Edited Transcript of DAE.S earnings conference call or presentation 11-Aug-20 8:00am GMT

Laveta Brigham

Altdorf Aug 22, 2020 (Thomson StreetEvents) — Edited Transcript of Daetwyler Holding AG earnings conference call or presentation Tuesday, August 11, 2020 at 8:00:00am GMT Bank Vontobel AG, Research Division – Executive Director & Head of Industrials Team UBS Investment Bank, Research Division – Director & Sell Side Equity Research […]

Altdorf Aug 22, 2020 (Thomson StreetEvents) — Edited Transcript of Daetwyler Holding AG earnings conference call or presentation Tuesday, August 11, 2020 at 8:00:00am GMT

Bank Vontobel AG, Research Division – Executive Director & Head of Industrials Team

UBS Investment Bank, Research Division – Director & Sell Side Equity Research Analyst

Ladies and gentlemen, welcome to the Dätwyler Interim Report Webcast. I am Sandra, the Chorus Call operator. (Operator Instructions) And the conference is being recorded. The presentation will be followed by a Q&A session. (Operator Instructions) The conference must not be recorded for publication or broadcast. At this time, it’s my pleasure to hand over to Mr. Dirk Lambrecht, CEO; and Mr. Walter Scherz, CFO. Please go ahead, gentlemen.

Thank you very much. Good morning, and welcome to today’s call. I have here with me on the call for the first time, our CFO, Walter Scherz. I will directly move to today’s agenda. After our explanation, Walter and myself will be happy to answer your questions. I will start with the business review. This year’s figures are impacted by several significant factors besides the impact of the COVID-19 pandemic and the strong Swiss franc, we also have the divestment of 3 businesses. Despite the COVID-19 pandemic challenges, we did implement the unknown strategic focus on system critical elastomer components. We, therefore, sold the 2 distribution companies, Distrelec and Nedis, at the end of February and the civil engineering business at the end of April.

On this slide, you can see the key financial figures of the old Dätwyler Group, including Distrelec and Nedis for 2 months and the civil engineering business for 4 months. With regard to revenue, we are short of some CHF 16 million compared with the previous year. This is due to the only partial consolidation of the 3 companies sold. The EBIT and EBIT margin are adjusted for the loss on sale of the subsidiaries and for the start-up costs for the new U.S. Health Care plant. The net result is adjusted for the loss on sale of subsidiaries only. The COVID-19 pandemic has led to a massive decline in the automotive and oil markets and to a stronger Swiss franc. Despite the negative impact, we have managed to deliver a solid operational performance. Walter will come back with more details during his presentation.

As a note, in February, we reorganized our company to strengthen our market focus and our core competencies. The new organization has been implemented successfully and has already proven itself during the COVID-19 pandemic. The increased focus on the respective markets helped Dätwyler to respond quickly and agile to changing market developments and customer needs.

This slide gives an overview of the key financial figures of the continuing operations or the new Dätwyler, consisting of the business areas Health Care Solutions, Industrial Solutions and the remaining Online Distributor Reichelt. The divested businesses, Distrelec, Nedis and civil engineering have been excluded for both periods. On this space, we were able to limit the organic sales decline to 5.2%. This is thanks to strong demand in the Health Care, food and beverage and the Reichelt business. Due to the strong Swiss franc, the reported revenue declined by 10.3%. The COVID-19 pandemic led to a sharp sales drop for Industrial Solutions and additional cost for Health Care Solutions. Reported EBIT came in at CHF 64.5 million. This corresponds to a 13.2% EBIT margin. Adjusted for the start-up cost of around CHF 8.1 million for the new U.S. care — Health Care plant, EBIT was at CHF 72.6 million, and the EBIT margin reached a solid 14.9%. Some CHF 3.5 million of the year-on-year decline in EBIT was due to the strong Swiss franc. The reported net result reached CHF 43.5 million. The high resilience of our business was supported by early cost-saving measures and the affected plants of the mobility, general industry and oil and gas business units. Our diversification to several market segments has proven itself in difficult times such as the COVID-19 pandemic. With the Health Care, food and beverage businesses and the Online Distributor Reichelt, we generated more than 70% of our sales in low cycle and formerly growing markets.

