Earnings Call: H1 2017

Aug 11, 2017

Ladies and gentlemen, good morning, good afternoon. Welcome to the Digit Wheeler 2017 Half Year Results Conference Call. I'm Newell, the Chorus Call operator. I would like to remind you that both participants will be listen only mode and the conference is being recorded. After the presentation, there will be a Q and A session. The slides for this conference call can be found on the CLEAR Group's website under the publication section of the Investing menu. At this time, it's my pleasure to hand over to Mr. Deep, Ramrecht, CEO, and Mr. Roberto Velte, CFO. Please go ahead, gentlemen. Good morning, everybody, and thank you for your interest in Devweiler. My name is Derek Lamke, and I'm the CEO of the Devweiler Group and I'm speaking here together with our CFO, Rachel Veltin. I would like to start with an overview on the key financial figures of the first half of twenty seventeen. See, I refer to the slide 3 of our today's presentation which is available on our website. Okay, let's go. SSE, we have increased our unaudited net revenue year on year by 3.8 percent to CHF644.5 million. Adjusted for positive acquisition effects negative currency effects, this equates to organic growth of 2.2%. The reported operating results stood at 1,000,000 Swiss francs included in this year are 1,000,000 of one off costs. These are mainly related to the succession of Syscolex new enterprise app in Manchester. Before those one off costs adjusted EBITS claim was 1,000,000. The adjusted EBIT margin consequently ended on 13.5 percent, slightly above the previous year's level. So we managed to keep the EBIT margin stable in spite higher prices for raw material in the Siemens Solutions division and a drop in revenue at Natus our home and consumer electronic food airline unit. The net result declined slightly to 53,300,000 due to higher tax expenses. Rachel will provide additional details later. So we go to slide 4. You see our balance sheet at the end of June 2017 compared to the status at the end of 2016. We currently have 1,000,000 in cash and cash equivalents and have access to some CHF650 1,000,000 including unused credit limits. This means that there is a sufficient liquidity to finance our profitable growth strategy. The equity ratio is up to 66.9%. I continue now with slide 5. As all of you probably know, the debt bonder group consists of 2 divisions. For the production plans of the globally active Student Solutions provision, we employed some 6000 persons and generate some 60% of the group revenues with an increasing trend in 2017. The technical components division comprises the debt rider distribution business for electronic components. In this division, we focus on Europe, employing 1200 persons and generate some forty percent of the group revenue. Now we are continuing to slide 6. I will start with the Senior Solutions positions where we do the low and manufacture customer specific ceiling components for 4 attractive global industries. Most of these are system critical components without them assistance of our customers would not work At the same time, our components only account for a very small percentage of the total system cost. Next slide 7, you can see here the revenue potential of relevance to us in the 4 market segments in which we operate. The consumer goods market segment contains the net special business. The partnership continues to be very successful We have improved the revenue potential with the automotive market expense. Thanks for the acquisition of Oregon in 2015, and out in 2018. Within the health care market segment, we are comfortable with the 2nd strongest solution provider in a very attractive global market. Within the civil engineering market segment, we mainly do the low and produce steel profiles for project businesses like tunneling work and denting elements for railway structures. All four market segments as an attractive potential for growth and high barrier for entry. I continue to slide 8. Our streaming solutions division was able to accelerate profitable growth in the first half of twenty seventeen. This is mainly thanks to our leading positions and the start of serious production of new components and measures which we actually implemented in the last years. The revenue grew by 9.7% to CHF 420,000,000. Taking positive acquisitions effects and slightly negative currency effects into account, this equates to an organic growth of 6.2%. For the 5th consecutive time since the merger of the 2 former divisions, proceeding Solutions division managed to increase EBIT this time to 78,600,000 The EBIT margin reached 18.7% and came in only slightly below the prior year value. This is despite higher raw material prices and significantly intensified activities and marketing sales and capital support. Our Healthcare market segment has successfully launched a new offering strategy which will support us to constantly increase the number of active customers or share with our main customers. The demand for high quality components for prescript syringes was well above market growth. The automotive market segment recorded a very strong growth, especially in China, In Europe, the strict enforcement of emission tribulations has boosted the demand for selective catalytic reduction systems to treat exhaust gases and diesel vehicles. As market leader for the corresponding high quality ceiling components, Debtvana profits from this development. The civil engineering market segment has recovered and reported revenue considerably higher than prior year. In the consumer market segment, when espresso order developed