Dätwyler Holding AG (DAE) Earnings Call Transcript & Summary

Ladies and gentlemen, welcome to the presentation of Dätwyler's Half Year Results 2022 Conference Call and Live Webcast. I am Alice, the Chorus Call operator. [Operator Instructions] And 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 very much, and welcome to our conference to present our half year results. My name is Dirk Lambrecht and as you already heard, with me is Walter Scherz, but as well Guido Unternährer, Head of Investor Relations. The agenda start us with a review and outlook, and that will be followed by our explanation by Walter about further financial targets. This slide summarizes the most important points of our half year results on 1 slide. All figures are for the continuing operation. The online distributor Reichelt, which was divested in Autumn '21 has been excluded from the previous year's figures. We would like to emphasize the unchanged positive development of the relevant markets and 4 out of 5 of our business units, only our Mobility business unit faced a declining market. We achieved an 11.7% increase in turnover to end at CHF 541.6 million. This has been adjusted for the negative currency effects and the sales of the acquired companies and its correspondent to 5.9% organic growth. When we look at the operational results, then we should point out that the strong price and input cost and the delayed effect also successfully implemented price increases led to a decline and we landed at CHF 72.5 million. This amount takes a onetime negative effect of CHF 7.5 million into account. On one hand, these are reversals of inventory that we reevaluated to market volumes and the acquisition balance sheet. On the other hand, there were write-offs on assets due to the temporary closure of the Ukrainian subsidiary. Adjusted for these onetime negative effects, the EBIT margin reached 14.8%. The net results amounted to CHF 57.4 million. Apart from the difficult environment due to the war in Ukraine, and the rising input costs, the first half year of the year was marked by 2 strategic important acquisitions. We are the world-leading supplier of high-quality seals for electrical connectors since the acquisition of QSR, now our business unit connectors since the beginning of May. QSR is American company with 3 plants based in the U.S., 1 in Mexico and 1 in China. QSR generated sales of CHF 164 million and employed 1,250 employees in '21. Several megatrends such as electrification, connectivity, Internet of Things and Industry 4.0 present attractive growth opportunity for QSR seals in various markets. We expect annual growth of around 9% and an important growth driver is the transformation to E-mobility. We have our own health care plant in China since the beginning of March, thanks to our second acquisition of Yantai Xinhui packaging. Xinhui generates sales of CHF 15 million encountered 170 employees last year. China is already the second largest healthcare market in the world. At the same time, it is one of the fastest-growing health care markets with an annual growth rate of more than 10%. This is driven by growth trends such as the rapidly growing middle class, the increase in chronic diseases such as diabetes and the use of syringes as the preferred method of drug delivery. In the medium term, QSR and Xinhui will accelerate our profitable growth. In the short term, we are working on the integration of the 2 companies. Our new organizational structure introduced at the beginning of 2020 has proven itself during the challenging times. We have integrated QSR as a part of Industrial Solutions business area as a new business unit called Connectors. There are interesting cross-selling opportunity since QSR serves some of the same market as our existing Mobility and General Industry business units. Xinhui is a part of the Healthcare Solutions business area and add a planned and sales organization to the overall picture. I will now move on to the business update of our 2 business areas, starting with Healthcare Solutions. This business area offers high-quality system critical elastomer components for containers, syringes and delivery systems for injectable drugs. Among other things, our products contribute to the fight against the COVID pandemic. The Healthcare Solutions business area increased its sales to CHF 265.7 million. Adjusted for currency and acquisition effects, this corresponds to a 12.6% organic growth. Sales of COVID vaccines components increased slightly once more. And the higher margin pharmaceutical business, the growth amounted to 14.9%. The operating profit only rose slightly to CHF 58 million. This corresponds to a 21.8% EBIT margin line and the customer base for high-quality components from our first-line standard advanced positively. This is the result of our intensified market development and our new customer contacts obtained during the pandemic. In the first half of the year, we were also able to complete the expansion of our Indian site. The second [indiscernible] will be commissioned by the end of the third quarter, the doubling of our capacity creates an important basis for the targeted profitable sales growth in the coming years. Let's now address the Industrial Solutions business area. Here, we offer system-critical elastomer components for Mobility, Connectors, General Industrial applications and Food & Beverage. The Industrial Solutions business area increased its sales by 12.1% to CHF 279.5 million. Adjusted for the positive currency effect on the first-time consolidation