation in both periods, excluding the divestment in the first half of 2020. Due to the negative effects of the pandemic in the prior year period in comparison with the first half of 2019 provides additional information. Based on continuing operations, our revenue and net results already are above pre-pandemic levels by 8% and 7.4%, respectively. Our strategic realignment proved successful throughout the pandemic and beyond. The 2 business areas, Healthcare and Industrial Solutions, focus on markets and customers, while the group functions Technology and Innovation and Finance and Shared Service provide valuable and competent support. In the first half of 2021, the both businesses areas generated a combined EBIT margin of 18.3%. With this figure, the profitability of the core business is already almost on a par with that of the former Sealing Solutions Division, highlighting the promising potential for the future. Next, I would like to comment on the performance of our business areas. I 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. As part of this business, we support the leading vaccine manufacturers and the provision of COVID-19 vaccines. Together with our employees, we are proud that we can make such an important contribution to overcome the pandemic. In the Healthcare business, we experienced a very strong demand from the core business and from the COVID vaccine manufacturers. We were able to increase revenue by 18.7% to CHF 238.7 million. Our new plant in Middletown supports us in absorbing the high demand. The higher-margin Pharma business generated a growth rate of more than 22%. Thanks to the high capacity utilization, EBIT rose by 60% to CHF 56.9 million. The EBIT margin improved by 1/3 of 23.8%. This was supported by a positive change in the product mix, namely a greater proportion of high-margin coated components that are manufactured according to FirstLine Standards. Through our newly launched NeoFlex components and our participation in COVID-19 vaccine projects, we could attract new customers and expand our customer base. This creates a foundation for a long-term revenue growth. To avoid future capacity bottlenecks and to maintain delivering capabilities, we are investing in production capacity expansion in the course of this year. The opening of the new second plant in India is planned in the second quarter of the next year. 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 & Beverage and General Industry markets. By streamlining its organization, we have further optimized the Industrial Solutions business area structure. Among other changes, the oil and gas business unit is now part of the General Industry business unit. I will continue to lead this business area directly. While doing so, I can rely on 3 very seasoned and committed managers who had and drive the 3 business units. The Industrial Solutions business area experienced normalized market conditions and a significant demand recovery in the first half of 2021. Accordingly, revenue rose to CHF 249.3 million. Adjusted for currency effects, this equates to a 23.5% growth compared to the prior year period, in which the business was hit hard by the pandemic. The mobility revenue even grew by 29%. This is encouraging. But based on the continuing business, we are still 4.7% below the pre-pandemic level of 2019. The Mobility business unit is still some 10% below the 2019 level. Thanks to the improved capacity utilization and the consistent cost management, we were able to increase the EBIT by some 50% to CHF 39.9 million. This is still 22% below the pre-pandemic level and leaves room for further improvement to previous levels. This EBIT margin grew from 10.5% to 12.8%. In the Mobility business unit, we are currently establishing a global production base for complex multicomponent parts by transferring the liquid silicone production technology to our global production network. Multicomponent parts are particularly used in electric vehicles. In the Food & Beverage business unit, the new 10-year contract with Nespresso and the supply of additional customers resulted in a revenue growth of some 20%. As announced, the changed product mix has a negative impact on the margin, but will improve the absolute EBIT over the coming years. To cope with the high order backlog in the Food & Beverage business unit, we plan to invest in new production facilities and automation of the Swiss site in the course of 2021. Besides our core business, the online contributor Reichelt completes the Dätwyler. Based on the competent technical support, high availability and short delivery times, Reichelt supplies more than 100,000 electronic products to more than 1 million business, government and private customers. Thanks to its attractive price performance proposition, Reichelt could continue to increase its market share and accelerated organic revenue growth to 14%, the first half of '21. For the first time ever in its 50-year company history, Reichelt generated more than CHF 100 million in revenue within a 6-month period. In the first half of '21, the growth in the business-to-business segment gained momentum, while the growth in the business-to-consumer segment slowed down a bit as we have expected. Thanks to the very high capacity utilization and operating leverage effects, the EBIT rose by more than 1/3 to CHF 10.1 million, and the EBIT margin improved to 9.6% despite the already strong base from the prior year period. To cope with the high growth in demand, we will invest CHF 10 million, as announced, and a new distribution center. This will double Reichelt's logistical capacities. With this, I conclude my review and hand over to our CFO, Walter Scherz. Walter, the floor is yours.

