Earnings Call: H1 2018

Jul 12, 2018

Ladies and gentlemen, good morning. Welcome to the DKSH Presentation Healthy Results 2018 Conference Call and Live Webcast. I am Alice, the Chorus Call operator. I would like to remind you that all participants will be in listen only mode and the conference is being recorded. After the presentation, there will be a Q and A session. The conference must not be recorded for publication or broadcast. At this time, it's my pleasure to hand over to Till Leissner, Head of Investor Relations. Please go ahead, sir. Thank you, Alice, and good morning, everybody. It's a pleasure to welcome you to the 2018 half year results conference call of DKSH. I'm still as you've heard. And for those on the call with me today are our CEO, Stefan Brods and our CFO, Bernard Schmidt. Before we start, please have a look at the disclaimer of the presentation regarding the forward looking statements. For those who do not have the presentation in front of them, you will find them on the web page under Investor Relations. Let me give you a quick overview of today's agenda. First, Stefan will present to you the highlights of the last half year. Then Bernhard will walk you through the financial highlights of the group and the performance of the business units. At the end, Stefan will close with some final remarks. Before we go to the Q and A session, I kindly ask you to tell us your name and if you have a question also the company that you're working for. With that, I would like to hand over to our CEO, Stefan Buss. Thank you very much. Good morning, ladies and gentlemen, and welcome to the presentation of our half year results 2018. Please let me get right to the point with the highlights of the 1st 6 months. The DKSH group increased net sales by 7.4 percent to CHF 5,700,000,000. With regards to EBIT, we are approximately at last year's level with CHF 139,500,000. Dollars We increased profit after tax by 4.5 percent to 97,500,000 Our business units, Healthcare, Performance Materials and Technology all delivered good results. After several years of declining revenues in business unit consumer goods, we managed to bring back to growth and through targeted investments and initiatives. This naturally has an impact on the results of the business unit, more on that shortly. Overall, we have grown our business and have increased our strategic focus again. The sale of the healthcare business in Mainland China, as announced 2 days ago, is the best example of it. There, we are active in the niche markets. Further market penetration in the People's Republic of China would have required significant additional scale. Therefore, after assessment of the market situation, we have decided that these funds can be put more effective use elsewhere. An increased strategic focus means that we reassess our broad portfolio on a regular basis. Let me give you an overview of the two factors that drove our growth in the first half of the year. As mentioned, net sales of CHF5.7 billion at group level meant an increase of 7.4%. On the slide, you can see that 3.7% can be attributed to organic growth. Acquisitions, primarily the new business in Indonesia, contributed marginally with 0.6%. Finally, foreign currency movements had a positive impact of 3.1%. Let us have a look at the split of sales by countries and regions. Thailand was around 31%, remains the largest market for BKSH. There, the demand for our health care service continued to be solid. And in the consumable sector, we have increased demand significantly for the first time in a few years. We have increasingly brought Asian brands, so called local heroes into the into our client portfolio. For example, Korean cosmetics, which is very popular in Asia. Since May this year, Malaysia has a new government, as you might have followed in the media. We expect positive impulse from the changes. On the on one note, one of the electoral promises was to abolish the Goods and Services Act with VAT of over 6%, which was unpopular among the population. This happened on June 1 and resulted in delayed demand for consumer goods. In Cambodia, Laos, Vietnam and Myanmar, DKSH reported strong growth. Here, consumer demand is soaring, and DKSH is well positioned as a company. We currently employ already more than 8,000 people in those promising markets. Finally, in Mainland China, we have made an important decision with the announced sale of the healthcare business. As soon as the transfer is complete, China's share of group sales will decline, obviously. We expect closing to happen in the second half of the year. Nevertheless, China remains an important location for DKS in the areas where we continue to rely on our niche market strategy. Especially, the measures that we initiated in business unit consumer goods and the growing demand in countries such as Vietnam and Thailand enabled us to increase net sales in the consumables business for the first time in a few years. We have expanded and upgraded our business development and key account management, which is all about building better relationships with our clients, be it the existing potential. Identifying and onboarding new clients demands additional personnel resources, especially for the smaller Asian class. This led to higher short term costs, but