of QSR sales, this corresponds to a minor organic decline of 0.4%. The reason for the stagnating sales was a decline in vehicle production, especially in our main German market. This led to a temporary sales and profit declined for our ability business unit of around 9%. However, we managed to increase prices and win a solid number of new projects at the same time. More about this in the outlook. The General Industry business unit performed very well and grew by 21%. This was thanks to a strong demand from the oil and gas industry as they acquired new customers. When it comes to the Food & Beverage unit, our leading position enabled us to continue our profitable sales growth of 4.5%, although the market growth slowed down after 2 strong years. QSR as the new business unit connectors contributed CHF 28.7 million in sales in May and June. This reported operating profit decreased to CHF 14.5 million and the EBIT margin to 5.2%. The reason where the significantly higher input cost, the price increases that only have a delayed effect and the lower capacity utilization rate at the mobility plans, especially in Europe. In addition, the already mentioned one-off negative effects from the QSR acquisition and the Ukrainian side were fully absorbed in the Industrial Solutions business area. Adjusted for this, IS reached CHF 7.5 million, and the adjusted EBIT margin was 7.9%. Due to the ongoing war in Ukraine, we have decided to close our plant in Malyn till further notice. For most of our nearly 100 Ukrainian employees, 30 of September will be the last working day for them. This decision has not been taken lightly. However, since our customers do not agree with deliveries from the Ukraine, we consider these measures necessary. With that, I would like to hand over to Walter. Walter, please?

Thank you very much, Dirk. Also a warm welcome from my side. My name is Walter Scherz, and I have the pleasure of giving you an overview of the development of the key financial figures in the first half of '22. Let us start with the change in turnover in the first half of the year. The 5.9% organic growth came this half year solely from health care. This business area organically grew by 12.6%. Industrial Solutions suffered a slight organic decline in sales of minus 0.4%. Dirk has mentioned that in his last slide and as you know, this is mainly coming from Mobility. The 2 newly acquired companies, QSR and Xinhui contributed CHF 34.1 million in sales. This includes QSR for 2 months and Xinhui for 4 months. This means a growth of 7%. The negative currency effect and the intercompany eliminations amounted to minus 1.2%. For the comparison with last year, it is important to exclude the turnover of the recently divested online distributor Reichelt in the previous year. This results in the previous year's turnover of the continuing operations of CHF 485 million. Compared with this, we increased the reported turnover by 11.7% to CHF 541.6 million. We also see this comparison pillars on the EBIT bridge on the next slide. This table depicts how the EBIT changed. To be able to compare it with the same period of last year, we excluded Reichelt's profit contribution in the previous year. This results in the previous year's EBIT of the continuing operations of CHF 88.8 million. This is the third pillar you see on this slide. The Healthcare Solutions business area increased its EBIT by 6.3% or CHF 3.6 million. This also includes 4 months result for Xinhui. On the other side, the Industrial Solutions business area noted an EBIT decline in the amount of CHF 18 million. It should be mentioned that CHF 7.5 million or over 40% of the decline relates to the one-off negative effects that Dirk mentioned already. Without those effects, the EBIT decline of Industrial Solutions amounted to approximately 31%. These figures also include 2 months of results for QSR. Strong Swiss franc actually mainly against the euro reduced our profit by almost CHF 2 million or 2.2% in the first half of the year. Overall, EBIT in the first half of '22 fell by 18.4% to an amount of CHF 72.5 million due to the sharp increase in input costs and the one-off negative effects. And right now, we've talked about the absolute operating profits and the absolute sales. But what does that mean for the margins. For that, we go to the next slide. This graph here show -- or these graphs show the EBIT margin developments of the 2 business areas and the Dätwyler Group in its entirety for the first 6 months of the current year and the last 2 years. In the previous year, the company in its entirety consisted of the continuing operations. That means Reichelt was excluded, Distrelec, Nedis, Civil Engineering. We managed to significantly improve the margin in both business areas in '21. That means after the first COVID year in 2020. This year, '22, we experienced margin pressure due to the delayed impact of the implemented price increases. This results in EBIT margins of 21.8% for Healthcare Solutions, 5.2% for Industrial Solutions and 13.4% for the Dätwyler group. If the margins are adjusted for the onetime negative effects of CHF 7.5 million, then the adjusted EBIT margin for Industrial Solutions amounts to 7.9% and for Dätwyler Group to 14.8%. And that brings us to the overall picture of the income statement. The income statement, as shown here, is a functional income statement. So that means there are functions just as the G&A or R&D shown here. It consists of 3 columns due to the divestment of Reichelt last year. In the current year, the continuing