Dätwyler Holding AG (DAE) Earnings Call Transcript & Summary

Ladies and gentlemen, welcome to the presentation of Dätwyler Half Year Results 2023 Conference Call and live Webcast. I'm Sasha, 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 is my pleasure to hand over to Mr. Dirk Lambrecht, CEO; and Mr. Walter Scherz, CFO. Please go ahead, gentlemen.

Yes. Hello, everybody, and welcome to our half year results presentation. My name is Dirk Lambrecht, and I'm here together with Walter Scherz, our CFO; and Guido Unternahrer, our Head of Investor Relations. I'm very pleased that you decided to attend our call despite the vacation season. Next slide. The agenda starts as usual with a review and outlook presented by myself as well as a presentation of the financial figures by our Chief Financial Officer, Walter Scherz. Let's start by giving you an overview of the key points regarding our half year results. The nearly complete loss of COVID business and destocking of our customers slowed our revenue growth, particularly in our Healthcare business. Overall, we were able to increase revenues by 11.3% to CHF 602.7 million. This corresponds to a 5.6% organic growth adjusted for the positive acquisition effects and a strong negative currency effect. This includes a 4.7% sustained positive effect deriving from price increases. The Healthcare business has been a low cyclical and dynamically growing business for decades. This is reflected in our growth of more than 40% since 2019, excluding COVID effects. Accordingly, we have continuously invested in our production capacity expansion. In addition, we advanced certain investments due to the pandemic. The temporary low volume growth has now led to underutilization in our Healthcare plans. Also, the one-time higher energy costs and the temporary unfavorable product mix development had a negative impact on our margins. The accumulation of these temporary negative effects led to a decline in profitability. The operating profit decreased to CHF 60.5 million and a 10% EBIT margin. Due to higher financial expenses, net income decreased to CHF 32.1 million. I would like to emphasize here that the long-term growth trends in our markets remain fully intact. This is demonstrated by the large number of new projects with existing and new customers that we gained despite price increases in the first half of 2023, I will come back to this later. Here, you can see our organizational structure with the 2 market-oriented business areas, Healthcare Solutions and Industrial Solutions. Our market units are supported by the 3 group functions, Technology & Innovation, Finance & Shared Services and Sustainability & Operational Excellence. Next slide, please. I will now move to the business performance of our 2 business areas, and I would like to start with Healthcare Solutions. In this business area, we offer high-quality system-critical elastomer components for [ vials, syringes ] and delivery systems for injectable drugs. The Healthcare Solutions business area was able to compensate for the loss of the high-margin COVID business through growth, price increases in its regular business. Reported revenues of CHF 253.8 million was slightly lower than in the very strong prior year. However, this represents a slight 0.6% organic growth adjusted for currency and acquisition effects. This includes a significantly positive effect of [ 5.3 ] deriving from implemented price increases. This will support our margin in the future. In the short-term, the volume decline, which is unique for this low cyclical business led to underutilization of our plants. This was accompanied an unfavorable product mix development. As a result, the EBIT declined to CHF 39.8 million and the EBIT margin of 15.7%. We remain very confident for the future. We are in contact with all leading pharmaceutical companies and have a promising project pipeline. I will come back later to this. As much as our advanced investments are waiting on earnings this year, they will enable our growth and review scaling effects as soon as the environment normalizes. Walter will present further information on this. Now I would like to discuss the Industrial Solutions business area. Here, we offer system critical elastomer components for Mobility, Connectors, General Industry Applications and Food & Beverage. In the Industrial Solutions business area, we increased revenues to CHF 350 million, adjusted for acquisition and currency effects, organic growth amounted to 10.1%. Our absolute EBIT at CHF 20.7 million was significantly higher than in the previous year. As a result, the EBIT margin improved to 5.9%. Contract-related higher electricity costs at our Swiss plant of some CHF 11 million prevented a stronger profit recovery this year that will become visible in 2024 and 2025. QSR, which we acquired in May '22 contributed CHF 81 million to revenue as the connector business unit. The integration is proceeding according to plan in the current year. The implemented optimization measures have an impact and ensure a continuous margin improvement. The cross-selling projects with the mobility business units are also developing well. Mobility achieved a significant 9% increase in revenue. This was despite the fact that the economy in China did not recover as expected in the first half of the year. The transformation to e-mobility is making good progress, more on this through the outlook. The General Industry business unit was temporarily held back by destocking of European customers and the SAP rollout at the main U.S. plant. However, business in the energy sector developed very positively, and we expect a significant increase as much in the second half of the year. The Food & Beverage business unit once again grew well ahead of the market at 70%. In addition to existing business, all 4 business units succeeded in winning a large number of promising new projects with existing and new customers. I would like now to hand over to Walter. Walter, the stage of yours.