also to higher growth. As you might have observed, the entire consumer of the industry is undergoing changes and facing growth challenges. Another level is the routes to market. This means that we are further strengthening our capillary distribution network in Southeast Asia. For example, in Myanmar, we significantly upgrade our coverage. As consumer demand, especially in more rural areas, continues to rise, we need to chase those further investments. We must ensure that we offer the right products to the best selling retail outlets. We call that winning with winners. Over the past few months, we have rolled out a new trend of management with them that's called Roadnet, which optimizes the delivery of orders and synchronizes them across the group. A third important aspect is the development of our new market in Indonesia. As some of you might recall, exactly 1 year ago, we announced acquiring the majority of the Indonesian distributor, VJAXANA, enabling us to bring in international clients over time. We have just won the 1st multinational consumer goods clients for Indonesia. To boost growth in this market, the largest in Southeast Asia, we have made the required investments over the past few months. On a group level, we will continue to focus on expanding our acquisition pipeline as the industry for market expansion services in Asia remains fragmented. The 4th and final aspect of our strategy, which I would like to mention today, is digitization. We continue to rely on our proven omni channel strategy, which means regardless of which is used, offline or online, DKSH ensures consistency across all channels also when it comes to pricing. This approach is well accepted by our clients and our digital business has experienced solid double digit growth. With this overview in mind, I would like to hand over to Bernhard Schmidt, our CFO. He will provide you with more detail about the group results and specifics on the 4 business units at EKSH. Thank you, Stefan. Dear, ladies and gentlemen, I would also like to welcome you to our presentation of the half year results 2018. In the first half of 2018, we grew net sales by 7.4 percent to CHF 5,700,000,000. Operating profit is on last year's level and amounts CHF 239,500,000. Profit after tax was 4.5% ahead of last year and amounted to $97,500,000 As you can see, we kept our operating profit at last year's level and our net profit above previous year, despite our targeted investment and initiatives in business unit consumer goods. This again highlights the resilience of our business model across different Asian markets. Free cash flow grew by 22.8 percent to CHF69.6 million. And with that, our net cash position remains strong and amounts to CHF304 1,000,000. The road off, the return on net operating capital is still on a good level with 22.1%. Additionally, the number of specialists grew by 3.8 percent to slightly above 32,000. Let me now give you some more details about the performance of the business units. 1st, consumables. Our business unit consumables managed to return to sales growth in the first half of twenty eighteen. Net sales increased by 9.4 percent to CHF 1,900,000,000, especially the fast growing region of Vietnam, Cambodia, Laos and Myanmar achieved big results. The growth was especially driven by the growing Asian middle class in these countries as well as by our continued focus on Asian clients. EBIT of CHF 34,100,000 is below last year's level. As Stefan Pultz has already explained, we have both qualitatively and quantitatively strengthened our key account management in FMCG. Furthermore, we have expanded our distribution network, especially in the more rural areas. We also invested in the market buildup in Indonesia and the growth initiatives in e commerce. These measures have impacted our operating profit. In sum, these investments will strengthen the market position of DKS in the future. In the luxury goods business, we continued our restructuring. It is progressing, but the business is still loss making. Nevertheless, we continue to invest into the Morris Lacroix brand as we believe in its value. Let me move on to Business Unit Healthcare. Sales increased by 6.7% to CHF 3,100,000,000. In the past half year, EBIT of CHF 79,700,000 increased by 4.9% compared to last year. We recorded good growth across Southeast Asia as these healthcare markets are still highly underpenetrated. This means that pharmaceutical products are still not fully available to all consumers. 2 days ago, we announced the agreement to transfer our healthcare business in China for approximately CHF100 1,000,000. DKKH has pursued a new strategy in the Chinese healthcare market for many years. We view our portfolio on a regular basis, we realized that scale matters to further take advantage of the potential of the business. With WAPO PINKERS, we have found a partner who is able to create the needed scale. We expect to close the transactions towards the end of this year. If successful, we will deconsolidate the proportionate share of our sales of more than €300,000,000 and related profits in 2018, a larger part will follow in 2019. The transaction will result in a significant profit for DSH. More information will follow once the transaction is closed. Let me continue with business unit