I would now like to comment on the performance of our business areas. We will start with Health Care Solutions. This business area offers high-quality system critical components for containers and delivery systems for injectable (technical difficulty) for the pharmaceutical and medical market. During the COVID-19 pandemic, the first half of the year, we proved that we can make an important contribution to our pharma customer business contingency. This is thanks to our presence with standardized high-quality plans on 3 continents. Thanks to our leading market position, we see strong demand in the Health Care business. The COVID-19 pandemic has further stimulated demand. I will talk more about this in the outlook. Currency adjusted, we managed to grow our revenue by 5.7%, but the stronger Swiss franc compensated for some CHF 12 million or more than 6%. Therefore, the reported revenue is more or less in the strong prior year level. The fact that we are not able to show more growth this slide due to the negative impact of the COVID-19 pandemic. Although, all Dätwyler Health Care plants were considered as essential manufacturing activities, government measures that used in manufacturing capacity for several weeks. Our plants in Northern Israel and India were closed to hot spots of the Corona pandemic. Due to government restrictions, our plant in India, for example, was limited at 50% of its capacity for several weeks. However, since the end of April, productivity has been rising steadily, and sales growth is accelerating accordingly. And partly, the product mix is changing particularly with the proportion of higher-margin coated components increasing significantly. The COVID-19 pandemic has also led to a higher cost to overcome the negative effects. Additional costs came from many sources, for example, from protective measures at the plants, additional logistic efforts and even accommodation for our employees near the plants. In addition to the onetime COVID-19 costs, there were higher amortization and start-up costs for the new Health Care plant in the U.S. adjusted for the start-up costs of CHF 8.1 million, the EBIT margin reached 21.7%. Now the reported EBIT margin was 17.7%.

I will now switch to the business area, Industrial Solutions. This business area offers customized system critical components for demanding applications in the mobility, food and beverage, oil and gas and general industry markets. Contrary to the Health Care business, our business area, Industrial Solutions, was hit with full force by the negative economic impact of the COVID-19 and 3 of — out of our 4 business units. Automotive and general industry customers had to close their plans around the globe for several weeks. The number of oil rigs also fell dramatically within a very short time. The business unit food and beverage benefit from the corona effects as a result of the worldwide regulation to work from home. Revenue growth accelerated compared with the previous year. Overall, the business areas revenue declined to CHF 208.7 million. This represents an organic decline of 18.4%. Thanks to the rapid implementation of cost savings measures at the affected sites, we were able to adapt our cost structures to the changed demand situation. Adjusted for the noncash loss on the sale of civil engineering business, the EBIT margin of the business area reached 10%. Considering the harsh market conditions 3 out of 4 business units this is a very respectable result. We have adjusted our cost structures and investments due to the lower demand caused by corona. However, we will proceed carefully and continue to invest in the development of new customer projects.

Besides the 2 business areas of the core business, the remaining Online Distributor Reichelt reports directly to me. Reichelt has always distinguished itself by a lean organization, a low cost base. This has proven itself during the corona pandemic. Thanks to its attractive price performance proposition, Reichelt was able to profit from the accelerated trend towards online purchasing due to the corona pandemic. The introduction of working from home and online schooling led to an increased demand for electronic devices and accessories. The strong growth in the business-to-consumer segment more than compensated the decline in the business-to-business segment. In an overall shrinking market, Reichelt achieved an organic growth of 10.8% and increased its sales to CHF 89.6 million. Operating profit rose by 15.8% to CHF 7.5 million, and the EBIT margin improved to 8.3%.

With this, I conclude my review and hand over to our CFO, Walter.

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Walter Scherz, Dätwyler Holding AG – CFO & Member of Executive Board [3]

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Hello, everyone, and I’m very pleased to have you here. My name is Walter Scherz, and I’m presenting the financial results half year 2020 for Dätwyler Group. Thank you for your interest in Dätwyler. When we start with the first slide with the net sales, you can see that divestments in individual market developments led to decreasing turnover. Half year 2019 turnover for Dätwyler Group was CHF 706.3 million. That’s the first column. Excluding the divested businesses, Distrelec, Nedis and civil engineering in 2019, and this is actually for 6 months. The 2019 continuing operations turnover was CHF 544.7 million. This is the third pillar from the left. The reorganization now shows the 3 pillars, 3 business pillars, Health Care Solutions, Industrial Solutions and Reichelt and their respective development. I’ll dive into that now.

Health Care Solutions organically grew by plus 5.7% or CHF 11.6 million. By Reichelt, also organically grew by 10.8% or CHF 9.2 million, actually benefiting from the corona crisis and the demand for home office supplies. Industrial Solutions organically lost minus 18.4% or CHF 51.7 million. While food and beverage held the line and increase their sales, business units, mobility, oil and gas and general industries suffered from the corona impact as some customers even ceased their operations. Given the relative precrisis position of Industrial Solutions, all those effects led to an organic decline of minus 5.2% overall. That’s the first arrow.

