Huber+Suhner AG (HUBN) Earnings Call Transcript & Summary

Good morning, ladies and gentlemen, and a very warm welcome to our second Capital Market Day here at HUBER+SUHNER in Herisau at this beautiful sunny day. We are very happy to have such a broad interest with our business and our story. I'll give you in the first session, a strategic overview, although the Capital Market Day is designed to give you a deeper insight into our market applications and into our solutions, I still would like to give you a little bit the overview. And I can already say that there are not many new things on a group level, the strategy is the same. And we will come to the outlook, and you may have already taken from the press release, also the outlook for this business year is confirmed. Nevertheless, it's always important to explain what HUBER+SUHNER does and please bear in mind, HUBER+SUHNER is not a complicated company. Actually, it's very simple, we connect people with people by connecting things with things. HUBER+SUHNER at a glance, our business activity is, as I said, connectivity, and it is very obvious that our world is very much based on connections. Connections between places, humans and systems. And it also goes without saying that they are absolutely essential for the functioning of our society. Our pieces are quite often hidden behind either a wall or somewhere where people don't get easily accessed. That's why these Capital Market Days are a real opportunity for us to showcase what we are doing and give really an insight of our applications and what our product does for the society. Our playground is the connectivity, which consists of connectors, of cables, of antennas and complete systems thereof. We base our solutions on the three key technology that exists for transmitting energy and data, which is copper cables or the low frequency, the fiber optic business, which is the optical signal transmission and also RF for radio frequency. Our business, which last year consisted of CHF 851 million. After the record year '22, we had to accept a decrease of our business in '23. It consists of 2/3 customer-specific solution, I will come to that in a minute what that means for our business model. We have a business model that is very much based on innovation and technology, and that's also why this Capital Market Days are so important that we can explain what our technologies do for the big trends that exist in our world. And hence, we spent quite a substantial amount of our sales in R&D and engineering, actually, at this moment, it's over 6%. As a Swiss company, we are also condemned to improve our efficiency all the time and remain competitive. And that's why also one of the focal areas is our manufacturing processes globally, which are supported by quite substantial investments in the magnitude of 6% of our sales. It's not just automation which drives our CapEx but in these days, it's also quite often IT tools and IT infrastructure, as you can imagine. We are close to our customers with 4,500 people globally, and we are present in more than 80 countries, and we target, as you know, the 3 segments, Industry, Communication and Transportation. We are close to our customers with a global presence. We have, from this 4,500 people, almost 10% are in sales. So we have about 400 people whose prime task is to face customers on a daily basis, and we spend about 14% really on our sales structure, which is quite substantial for industrial companies, but that also has to do with our business model that I will explain in a minute. We have, next to our own presence, we have a network of distribution and sales partners globally, which add additional points of sales to our structure, and we are increasingly selling also standardized products [indiscernible] That I have indicated just before through online channels. Last but not least, our manufacturing footprint consists of 18 sites globally and ensures that we are always regional and always close to our customers. I'm going to share 5 reasons with you why to invest in HUBER+SUHNER. And actually, I will present 4 and our CFO -- still CFO, Ivo Wechsler will highlight the fifth point at the later point in time. I'll start with our unique value proposition, which ensures strong customer loyalty. I start with our customers, which are of key importance to HUBER+SUHNER. We have more than 3,000 buying customers globally and on this list and I'm not going to show you the list, but you will not miss any large global brands, be it the hyperscalers in communication, the large OEMs in rolling stock or automotive but also all industrial global brands will be on our customer list. The cube is not the strategy, but gives cleans up and tidies up a bit our scope of business with the 3 technologies at the bottom, the 3 market segments on the Y-axis and on the [ Z-axis ], you'll find the 3 regions that we usually -- and those that follow us since a long time, we report along those 3 dimensions. The segment split is, at present, and those are the '23 year-end figures is quite equal. So all 3 segments are of similar size. And if you look at the regional split, you'll see that our main region is Europe and Middle East and Africa, which consists of 55%, while the Asia Pacific accounts for 26%, and the remaining 19% of our sales is conducted with American customers. About 40 customers make up for 50% of our sales. Then we have another about 150 to 200 customer, which accounts for another 30%. And then we have the whole tail-end of customers, which are, as I said, roughly 3,000 buying customers, which account for the remaining 20%. Important to say, and that is indeed for HUBER+SUHNER, a key point is that we have very loyal customers. And 2/3 of our customers are really recurring customers that we can maintain over different cycles over different business years. The bubbles actually in the cube, they represent the size of the different technologies in the respective segments. And you