nicely again, The negotiations on the new contract at a very advanced page with the key parameters already defined in the formal letter of Incent. The integration of the 2016 acquired German company opted very well on track We actively choose the synergies in the customer portfolio and jointly developed 1st new component. Now, slide 9, you'll see a good example for our efforts to accelerate organic growth. Our new U. S. Plan for high quality elastomericomponent is being built in Middleton, Delaware. The construction workers on track, starting towards the end of 2018, we will serve the growing needs of leading USA care companies for high quantitative components of injectable drugs in general and for presales, beverages and pedicure. An investment of more than US100 $1,000,000 in this greenfield manufacturing plant, we are setting new industry standards and create 120 new jobs. And we're leaving 1st line standard comprises among other things ultra modern clean home technology and fully automated production side. We continue to slide 10 until the Technical Components Division. This division comprises Netwireless electronics distribution business. So this model is based on a high level of service and high availability. A broad range of components which we can generally supply to our customers on a next pay basis. Based on this business model, we talk about time critical electronic compliments that we supply to our customers. Slide 11, summarizes the 4 main market segments of our distribution businesses NRO, which means maintenance repair and operations, automation, electronic design engineers, in production and the wholesale and consumer electronics system. This is still quite challenging to assist physicians segment the market and to define the potential of the relevant segments. However, we are doing some good progress here. As outlined at the annual Russel press conference and winter, we will be making the MRO and automation treatments for our priority. These are perfected suited to grow our history as a company and our core competencies. In the market segments of EDE Electronic Design Engineers And Wholesale With Consumer Electronics, Our objective is to defend our market position. I continue to slide 12. The technical components division is short and mixed risk task in the first half of twenty seventeen. Overall, the revenue declined 224,000,000. This was mainly due to weak demand affecting the business to consumer business in general, and the home and consumer consumer electronics food and their needles in particular. Taking the negative currency effects into account, This equates to an organic revenue decline of 4.1 percent. In the core business to business of Disconnect and Lycos, we recorded an encouraging demand in oil geographical market. A new house brand for R&D and for standard products auto performs well. The lower sales volume lead to a decline in EBIT despite strong cost control and improved commercial margins. Adjusted for warm up costs of 6,600,000 Swiss francs, EBIT reached 8,100,000 Swisss. This equates for adjusted EBIT margin of 3.6 percent, which is below last year and also below our expectations. The one off costs are mainly related to the restructuring at SyscoBank. The implementation of the new enterprise hub in Manchester is on track and will generate annual cost savings of 3,000,000 districts I will give you some more information on the slides to follow. Chrysler exchange showed good profitable growth but still offer significant optimization potential for the future. The acceleration of the successful international pension with full growth already partly in the second part of 2017 and of course in the future. It has suffered a really serious drop in revenue in the first half of the year. This has several reasons. One is that we have deliberately reduced unprofitable business. Another reason is that the very challenging and competitive market environment. And finally, we recognized some unmade problems which should be able to correct in the coming to the Neste. The excellent factors like the growing trend of online shopping accelerated the closure of Small and medium sized retail businesses. As a consequence, we have lost many of our traditional customers establishing the business as a profitable supplier for the major online retailers proves to be challenging. However, the problem is identified as the strategy is being reviewed firstly needed will be complicated on product rent. This will provide an efficiency and an asset and cost savings along the entire supply chain. Additionally, we will implement further savings with regard to operating costs. And we will concentrate more on faster market trends such as smart home technology. On Slide 13, you'll see our performance improvement plan and the technical components division. Which I had presented at the results press conference and winter, and which guides our activities in the course of this year and in the future. As you know, we have spent the last 3 years integrating the companies we have acquired and developing a shared infrastructure platform. We now want to use this platform to strengthen our market position. We are still looking to segment our markets and customers' progress and align our value proposition and offering strategy even more effectively with current and future customer needs. We aim to significantly increase our share of online business. Therefore, we want to offer our target customer added value in future with the most appealing packages and the shortest response time. And while we are strengthening our market position, we also need