Drägerwerk AG & Co. KGaA (DRW3) Earnings Call Transcript & Summary

Good afternoon and a warm welcome to everyone joining us today on our 6 months financial results. Today, I have with me Gert-Hartwig Lescow, CFO; Thomas Fischler, Investor Relations; and Peter Mueller, Financial Communication. We would like to take you through presentation on the half year results, which we made available on our website this morning. I'm pleased to start right away with an overview of some business highlights and the demand trends before we have to go into the financial details of the quarter, 6-month period. I will close the presentation with a summary and our revised outlook. [Operator Instructions] Out of respect to everybody's time, we will end this conference in 1 hour. As you are aware, we published the preliminary figures back in mid-July. In the final set of figures published this morning, there are no significant deviations from the previous [ year ]. Starting on Page 3, we will now look at the business highlights of the first 6 months of 2021. For more than 1 year now, we all have been living and working under the regime of the coronavirus pandemic. The pandemic and its impact continue to dominate the headlines and concern people, government organizations and businesses worldwide. Protective measures and rules have helped to manage the pandemic situation in most regions. In some countries, in Asia, Africa and Latin America, the pandemic situation remains challenging. Going forward, testing and tracking as well as the vaccinations will help us to advance and live with COVID-19. We all have to get used to that. In this environment [indiscernible], a dominant topic remains supporting our customers in the fight against the coronavirus pandemic. We continue to do as much as we can to serve our mission: to protect, support and save lives. We started the new business year with a record order taking. And the demand for products to treat patients suffering from COVID-19 has persisted longer than anticipated. Order intake remained at a high level in both the first and second quarter. We have received some pandemic-related larger orders from customers in some emerging markets where the pandemic situation is still very challenging. As a result, business development has so far been stronger than originally expected. Order [indiscernible] our expectations for fiscal 2021. Following the record year 2020, we had originally expected a roughly double-digit decline in net sales. Following the high order intake in the Q1 and Q2, we have raised our guidance and now only anticipate a decline of between 2% and 6%. Due to the improved expected sales performance, we have also raised our earnings forecast and now expect an EBIT margin of between 8% and 11%. However, in many regions, we are starting to see pandemic-driven demand to come down again. This normalization of demand will continue throughout the remaining months of the year. We expect a lower order entry development in H2 and do not anticipate comparable demand in the coming year. What else has happened in the last couple of weeks? We brought our antigen test, the advanced COVID antigen test to market maturity and approval. In the first step, CE conformity will [indiscernible] professional use [indiscernible]. I had elaborated on this already on our last -- and the second steps, now in July, we have received the additional approval for use by nonprofessional users. Our test can now be used by professionals and [indiscernible] alike and both would benefit on the most user-friendly tests available on the market. While obviously, corona [indiscernible] its unmatched ease of use as a clear [indiscernible] more competitive test kit on the market. We will market it as an optional service to get a test certificate online, which is recognized by all major airlines and [ CTA ]. Even though [ this worries ] the premium price of our self test, it will have to be seen how receptive the market will be going forward with this new [indiscernible]. Furthermore, our work on the implementation of measures to remedy the deficiencies identified by the FDA remain a top priority. Our activities remain to be on track, and we will hopefully resolve more issues by the end of the year. We have [indiscernible] some M&A activities during the last quarter. As already announced in our last call, we finalized our acquisition of the majority share of the Swiss medical start-up STIMIT beginning of the second quarter. With STIMIT now on our portfolio, we are further expanding our expertise in the field of lung-protective ventilation. STIMIT is working on innovation to target a stimulation of respiratory muscles of intensive care patients by stimulating the diaphragm by noninvasive means of electromagnetic fields. I'm very excited about this collaboration since it has potential to bring significant value to our customers. In May, we also made a smaller acquisition for our hospital consumable business. We acquired a majority stake in the Swedish company UAX. The company manufactures for heat and [ merger ] exchanger in [indiscernible] that ensure that the inhaled air is humidified securing mechanical ventilation and [indiscernible] infections are minimized. UAX operates in a very concentrated segment inherited from [indiscernible]. With this acquisition, we are safeguarding our access to these important [indiscernible]. And finally, regarding the sales of our Interlock business in the U.S. and Canada, we divested part of our nonstrategic portfolio. The [indiscernible] business is a service business that installs and delivers breath controlled immobilizers into vehicle offenders that have been convicted of driving under the influence of alcohol or drugs. It aims to prevent driving under influence and to ensure regular required reporting to the responsible authorities. For the past 3 years, there have been many changes in the U.S. market that involves around combating drunk driving. These changes will require significant investments in our part in order to be competitive. After careful consideration, we decided to look for a strong partner who will fully concentrate on the market dynamics of the U.S. and Canadian markets and thus create a basis for a successful future of the business. Please note that this transaction only concerns the direct [indiscernible] devices to end customers. We will continue to supply [indiscernible] devices to appropriate providers for this service and of course, continue to supply the police with alcohol [ monitoring ] devices. [indiscernible] Dräger remains fully committed to the development, production and marketing of [indiscernible] products and all other impairment check devices. Now [indiscernible] business development of the group. With that, I would like to hand over to Gert-Hartwig, please.