Thank you very much, Dirk. Hello to everybody. Great to have you all on the call, and thanks a lot for your interest in Dätwyler. My name is Walter, and I'm happy to provide you more financial details on Dätwyler's half year results 2021. Let us start, as usual, with the sales bridge. We have a proper prior year period base to compare with. We have to deduct the remaining revenue of Distrelec, Nedis and Civil Engineering from the reported revenue 2020. Today's business generated CHF 488.6 million in revenue in the first half of 2020. This is the third pillar from the left here. Further to the right, you can see that all 3 businesses supported our substantial organic revenue growth with double-digit organic growth rates. Healthcare Solutions grew by 18.6% to a revenue of CHF 238.7 million, which is the figure in the bracket, as you can see. Industrial Solutions by 23.2% to CHF 249.3 million and Reichelt by 14% to above CHF 100 million, CHF 105 million. This adds up to a 20.3% organic revenue growth for Dätwyler as a whole. For a change, the Swiss franc was slightly weaker in the first half year '21 compared to almost all currencies relevant to Dätwyler. It is 0.5% this year, and actually, it is positive for a change. Overall, the reported growth in the continuing business totaled 20.8% and revenue reached CHF 590 million. I will now move on to the EBIT bridge. As you remember, the EBIT of the prior year period was impacted by our divestments. The EBIT of the continuing operations was CHF 64.5 million in the first half of 2020, the third pillar from the left again. Further to the right, you can see the contribution to the EBIT increase of the 3 businesses in the first half of 2021. Healthcare Solutions and Industrial Solutions both increased its EBIT or their EBIT by more than 50% to a level of CHF 56.9 million or CHF 31.9 million, respectively, again, the figures in the bracket. Reichelt improved EBIT by another 1/3 in addition to an already very strong prior year period. In absolute terms, the Healthcare business was the largest contributor to our overall CHF 34.4 million EBIT growth. It contributed almost 60% of the total group's EBIT, which was CHF 98.9 million. As the same with revenue, the currency impact on EBIT was negligible in the first half of '21, and it is positive for a change. The reported EBIT increased -- The reported EBIT increase amounted to 53.3%, thanks to strong revenue, good capacity utilization, but also good cost discipline. How does this compare to the past? This slide shows you our robust track record in operating profitability, thanks to our leading market positions and our close customer relationships. You see that the Dätwyler reorganization in '21 actually pays off and is appreciated by the markets we serve. For the group, our continuing operations are actually back at the pre-pandemic EBIT margin levels of 2019. Healthcare Solutions delivered a strong EBIT margin rebound in '21. It is considerably above the reported pre-pandemic EBIT margin levels in 2019. The reported EBIT margin in the first half of 2020 was affected by one-off costs to overcome the pandemic impact and actually start-up costs or ramp-up costs of the new U.S. plant in Middletown. The EBIT margin for Industrial Solutions also recovered compared to the previous year. It is still behind the level of 2019, but the ambition is clearly to reach previous levels again. Reichelt succeeded in continuously improving its EBIT margin over the last years, thanks to strong demand and high capacity utilization. On this slide, you see the consolidated income statement. Don't worry, I will not go into all the details, but I want to make a comment below EBIT regarding the net finance result and the income tax expenses. Dätwyler's financial result in the prior year period was characterized by a large corona-related foreign exchange fluctuation and therefore, a strong negative currency impact. In 2021, the currency is relevant to that figure, almost all of them recovered against the Swiss francs, are more or less in a normal fluctuation mode. The income tax expenses increased to CHF 23.2 million. The low value from the previous year's period is due to one-off effects from the divestments, but also the corona impact. That means significantly declined operations in low tax countries, mainly in Industrial Solutions. The current tax rate is closer to the medium-term reality of some 22% to 25%. When we have a look at the balance sheet, you see that it expanded due to a strong growth, good business performance and related net results of CHF 74.5 million. As a result of our customer-driven investment activity and here, I make a reference to the recent media releases about investments, and I'll talk about them in a second, the cash balance actually decreased. As a result of the strong growth in turnover, as you can see here, net working capital also slightly increased. While our current liabilities actually expanded nicely, mainly the accounts payables, accounts receivables also increased. Our equity ratio increased compared to half year 2020, but slightly decreased against year-end 2020. The 65.2% equity ratio and strong financial flexibility support our pursuit of future opportunities and investments even beyond pandemic times, especially in Healthcare Solutions and Food & Beverage. Here, I'll give you -- or will give you an overview of the average capital employed and on the return on capital employed over the past 5 years. The strong EBIT increase of more than 50% is the main driver of the improvement on the return on capital employed. To appreciate the decrease of capital employed, you need to understand the calculation model. The capital employed is an average of 3 values: end of June 2020, end of December 2020 and end of June '21. You certainly remember that the value at the end of June 2020 was significantly impacted by corona, and therefore, lower than usual. This was due to lower receivables and inventories, and as I said, in the midst of the corona prices. As announced earlier this year, we are investing in production capacity expansion of the Healthcare and Food & Beverage businesses. This is driven by encouraging order intake and customer demand. In total, we have invested in the half year -- first half of '21 CHF 54.8 million. Compared to net revenue, our capital expenditure reached 9.3%. This is actually higher than in the 2 previous years and clearly driven by customers and market needs, which gives us a lot of confidence for the future development. Driven by strong demand, we allocate our capital into growing markets, where we see attractive growth and profit potential for the future. Let me quickly provide you some information on the consolidated cash flow statement without going into the details. Our stress -- strong, sorry, our strong cash generation from operations of CHF 78.6 million allows investments and further repayment of debt. Free cash flow stood at plus CHF 25.3 million in the first half '21. This is below the figure for the same period last year. But as you can see here on the third line, the amount for net cash used in investing activities is also some CHF 35 million higher than in the previous year because of investments, but we also had the cash inflow from the divestments in 2020. On this slide, you see the multi-year overview of the important projects in which Dätwyler invests. As announced, we want to take advantage of the attractive market opportunities. We expect to invest some CHF 120 million to CHF 130 million for the full year '21. In the coming year from today's perspective, we expect our investment activity to reduce to some CHF 90 million to CHF 100 million or around 7% of net sale. And this 7%, obviously, depends and differs between the various businesses. As you can see, the majority of the current main investment projects support our 2 high-growth and high-margin businesses, Healthcare Solutions and Food & Beverage. Additionally, we will invest some CHF 10 million in the expansion of the logistics capacities of our online distributor, Reichelt. And some CHF 6 million in a new competence center for Surface Technology at the Swiss plant. Talking about investment figures is one thing, visiting our highly automated production facilities and see what value those investments create is another thing. Therefore, we are very happy to invite you to our Capital Market Day on 30th September '21. We will be honored to welcome you as our guests in a beautiful [indiscernible]. In addition to presentations on current topics, we would like you to show or would like to show you, in particular, our plant in Schattdorf, here in Switzerland. You will have the opportunity to see our investments in the production facilities of the Food & Beverage business. It will allow you to get an idea of the production processes complexity as well. A detailed invitation with registration link will follow by tomorrow. With that, I would like to hand over to Dirk.

