DKSH Holding AG (DKSH) Earnings Call Transcript & Summary

Ladies and gentlemen, welcome to the DKSH Full Year Results 2020 Conference Call and Live Webcast. I am Sandra, 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 Till Leisner, Head Media on the Investor Relations. Please go ahead, sir.

Thank you, Sandra, and good morning or good afternoon, everybody. It's a pleasure to welcome you here on behalf of DKSH. As Sandra said, my name is Till. I'm looking after Investor Relations. Before we start the presentation, please have a look at the disclaimer of our presentation regarding forward-looking statements. For those who do not have the presentation in front of them, you'll find them on the web page in the Investor Relations section at www.dksh.com. With that short introduction, I'd like to hand over to Stefan. Thank you very much.

Yes. Good morning, everyone, and welcome to the presentation of our full year results 2020. I'm joined today by our CFO, Bernhard Schmitt, via call from Singapore and Till here in Zurich. Today, I will give you an overview of what we have achieved in the last year and then comment on the performance of our business units. Bernhard will follow-up with an outline of the financial review before I conclude with the outlook. I think it's fair to say that 2020 was an unprecedented year. Across the globe, people stayed at home, travel was canceled, nonessential shops closed, production facilities shutdown and economies contracted. If we look at the situation in Asia over the course of the year, the pandemic spread in the first quarter, most predominantly in Mainland China and Hong Kong. In the second quarter, almost all markets in Asia Pacific went into some form of lockdown. In the third and fourth quarters, restriction levels remained high in Asia. When we compare them to those levels in Europe, they're sometimes even higher. Despite these challenges, we successfully navigated the crisis, thanks to the good performance of our Business Units and report solid results for 2020. First, we achieved the GDP plus performance. Our net sales growth at constant exchange rates were better than Asian GDP. Second, we reported a robust EBIT. Third, we increased our free cash flow by 34%. And fourth, we continue our dividend track record by proposing a 2.6% higher dividend of CHF 1.95 per share. Let us now look at the key developments in 2020. Business Units. We diligently implemented our Business Unit strategies. In Healthcare, we increased the share of higher value-added commercial outsourcing partnerships. The transformation of the fast-moving Consumer Goods business progressed well and report higher profits for the second consecutive year. In Performance Materials, we expanded our position as a leading distributor of specialty, chemicals and ingredients. And in Technology, we have set the stage to increase resilience and deliver growth in the future to exceed pre-COVID levels again. Markets. We increased our share of faster-growing markets. The region, rest of Asia Pacific, which includes markets such as Vietnam, Cambodia and Indonesia, now accounts for 23% and is, therefore, the second largest region in our portfolio. People. With our new Chief HR Officer and identity, we rolled out a modified HR strategy, enhancing our value proposition and increasing our competitive advantage. The KPIs are already developing well. To give you an idea, our internal hire rate stands at over 80%, 25% more than in 2019. We upgraded the caliber of our talent and made some strategic recruitments in functions like consumer goods, marketing and IT. The number of managers in our long-term incentive plan increased, and we plan to double that number further. Diversity is important to us. We have 75 nationalities at DKSH and a balanced women-to-man ratio of 53% to 47%. Digital. Our 4 Business Units are now all selling online, and we have further digitized the company. For example, we expanded the Connect platform to digitally interact with our clients and customers and now offer more e-payment solutions to optimize our internal cash collection process. Sustainability. Without going into detail into our sustainability initiatives, please let me highlight that for the first time, we have introduced sustainability targets aligned with the UN Sustainable Development Goals. Until 2030, we aim to achieve climate neutrality in all our locations, and we also linked the compensation of our entire executive management team also to sustainability targets. To sum it up, despite all challenges, we successfully developed the company in 2020. Please, let me now discuss 2 of these developments in more detail, our digital transformation and M&A strategy. Let's start with the digital part first, which is becoming increasingly important for our clients and customers. Last year, we exceeded our e-commerce sales target of CHF 150 million and reached sales of well over CHF 200 million. That means that we have organically doubled our e-commerce business in the last 2 years. This achievement is a result of all our Business Units rapidly leveraging digital technologies. To give you some examples, we conducted more than 270 webinars and over 2,800 digital campaigns, and in Performance Materials alone, sold over 6,000 specialty chemicals online in 2020. As more and more clients taking up our digital services, we expect good growth in our e-commerce business this year. M&As are another focus areas. Since 2017, our M&A strategy has delivered 10 acquisitions. This has created shareholder value and as they have expansion potential, and we have paid attractive multiples. Last year, we successfully acquired and integrated 2 companies, Axieo and Crossmark in Australia and New Zealand. With Axieo, we gained broader market coverage and customer reach in Asia Pacific. Already, within the first 9 months, large clients such as Ashland, Elementis and Shin-Etsu joined us in Australia and New Zealand. Transaction activities slowed down in the second half and -- in the second and third quarter, excuse me, of 2020 and have since then picked up again. We will continuously scan the market, and we do have