Thanks, Stefan. I would also like to welcome you all to our conference call for the results of the first 6 months. Before starting with the financial development of the group, I would like to clarify that whenever we refer to growth rates, I will give values in constant currencies, unless otherwise stated. Let's start with the business development of the Dräger Group on Page 4. In the second quarter of this year, order entry remained on an elevated level with just under EUR 788 million. Order entry in Q2 was on the level of the first quarter mainly driven by strong order development in May. That means during the quarter, we still had a good portion of pandemic-related order entry versus 2019, the year not affected by the pandemic, order entry is up by nearly 10%. The conclusion is that while current demand was lower than the very high levels we experienced during 2020, it was not yet at normalized levels. Mentioned by Stefan Drager at the beginning of the year, we had expected to see [ quicker ] normalization in demand. Currently, especially towards the end of Q2, we now do see a lower level of corona-related orders coming in and the lower final level for the rest of the year. Hence, going forward, we expect to see the normalization of demand that was to speed up in the second half of the year. Net sales in the second quarter amounted to EUR 841 million, exceeding the high level of the first quarter and well above the previous year's figures as well. Last year, pandemic-driven net sales had started to pick up the second quarter consequently as a base effect quarterly or year-over-year growth rates starting to come down now. As compared to the pre-pandemic level, net sales are obviously much higher, more than 30% over the 2019 second quarter. Gross profit was roughly on the level of the prior year's quarter. The group's gross profit margin is 46.3%. Among other things, higher quality costs, negative exchange rate and tax led to a reduction of about 3 percentage points in the gross profit margin. Especially in the medical division, we have seen it [indiscernible] decline, of course, [indiscernible]. While [ functional ] costs in the first quarter were at the level of the previous year, obviously not normal [ rate ], they were roughly higher in the second quarter compared to the second quarter of 2020. This increase is mainly the result of our hired personnel expenses due to the increase in the number of employees, including higher provisions for variable compensation considering the revised guidance and higher expenses for project-related third-party services. With some [indiscernible] pandemic-related constraints, sales and marketing expenses are also rising again slightly year-on-year. As a result of the aforementioned, despite the higher net sales volume, EBIT came now below the level of the previous year to around EUR 80 million at the second quarter. Looking at the 6 months period, this led up to a very strong net sales development, 17% higher than the comparable figure 1 year ago. While net sales growth was strongest in the regions of America and AAA, net sales increased also in Europe, mainly due to high net sales volume. The gross profit contribution was high up by close to EUR 131 million to EUR 802 million. All 3 regions contributed to this growth. Overall, the gross margin of 49.1% was 2 percentage points [indiscernible] the level of the previous year. The positive country and product base, which especially in Q2 [indiscernible] supported a higher margin overcompensated for higher quality costs and slightly higher negative exchange rate effects. With [ trailing ] pandemic tailwind, we expect the lower gross profit margin in the coming quarters. For the full year, the gross profit margin should come out rapidly on the level of pricing. The financial expenses are [indiscernible], EBIT amounts to EUR 209 million, which is significantly above the prior year's level. In the 6-month period overall, currencies had no meaningful impact on the gross profit margin. And should exchange rates remain on current levels, they [indiscernible] profitability for the full year despite unexpected full year average on the top line. Our [ trailing ] value added increased by more than EUR 320 million to around total of EUR 403 million. Moving on to the medical division on Page 5. In the second quarter 2021, we recorded a year-over-year decline demand of just under 20%. But compared to the second quarter of 2019, order entry is still nearly [indiscernible]. Looking at 2021, quarter-over-quarter, Q2 order entry was even [indiscernible] to Q1 level, showing that the second quarter still benefited from pandemic-driven demand. However, as I said, we have seen the normalization of order entry in this mix to pre-corona pandemic levels, and we are seeing continuing normalization also during the current quarter. Despite lower order entry, year-over-year, net sales increased slightly by 1.6% versus the same quarter last year. The increase of the region AAA as well as Americas was offset by decline in Europe, especially in Germany. The gross profit margin was disappointing, the second quarter gross profit decreased by 10% and gross margin decreased by roughly 1.5 percentage points. Higher expenses for quality measures and weaker positive effects from the current [indiscernible] compared to the first quarter of 2021 are responsible for this decline. Higher [indiscernible] actions triggered provisions of about EUR 10 million to EUR 15 million towards the end of the quarter. Q2 EBIT was just below EUR 48 million, transforming to an EBIT margin of 9.5%. For the 6-month period, order entry of around EUR 453 million is 14% -- the half year in 2019 in nominal terms. But as expected, it is lower than the order entry 1 year ago. Net sales during the first 6 months increased [indiscernible] by a total of 15%. As a result, gross profit rose by more than 18% and the margin increased by 2.8%. It is a very good gross profit from the first quarter and compensated for the decline in the second quarter. As a reminder, in Q1, we had a very strong gross profit margin in the Medical division, mainly due to higher mix capacity utilization, better pricing and improved product mix. EBIT of the first half of the year improved to EUR 145 million, contributing to a strong improvement of the DVA, which is up to EUR 275 million to just about EUR 335 million. Let us now look at the development of the Safety division on Page 6, starting with the development in the second quarter. As you just know that for the Medical division, also the Sales division, order entry is above the pre-corona levels. Compared to the record level 1 year ago, Safety division's order entry declined slightly by 9% in the second quarter. The Safety order entry is currently no longer benefiting from pandemic-related demand, following the strong increase in demand for life respiratory protection last year as the business with [indiscernible] or N95 masks. We currently see order entry normalized, particularly in Europe and the region of Americas as the pandemic-related large orders will not appear this year. On the other hand, we currently see a solid demand in the Service business as well as the business with respiratory and personal protection and with COVID test kit. Net sales in the second quarter increased by roughly 25%. All regions contributed to this growth with the Americas region contributing strongest with an increase of some 40%, in line with the increased sales volume -- was profit improved significantly by 23% due to the gross profit margin, remained stable at the level of the second quarter of 2020. Due to EBIT, nearly doubled to a total amount of EUR 32.5 million, lifting the EBIT margin to 10.3%. Looking at this 6-month period, net sales increased at nearly 22%. The gross profit margin increased by close to 1% of product. And country mix effects was partly compensated for -- by start-up costs and [indiscernible]. EBIT for the first half of the year reached nearly EUR 64 million, corresponding to an EBIT margin of 10.7%. Due to the higher earnings, DVA improved and increased to just below EUR 68 million. Turning now to some of the key figures of Dräger Group on Page 7. With more than EUR 172 million, cash flow from operating activities for the first 6 months is considerably higher than in the previous year. Main factor for the strong development is the higher profitability. Besides that, also the strong collection of trade receivables and the lower buildup of inventories contributed. By contrast, operating cash flow was negatively impacted by a reduction in trade payables and other prepaid items in accumulated purchase options for ventilators last year. In addition, we had a cash inflow from investing activities of some EUR 33 million, whereas in the same period of the previous year, there was a cash outflow of around minus EUR 49 million. The cash inflow is explained by the divestment of money market funds, a net amount of nearly EUR 90 million. Main cash outflows are for replacement and extension investment -- and some investments to our new mask production facilities. Cost trends of free cash flow is substantially above the prior year's level at roughly EUR 206 million. As you might be aware, we have taken steps to optimize capital structure, something we have discussed in detail during our last conference. As a result, these activities, the cash outflow for financing activities in the amount of EUR 251 million can be attributed to the cancellation and partial buyback program of participation [indiscernible]. Payment of the termination value for main series D participation certificates in the amount, rounded, EUR 209 million, will be paid as scheduled in January 2023 from current liquidity. Moving on to net financial debt. The first half 2020 net financial debt had increased and the equity ratio has fallen significantly due to the cancellation of the participation certificates. As of end of June this year, net financial debt was EUR 148 million, is back at a lower level. Also, the equity ratio has increased to 38.2%, 8.2 percentage points more compared to the end of June last year. The improvement in the equity ratio by almost EUR 177 million is mainly [indiscernible] through a significant increase [indiscernible] in addition to the adjustment of the accounting parameters for share [indiscernible]. The net amount of this adjustment of around EUR 35 million after tax adjustments increased [ contained ] earnings and equity [indiscernible] loss. Also the issuance of the new long-term issuing note loan to the amount of EUR 100 million and [ nearly -- partially ] repurchase of participation [indiscernible] the amount of EUR 100 million contributed to this. That's from my side. I hand back over to you.