to keep improving our operating processes and then thrive in everything we do to be best in class. I'll continue to slide 14. This select new enterprise hub and Manchester is very much in line with objective of the Performance Improvement Plan. We want to become the most arguably distributed by Century during our product supplier procurement, e Commerce, and marketing management. By doing so, we want to significantly increase the quality and productivity of our proposition delivering. At the same time, we want to boost our range of products and services on offer to customers. As a consequence, summarize adjustment across all locations and seeing Germany, Switzerland and Italy are being relocated until the end of 2017. Local sales functions and existing distribution centers continues to serve and supply the customers without interruption. The total expected 1 off costs amount to CHF8 1,000,000 in operating annual cost savings of CHF3 1,000,000 as mentioned before. I now come to Slide 15 and to the outlook for the year 2017, which has not changed a lot. At group level, we are now aiming for revenue of between CHF1.27 billion and CHF1.31 billion. As in the first part of 2017, and adjusted EBIT margin should end up with an upper half of the 11% to 14% target range. In the Senior Solutions provision, I am confident that our strong position will enable us to grow faster than the market average and all for market segments. We will further intend to accelerate growth by instantly finding sales, technical services and marketing activities as well as by expanding capital cities and by upgrading the production processes. Additionally, we constantly stream the market for temporary solar acquisitions to tap into new regions and technologies. In the technical components position, the impetus is still on enhancing our segmentation of market and customers. We need to align our value proposition and offering strategy more effectively with current and future customer needs With establishing of the new DisCollect enterprise hub, the accelerated international expansion of rifles and the strategy review at Natus, I'm confident that we'll do the right things to bring the distribution business forward and the future. So, thank you for your attention. Now, I hand over to our CFO, Rachel Delson. He will give you some details about what financial results later please. Welcome also from my side. I'm now referring to Page 17 of the presentation where you'll find the consolidated income statement. For the 1st 6 months 2017. As you can see, net revenue has increased by 3.8% is $644,500,000. The gross profit margin has slightly decreased to 25.8% compared to 26.7% in the previous year. It has already been explained by Dirk in his presentation where it comes from. Research and development expenses, marketing and selling expenses and all the other expenses that you see down for the EBIT line, they showed no significant deviation to the previous year. And dimensionally, they're almost Our operating result before interest and taxes is at CHF80.1 1,000,000, which corresponds to an EBIT margin of 12.4% compared to 13.2% in the previous year, which is 2% less absolute value. As you realize from the P and L, the net finance results has slightly decreased. Compared to the previous year. So, we end up with an exchange before tax of CHF 76,100,000 which corresponds to a margin of 11.8% compared to 12.3% in the previous year. Now one important aspect is the increase in income tax expenses. Now this has a very clear explanation Kirka has already mentioned that the Navy season at the moment is not developing very well. And due to the situation we have decided not to capitalize taxable credit forwards anymore. This thing would have done. The tax tax expenses would have decreased to $20,300,000, which then would correspond to a tax rate to an adjusted tax rate of 26.7 percent which is similar to last year's tax rate. So the explanation is really on the basis of course of the business that especially the Navy's people do not develop of a more profitable way. Further down, you realize a net result of BRL53.3 1,000,000, which corresponds to a margin of 8.3%. Compared to a margin of 9.1 percent in the previous year. Net results per share inside of the dividend of course is on the basis of the slightly decreased net result, also a little bit lower. I now continue on page 18 of the presentation. On this page, you find the balance sheet comparisons between June 2017, December 2016, and June 2016. Mainly referring to, the December 2016 call and compare it to the 2 initiatives. You realize that total assets and also of course total liabilities and equity, there is no big difference compared to the situation by the end of December. 2016. Net working capital has potential for improvement with real estate and state that. And we have taken measures to improve the situation, our ability targets with those divisions to optimize the networking capital. Current liabilities compared to the end of December have increased, but that's only the explanation. It's the move of the bonds that we have that until now has been shown on the long term liabilities has now become a short term liability. Total liabilities, as I said, already, is almost a similar level as by the end of December 2016. The equity ratio as you realize further down has increased a little bit to 66.9% compared to 66.2% by the end of December. Our net cash surplus decreased a little bit, as you will see further information right now, when we switch to the consolidated cash flow statement, which you can see from Page 19 of the