Thank you very much. A warm welcome from my side as well. Hello, everybody, and delighted that you are attending this call today. I'm happy to provide you with an overview of the development of the key financial figures in the first half 2023. Let me start with the change in revenue in the first half of the year. Here in this slide, you see it. The 5.6% organic growth this half year is almost exclusively attributable to Industrial Solutions. This business area grew organically by 10.1%. This includes price effects of just under 4% in volume and mix effects of over 6%. Healthcare Solutions, on the other side, achieved only a slight organic growth of 0.6%, as already explained by Dirk. Some more detailed information will follow on the next slide. The 2 companies we acquired last year, which is QSR and Xinhui, contributed another CHF 55 million or 10.2% as an acquisition effect to growth in this half year. However, this figure does not represent the total half year sales of these 2 companies. The reason is that QSR and Xinhui were already included for 2 and 4 months in the first half of 2022. The stronger Swiss franc, well, actually nearly against almost all currencies reduced revenues by CHF 23.8 million or 4.5% in the first half of '23. Here, you see the corresponding revenue bridge for Healthcare Solutions with the various influencing factors. It gives a more detailed explanation of the revenue development at Healthcare Solutions. The decline in COVID revenues of CHF 26.6 million was offset by growth in the regular business of CHF 12.5 million or 4.7% and a price increase in the regular business of CHF 15.8 billion (sic) [ CHF 15.8 million ] or 5.9%. So you see the overall Organic growth in the regular business was actually 10.6%, actually offsetting the COVID loss. On the other side, we had a strong Swiss franc, which had a negative impact of CHF 14.9 million. As a result, the reported revenue decreased by a total of CHF 11.9 million. The price increase effect was larger than the volume growth of the regular business in the first half of '23. Taking the decline in COVID revenues into consideration, this resulted in an overall 5.3% volume decline. This is the reason for the aforementioned underutilization of our recently expanded production capacities. And of course, as we have seen and as we can feel the COVID effect hurts; however, despite the destocking of our customers, we succeeded in growing our regular business and implementing substantial price increases. And this brings me to the EBIT bridge, which you see here. And these figures that you see here are actually absolute values. The Healthcare EBIT decreased by CHF 15.5 million due to the underutilization mentioned above, or before and the unfavorable product mix change. The Industrial Solutions business area, QSR and Xinhui, which were included for 6 months for the first time, improved our absolute EBIT by CHF 2.8 million and CHF 4.3 million, respectively, as you can see here. However, this was not enough to compensate for the decline at Healthcare. The business unit connectors is developing well in terms of profitability so far in 2023. And the double-digit run rate EBIT margin was reached in recent months. We are confident that this development will continue according to our plan and that we should achieve an EBIT margin of around 15% in the final quarter of 2023 and the ultimate goal is clear. We want to move into 2024 with 18% and beyond. The strong Swiss franc reduced profits by an additional CHF 3.6 million or 5% in the first half of the year. What this development means for the EBIT margin is shown on the next slide. And here is the development of the EBITDA and EBIT margins of the entire company and the 2 business areas in the first 6 months of the current year and the 3 prior year periods. It needs to be noted that depreciation at Healthcare Solutions has increased in recent years. And you see it here, calculated here, it used to be 7.3%, 7.5% difference, right now, this year, it's at 8.7%. This summary depicts how the unfavorable change in the product mix and the capacity underutilization led to a decline in margins for the Healthcare area and the company as a whole. The Industrial Solutions business area was able to increase its margins, thanks to a positive development of the business units connectors and mobility. Contract-related significantly higher electricity costs at the Swiss plant which produces mainly for Food & Beverage, prevented a stronger EBIT margin recovery. This will return to normal levels in 2024. The lower margin is the accumulation of several temporary effects. Therefore, we remain convinced that the margin will recover substantially once the destocking by our customers is completed and the environment normalizes. And this brings us to the overall picture of the income statement. This income statement shown on this slide is a functional income statement. So you see the distinction between functions production, research and development, marketing and sales and general administration. The decline in profit figures reflects the underutilization of our recently expanded production capacities, which is manifested in the cost of goods sold. Keep in mind that the additional depreciation, for example, of