performance material. We achieved net sales of CHF 475,700,000, an increase of 5.8% compared to last year. Especially in Thailand, the Philippines and India, DSH recorded strong growth. But also in Europe, in markets such as Germany, Spain or France, we performed well in the first half of twenty eighteen. This again shows the success of our acquisition strategy. We cover more European countries, which gives us more power in the market. The closing EBIT of CHF39.7 was 6.1% above previous year. Finally, let me talk about the business unit technology. In terms of net sales, we were slightly ahead of last year's level with CHF192,100,000, particularly in Thailand, Indonesia and Japan, we recorded good growth. The average of $8,700,000 was more than 50% above last year. We closed larger projects in Japan in the first half year of twenty eighteen and initiated portfolio adjustment in selected countries such as Vietnam. Technology is a project driven business, which can lead to fluctuations of the results between the half years. And let me summarize the first half year results as following. The achieved profit and cash flow growth once again proves the resilience of DBSH business model. Thank you very much. And with that, I hand back to Stefan. Thank you very much, Werner. Before we come to the outlook, I would like to share our focus topics for the rest of the year. These topics are part of our strategy for sustainable profitable growth. We have been pursuing this strategy for many years, and it is based on 3 pillars. Firstly, focusing on our existing 4 business units secondly, continuously expanding our service offering and thirdly, increasing our operational efficiency. Particularly, 3 key growth drivers, the growing middle class, the increased inner agent rate and also the trend towards outsourcing remain. In addition, there is an increasing demand from our clients for regional solutions, a demand for which DKSH is naturally well positioned for with its pan agent coverage. This is the case with the pharma multinational GSK the leading cosmetic company, Coty, who do not want to work with a multiple of partners for Southeast Asia, but increasingly with a partner like DKSH. With regard to the first strategic pillar focusing on the existing business units, we will continue to invest in business development and key account management. I mentioned before that we expanded our route to market, meaning the market access to customers and consumers. In the coming months, we will continue to roll out our new transport management system in further countries such as Malaysia and Hong Kong. By expanding our service offering, the second strategic pillar, our aim is add more value for our clients and customers. With these additional services, we can clearly differentiate ourselves from local competitors. A good example is in the business unit performance material, where we increasingly offer regulatory services. In terms of technology, it's the after sales services. Or in healthcare, with hospital solutions, where we support specifically departments and hospitals by managing their supply chain and product inventories. The last topic is to increase operational efficiency. A few months ago, we newly opened a partly automated distribution center for health care. 30, automated guided vehicles optimize the logistics, ensuring that the right product is delivered to the right customer at the right time and that the big impact is most efficient. Further, we have introduced a comprehensive set of KPIs in the company and are now able to even better identify progress in our business processes to increase operational efficiency continuously. Now let us proceed to the outlook. As I mentioned earlier, I'm still firmly convinced of Asia's long term potential. Thanks to the intact growth drivers, we will continue to grow sales this year. Due to the targeted investments and initiatives in business unit consumables as well as the announced transfer of the healthcare business in Mainland China, we expect an operating result in 2018 around last year's level. As mentioned already by Bernhard, if the transaction in China materializes, we expect a substantial book gain, which is not included in our operating result outlook. Also, we will continue with our progressive ordinary dividend policy in the future. Ladies and gentlemen, thank you very much for your attention, and we are now happy to answer your questions. We will now begin the question and answer session. First question comes from Aymeric Poulain from Kepler. Please go ahead, sir. Yes. Good morning. I've got a very good question, if I may. The first one is on the disposal of the Chinese Healthcare business. Do you have indication of the EBIT contribution that you will discontinue both this year and next? And in terms of the use cash, you're just going to receive €100,000,000 you already cash reached. Do you have already a view on what you will do with that extra cash? Then on still on the Healthcare, we see a sharp deceleration of top line growth in that first trial. Now the level of countries involved. What would you be do you best guess about the underlying trend that we should again extrapolate for that business going forward? And what may be responsible for that deceleration? Is it related to