can see that RF plays a dominant role in the Industry and fiber in the Communication area and our copper products are the key products for our Transportation segment. Nevertheless, and this is important, we have a unique offering, which consists of the 3 technologies, and it's important to say that the customers in their attempt to reduce their supplier bases, they ask for more and more products outside our prime scope of business, and that is why it's so important for HUBER+SUHNER to manage all 3 technologies under one roof. The second point is our end-to-end value chain, which we believe guarantees the focus on profitability. In order to explain that, I have to explain a bit our business model. You have already heard we base our business very much on innovation and technology. And I think that is our DNA, and HUBER+SUHNER is always at the forefront of technology, very early adopter and quite often present in very new emerging applications before many competitors even acknowledge that there is an opportunity. So the basis for that is our strong organization in R&D, in engineering. And when I before said we have 400 people in sales, that is the second element. And our sales is also very technical sales. Our products are quite often customized solutions. So as I say, 2/3, which are based on highly differentiated products, which gives us also a strong position with our customer. And our sales has to be able to sell those customized and advanced solution. So that's a technical sales, it's not a sales by catalog quite often. And we are very closely entrenched with our key customers. So our salespeople they have very close contact, not just with the purchasing but also with their design departments. And obviously, also in our sales process quite often our product management, R&D engineers are present at the customer's site. The third element, which completes our business model and rounds it up is the focus on manufacturing where we have a very strong focus on operational excellence. As today, it's not only the technology which gives differentiation, but it's quite often also the way how we supply and perform in our value chain. And so here comes the third element and the third pillar of our business model that's operational excellence. The third reason, and that is particularly important, HUBER+SUHNER is around since 160 years. So you're here in Herisau. The company SUHNER was founded here on this site, 160 years ago, exactly in 1864. And it's important for us to really make sure that we don't miss trends, and we are always at the forefront. And in order to be at the forefront, we monitor very closely the trends in our society which we call here the megatrends. I don't go into all those buzzwords, they are familiar to you, but it's things which drive our business to a very large extent, and you can easily figure out the big data and all other things, they drive connectivity to a large extent. So we are following those trends. We are trying to figure out where there is growth potential, and that's how we align our strategy to these megatrends. Based on that, and on our analysis and of course, also aligning this analysis with our strengths, we have identified our growth initiatives, which you can see on the right side here, it's aerospace and defense, data center, rail com, the autonomous driving here called advanced driver assistance system and electric vehicles. Those are our 5 growth initiatives, and it's obvious that in all areas, we have a very, very attractive market already and also going forward. The fourth reason is our strong position in those essential markets and applications, and I go along those markets in the 3 segments, you will hear more about those applications later on during the Capital Market Day. I start with the Industry segment, which is our highest profitability segment where high-tech niches really or high-tech applications allow for a very high differentiation and therefore, a high margin. I'll start with the test and measurement. This is nothing new. We are present in this market since a long time. Here, we serve really several sub-applications. So we go into the test equipment, we also supply the connections between the test equipment and the electronics to be tested. And there are also chip testing applications [ subsumized ] on this core market here. The test and measurement business has recently suffered a little bit. It is very much a market that is driven by the communication market and the electronics markets. And both markets have boomed after COVID and have now seen clearly lower demand, and that has also impacted our test and measurement business. Nevertheless, we have found really bottom of the decline last year. And we believe that from here on, it will not further shrink as a business but will grow again. And further to that, it's not only with the traditional applications that I have just indicated, but also with additional opportunities that we have identified in the area of lab automation. So complete system for testing, which include quite often products from RF, but also from fiber optics, and we will go into that later on. Then I'll come to the growth initiative, aerospace and defense, not long ago that people were quite negative about that business. I think perception in the public has changed. I see some agreement here in the room. HUBER+SUHNER has always being committed to that business and we believe that the way we address that market, it's also an attractive way. And aerospace and defense business is for us, an application that offers really a very good and positive ground for our highly differentiated technologies. Of course, we see rising defense budgets, which drive that business, not immediately as cycles are relatively long in that business. And furthermore, we have also [ subsumized ] the civil aviation under this market and space applications. And we do that for very simple reasons. It's quite often the same customers, which address