presentation. Starting with the net result of 1,000,000, adding up non cash items and changes in working capital, we see a net cash from operating activities of CHF 52.1000000 in 2017. The ones that follow that level of appraisal might realize or might remember that in the previous year, at this time of the year, 2016. He wrote actually actively following to try to acquire Premier for now. At the time it was already communicated and we had to reserve cash for this acquisition. So cash position in 2016 has to be partly moved to all the receivables. That's why you have a big position in the non cash items and changes in working capital in 2016. The position that has been moved from cash to total receivables and at the time were 164,000,000. Next line, you realize net purchases, property, plant and equipment, such investments, CapEx, you see a slight increase of 50% to previous year. That's mainly due to our big projects. We have started and Piyush has explained the thick one in the U. S. And there is another one that you might remember from house statements we made in India. And it will continue for the second half of the year that CapEx investments will be quite higher than in the previous year. Net cash provided by investment activities is then ending up at CHF 42.2 million compared to 28,500,000 in the previous year. So the actual situation that you see here in 2017 reflects a bit more what actually takes place in the top line group than in the previous year where we had a lot of transactions due to the potential acquisition of Premier Farnell. Net cash used from financing activities mainly includes the dividend paid to shareholders. So we ended up writing June 2016 with a cash and cash equivalent position of still BRL284 1,000,000. And if you add in the previous year, BRL170 1,000,000,000, that has been reserved for the Permian for now acquisition. And you see that the cash situation has been has actually not changed that drastically. I finish off my presentation with the segmental reporting by the addition on page 20. Probably you have seen the figures already already, remember them, as Dirk's partly already presented them, you see net revenue for the Sealing Solutions division, to CHF 470,000,000 compared to CHF 383,000,000 in the previous period, which is a plus of 9.7%. In technical components, net revenue has decreased by 5.8% as already explained by the we end up on group level with the $644,500,000 compared to $621,100,000 in the previous period. EBIT also presented already C78.6 million dollars for the 1st 6 months 2017, which is 8.5% added than previous year on for senior solutions and the technical components The EBIT that we present for 2017 is only 1.5 1,000,000 that you have to refer to the adjusted figures that have already been presented by Dirk, then the reduction is not that EBIT margin, our already explained EBIT margin in theory solutions is almost a similar level, as in the previous year, and, EBIT margin and technical components before one time effects is, of course, very low, 0.7% compared to 3.9% on an adjusted level. You have seen the figures already looks a bit different. I would now finish my presentation and we would be ready to answer your questions. Yeah. Thank you very much for it. And that's 3 to 7 and we are happy to answer your questions. So, say to a punch button, you have a question? We will now begin the question you. Participants are request to use only handsets for asking a question. The first question comes from Rachel Annstaden from Baader Nordea. Please go ahead, sir. Yes, good morning. Question regarding your guidance. When we look at the sales level, you new new guidance, when we look at the point that the implied that the second half should be about equal to the first half. You mentioned that component should proceed further in the second half, but when we look at seeding solution, normally has a seasonal decline there in the in the second half, but it looks like this this time, it could be also almost on par on the first half. Could this be related to the new expanded capacity. You have been mixing in production and the cleanroom, yeah, capacity you had to be in India is that are that the reasons for this black vision, let's say, sales performance in the second half or first half? Yes. So so for all, let's started seeing solutions. So when we are having a look to the figures in the last couple of months and so the order is what we have in the books today, I think it's a slight slightly better situation as it has in the previous year. So for the second half year, and it's correct that especially with our allowance. That is what we have defined for the Healthcare segment we see some further potential for the second half that is correct. And especially if it comes to the Kiko division. We have this drop down with Natus not from January onwards. So that means as this drop down of the sales with Natus is not constantly, constantly decreasing, but it starts from January onwards on the same level. Besides the defined measures, what we have for Lytle and for Gisolex, we are facing the last 2, 3 months and increasing trend of the sales. So that makes me confident that we can progress and delivering a good second half year. Okay. Thank you. And then the second part, regarding your margin outlook, guidance. You say you should be at the upper half of your 11% range. On on the adjusted basis. When you look last year, you had it by you had, for the full year, 13%. Adjusted EBIT margin. But now when we we look at the second half, what you say here, and important elements. I think on the seeding solutions side, that