China specifically or the market are also suffering from that apparent slowdown? And then last but not least, you had a pretty significant cost investment in consumer goods that you highlighted in the presentation, but you do not quantify this investment. So could you give us a bit more color on how much you're spending and how long you're planning to spend in that division and what kind of payback we should expect? Thank you. Okay, Pune. This is Pune speaking first. I'll give you the answer for the first two questions and then Seb, I will take over the next 2. You want an indication for the healthcare business in China how much equity will we consolidate. We normally don't give indications of country profitability and where we stand there. So I would say that I cannot give you an answer on that. But as we said, there will be significant profit from that transaction that will probably help you to gauge it a little bit. On the use of cash, you're absolutely right. We will have we will be liquid cash afterwards. I mean, we still have to do the closing, of course. Our dividend policy will stay unchanged. As before, we are committed to a progressive dividend policy. That means we will always pay more than the year before on the ordinary. And if substantial cash builds up sustainably, then we will decide on a special dividend. Clearly, we would prefer to invest that money into the company. That is a decision we have to take at the end of the year and it's finally a shareholder position. And finally, if you see the top Thank you very much, Brandon. Regarding our the development of the healthcare business, the net sales growth in healthcare was 6.7% or 3.7% at the current exchange rate. We see very good and strong performance in markets as Thailand, Malaysia as well as across the Indochina region. The market in Northeast Asia is a little bit more challenging. And we also had a change in revenue recognition with a few contracts in China, which was slightly depressing the growth rate in the year to date numbers for H1. Looking forward, we will continue to see some good growth in our Healthcare business. The next question you did ask was regarding the investment into consumer goods. I mean, overall, I would like to point out that after 3 years of declining revenues in consumer goods, we were able to turn the situation around and deliver some solid growth in consumer goods. If you look especially at some new data of FMCG sales in those markets, you know that this is definitely not guaranteed and a strong achievement. So the gap between the last year's numbers and this year's numbers is a little bit over 10,000,000 Please consider that last year, we had EUR 3,000,000 in there being represented by the sale of the distribution center, which brings the number down to around €8,000,000 We have significant investments in developing markets like Indonesia and Myanmar, and we are also strengthening our regional competency. So that means the quality and quantity of people, especially in our business development and key account management teams. So what we do here is we have more opportunities to grow the business outside of the outside of the main cities. So we are moving further down into the country side. That's the reason why we need to expand our route to market. And then the small Asian players are gaining more market share in those markets and identifying those local Asian heroes, advising them about the right market approach for the right markets and the right challenge and bringing them on board requires more personnel, and that is the reason for those investments. But obviously, in terms of route to market and our transportation management system, these are one off setup costs that we're going to disappear over the time. So we look much more optimistic into 2019 than in 2018. Okay. Thank you. You're welcome. Next. Thank you. Aymeric, next question please. The next question comes from Markus Strygmata with ZKB. Please go ahead, sir. Yes. Thank you. Good morning. Yes, I'm also wondering a bit about the revenue growth in the Healthcare division. Can you quantify the impact you had from the revenue recognition change? I mean, how much would it have been how much would the revenue growth have been if there would have been no change in the contracts? And then about your guidance of an operating result more or less in line with last year. I'm having a bit trouble imagining this because I think clearly in consumer goods, your margin in the second half will also suffer. If you compare it to last year, it will be clearly below this. And the Health Care margin, I also cannot see much higher probably. And with the low growth in Healthcare, then yes, I'm really having trouble imagining you will come to an EBITDA level of around CHF 300,000,000. I wonder how this will work out. If you could elaborate on that a bit, please. Okay. Maybe regarding China and Healthcare, so we would expect that the difference would be between 3%. So that means instead of growth at constant currency of 3%, the growth would have been 6%. In terms of the overall margin development, I think if you talk consumer goods for a second and you look at the overall margin development across the three business units, Healthcare, Performance Materials and Technology, you would