the 3 applications in aerospace and defense, take the example of Airbus which has a civil section, also a space section and also defense section. We address that market by dual-use goods to 99%, and it's a high-tech market and quite often related to Communication in this area. We have other markets that we address. I would like to highlight here the high-power charging market. We will come also to that in more detail. It's been a good application for HUBER+SUHNER. It's an example of one of those markets where we have been a very early adopter. We were the first one that had a cool cable solution available cooled because of the very high power that needs to be transmitted and the fact that those cables still need to be handled in the field by people like us, which are not body builders. And so with this high power going through the cable, we have to cool it and in order to keep it slim and handled by the people that charge the car. Our main market in the past has been the U.S. because the U.S. was at the forefront, there were big initiatives to support the e-mobility with a transnational structure of fast charging points in the U.S. And this market has seen a bit of a pit stop recently that has to do with the fact that the standard for the connector in the U.S., the CCS 1 wasn't a very good standard. It was actually also the first connector, which was standardized in that field, and it caused some problems in the field, which made the industry reconsider the approach to fast charging in the U.S. And the result out of that is that the car manufacturers have agreed that they will sell their cars as of '26, '27 with the Tesla connector and Tesla has decided to open up their charging points to everybody. With that clarification, obviously, the situation is clarified. We expect the business to come back. And in the meantime, HUBER+SUHNER also developed connector that goes with the cooled cable based on a Tesla standard called NACS for those that are interested in those details. More about that also later. We see also in Europe now the market picking up, not as fast and definitely not as bold as in the U.S. in the first phase, but step by step. And we see first deployments of high-power charging stations also in Asia, namely in China and we tried to participate also there based on the respective standards that are defined for those markets. And then we have all the other applications. I don't go into the details. It's niches, which I don't want to confuse you, but which are very much technology driven and still attractive for HUBER+SUHNER because of the high potential for differentiation based on technology. Okay. I'll come to the Communication market. Here, we basically serve 4 applications. The first one is the one that we supply since many years and where we deal with customers such as Ericsson and Cisco, it's the electronic equipment manufacturers that make communication networks run. And here, it's obvious that the trend goes to ever faster networks from 40 to 100 to 200 to 400 to 800 gigabit. And it requires faster electronic equipment, and that is a trend that we try to support with our key customers that I have just mentioned a few of them. An important initiative, which I would like to highlight here is our WCM technology, which is a wavelength division multiplexing component that goes on to transceivers. And that's now very technical, but in principle, transceivers are a cornerstone in communication network, which ensure the reception of the optical signal, transform it into an electrical signal that the electronic equipment then can handle and that the outgoing port, we have again, a transceiver. So it's really a core piece. And of course, these pieces, they have to be able to deal with those network speeds and there at the center point of those network pieces and with our filter technologies, WDM technologies, we go into those transceivers. And we see this trend from 400 to 800 gigabit that drives also our business here, a business that is part of the HUBER+SUHNER scope since 2014 through the acquisition of Cube Optics. Then we have the fixed access networks. We all know what that is, that's fiber to the home basically and then everything behind. And it's actually the complementary application to the mobile network because each and every mobile network needs a fixed access network backbone. Here, data traffic is doubling every 3 years still, and that formula was already valid 20 years ago and people said that will not prevail because it's exponential obviously, and it still is applicable. And of course, that drives the expansion of these fixed access networks that we are also part of. Then the mobile network, an important market for us. Here, we are very much dealing with the operators that are well known, like AT&T, Verizon, but also German telecom or Swisscom. And here, the key component is really the cabling for macro and small cells. Quite often, we have now completed the 5G rollouts in developed countries, and we are waiting for the next technology cycle, which will be 6G but we still see emerging countries such as India, which is where we see rollouts on 4G. So at present, we have a large project in India with the state-owned operator BSNL that rolls out 100,000 4G sites in a time frame of just 12 months and we are participating by selling the antennas to that project. Last but not least, it's data center and it's our growth initiative. And I am fully aware that everybody is talking about data center right now. For us, it's not just a recent trend. We are present in data center since a long time where we supply into the physical layer and the physical layer is basically where the optical signal is traveling in a data center. So it's all the fiber optic patch cords and the fiber optic management in a data center. The reason why everybody talks about data center these days is AI. And AI is also for us, important because it poses unique challenges to the architecture of data