simply should have relative to the situation in the second half, which was the easing headwind from raw material price effect. And as you mentioned in, in PECO, there you actually see a pickup in the operating performance and margin situation. So is it safe to assume that you can you can exceed in 2017, the EBIT margin, the adjusted EBIT margin of 14% achieved in 2016. Yes. I think we have to, of course, we are having a positive view to the second half of the year, but there could be extra gain factors which is not exactly what happens in the market. So, I assume that we will be as I said before in the range between this 11.40% on the upper half. It's too early to say if we really came on the profitable side, bring all into this from the net sales and to the profitable value because we are investing huge amount in talents and another production equipment. We have to see how that will run-in the second half. But it's, I'm still confident that we're having, but we're good on track. The next question comes from Michalis Farr Bank. Please go ahead. Good morning, gentlemen. Thank you very much. For taking my questions. I would have a couple of questions. Actually, three questions on technical components. Firstly, could you maybe provide a bit more details on troubles you are facing in technical components, respectively, Nahedis, from other players in consumer electronics markets, we are actually, we don't see such a bad situation as you are describing in your press release. So if you could maybe put more color here where this decline is actually coming from with your It's on one side. It's from falling market or whether it's more from ambulatory market share losses or on the other side, if you can maybe say how much, sales you basically lost from this deliberate sales cuts. Then on the second question, if you could maybe comment on this price of declining net is because if we look at Basically, I hope being positive for this product being rather flat. That would mean that my business may be The sales went down by at least 25%. You can maybe confirm whether this is more or less right. And then maybe the The third question would be in your press release and also in your comments in the in the presentation. It seems that you have a bit more clear strategy Fernandes. And, for example, with this focus more on smart home technology, etcetera, if you could maybe provide more details on this strategy and you're thinking there now and maybe update us on your expectations with Neddy's now. Thank you. Yeah. Leo, thank you very much. There's a lot of questions from me to me. Yes, other I think a part of the problem, what we have is a homing problem with me, as I already mentioned before, So, we assume that around 50% of that decline, what we are facing is a round link to that. And so, we have installed already some measures and we are starting to implement them in the next couple of months as I said before. And to try to get this loss of sales for the market back. On the other hand, we are having an increase of our gross margin so that losses at Natus is not so high as we would expect with such a decrease in sales. So what we have done, we have increased partly our prices for some product lines which lead us to the situation that we lost some small, some small customers. I think with your expectation when it comes to the decrease of net sales from latest, you are not so far away what we are facing. I do not like to give exact numbers. We are not doing that, but having said, it's not so fast it's not so far away. Yeah. So what we are doing currently is, as I said, we are working from Exelco with maintenance around 1213 brands. And our target is to reduce this number of brands significantly. So, for a small number like 2 or 3 brands, So that will give us more attention of the market and that will reduce further down our cost for the marketing of the different brands what we have at Native. That is one of the main actions. Another one of course is so that it's used a lot of cost and having customer full course and bringing the right proposition value, to the market. That is what we're currently doing. And I expect as we will see in the next, to the Nessus, as I mentioned before, some progress with respect to the situation. Okay. Thank you very much. Yeah. You're welcome. The next question comes from Charlie Feremba, AWT. Please go ahead. Good morning, gentlemen. Good morning. You said maybe this is under strategic review. You explained this a bit, but just a question for our The Navy's business also be sold at everything at all? No, there not foreseen. We are, 1st of all, will try to adjust that and to bring me this back on the growth track driven. But the point is, of course, it's not so easy. As you know, the business to consumer market is has a decline in trend that already started in the last year and we assume that will be ongoing in the near future. How we solve the problem was needed on the specific side, that is we are still working on what I mentioned before is to do some operational things, which will help us in the near future, but that doesn't is the final solution from the long term perspective. There we have to dive deeper into different topics. Okay. Thank you. May you allow a follow-up on the technical components? You said when I, as I heard, you expected a better second half year. Could you maybe give us some more fees about the EBIT margin? You had an adjusted EBIT margin of 3.6%. You think this would be flattish or even better in the full year or how do you see that? Thank you. I think it's too early to say exactly what we are will