the Indian plant is 100% flowing into that caption. In addition, this is also due to the unfavorable product mix development and the one-time higher electricity costs in 2023. The financial result always includes unrealized losses or gains on foreign currency hedges, in addition to the higher interest costs of CHF 7.6 million. As of midyear, they had a negative impact on the financial result due to the weakness of the U.S. dollar. The weighted average tax rate for the half year is 22.7%. The tax rate is temporarily higher due to acquisition effects. We are continuing to adjust the acquired constructions and to bring the tax rate into the range of the communicated 23% to 26%. As a result of the development explained above, net income decreased to CHF 32.1 million. This corresponds to CHF 1.89 per bearer share. With this, I would like to move on to the balance sheet. And as you can see, the balance sheet structure remained more or less unchanged. On the asset side, we succeeded in reducing the trade accounts receivables despite a 11.3% sales growth. Inventories also decreased due to the reduction of our safety stocks and also this reduction despite the sales growth that we have shown. The inventory reduction will free up further liquidity in the second half as well. On the liability side, the CHF 150 million bond repayable in May 2024 was reclassified as a current liability. Accordingly, this leads to a noncurrent liability reduction. So there was a flip as you can see. The equity ratio was at 29.6% at midyear, slight reduction compared to year-end '23, where we have been above 30% stems from the seasonal dividend payment that's happening normally in the first half of the year and cumulative translation adjustments due to the strong Swiss currency. Strengthening the balance sheet remains a very high priority for that year. We focus on countries with high interest costs or unfavorable currency developments when further reducing debt. And this leads me to the cash flow statement. The cash flow statement has returned to normal compared to the previous year. The previous year's period was characterized by the 2 acquisitions and the resulting necessary debt increase. Cash flow from operating activities now amounts to CHF 95.9 million in 2023 or the first half of 2023. The free cash flow increased to CHF 61.2 million as Dätwyler made early investments in the past and is therefore able to sharply reduce new investments. This free cash flow was actually used in 2023 for dividend payment on one side and debt reduction on the other side. We believe or I believe that this free cash flow development is encouraging. We have returned to the previous year's figures for free cash flow, as you can see in the chart on the right hand side of the slide. And this development will allow us to accelerate the debt reduction in the second half of the year. As I just explained, the room for action in the first half was limited due to the dividend payment and small repayments in the -- on the debt side. On the next slide, you can see the development of return on capital employed or ROCE. The decrease results from a double effect. On the one hand, the average capital employed increased to CHF 916 million as a result of past investments. However, it is very clear that this figure represents a peak as a reduction will now occur due to the development shown previously -- net working capital, but also the reduced investments. On the other hand, as I already explained, EBIT decreased due to the negative one-time effects. As a result, the return on average capital employed decreased to 15%, as you can see on this slide. With the investments brought forward, investments we did in the past, then also the sales growth forecast for the medium-term and the associated improvement in EBIT, ROCE will also improve again to well over 20%. And here, last but not least. This slide depicts the development of our investments over the last 7 years, which will accelerate our long-term growth. The figures in the previous years are in each case, the investments for the entire year. In the year under review, we have invested a total of CHF 29.2 million in the first 6 months. This is almost 40% less than in the same period last year and some 25% less than depreciation and amortization in the same period, as you can see in the 3 columns on the far right. At 4.8%, the ratio of capital expenditure to revenue is much lower than in previous years because Dätwyler is coming out of a multiyear investment cycle. For the full year '23, capital expenditures will range between CHF 60 million and CHF 80 million. In my view, the column chart impressively shows how we have invested in the expansion of our production capacities in recent years and are now ready for scaling effects. However, it's not only our infrastructure that is fit for the future, but also our employees, our systems, processes and culture. Key investments brought forward and advance investments we did in the last years, particularly in the Healthcare segment, will ensure significant economies of scale as soon as customer destocking is completed and our demand or that demand recovers. Thanks a lot for your attention. And with that, Dirk, I would like to hand over to you for the outlook.