centers. The AI requirements are such that huge computing power is needed and there are limiting factors, such as the speed of the information with which your signals are transmitted within a data center, but also the fact that you have to combine computing clusters in a very effective way. And we will go into details about that, why this AI challenges are so interesting for HUBER+SUHNER. We have products that ensure on one side, a faster speed of the signal in data centers, which allows larger data centers with the same latency for a signal to travel from one corner to the other. And the other one is that we have products that connect those computer clusters in a very effective way based on pure optics and not based on the conversion of the signal from optical to electrical and back and more about that in the deep dives. But important to say in all those communication applications is that it's really the technologies, which are very important for HUBER+SUHNER to cope with the increasing data traffic. And of course, we have traditional cables and connectors, but our focus for growth lies on these highly differentiated technologies, mainly in the data center but also in all other areas. Last but not least, Transportation, the easiest segment for most people to understand because it's things which we can touch and experienced in our daily life. We addressed the core market rolling stock since many years. We are the market leader globally for railway cabling. It's an important market. And it's more than a niche market because today, railway cables take account for a large part of the train. And in meter of train, you have about a kilometer of cable in modern trains. We believe rolling stock is technology, which is absolutely detrimental to decarbonize mass mobility and we have seen a decline of the market following COVID, but now the market is back and it remains an attractive market. We have then the EV business in Transportation, where we focus very much on commercial vehicles. And this is a market where we currently don't see the growth rate as anticipated. We don't see that this Generation 2 platforms are having huge demand in the market for whatever reasons, I could go into details. But I think the products are ready, and the market is not demanding those platforms to the extent foreseen. Is that going to prevail? We don't believe. We believe that latest with the Gen 3, which is under development and where we are also designing in our products. The EV platforms will have an advantage over traditional platforms and latest, then we will see that market taking off. We have a very strong position here. We are designed in with all key OEMs in Europe but also in America. And I think also the trend that goes towards higher voltages is helping HUBER+SUHNER. We have then the autonomous driving, and that's the other segment in the automotive or the other application in automotive field. Level 3 automated driving is the next step. Some cars can do it, you can use it on some roads, but not in Switzerland, the Swiss government is trying to set now the regulations, but everything on the regulatory side is very slow. We don't see that business growing to the extent which we have planned, and we even consider to take that list of growth initiatives because the growth initiative in our terms has to have the potential to grow to CHF 100 million in a few years, and we currently don't see that potential in such a short time. I have to also admit that I was wrong in my assumption that by 2025, we will read the newspaper in a car. And that's most likely not going to happen, although the technologies would be available. And last but not least here, rail communication. It's a key application for us. It complements our rolling stock cabling. It's really about train protection. It's about communication between the train and the ground and it's about really providing access for the passengers to fast Internet. And we see really good demand here and also our approach is very promising. We have a strong basis on the components, and we are moving up the value chain towards complete systems. We have just announced, this year, the contract win with Deutsche Bahn, which is the first system project, and we expect more of that to come. So this wraps it up. I don't go into the details here. I have taken half year '24 figures for the split. So I know that most of you do that, we give even a bit more breakdowns into two areas in each segment. So aerospace and defense accounted for 12% of our sales after the first 6 months, automotive for 13%. You can see those figures, you have it in the handout. You can see the growth versus last year after the first semester. And I give you an indication where we expect to different market segments to be end of this year, I expect aerospace and defense to grow. By the end of this year, I expect fixed access network to grow based on data center, and I expect railway to grow based on rail communication. I expect industrial flat, mobile network flat and automotive down. This is for your reference and for your models. And I'm almost at the end, but I will not finish without sharing with you our way towards a low-carbon future and our climate transition plan for 2030 and beyond. What you can see here are our targets that we have actually also here, an early adopter since 2017, where we have defined targets for the period 2015 until '25. And our commitment was to reduce CO2 emissions by 50% on Scope 1 and 2, and we have been successful in doing that. Actually, we have overachieved that. This leaves us now without target going forward. And of course, we don't want that to happen so we have just submitted new targets to SBTi for the period '23 to '30 where we commit ourselves again for a reduction of 55% on Scope 1 and 2. And we have also, for the first time as required, target for Scope 3, everything that we purchase, where we try to bring that down together with our suppliers by 25% until 2030.