operations cover the company in its entirety. As you can see, the manufacturing costs of the COGS or cost of goods sold increased more than the turnover. This is the result of higher input costs, raw materials were mentioned, personnel, logistics, also the delayed effects of the implemented price increases and the higher depreciation. The reduction on gross profit level amounts to 4.9 percentage points. As part of our long-term growth strategy, we increased our investment in research and development, amongst other things, with the [indiscernible] units, as mentioned earlier. The other expense items are more or less in line with the previous year. This leads to an EBIT of CHF 72.5 million or 13.4%. The tax rate is almost unchanged compared to the previous year, as you can see. We are still in the range of 22% to 25% and, of course, paid less tax due to the lower taxable profit. Net income, last but not least, from continuing operations declined to 14.1% or CHF 57.4 million. This corresponds to CHF 3.38 [indiscernible] per bearer share. This leads us to the balance sheet, as you can see on the next slide. And you see that very nicely here, newly acquisition of QSR has led to significant changes in the balance sheet structure. This is better visible on the liability side, which is the right side here rather than the asset side. But nevertheless, let me start with the asset side. If you look at the asset side, the cash position has decreased significantly. Dätwyler used these funds to acquire QSR and Xinhui. Fixed assets, inventories and trade receivables have increased. On one hand, this is due to the acquired units, more business. On the other hand, there were deliberate measures taken to ensure supply chain and business operations. In order to ensure our ability to deliver, we have increased the safety stock for raw materials but partially also for finished products. The increase in trade accounts receivables is due to the fact that the acquired companies do not yet have the same good aging structure as we are familiar with at that tier. Here, we are using the old positions as we speak, and this will continue. On the liability side, we have seen a significantly lower equity ratio of 28.2%. This is the result of a double effect. The acquisitions increased our debt by some CHF 627 million compared to the end of '21. At the same time, and that's the second effect, equity decreased by some CHF 578 million due to the direct offsetting of goodwill. As of the balance sheet date, 30th of June 22, the current liabilities include the bridge financing to pay for the QSR acquisition. As you probably know, we have been able to take out the bridge financing in the meantime. You can also read about the bond issued under events after the balance sheet date in the financial report. That means after the balance sheet date in the last few weeks, long-term liabilities have increased and short-term liabilities have decreased in the same way and put the ratios in the right balance again. But I'll talk more about that on the next slide. The consequence of the QSR acquisition and also the Xinhui acquisition was that our net liquidity of CHF 129 million in the previous year, turned into a net debt of CHF 628.5 million. A large part of this was shown as short term on the balance sheet date because the bridge financing is normally limited to 1 year, so short term. However, we have been able to significantly reduce the short-term liabilities or the bridge finance after the balance sheet date in the last few weeks and have achieved a long-term debt structure. On one hand, we successfully placed a CHF 240 million fixed rate bond and that bond was paid on 13 of July at a 2.1 percentage interest rate over a 5-year period. On the other hand, we took out a syndicated bank loan in the amount of CHF 167 million. Long-term liabilities also include a listed bond of CHF 150 million, which runs until 2024, a loan from the majority shareholder also contributed to the financing of the QSR acquisition. As we have proven in the past, Dätwyler and we, as a team, are continuously striving to reduce debt from '22 onwards and increase the equity ratio again. With that, I would like to give you some explanations about the cash flows in the first half '22. As you can see very well in this condensed cash flow statement, the cash flow for the 6 first months was influenced by the 2 acquisitions and the required financing. Let me start with the operating cash flow that operating cash flow has deteriorated. We are by around CHF 42 million compared to the previous year. On one hand, this is due to the lower net result but also, on the other hand, to the increase in net working capital compared to the previous year, around CHF 30 million more are tied up in net working capital. In order to ensure our ability to deliver, as I said before, we have increased the safety stock for raw materials but also for finished goods. And in accounts receivables, we are in the process of reducing the old positions of the newly acquired companies. When we move on to the cash flow from investing activities, that was amounting to CHF 649.1 million, and that is primarily due to the acquisitions. However, Investments in fixed assets as we have seen, have declined and will be reduced further in the second half of the year. The cash flow from financing activities as the third one, maintain inflow of CHF 485.9 million. These are primarily the inflows from our banking partners and the majority shareholder. All of this led to a decrease in liquidity