Yes, Walter. Thank you very much for this financial insight. I think the good thing is how you have explained that. Now, let us have a look at the outlook, and let me first of all, start with our unchanged mission and that is that we would like to materialize -- materializing ideas for safer, smarter and more sustainable world. The long-term growth trends in our markets are intact, and we are strategically positioned as never before to benefit from them. In the short-term, the negative external one-time effects will prevent us from realizing our full potential. The COVID revenue loss and especially speed as this and the destocking by customers will continue to lead to underutilization of our capacities and to an unfavorable product mix in the second half of the year. In addition, the risk of a further weaker economy and currency developments continue to call for caution beside as well some opportunities. For the full year '23, we are, therefore, targeting revenues of around CHF 1.175 billion and an EBIT margin of around 11%. At Dätwyler, we take a long-term management approach and do not allow short-term external weaknesses in demand to distract us from our strategy. However, we have responded to the current market situation by implementing cost-saving measures and initiating further ones in the second half of the year. This will have a positive impact in the future. In the first half of '23, we succeeded again in winning a large number of promising new projects in all business units. This is thanks to our strong market positions and our recognized core competencies. I will come back to that at the end of my presentation. This confirms that the long-term growth trends are intact and our positioning is right. We, therefore, maintained and selectively expanded our capacities and competencies for the acquisition, implementation of new customer projects, the further continuous growth development and innovation projects. A good example of this is the continuous expansion of our product and service portfolio for fast-growing large molecule drugs. For example, we launched the UltraShield film coating for our Healthcare components in the first half of the year. This complements our existing spray coating, which is well established under the OmniFlex and NeoFlex brands. we produce all coated components exclusively at our first line plant in the U.S., in Europe and in India. Looking at large molecule biotech drugs here, coating of components for containers and syringes, is becoming increasingly important. Coating prevents reaction and leaching between the drug and the elastomeric material. Based on initial feedback, we are very confident that we will be able to offer additional customer value with film coating in the long term, which will help us to grow profitably -- profitable above the market average. We are currently winning an encouraging number of new projects in our Mobility Business unit. In particular, the share of development projects for electrification of cars is continuously increasing. We are working with vehicle manufacturers and battery system producers. We are succeeding and convincing leading Chinese manufacturers of electric vehicles, as for example, BYD of our capabilities as well. We have strengthened our presence with local development engineers to ensure optimum customer support. This is ever so important as Chinese manufacturers are increasingly shaping developments in electro mobility. To ensure that we can optimally manufacture our future mobility products portfolio, we are in the process of streamlining and consolidating our plans. On this slide, you can see some examples of our customized sealing solutions for e-mobility. Due to limited time, I would like to briefly highlight the battery as one of the key topic today. The main challenges are temperature management and safety. We develop specific materials and solutions based on our competencies. These either ensure high thermal conductivity or act as a protective shield in the event of uncontrolled strong heat generation. We offer attractive solutions that ensure the safety and long-term performance of batteries. The transformation to electro-mobility is currently leading to increased expenditure. However, the