Yes. Walter, thank you very much. A lot of interesting figures and is coming up in the right direction. So I will now continue with the outlook. But allow me, first of all, to remind you of our strategic priorities as we have strived profitable growth, accelerated digitalization and increased agility and advanced sustainability. By focusing on these priorities, we will drive our organization and provide the framework for our current, our future success. The way we have managed the impact of the pandemic so far shows that we are working on the right topics. Our people and our organization were and are agile and digital enough to operate and to do business successfully in a very fast-changing environment. Looking at the future, we want to further enhance the sustainability of our organization and employees. As mentioned on previous occasions, an [ interdisciplinary ] project team has been working on developing our sustainability and climate strategy. I'm pleased to briefly introduce our brand new ESG landscape. It includes 12 focused topics that prove our commitment to reduce our environmental footprint and deliver more value for our stakeholders in the future. The focused topics are structured according to environmental, social and government -- governance priorities, and are intended to close gaps and build on existing strengths. One of our main environmental initiatives is for our own activities worldwide to be climate neutral by 2030 by following the science-based target approach. Through our social activities, we want to proactively improve the relationship with our customers, employees and the communities, in which we are active. In the area of governance, we focus on continuous developing -- the development of transparency, compliance and ethics. Each topic bundled activities relating to current and future projects. There are clear responsibilities with measurable objectives for effective monitoring. All the activities are culminated by the new head of sustainability function who reports directly to me. The official launch of our renewed sustainability strategy will happen together with the next edition of our sustainability report at the end of this month. We are looking forward to providing more details during our Capital Market Day on the 30th of December (sic) [ September ]. For the specific outlook for the full year '21, we are optimistic despite the remaining uncertainties due to the pandemic. For the Healthcare business, we expect the significant double-digit revenue growth close to 20% to continue in the second half of the year. The same counts for the positive product mix development to high-value products, which will lead in the mid and long term to further margin improvements. Due to the high order backlogs, we also expect the growth rate in the Food & Beverage business unit to remain high in double-digit range. In contrast, the short-term trend in the Mobility business unit depends substantially on how the general shortage of electronic components will affect the number of vehicles produced worldwide. We expect that this bottlenecks will be solved in the coming quarters. Also Reichelt's further development is subject to how the shortage of electronic components will influence the availability of electronic products. More uncertainty is the result of increasingly difficult procurement situation of certain raw materials and logistics. Despite these challenges and the seasonally weaker second half, we are raising our full year guidance to above CHF 1.15 billion for sales and slightly above 16% for the EBIT margin. 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. In the first half of '21, thanks to a high demand and dynamic profitability growth, our core business showed our promising potential for the future. I'm convinced that our strategic realignment with focus on system-critical elastomer components for attractive global markets will pay off in the long term as well. Now I would like to thank you for your attention, and Walter and myself are now happy to answer your questions.