of CHF 93 million as you have already seen on the balance sheet. On the next slide, you see the development of the return on capital employed of the continuing business. As of the balance sheet date, June 30, ROCE from continuing operations was 18.2%. Same as with the equity ratio, the ROCE also had a double or saw a double effect. On one hand, the average capital employed increased due to the investments and the acquisitions. On the other hand, the EBIT decreased due to the higher input costs. As a result, the return on average capital employed fell to 18.2%. Although this is lower than in the previous year, it is still higher than 2 years ago. And our goal is, of course, to return to previous levels. We are approaching the end from the financial review, and this graph depicts the development of our investments over the last 5 years. The figures in the previous years covered investments for the entire year. In the reporting year, '22, we invested a total of CHF 47.9 million in the first 6 months. CHF 43.9 million or the vast majority was spent on property, plant and equipment. The investments executed in previous years allow for a lower level of investments in the years to come as we also communicated after investment cycles of the past. Investments for 2022 will be in the range between CHF 80 million to CHF 100 million for the whole Dätwyler Group. Well, we have mentioned quite a few times, the higher input costs on several occasions today. We were mainly talking about the higher cost for raw materials and intermediate products. In the meantime, and as Dirk has highlighted, we have successfully passed these costs, these materials and intermediate products increases on to our customers through price increases. This slide, however, shows on the left, the price development for electricity in Switzerland, Germany and Italy, and on the right for gas in Italy and Germany. When we compare this on a year-on-year basis, then we see that the electricity price will increase tenfold in 2023 in Switzerland. The prices for 2024 will remain several times higher than the long-term average. The price of gas will multiply as well in '23 and '24 in Germany and Italy. By the way, these figures are just very lately or newly collected and reflect exchange prices. These massively higher energy prices at our own plants and our suppliers will have an impact on the '22 and '23 income statements. 9 out of 28 or 1/3 plants of Dätwyler are located in European countries. Our plans themselves have only a low direct dependence on Russian natural gas. However, in the event of a general gas shortage, indirect effects via our customers as well as suppliers cannot be ruled out. Well, and that's the bridge to the outlook. With that, Dirk, I would like to hand over to you.

Yes, Walter. And thank you very much, and it's really unbelievable what we see on the energy market here. However, thank you very much for the transparent view of our financial data. Now I would like to go forward and give me a couple of minutes to come back to our mission and our strategy. And here, I would like to start with our outlook. Our mission is unchanged. We materialize ideas for safer, smarter and a more sustainable world. The current challenges which we have, like the war in the Ukraine and the rising input costs have no impact on our business model or our mid- and long-term growth opportunities. I would like to make it very clear here. We have leading core competencies and our -- and we have a very strong market position. And we believe with that, that we can continue with our business success to the future. We will continue to focus on our strategic priorities to drive the success of our company. With several unpredictable events over the past 3 years shows that we are on the right track with our strategic priorities, our focus on agility, digitalization, sustainability and profitable growth make us an attractive partner for all stakeholders. Yes. Now, let us have a look to the health care business. What I would like to do, I would like to give you a couple of examples how we are positioned ourselves with different products for an example of the business units for the future. And I would like to start here with the health care business. We have recently launched a new plunger for prefilled syringes under the NeoFlex brand. As the NeoFlex plunges complement our coated components portfolio, and all these plunges need -- are reduced as per our FirstLine standard. Our coated components feature and in-house develop Proprietary fluoropolymer spray coating for the highest quality and performance demands. They are particularly suitable for highly-sensitive biotechnology drugs consisting of large molecules. The coating has unsurpassed by [indiscernible] properties, but is very thin and flexible and have a low friction caution. This means that no addition of silicon is required for the filling equipment or for the plunger functionality of the syringes. In addition to the functional benefits with the new NeoFlex plunger, our customers also benefit from the fact that no new validation is acquired when changing a drug from one container to another one. During its life cycle, medications are often added first to vials than syringes and finally, cartridges for pen systems. The administration of drugs by syringes is becoming the preferred method in the future. As a risk side, plunger stoppers for prefilled syringes are one of the fastest-growing product segments. There is a great interest in our NeoFlex components, and we have an