see at the end of the year. First of all, as I said in the wintertime and in the first couple of months of the year. Our main topic today is to define the right measures and to bring that interaction and that is for me more much more important and we will measure at the end you see the results and then the 2018 and hopefully then we will see a significant step forward for next year. So we'll see new ventures are up. We already will see a 3,000,000 benefit of cost reduction for the Teco division. Which will help us in the future and of course, we are working on further topics here. The next question comes from Alicia Bar from pharma, AEC. Please go ahead. Yeah. Hello. Good morning. My question would get to, the billing, division that you have. What do you think was a major contributor to your growth in that division? And second question is, What do you think is the goal of health care in your growth currently and going ahead in the future? Yeah. 2 of all, thanks for your question. I think the point here with the with the health care is that we have invested a huge amount of money in the couple of years. And we decided investment in production equipment we invested as well in the province. And so I assume that we will see out of that a stronger growth And that is one of the reasons that we are facing a growth factor with the health care segment. And clearly, and if you have a look to our investments and what I mentioned before, of course, the health commitment is in a strong focus in the future and we will work very hard to accelerate our growth within this business Thank you. The next question comes from Richard Sully from Citibank. Please go ahead. Good morning, gentlemen. I've got several questions. First of all, a a short time, the strategic review of Netis was several times mentioned, when can we expect first results out of of this? Yeah, I think that we will communicate in time and I expect that with year end results of 2017, we can give you some further indication how we would like to proceed then. Okay, thanks. Then if I'm remembering right, you've mentioned that it's years and results conference. That, MN days is still a topic. You have lots of cash at hand and that the focus is is mainly on on the ceiling. So so far, we didn't hear any news on on this, but am I right to expect that this focus didn't change? You are right. We haven't changed the focus. We are screening the market permanent and as I said before, I wish up And of course, it's difficult to say exactly when acquisition will happen, but we are working with a lot of in contact with a lot of companies, but I can't tell you when it will happen. When that is clear, the focus acquisition is ceiling solution. Yes. Okay. Then, you also have mentioned that the success of your EASL EXOS solution. Now I guess diesel's candle, short term helps but but how are the the midterm prospects? So how do you see those markets involve midterm? Yes. First of all, we assume that, is this thermal and the risk part of that, that means that the OEMs have to over engineer their product portfolio will help us for the next couple of years to take part on the high increase of growth causes new SCR systems. So, I'm confident is that it will at least for the next 3, 4 years help us to accelerate the growth. We have to see what happens in the next year now that is in the, in the press currently is on the very high level, what they are talking about on diesel bundles. I think that as I've looked at that by endoftheyear next year, and then we can see how that will proceed into the future. Then I've got the final one concerning consumer goods. What about the prospects to diversify beside in an espresso business. So is this still status quo, or are there any other attractive prospects in the near future? No. We are focusing, to to to capitalize and to hold our business with the circle. There is we are all of course we are trying to get another business in this sector, but our partnership and the relation with Nespresso is the first topic for KitNet and that is what we will do for sure. If there is an option in the future, yes, of course, we will handle that but I do not expect that we will see something different in the next for sure not in 2017 yet. Thank you. I have a follow-up question from Mr. Rato Armstrong. The raw material price effect and the impact, the first impact you had in the first half, can you give you some more details or some indications and how you would expect this, adverse impact yeah, to remain in place for the second half. Yeah. We'd rather expect, it would ease, may come even in a slight tailwind? Well, I think from the raw materials side, And if we would separate this effect, that is around 1% to 1.3% of even so far and remember correctly, but the division was able via additional productivity and higher sales to compensate that. So, we are always certain, influenza impact could be between 1% to 1.5%. But so far, we were able to handle that with FS Sales with productivity. So I assume that for the second half, we will not see a huge difference. So, perhaps we can convert some of the productivity into risk side, but this is what we have to see in the second half. That is a good chance. Gentlemen, there are no more questions at this time. Yeah. Okay. Then, thank you very much to all of you. And so I wish you, good weekend and I'm looking forward to see you for the next press conference. Thank you very much. Ladies and gentlemen, the conference is now over. Thank you for choosing Chorus Call, and thank you for participating in the conference. You may now disconnect your lines. Bye.