The Swiss franc further strengthens relative to all currencies that will — is exposed off in continuing operations, which contributed another minus 5.1% decline in the amount of some CHF 25 million. This leads to the half year 2020 revenue for continuing operations of CHF 488.6 million, which is the third pillar from the right. Adding the revenue of Distrelec and Nedis for 2 and civil engineering for 4 months leads to the total revenue for the whole Dätwyler Group in the amount of 400 — CHF 545.7 million.

If we continue to the next slide to the earnings before interest and taxes, you will have noticed that the reported EBIT is heavily impacted by divestments, as communicated earlier. The sale of Distrelec and Nedis also affected the 2019 results with an impairment charge in the amount of $169 million, so that these nonoperational effects have been excluded on this overview to compare the actual operational performance. Dätwyler showed the resilient performance in a challenging environment. The EBIT for the whole Dätwyler Group in this year of change before the loss of sale of subsidiaries reached 11.9% or CHF 65.1 million. Continuing operations alone delivered an EBIT margin of 13.2% (sic) [13.4%].

Taking into account the start-up costs within Health Care Solutions for the new site in Middletown, Delaware, the adjusted EBIT stands at 13.4% or CHF 73.2 million. As you can see in our APM document on the Dätwyler website, half year 2019 had not yet seen impacts from the divestments. That only came end of 2019 with the announcement of the sale of Distrelec and Nedis. Health Care Solutions reported an EBIT margin of 17.7% or CHF 35.5 million. Adjusted by ramp-up costs in Middletown this resulted in 21.7% or CHF 43.6 million despite various corona related costs and production constraints, for example, in India. Industrial Solutions reported EBIT margin includes the divestment of civil engineering, thus, the 6.2% or CHF 13.2 million. The adjusted 10% or CHF 21.2 million do not represents the grade, but still a reasonable result in our view, given the massive top line decline in some businesses, as explained by Dirk before.

On the bottom right, you see Reichelt, and Reichelt increased their EBIT to 8.3% or CHF 7.4 million compared to half year 2019. We actually expect this trend to continue until year-end, and Dirk will talk about that in a minute.

If we continue to the next slide, the balance sheet, you see that the balance sheet overall has shortened due to the divestments. However, please be reminded again that Distrelec and Nedis balances already have been impaired at year-end 2019 in the amount of CHF 169 million. This actually means that the development you see here on the balance sheet is a little less pronounced as you might have expected at first sight. We were able to increase the equity ratio to above 60% again. It stands at 61.1% compared to the 58.1% at year-end 2019. We shortened the current liability positions, mainly by repaying interest-bearing debt in the amount of CHF 26.7 million. This further reduced net debt and our gearing. The gearing ratio currently stands at 0.13.

Our strong balance sheet allows us to pursue further strategic opportunities during these corona times, especially in Health Care Solution, as Dirk has mentioned before. Our liquidity and liquidity planning actually allows these investments, especially since we focused on cash conversion, particularly during the last 2 months during those corona times. End of July, not June, end of July. So it’s actually last month, we showed — or we had cash balances in the amount of around CHF 200 million again.

If we move on, we see that the average capital employed only slightly decreased, while the absolute EBIT decreased compared to the last years. The ROCE, therefore, is driven by lower absolute EBIT more or less constant capital employed. This results in a ROCE of 14.7%, which is below our expectations in regular years. It is driven by lower absolute EBIT. For 2020, we see an increase by end of the year, but only by end of ’21, we expect pre-crisis levels on the ROCE. This is an area where we definitely will have a focus. First half 2020 showed that our strategic investments in first-line and others come to their end and reach more or less the level of the depreciation. However, due to the investment opportunities based on additional orders and demand in Health Care Solutions, but also food and beverage in the coming years, we are ready to invest further. We see opportunities in these areas and can further support our customers in their fight against corona. Therefore, our capital expenditures this year will only be slightly less than in 2019. However, and this is important, Dätwyler allocates its capital into low cyclical but growing markets where we see future potential. Midterm, the range of capital expenditures should come back to some CHF 60 million to CHF 70 million, as communicated earlier.