exciting medium-term project pipeline. But I have to mention again, especially for this type of products that will take years when we see a significant influence to our sales and margin level with the health care sector with such product lines. I would like to come to another example. And here, you see some examples of our tailor-made ceiling solutions for e-mobility. Due to the electrification trend, there is a strong demand increase for more sophisticated components, specific materials, sensors, and new interfaces with drivers and passengers. As a co-engineering partner, we leverage our core competencies such as material development, simulation and design support to supply solutions for numerous applications in the electrified vehicle. Some examples are housings with integrated ceilings for electronics and advanced driver assistance system, gaskets, terminally conductive materials, we call it ETEMI and numerous other solutions and components for battery systems and electrified powertrain are also very important. We are working successfully on the transformation to e-mobility despite the current challenges in the automotive market. We won and encourage a number of new projects for future revenue. Again, in the first half of '22, 50% of these projects are already for e-mobility components compared to 30% in the full year '21. This is a very important increase and in line with our strategic ambition to significantly increase our addressable market. E-Mobility attracts a new type of players as well. For example, our new customer, Huawei moved from a mobile phone and electronics producer to a major player in the automotive market. We have globally strengthened our customer interface team by highly technical skilled team members that have application know-how in the relevant areas. This allows us to provide best-in-class technical service and to support these new customers. This means increased expenses now, but it will pay off in the long run. Now let me come to QSR. By acquiring QSR, as we said, the business unit connectors, we are now open to new profitable growth opportunities. Thanks to Connectors, we gained long-standing and close relationships with the world's leading connector manufacturers. The business unit connector itself is the world's largest #1 for seals and components for electrical connectors. For these products, independent market research forecast an average annual growth of some 9% for the years to come. The growth drivers are megatrends such as Connectivity, Internet of Things, Industry 4.0 and Electrification. In particular, the transformation to e-mobility will significantly accelerate the demand for electrical connectors. Our main customer, TE Connectivity expects a sevenfold increase in the number of electric vehicles produced by 2030. Today's electrified cars contain some 250 electrical connectors. Most of these connectors contain a silicone elastomer seal to ensure reliable lifetime functionality. Electrical connectors are already used in many industries. In the coming years, more industries will start to employ electric connectors and at the same time, the number of electric connectors applied will rise. In addition, the harsh environment in which the electrical connectors are used will increase the demand for system-critical seals and components to protect the connectors. Electrical connector seals safeguard connectivity in harsh environments and prevent severe consequences from connection failures. At the same time, they only contribute to a small portion of the system cost. This is completely in line with the existing Dätwyler product portfolio. Yes, we expect a continued challenging environment for the remainder of the year. However, demand in Industrial Solutions business area, market should pick up. When we take the Healthcare Solutions business area here, we foresee a slower growth due to the declining sales of COVID vaccine components. This will have a temporary negative impact on our product mix. On top of that, we forecast higher energy and labor costs at our own sites and our suppliers in the second half of this year and in the full year of '23. As for the higher material cost, we will also pass these cost increases on to our customers in the form of price hikes. However, there will again be a lag in this case. This will prolong the temporary margin pressure. Besides that, the integration of QSR and Xinhui will lead to additional costs in the mid-single-digit millions in the second half of this year. Despite the difficult environment, we are still aiming for full year sales of CHF 1.1 billion to CHF 1.2 billion in '22. For the EBIT margin here, the target range is still 13% to 16%. These figures include the acquired QSR and Yantai Xinhui packaging. This forecast assumes that the geopolitical macroeconomic and pandemic conditions do not deteriorate even more and that energy supply is granted. To conclude my part of the presentation, allow me to summarize the 5 unchanged elements that will drive our future success. We will focus on system-critical elastomer components. We will offer superior customer value based on our recognized core competencies. We have leading positions in our markets, driven by the megatrends, and we are dedicated to talent development and sustainable growth. And as in the past, we have a very strong track record of strong performance and financial stability. Yes. With that, I would like to close our report of the first half year '22. And now Walter and myself are happy to answer your questions, if there are any.