interest of our customers and the large number of new projects show that we have very good opportunities to increase our share of sales per car. This slide covers the expected development of Powertrains and the electrification rate of cars produced worldwide in '23 and over the next 7 years. Independent experts predicted in '27 for the first time, more electric and hybrid cars will be produced than cars with pure combustion engines. By 2030, the electrification rate of newly produced cars is expected to increase to 58%. I think but everybody knows that these figures could even change in the coming years. And therefore, Dätwyler is always be aware that could be faster than expected. The number of cars produced annually worldwide increase by some 90% by 2030. The number of cars produced annually with internal combustion engines decrease by around 27% in the same period. In return, the number of electric and hybrid vehicles produced each year will triple. This corresponds to an average annual growth of some 15%. Here, we have shown as an example, the development of 3 attractive end markets that are very important for Dätwyler. The independent growth forecast for electric and hybrid vehicles for Electrical Connectors and for Pre-filled syringes show that the mega trends in our markets are intact. The average annual growth rate of 8% to 15% will also keep demand for our system critical components for these systems high in the coming years. And now here's a recap why Dätwyler will benefit from the growth trends in the markets served. First of all, we have clearly leading positions in markets with high entry by years. Our system-critical components make a decisive contribution to the functionality and quality of end products, while at the same time, they represent a very small share of the total cost of customer systems. We are a competent development partner, thanks to recognized core competencies in solution design, materials know how and operational excellence. And please note, especially this cooperation of this components -- of these competencies are very important because, of course, we have some competitors in the market with having similar ones, but not in this combination. As a creator of elastomer components, we are the owner of the corresponding IP rights. It is the interaction of these core competencies that gives Dätwyler a unique position in the served markets. We have a global presence and can offer our customers a local-for-local approach with consistent product quality as we have production plans on 4 continents, always very close to our main customers. We are pursuing the right strategic priorities for a dynamic world. At the same time, our focus on sustainability, agility, digitalization and profitable growth makes us attractive to talents. On this basis, I'm convinced that the forecast market and revenue growth will lead to a disproportionate EBIT growth in the medium term via scale effects. Finally, I would like to draw your attention to our next Capital Market Day on Friday, November 10. We are delighted to keep you up to date with further developments in our key markets because we are aware that in such a short call as what we have today, we cannot explain in detail what all effects will be in the market and how, let me say, we believe and why we believe that we can benefit in the future. And therefore, we will give you a further in-depth insight on our long-term planning, especially for the Healthcare market, how we will benefit from the high scaling effects in the future. Then we have the business model of the connector business unit. And finally, how we would like to generate synergy effects together here with the Mobility Business unit together. And of course, there is a couple of other topics, but let us present that to you in the autumn of this year. And I'm sure that you will get some further interesting information. Please reserve the date and discover our growth and innovation projects yourself in person on site. The details -- further details will follow. Yes, with that, I would like to stop here the presentation. Hopefully, you've got some further insights. And now we are open for your questions. Walter and myself, we are happy to answer that.