[Operator Instructions] The next question comes from Charlie Fehrenbach from AWP.

Could you give us some more light about the future of Reichelt? Are there any discussions with possible buyers ongoing, maybe 2 to 3 words to that? And second question is concerning the margin. You had this 18.3% in the core business, and you see further potential for improvement. So where is the room for the core margin, EBIT margin, is it over 20% possible?

Yes, Charlie, thank you very much for your great questions. First of all, to Reichelt, as we already said several times. Reichelt is performing very well, as you have seen in our report here for the first half year and in the previous years. So there is not a high pressure. As I said several times before, if a company is combining, and looking for Reichelt, we are always prepared to act accordingly. So from that perspective, there is no pressure from us. There is no formal process from our side currently to sell Reichelt. And we will review that every year, as mentioned before. And for the second point, as I said within my outlook, if we are looking on the 18.3% margin, which is for the core business, yes, there is further potential for the future, and that always depends a little bit about, let me say, the product mix. But overall, I'm quite confident that we will be able in the coming years to have a, let me say, a sustainable approach in this direction to optimize it year-by-year.

Okay. But maybe for Reichelt, it's not belonging to the core business anymore. This is unchanged.

Correct. That is unchanged. That is the reason why we call it a bolt-on core business with Healthcare and Industrial Solutions.

The next question comes from the line of Richard Frei from ZKB.

I have two questions regarding Healthcare. The first one is about FirstLine. You have mentioned that you have achieved a positive development regarding mix, meaning that you have a higher share of FirstLine components in it. May you give us a rough indication so that we can imagine a bit better how big that changes or how big the share of FirstLine in the mix looks like? And secondly, also regarding Healthcare. May you give us an indication how organic growth without the COVID boost would have looked like? Just to have also an idea without COVID how business would have been developed?

Yes. Richard, thank you very much for your questions. And I think that is interesting for others as well. Yes, with regarding to the FirstLine approach, as you know, that we are currently ramping up new facilities in the U.S. as well in India with FirstLine. So our FirstLine is designed for high-value products, which is still on the, let me say, on a level of around 15%. So from that perspective, if there's good room for improvement over the coming years that our mix will be more in favor of us so that we are moving into the high-value product range over the next coming years when we have other facilities fully ramped up. With regard to the topic of the margin, I think there is, of course, here as well some room for improvement, but it's mainly linked to the product next year. When we are looking to the portion of the COVID, I think it's around 50% currently what we experienced so far, and we have quite a good visibility for the next 2 years that we see a similar mix of a minimum for the next 1 to 2 years.