Thank you, Gert-Hartwig. Let me close with summary of the financials and the outlook for the current fiscal year. We had a very strong start into the year with considerable tailwinds [indiscernible] our Q1 net sales, net earnings. In the second quarter, order entry remained above our expectation on a high level compared to last quarter. Following the strong demand developed in the last quarter -- previous expectation, we raised our full year guidance at the end of June. We now anticipate a decline of only between 2% and 6% in currency adjusted net sales compared to the record level last year. And due to the higher expected volume, the associated gain effect and the expected product mix, the earnings guidance was also raised. EBIT margin is now expected to reach between 8% and 11%. This guidance implies a lower top line and bottom line for the second half of the year. This is based on the fact that we have started to see pandemic-driven demand coming down, which is in line with what we had said before. Pandemic-related demand would normalize during the current year, and we do not anticipate comparable demand into 2022. Of course, due to the pandemic, the guidance remains subject to higher uncertainty than usual. With this, I would like to end the presentation and hand over to the operator to open the floor for your questions, please.

[Operator Instructions] It appears we have no questions in queue at this time.

Give it a little bit more time. If there are questions coming, we would like to answer questions. Last chance. If there are any questions, you can ask now.

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If there are no questions, we thank you for your participation and for being with us and listening to us. And we look forward to hear from you and hopefully meet you some time in the not so distant future. Thank you very much and a good afternoon and summer. Bye-bye.