On this slide, you basically have the consolidated income statement, and this is a functional income statement, as you can see. I have 3 remarks there too. First, the general and administration expenses increased due to some reallocation of position during the reorganization that we had and also due to IT services to the divested businesses. These costs are recharged to third parties now not internally charged thus resulting in higher other operating income. These actual costs are recharged externally and not internally as before when the position G&A was shown net. So it’s a gross consideration here. Second remark is that the finance result includes development of the unhedged currencies, such as Indian rupee, Brazilian reals and Czech Koruna. During the corona time, they depreciated quite strongly against the Swiss franc. The valuation of open derivatives and thus unrealized hedge results are included as well. Third, the EBIT decline led to less tax expense. However, there are various tax jurisdictions that still levy base taxes, so the decline is actually under proportion.

When we move on to the condensed consolidated balance sheet, just 2 remarks to make here, the equity ratio increased to 61.1%. And the increase of the net cash surplus is due to the repayment of interest-bearing debt in the amount of CHF 26.7 million. That leads me to the condensed consolidated cash flow statement. Net change in cash and cash equivalents is minus CHF 19.2 million, mainly influenced by financing activities. Net cash flow from operating activities is positive by CHF 79.1 billion (sic) [CHF 79.1 million]. Net cash used in investing activities reduced to 6 — to CHF 18.5 million mainly helped by less CapEx, as you can see. And obviously, the cash inflow of sold subsidiaries. Net cash used in financing activities increased to minus CHF 79.8 million, mainly due to repayment of debt, whereas 2019 actually saw loan increases.

What you can see in the cash flow statement is that operationally, purely operationally, Dätwyler already earned or generated, let’s say, that the normal dividend in the first half 2020. What is also remarkable is that a large portion of the investing cash flow is investments into the future.

With that, I hand over to Dirk for his outlook into that future.

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Dirk Lambrecht, Dätwyler Holding AG – CEO & Member of Executive Board [4]

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Yes. Walter. Thanks very much for the brief financial insights. And now I would like to continue with the outlook. The COVID-19 crisis will continue to our company as in the coming months, and therefore, the uncertainties for the second half of the year remained high. We will continue to focus on ensuring the health of our employees as good as we can in meeting our customers’ needs. Due to the reduced demand at our mobility, oil and gas and general industry units we will continue to adjust capacity and cost structure. This is likely to result in one-off restructuring costs in the mid-single-digit million range. Irrespective of the mentioned uncertainties we also see first signs of improvement in this business unit. This indicates a first sign of a global economic and market recovery. In China, for an example, we are experiencing a rebound of this market in the last months on previous year’s level. This also shows how well we are positioned in the markets we serve. We see a very positive picture for our pharma and food and beverage business units and our brand Reichelt. The first 2 in particular have high order backlogs. This will lead to accelerated revenue growth in the second half of the year 2020 in the coming years. Overall, we expect a continuous improvement of the business in the second half of the year. This should be at least on the level of the first half. More than 70% of our sales come from low cyclical and solid growing markets.

As mentioned, sales growth in the business area Health Care Solution is accelerating since the end of April. This is already a direct effect of the global efforts to develop therapies and vaccines against the COVID-19 virus. Due to payments from foundations and government authorities as well as market potential, some pharmaceutical companies plan to produce therapies and vaccines to compare the COVID-19 virus at their own risk before they receive regulatory approval. With this unique case of the COVID-19 virus, all people around the world need therapies and vaccines. Therefore, once the drug will be developed and approved, there could be bottlenecks in the glass vials or rubber stoppers as international media has been reporting. We will support the Health Care industry in its fight against COVID-19. With our new additional production capacities in the main regions, we are an attractive partner for the pharma industry. To be able to handle the additional volume quickly enough in 2020 and for the coming years, we will invest in additional capacity expansion of our existing health care facilities.

Our strong balance sheet with an equity ratio over 60% and high liquidity allow us to size profitable growth opportunities at any time and Group emerge stronger from the COVID-19 crisis. At Dätwyler, we are all proud to be able to contribute to COVID-19 therapies and vaccines that will save hundreds of thousands of lives. We will continue to work with pharmaceutical companies, packaging suppliers and other health care industries experts to develop multiple proven system solutions.

To conclude my presentation, I would like to draw your attention to Dätwyler’s strategic priorities. With our focus on increasing agility and accelerating digitization, we have been preparing ourselves for unforeseen events in the Book Award since 2017. With this corona pandemic, we are benefiting from this groundwork. The progress achieved has shown us that we can react even faster and better to exogenous impacts.