I start with 2 slides from our half year press conference. However, I don't want to bother you too long because most of you have already, let's say, participating at our half year web stream or have checked at least the numbers. But I think it's important to set the stage. And you can see here that we actually started very well on the 2022, we had a very good financial year and still [ one ] in the first half of '23. However, in the second half of last year, we had significant lower volumes and therefore, also our margin came under pressure and came actually below our midterm target range. That's why we are extremely happy that we have actually achieved the turnaround in the first half of this year with a new record when it comes to order intake with CHF 521 million. Nevertheless, we have also displayed, there's a large part of this project in India, the 4G rollout. That's why in the second half of the year, we can't keep this level, but nevertheless, we actually believe we can continue to grow. So also due to these higher volumes, we have then actually achieve the margin of 9.6%, which is now back in our midterm target range. And this 9.6% EBIT margin is actually split up into the 3 market segments. First of all, Industry with 17%, so slightly below the first half of last year but improved compared to the second half of last year and still on a very nice level with 17%. Communication almost doubled to 6.7%, and we believe there is further potential to increase the margin in this market segment. With regards to Transportation, there is actually slightly below last year. So -- and then not double digit anymore, but still on a very good level with 9%. So there was some price pressure actually in the market and also some lower volume we have heard before, in particular in the automotive market. Nevertheless, with 9.6%, we were almost on the level compared to last year. And then with regards to our guidance, we have actually announced it on the 5th of March this year that we want to grow organically and also that the EBIT margin will be in the lower half of our midterm target range from 9% to 12%. And we actually could confirm this guidance during August meeting and also today, as stated in our press release, we can confirm from today's perspective that we will see organic growth and the EBIT margin will be between 9% and 10.5%. With regard to the midterm target range, it was not always the case, 9% to 12%, and you can actually see it here that the last decade, and we actually started with 6% to 9% as a target range increased at 8% to 10% and ending up at the current level of 9% to 12%. And actually, we not only announced it, as you can see it here, we actually also delivered it. The higher margins and with the exception of the year 2017, where we were below our midterm target range. We have always been within our target range and even in years where we had very good market conditions. For example, 2021, we have even been above. And I think that's important that we have developed our company to a higher profitability and this despite the stronger Swiss franc. And then cash flow is obviously always, should be very high on the agenda of a CFO and I always communicated internally but also externally for a size, of the size of HUBER+SUHNER, we should actually generate net cash from operating activities in the magnitude of CHF 100 million over the cycle. And as you can see also here in the last 6 years, over the cycle, we have achieved that this CHF 100 million threshold, and it's a significant improvement compared to the previous period. Probably, unfortunately, this year, in 2024, I'm not sure if we can reach the CHF 100 million. This has also to do with the Indian project because there in India, you have slightly driven the net working capital payment terms, and that might be that then we will not reach it this year, but then we will reach it next year because when the project is finalized. So this number, which you should always consider over the cycle. And what we are doing now with this CHF 100 million? I think, first of all, half of it we invest in our business. So normally, 40% to 50% over the last few years. So in our CapEx, so we invested in new sites, for example, [indiscernible] But also around the world, this new Polatis factory, we are currently building, but we also invest in IT application infrastructure, and we invest in also new production equipment. And the second half of it, we actually give them back to our shareholders in one way or the other. And I think we have this profit-orientated dividend policy, those who follow us for a long time, they know it. It's about 40% to 50% of our net income. To be a little bit more precise, if you look at the last 5 years, it was 45% to 50%. Our target payout ratio. So we do that. And I think that's important also for our core shareholder base. They are requesting that we have a steady dividend payment year-by-year. On top of it, we have actually also during the period '21 to '23, we have also completed our share buyback program. There, we actually returned CHF 81 million to our shareholders via this buyback program where we bought back 5% of our share capital. And nevertheless, despite this considerable returns, we have still a debt-free balance sheet. Some of my colleagues telling me sometimes you have a lazy balance sheet, but I have to say that I think for a company like HUBER+SUHNER, it's important that we have a strong balance sheet because we have volatile end markets and -- so I actually inherited a strong balance sheet, and I will then pass over also to my successor, a strong balance sheet. Nevertheless, we have, still, excess liquidity about currently around CHF 100 million. So we can actually do some, let's say, smaller acquisition with that money. And even if we would go from a larger acquisition, we could use our debt capacity and get also some funds from the banks. So I think there, the growth, which we actually foresee the balance sheet is not the delimitating factor. And I think that's always a good position for a company to be in that we can really grow when the opportunity arise.