Okay. Just a clarification. This 15% you've mentioned regarding FirstLine, this is in accordance to sales in Healthcare?

Yes, correct. Yes, of course. Yes.

The next question comes from the line of Serge Rotzer from Credit Suisse.

I have plenty of questions, but let's try to ask only a few of them. So the first one is you have been guiding CapEx of between CHF 90 million and CHF 100 million for next year. And Walter mentioned that it will be 7% of sales. So this tells me that sales for next year for '22 will be between 1.285 and 1.428, so midpoint is 1.350 million. Do you feel comfortable with these numbers that we will have sales next year already between 1.3 and 1.4 plus?

Yes, I think that's -- Walter, would you like to answer that?

Yes, of course. Well, Serge, as in the past, that's an indication, right? That's the goal. Often, you have seen that in the slides after we have had some recent investments. The midterm goal is actually to go back to a kind of normal level of 7% of net sales. Having said that, and I repeat it again, if there is customer demand, if there is actually a demand in the market, we are there further to support that growth, that demand and might invest as well. It really depends on our customers, and we are certainly there to support them.

Okay. To become more precise, when we are on Slide 20, where you have all these investments and these new capacities or plants, we have all the phaseout or going into 2022. So can you go plant by plant and tell me what is the incremental revenue? When is the revenue recognition of these several initiatives?

Honestly, we are not going plant by plant here. That is a [indiscernible] I don't think that you have expected that yet.

No, I'd write it. Okay.

No, I think, as we said, we are investing based on the market demand and the market demand, especially in some areas, is quite very high. And especially in the Healthcare sector, as you know, if we are starting to invest in Healthcare, which will now as well in next year, especially in India, that will lead to further sales in the next year. And I said several times, that will give us an opportunity to grow in this sector on the double-digit range, independent of what happens with COVID and COVID will be always that additional tailwind to go beyond this figure, I think that is what we can say. In Food & Beverage, I think it's -- I think we have this long-term agreement. We have, let me say, great customers on board, which are placing more and more orders for us that we have to increase the capacity. And that installation of the new capacities that will take some time here. But overall, we'll see that in the coming years that we should benefit from this investments, what we will do in 2020 -- '21, sorry, and '22. So that is what we can say today. Uncertainties we still have in the Mobility sector. If we are looking here for the short term, the chip shortage crisis, as you know, is not really over that is lingering disruption. It's now likely to reduce the scale of the global light vehicle production in the second half of '21. We expect that a lot of activities will be then moved into the year '22, so that we will see some further increase of sales in '22 and then it was a stable low single-digit growth in the next years. But I think we should be as well here about the market.

Okay, it is very detailed. But with that, can I come back to the guidance on Healthcare and Food & Beverage. I believe you said that you said double-digit sales growth for Healthcare or close to 20%. And with the sales mix, then the margin will further improve already in the second half? Or is it more midterm, long term?

That will be more in the mid and long term, yes. So let me -- as I said, the installation of the new FirstLine facilities, which are ramping up currently that will take some time. We are getting more customers on board with our clear target to drive more in the direction of high-value products, as we said, from example with our NeoFlex product line. That will need some time, but that will come over the coming years.

But you can keep the margin you achieved in the first 6 months of this year?

No, the margin for the second half of this year due to this seasonal effects, what we have, as you know, in July, August and December, will be slightly coming down. And that is why the reason why we have, let me say, in the outlook for the second half of the year, a slightly lower margin.

Okay. Got it. And probably the last one, growth in Food & Beverage, you mentioned double-digit or high, but you have been growing 20% in the first half. Of course, the base is lower compared to the second half. But then is this more now the CHF 70 million plus a sustainable level? Or can you grow much further on this CHF 70 million plus?

Based on the orders that we have in the hands, it seems to be a very stable outlook. So that means it should be on the same level.

So no further growth sequentially?