[Operator Instructions] The first question comes from the telephone line is from Mr. Michael Inauen with Stifel.

I have a quick question -- actually, 2 questions on the cost side. So you mentioned here on the slides, the energy costs, and I know these are the exchange price that are actually crazy at the moment. But how does it actually function for you? I mean, for example, in Switzerland, you -- I would assume you have contracts with the utilities? Or are you actually how can I say it? Did you move to a cheap utility that buys them directly over the market and these prices go now up like crazy? Or -- so how does it really work for you in your factories? And can you give us just kind of a number, what are we talking about here in, let's say, millions in energy costs so that we could calculate what would it mean if it would double, for example? And the same direction is also with passing on to clients. I mean, can we expect the same thing to happen like this year? I mean, because if you don't know how high the energy prices are, it will be difficult to pass them on. So you can only pass them on when you're already paying higher prices. Is that correct? And on the other -- on input costs, I've seen or we have seen that aluminum prices have come down, for example, oil prices is coming down to around pre-war levels or early war levels. And also elastomer prices in China are at least stabilizing. I know it's only China, but I can only see these data. So can you give us also a bit of details on the other input costs? And what would that mean if they really go down or stay at these lower levels?

Welcome, Michael, and thank you very much for your questions. Let me start, first of all, with regard to the energy situation. Of course, in most of our factories, we have defined -- we have contracts with the energy providers, especially for the year '22, but we don't have it for the year '23. We -- meanwhile, we started to secure the energy delivery for the year '23. And we are purchasing such energy from the spot market. So the increase, what we're seeing is quite as Walter has explained quite significantly for the next year. When it comes to the cost of energy, we will not pass this through prices -- price increases through to the customers via price increase. Typically, what we are doing is working forward with surcharge. So we will explain the customers what are the actual situation at market is with the energy prices and then we will show the effect business unit by business unit or a customer-by-customer, so that we can charge that in a different way. I think there's no other ways because this amount of our energy cost is today around in the low single digit range percentage-wise to the net sales. Having said that, please remember that this, as Walter said, most of these energy topics we're facing in Europe, that is currently not a huge topic in the U.S. or in Asia. So that is -- currently, it's more a topic for the European sites. And as Walter said, we have 9 of them of our total portfolio is linked to Europe. Yes, with regard to the oil price, it is correct that the oil price is dropping down. However, what we have calculated in our actual outlook for the year '22, we believe there is a high risk that raw material prices will increase again. And the main reason for that is that we assume that our suppliers will have higher input costs as well, like due to the high inflation or due to the, let me say, with some personnel cost, but on the other hand, with the energy costs. And that could lead again to a higher price or a stable price on the raw material side. That is the reason why we are not so optimistic with regard to the raw material prices for the second half of the year, but that is implemented in our actual forecast. So that is my answer to your questions.

[Operator Instructions]

It seems they have no -- then we have some questions here.

Yes. If there are no more questions via the phone, then we do have some questions that came in via the chat. Someone has a question regarding the EBIT margin for the second half year, he calculates that comes in between 12.7% and 18.2% of the midpoint of the sales guidance. And that's a very broad range with only 4 months left in the year. So the question is, could you provide more granularity where you expect it to end up at rather at 13% or at 18% for the second half year, if I understand right.

Yes. Let me answer that in such a way. I think the -- as you know, the second half of the year is typically as well as seasonal effects what we have typically in our markets and where we have our locations. So from -- of course, you could say that the bandwidth is quite wide. But the problem is here currently that is difficult to estimate how the further inputs cost will develop in the next couple of months. So currently, we believe that let me say, for the total year, the margin will become closer to the [ 13% ] than to the higher -- to the high end. However, we believe as well that we have done some more constative considerations in our forecast. And we have to see how that will develop in the next couple of months, especially when it comes to raw material price increases or especially as well, are there any supply chain disruptions at the customer end that is quite difficult to predict how that will develop. And therefore, we have this range.