I’m very confident — convinced that Dätwyler is well positioned for the challenges and opportunities in the future. With our strong market positions, our focused capital allocation, our strategic priorities we will profit from the long-term structural growth trends in our core markets, and we create value for our customers. How we will do this? We would like to show and present this during our next Capital Market Day. If the corona situation allows, we will invite you to visit our Swiss plant in Schattdorf on Wednesday, the 4th of November. Please save the date. More detailed invitation will follow. Now thank you very much for your attention. And now Walter and myself are now available to answer your questions.

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Questions and Answers

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Operator [1]

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(Operator Instructions) The first question comes from Michael Foeth from Vontobel.

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Michael Foeth, Bank Vontobel AG, Research Division – Executive Director & Head of Industrials Team [2]

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My question would be regarding the investments in your Health Care Solutions business going forward. And how you manage the potential volatility in demand going forward? I mean, I would expect that currently, we have sort of high levels of order intake in preparation for ramp-ups. But it’s very unclear how the demand will really be in the next 12 to 24 months? And is there a risk on your behalf to over invest in capacity and then to be stuck there with that capacity if the demand is delayed? Can you make a comment on that, please?

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Dirk Lambrecht, Dätwyler Holding AG – CEO & Member of Executive Board [3]

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Yes. Maybe let me test some comments to that. As you know, many companies around the world are working on the vaccine for the corona virus. At present, it’s hard to say which vaccine is going to work. What we know is that we face on a global sale (sic) [scale] close to 20 million confirmed cases and more than 730,000 deaths. The researchers around the world are developing more than 165 vaccines and 30 vaccines are in human trials. Vaccines typically requires years of research and testing before reaching the clinic, but the scientists are racing to produce a safe and effective vaccine by the next year. Dätwyler is working with a couple of pharma companies to support them in their development. All of them, which we are working with reserve capacities at Dätwyler for the coming years. That’s the reason why we will invest further in the next — at minimum, in the next 1.5 years. Independent of the COVID-19 crisis, the demand what we are facing, especially for our high-value products is constantly increasing. So that is linked to our concept with the first line. And therefore, we see, of course, an additional boost was related to COVID. But beyond that, whatever we are installing as an additional capacity for this COVID-19 crisis. We can use it later on for the higher demand for other applications in the future. So I’m still confident that we are not over investing in additional capacity.

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Michael Foeth, Bank Vontobel AG, Research Division – Executive Director & Head of Industrials Team [4]

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Okay. And maybe just a second to the — and 1 follow-up on that. In terms of the start-up costs that you mentioned, are you expecting similar start-up costs now in future periods related to those additional capacities?

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Dirk Lambrecht, Dätwyler Holding AG – CEO & Member of Executive Board [5]

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No, no, no. I think that is — what we are now doing is in our existing facilities, investing further equipment, but that is not leading to additional costs because we will accordingly when we have equipment inside, we can start to produce.

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Operator [6]

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The next question comes from Charlie Fehrenbach from AWP.

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Charlie Fehrenbach, [7]

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You initiated cost-cutting measures already last year. And you now say you want to increase these measures because of the situation of Industrial Solutions. Could you may give us some more light about that some more details, what does this mean, can create in increasing this measure? And can you tell us how many employees, you have to let go from the company already? Or how many — for how much you will reduce the workforce in the near future?

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Dirk Lambrecht, Dätwyler Holding AG – CEO & Member of Executive Board [8]

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Thank you very much for this question, Charlie. I think as you know, the adjustment of our cost structure at the various location is an ongoing process. And that is in line with the constantly changing customer demand, especially in the mobility sector. It’s quite difficult to say today what that means finally, because of — as you know, we said that we believe that we are facing a U-turn in this mobility sector. What we will do after all these cost measures and cost reductions, what we did already in the last couple of years, we will have a close look to that what the market is doing in the next couple of months. And of course, we still have opportunities to further reduce the cost. But what we would like to see, first of all, how the markets are developing. And therefore, it’s not a fixed value. What we are talking about is more about what is coming up in the next couple of weeks and months. And we are talking about the reduction of people, if I remember right, Walter may, you can help me, I think, is around 700 people when we compare that for the year 2019. Meanwhile, in this year is around 300 let me say. So from that perspective, we already reacted very fast. And currently, we have not foreseen further huge changes here. Depends on the market development, as I said in the next couple of weeks.

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Charlie Fehrenbach, [9]

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May I repeat you reduced workforce 2019 around about 700 people. And in the first half of 2020, around 300 people? Is this correct?