[Operator Instructions] The first question is from Michael Inauen from Stifel.

I have a couple of questions, if I may. First of all, how much COVID revenues you still had in the first half? Because I thought you would have probably around CHF 40 million, CHF 50 million per year. So is there another CHF 25 million that you're going to lose? That would be the first question. Second question is on the energy in Switzerland. So -- or generally, you said CHF 11 million more cost for electricity, and this would change next year, so what gives you the confidence that this will change next year? Have you -- do you have new contracts there already for the next year? Or how does systematics work there? And also a question regarding QSR, can you maybe share an organic growth data here? Because I assume there was a pretty strong impact on the weak dollar, but how much was it really growing volume-wise? Maybe this would be 3 questions for the moment.

Yes, Michael, Thank you very much for your question, now let me start with COVID. I think COVID is more or less totally done. We have the peak 2 years ago for the 2021, it was more than close to CHF 70 million, slightly above. Then in last year, we had slightly above CHF 50 million. And now in the first quarter of '23, it is more or less close to 0. That was a very fast decline when we compare that with the last year. So that is more or less let us consider that close to 0, that is the first part of your question here. If we come in to the second part that is about energy costs in Switzerland. Yes, we had an unfavorable contract, which led to an additional CHF 11 million cost of energy in Switzerland, where we were not able, due to the contracts to pass it through to the customer. However, due to the fact what we are seeing, we already have to sign the energy contracts for the year '24 and '25. Therefore, we will see a significant reduction of this cost in the next 2 years, a big portion already next year. And then in '25, it should be already more or less annualized to a level which is, let me say, not any more significant to this production facility in [ shutoff ].

And then for the organic growth of business unit connectors, that is in the mid-single-digit area.

So Inauen, I hope that helps.

Yes, that does. Can I just have an add-on question, sorry, on -- you mentioned the projects that you're winning in Healthcare. Is there any idea on -- is there any number you can put to that? I mean, what are we talking about? Are we talking about potential of CHF 50 million in the future, CHF 80 million or more? Just to understand, because a number of projects, it's really hard to imagine something hard behind that.

Yes, yes. Of course, to bring in the number behind is not so difficult. But the question will be when it comes into production. Now let me give you an example. I think we have just a figure on the top 10 projects, which are having a considerable top peak volume of around CHF 100 million, only the top 10 projects what we are currently working. For a couple of them, we have more -- very high probability that is coming through. And so we expect for an example, that such projects will be fully visible with a peak volume in the year '26 to '28. So of course, that [ points ] will vary due to the, let me say, to the market, the market development of such product lines at the customer side. We are -- we will be prepared. And hopefully, the products will be very successful from the customer perspective. But I think that is very good. Having said that, of course, we have a large number of further projects, let me say, which will help us in the years to come to our growth range, what we always said, what we would like to achieve between 8% to 12% after we have, let me say, the destocking effects behind us. So that is -- that nobody can say today when that will be happening, okay?

The next question comes from Benjamin Thielmann from Berenberg.

This is Ben from Berenberg. Maybe a couple of questions from my side as well. Maybe in terms of margins for the midterm guidance, you were guiding for Healthcare, roughly 22% to 25% margin. And for Industrial, somewhere between 12% to 15%, as of today, we're roughly 16% margin in the Healthcare business, and you already mentioned that you have a couple of new projects, which should flow in the P&L somewhere in like 2026 onwards. Now my question is, if you want to meet your midterm guidance, let's say, 22% of Healthcare, you should increase the margin by about 150 basis points per year, what are the short-term catalysts to be considered?

First of all thank you very much for the question, and of course, that is valid ones. And of course, that is very important. But let me start with Industrial Solutions. I think with Industrial Solutions to be coming in the range of 12% to 15%, I think it's should be becoming faster after we having as per some areas here as well, not anywhere the destocking effects. And the reason why that should become faster is due to the fact that we have a lot of initiatives internally, which will lead into the cost optimization, which we really have more or less a couple of them in hand. And we are not, let me say, so strong related to the market demand. So from that perspective, I think we should be able to generate that in the next 2 to 3 years, maybe earlier, depends on the market demand. When it comes to the area of Healthcare, of course, is more difficult. And -- but here is the same -- similarly to IS when we're talking about the fall-through. So that means we explained that we currently have and why [ that it did it via ] investment [ drop ] that we have not so much to invest in the infrastructure for the next, let me say, a couple of years. So we will be able to use our existing equipment infrastructure which we have around the globe to follow the demand from the market and that should be -- lead to a very high fall-through from net sales to EBIT -- when we talked about the scaling effects, and that should be very fast going forward. Now depends on -- and that is very difficult to say today. It depends on how the market demand will be visible in the next years. And it could be that the actual situation will stay at minimum for this year in the market. And maybe as whether the beginning of next year or even until the end of next year, nobody can tell that today. But if it will be over, I'm sure that we can really fast increase the EBIT margin.