a solid M&A pipeline to drive market consolidation across all Business Units. Let me now continue with an update on our Business Units, starting with Healthcare. Contrary to expectations, the pandemic impacted the health care industry in Asia. Patients avoided hospitals, spend less, operations were canceled and medical tourism collapsed. Our own results, however, proved resilient. Net sales at constant exchange rate were down only 5%. This is mainly due to our diversified portfolio across channels, categories and markets. We've laid a key role in supplying the public with medication and won new clients. For example, by entering the Philippines with Lotus, we also grew Pfizer in Taiwan, Zuellig Pharma in Thailand as well as with [ Health UM ] across Asia Pacific. EBIT at constant exchange rates remained at last year level due to stringent cost discipline and a higher share of commercial outsourcing partnerships. Due to the ongoing lockdown, demand for health care services has not yet recovered and medical tourism remains at a minimal level. Therefore, we will continue to monitor our expenses, expand our digital channels and drive growth in higher-value segments and services, such as commercial outsourcing deals, biosimilar partnerships or the extension of the medical device segment. Let me also say a couple of words about the distribution of the COVID-19 vaccines at this point. In our Business Unit Healthcare, we are committed to making high-quality medical products accessible to patients across Asia. We have long-standing relationships with large vaccine manufacturers and a track record of being the trusted partner to reliable distribute general vaccines across 6 markets in Asia. We are well prepared to help governments and private organizations in their vaccine initiatives. In anticipation of increasing demand, we also expanded our cold chain capacity by 25% in certain markets. However, the distribution of COVID-19 vaccines is still at an early stage in Asia, and the further cost remains to be seen. In any case, our future direction will be guided by prioritizing the common good. We will keep you duly informed once we have new -- more news to share. Please let me now move on to the Business Unit Consumer Goods. In our fast-moving consumables segment, the transformation initiated at the end of 2018 continue to progress very well, thanks to a leaner structure in FMCG, under the unit's leadership team and our optimized product portfolio, we increased the EBIT in FMCG strongly. We rebuilt the spirit of a winning team, regained trust in the markets and won several key client contracts. Especially also in e-commerce in Indonesia, we recorded high-growth rates and are generally confident about the further transformation of this business. The Luxury & Lifestyle segment within CG was significantly impacted by the pandemic as retail shops closed and tourism fell heavily. Net sales and EBIT declined by a substantial double-digit percentage. We immediately implemented cost-saving initiatives, which will support profitability going forward. On a positive note, the watch brand Maurice Lacroix gained market share and reported a small profit for the second year in a row. Maurice Lacroix continues to strengthen its brand position in a prestigious manufactory of Swiss watches. Alongside the biggest names in the watchmaking industry, the brand has been chosen for the first time this year to present its new products at the digital edition of the Watches and Wonders Geneva exhibition in April. Taking both segments together, net sales and EBIT at constant exchange rates remained at last year's level for the Business Unit Consumer Goods. Let's continue with Business Unit Performance Materials, where we delivered another year of growth. At constant exchange rate, net sales were up 15% and EBIT 7%. We grew well in all the life science segments where we cater to the pharma, food, beverage as well as personal care industries. Across all segments, we expanded distribution agreements with key clients, such as Stepan in India, Korea and Vietnam, Elementis in France and SABIC and Eastman across Asia Pacific. We also increased market coverage by adding more than 1,000 new customers globally and continue to invest in value-adding innovation, formulation soothing and regulatory capabilities. With 2 new food and beverage innovation center openings in Indonesia and Korea, we increased the total number to 48 centers. Another milestone was the acquisition of Axieo in Australia and New Zealand. This deal not only helped us to strengthen our geographical reach, it also marked the biggest transaction for the Business Unit. The integration is going well, and the business is already implemented on our SAP platform. In 2021, we plan to increase Axieo's profitability further, enhance our digital and value-added capabilities and assess new acquisition targets. We have a clear road map and see further growth opportunities. Finally, let me please continue with the Business Unit Technology. This division was significantly impacted by COVID-19. Especially in the second quarter, customers temporarily shut down production facilities and put investments on hold. As a result, net sales declined by 6.7% at constant exchange rate and EBIT stood at CHF 21.8 million. We took prompt actions and set up a cost-saving plan to secure profitability. We intensified our business development focusing on growing segments like scientific instrumentation, precision machinery industry for 0 and after-sale services. To name a few examples, we expanded our partnership with HP for 3D printing and started providing integrated services for Thermo Fisher's range of ultra low-temperature freezers in Thailand. This partnership contributed towards specimen storage for COVID-19 testing and according to the WHO guidelines. With a focus on higher value-added services, digital marketing and cost control, we intend to further stabilize the business and deliver growth to exceed pre-COVID-19 levels in the midterm. With that, I hand over to our CFO, Bernhard Schmitt, who will walk you through the full year results 2020 in more detail.