see that the margin did increase. And In In consumables, as I was just explaining before, we did recognize that the announced investments and initiatives are showing some tractions and delivering some growth. So it was a well defined decision to accelerate those investments, to accelerate the growth and the additional growth we are going to generate will also then obviously stabilize the margin and increase the margin over time. Okay. Thank you. Next question please. The next question comes from Pascal Forger with Vontobel. Please go ahead. Good morning. Also a few questions from my side. So first question, a follow-up on consumer goods. So can you please just elaborate a bit more into detail? So where do you stand in terms of execution? So just if you could give a bit more of an update on the time line. So how long will this really go? I mean, with just the measures you implemented right now. Then in these higher investments, I think this also compares sort of to much higher investments we see. And so now the barber investing 1,000,000,000 of dollars. That is put pressure on your business as well. And then next question also on your REMS portfolio reassessment. So here, 1st of all, at the health care disposal in China, so can I assume when you said this impact from the revenue recognition was mainly in China, a, in China, this will disappear next year? And then part of your portfolio investments were probably also other countries. So are there any other niche assets you could divest, for instance, consumer goods, China, activities in Taiwan? Is there more to come from that side? Thank you. Okay. Thank you very much, Pascal, for the 4th question. Regarding execution in consumer goods, I mean, this is on the way. I mean, while we talk here, the team is diligently putting those initiatives into action. The majority of those measures, I mean, they will happening over the next 12 months. And then the positive effect of that is probably ongoing because it would enlarge our footprint into the market. So increasing the points of sales on the one hand and on the other hand, bring more local Asian heroes into our portfolio. If I may say a few more words, what we need to make sure in this changing environment in consumer goods, not only in Asia, I mean, you know that the whole industry is suffering from that now a little bit is what we call winning with winners. We have to make sure that if on the client we look at the portfolio on the client side, we have the clients on board who are delivering innovative, market appropriate products, which can generate significant amount of growth in the region. And then on the other hand, we have to make sure that we are with our customers in those regions where additional growth is happening and that they have an attractive portfolio for their respective local markets. This is what we call winning with winners, and the rollout is consistently and ongoing. A few years ago, we had around 20% of local Asian euros in our portfolio. We enlarged that already to 30% and more is to come. Regarding your question in online or e commerce, we perform an omni channel strategy. So that means no matter if the client wants to go modern trade, traditional trade or online, we are there to help them. And also within online, we position ourselves that from running its own brand.comstore within Thailand or Vietnam to managing different channels in the online business across e market retailers or I mean, we put a lot of products onto Lazada, which belongs to Alibaba, as you might know. Overall, online penetration in Asia is still quite low. We talked here about 2% to 2.5% depending on the market. So this had at this point no material impact on our business, and we are very well positioned to capture this growth opportunity across different channels to come. The third question was regarding healthcare. Yes, as we mentioned in the announcement, the 2017 revenue of that business was €300,000,000 If the transaction is going to this is going to be successful executed in Q3 or Q4. This revenue stream obviously will be no longer there in 2019. Regarding your question of other areas where we review our portfolio and increase our strategic focus, yes, we are continuously doing that. And one very good example is technology. Last year, by the end of last year, we did some major review in technology and pulled with some sub business lines out of a few markets. And that's the reason why you see moderate growth in technology, but a huge jump in the profitability in tech. Even we must say there is a second driver included in the technology, this project business where you cannot always define exactly where the projects are going to land. So you have to be careful in expanding the 50% growth rate and profitability into H2. Did I answer all of your questions? Yes. Thank you. Ladies and gentlemen, that was the last question. I'd now like to turn the conference back over to Thierry Leisenberg for any closing remarks. Okay. And probably maybe very briefly from my side. Thank you very much to all of you for your time this morning, and thanks for listening in. And I look forward to see at least some of you during the upcoming roadshow over the next days. Thank you. 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. Goodbye.