Thank you, Stefan. Dear ladies and gentlemen, welcome also from my side here out of Singapore. I am pleased to further explain our 2020 full year results to you. In essence, we delivered solid numbers. Despite unique market conditions, net sales, EBIT and profit after tax remained around last year's level at constant exchange rates. At the same time, we strongly grew our free cash flow and our roll-off of 18.1% remained on a solid level. Let me now explain the numbers in more detail. Despite COVID-19, our net sales at constant exchange rates matched last year's level. Our organic growth rate was only down 4.2% amidst lower demand in several markets. Geographically, we experienced the strongest headwinds in Thailand and Hong Kong. At the same time, we grew at good rates in Vietnam and Indonesia. These markets are part of the region, rest of Asia Pacific, which today accounts for about 23% of our net sales. And with that, it's our second largest contributor to our business. In addition, we successfully acquired and integrated several new companies. We had to quickly learn how to roll out our SAP system online without traveling. Since 2019, Auric Pacific, SPC, Dols and CTD contribute to our results. In 2020, we closed 2 deals with Crossmark and Axieo. Combined, these 6 acquisitions added 2.1% to our sales growth. As the Swiss franc gradually strengthened against our Asian currencies, exchange rate had a negative 5.1% impact on net sales. Let me now discuss the EBIT in more detail. The EBIT in 2019 was CHF 265.4 million. Adding back the onetime restructuring cost of CHF 14.5 million in Consumer Goods, the adjusted EBIT was CHF 279.9 million. The organic development was minus 6%, and acquisitions added CHF 8.8 million or 3.1%. Currency effects reduced the EBIT by 5.1%. In sum and at constant exchange rates, EBIT of CHF 257.5 million was only down 2.9%. During the last years, we continued to diligently implement our asset-light strategy. We typically lease offices and distribution centers as well as outsourced transportation to third parties. Our capital intensity, measured as capital expenditures as a percentage of net sales, is very low. In the past years, on average, it only accounted for 0.4% of net sales. For this year, we again expect to see a CapEx level of around 0.4% of net sales. This means that they both stay asset-light. We delivered a strong free cash flow of CHF 210.2 million. Firstly, we improved our inventory and receivables management. Secondly, we benefited from an unwinding of working capital due to the slightly lower sales. Let me now move on to our balance sheet. Our solid balance sheet is a key criteria why clients choose to work with us. This is even more true in volatile periods like that of last year. Furthermore, our strong financial position enabled us to continue paying dividends and close 2 acquisitions. Despite our acquisition strategy, we still carry very little goodwill on our balance sheet. Goodwill accounts only for 13.5% of our equity. In sum, our balance sheet remained strong with a net cash position of CHF 342.2 million and a solid equity ratio of 35.2%. This will allow us to drive market consolidation via acquisitions in the years to come. Before I hand over to Stefan for the dividend and outlook, let me provide you with a few financial indications. With the integrated acquisitions of Axieo and Crossmark, we expect a positive M&A effect on our net sales of 0.1% for this year. We hope to add more growth in the course of 2021 with further acquisitions. If current spot rates prevail, we should have an insignificant translational FX effect on our net sales. We expect a tax rate between 27% to 29% and CapEx of around CHF 40 million to CHF 45 million should remain in the usual bank rates. Many thanks for your attention. And with that, I hand over back to Stefan in Zurich.

Thank you for this financial review, Bernhard. At DKSH, we agree what makes a good investment is not only the amount of the dividend, but also the consistency of its distribution. I would like to remind you that our ordinary dividend has been growing reliable every year. In line with our track record, our Board proposes a 2.6% higher dividend of CHF 1.95 at our upcoming Annual General Meeting in March. Let us now look forward. While visibility of the evolution of the pandemic remains limited for all of us, we are optimistic that in 2021 will bring at least a return to some form of normality and a slightly improved economic outlook towards the end of the year. We are convinced that we will emerge stronger from last year's challenges. We will continue implementing our strategy with a focus on digitalization, sustainability and M&A while ensuring operational excellence and disciplined cost -- cost discipline, sorry. Assuming an easing of the impact of COVID-19, such as rebounding tourism and stable currencies, we expect an EBIT above last year for 2021. We also hold to our progressive dividend policy and are committed to driving market consolidation through M&A. Looking ahead, we remain very confident about Asia's long-term potential. The recent formation of the RCEP, the world's largest free trade pack, should intensify regional trade and economic activity in Asia Pacific in the years to come. At DKSH, we are very well positioned to benefit from favorable market, industry and consolidation trends. Thank you very much for listening. Operator, please, let's now move to the Q&A session, please.

[Operator Instructions] The first question comes from Pascal Furger from Vontobel.

Three questions, if I may. The first question is with regards to your regional performance. So here, Thailand was down 13% or even around 12% on a reported basis in the second half. Of course, you had strong FX headwind, but still organically it's down almost 10%. Can you elaborate a bit what happened here in your key market? Then my second question is with regards to Consumer Goods. Do you observe a change in trend in consumer behavior in Southeast Asia, triggered by COVID-19? For example, is it fair to assume that there was a shift back to multinationals, which basically sell trusted brand names and which have been historically well represented in your portfolio because 2 years ago, you wanted to go more of the local players. So my question is here, what's your portfolio mix currently? And then last question in terms of Luxury & Lifestyle. The soft division has been a drag for many years. So first, we have Maurice Lacroix, your whole watch distribution network, which caused you then a restructure successfully. But now we have COVID-19, stores are closed. My question, does this subsegment require a change in strategy? Or would you even consider sort of a disposal?

Yes. Thank you very much, Pascal, for your questions. And let me start with the first one regarding Thailand. Yes, I mean, we all know about the economic environment in Thailand, and that's definitely not favorable for any market player out there and 2020 was another disappointing year in general GDP development. If you look at our business in Thailand and what is driving the decline, you have to consider 2 things. One is, we have quite a significant presence in health care in Thailand, and that business is partially also based on medical tourism as well as over-the-counter products for tourists. I don't have to share with you, you know that very well that the tourism almost went down to 0. So that's a major drag on our numbers. In Consumer Goods, we were actually able to gain some market share in unfavorable conditions. Second question regarding the Consumer Goods trend. There is a little bit of change of buying pattern, I agree with you, between multinational and local brands. It also depends a little bit on the different pricing points. But the main driver we actually see is that we gain more and more trust from those large multinationals and they are accelerating the trend towards outsourcing. So if I look at our BD pipeline, the stake of the large multinational business is growing significantly, which is also a component of the new and -- or renewed trust, let's call it that way, the leadership team there has on the ground. And a few of those contracts, we are allowed to publish and we did so most recently. Regarding Luxury & Lifestyle, yes, you're right. I mean, obviously, we were hit significantly. So the revenue is down over 1/3 in Luxury & Lifestyle or retail, obviously significantly impacted by all the lockdowns across the different countries. ML is a nice development, which is exceptional in this case, based on very good management and a very attractive collection they have. As I said -- or as we said already on the Capital Market Day, luxury and retail for us, it's not a significant part of the portfolio. It's under 10% in terms of sales, but it obviously has a quite attractive profitability. Overall, the strategy is to really focus on the 90% of our business, the FMCG business, where we have the critical size, where we are the #1 player across Southeast Asia and beyond, and harvest a little bit the Luxury & Lifestyle business over the years to come. So definitely, from a strategic perspective, this is not a growth area. Did I answer your questions, Pascal?

Perfect.

The next question comes from Nicole Manion from UBS.