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Dirk Lambrecht, Dätwyler Holding AG – CEO & Member of Executive Board [10]

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Well, the reduction of 350 jobs in business area Industrial Solutions worldwide since the beginning of 2020.

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Charlie Fehrenbach, [11]

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Do you have the picture, you’re saying that?

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Dirk Lambrecht, Dätwyler Holding AG – CEO & Member of Executive Board [12]

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We have did the total of voluntary levers of redundancies. And as we’ve mentioned since June 2019, so year-to-year result is 700 and the adjustment of the cost structure at the various locations is actually an ongoing process. So it’s ongoing after these minutes, these weeks, whatever, with the constantly changing customer demand of depending on the region.

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Charlie Fehrenbach, [13]

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Okay. And do you have the figures also for Switzerland, maybe?

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Dirk Lambrecht, Dätwyler Holding AG – CEO & Member of Executive Board [14]

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And let me say, in Switzerland is more balanced out because we have a quite very fast improving business with our food and beverage sector. And therefore, let me say it’s the more or less not on the — for the — our employees, not really a huge influence to that. We moved some of the people from the mobility to the food and beverage sector.

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Operator [15]

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The next question comes from Richard Frei from ZKB.

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Richard Frei, Zürcher Kantonalbank, Research Division – Analyst [16]

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I’ve got 2 questions. First of all, may you give us some insights how the mobility business in China is doing? And secondly, regarding food and beverage, the growth outlook is that closely tied to the announcements we heard from 1 of your main customers? Or are there new projects already, let’s say, driving growth?

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Dirk Lambrecht, Dätwyler Holding AG – CEO & Member of Executive Board [17]

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Yes. Thank you, Richard, for the questions. In China, what I can tell you is, if I’m looking to the last 3 months, that means included in — including July, we are back to the previous year level, so that you can see already there or even slightly above that. But it’s unclear whether this will be sustainable for the next couple of months. But what we are facing there, that is — it’s back to this level what we had before. And we have to look further down the road what will happen in the next couple of weeks and months. But it’s quite good, I have to say, and that is helping us that we have new product lines, which is starting there. If we have a look to for a beverage, here, we have invested and will invest in further capacity based on the alignment with our customers. So I expect that we will see a significant growth in the next couple of years, which should be above our average over the last years. And of course, that is not only related to 1 customer. We have won — we won another customer, but I can’t disclose — can’t disclose their name today.

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Richard Frei, Zürcher Kantonalbank, Research Division – Analyst [18]

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Just a quick follow-up. Your comment on China, is generally China industrial business or focused on mobility?

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Dirk Lambrecht, Dätwyler Holding AG – CEO & Member of Executive Board [19]

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As a mobility business, yes. And of course, in China, we have as well business for the Health Care sector. But that is more what we are delivering from our regions in Europe and India to China, but that is increasing as well. But China overall is currently a market which is supporting us and our strategy.

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Operator [20]

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The next question comes from Serge Rotzer from Crédit Suisse.

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Serge Rotzer, Crédit Suisse AG, Research Division – Research Analyst [21]

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I have 3 questions, if I may. First one is you mentioned that you have a high demand or backlog in Health Care. So I’m wondering given the new capacity in the U.S., where you said in the past that it takes 2 to 4 years for full capacity utilization, whether this is going faster. And with that, more top line and mainly more margin, what we can expect here?

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Dirk Lambrecht, Dätwyler Holding AG – CEO & Member of Executive Board [22]

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Yes. I think with this demand, you have to understand what we are doing with this COVID-19, of course, we are talking about product lines, which we already have in place today. So what we are doing is here that we are using existing processes, and we are just adapting this with further equipment in our locations, for an example, in the U.S. and as well in India and in Belgium. So that it’s much more easier to do that in such a way then compare if you with — have a new ramp-up of a complete new site is a complete different approach here. It’s more, as I said in my outlook, it’s more investment in equipment. And so that is not so difficult to bring it direct to the market.

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Serge Rotzer, Crédit Suisse AG, Research Division – Research Analyst [23]

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Okay. Got it. You mentioned this increasing capacity in food and beverage. So annually, when I take the first 6 months, you make about CHF 120 million sales. So how big is the capacity increase? Is it another CHF 20 million, CHF 30 million additional sales? Or what can we expect here on top line?

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Dirk Lambrecht, Dätwyler Holding AG – CEO & Member of Executive Board [24]

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Sorry, you mean for the Health Care business? Sorry?

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Serge Rotzer, Crédit Suisse AG, Research Division – Research Analyst [25]

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No food and beverage. Food and beverage you made….

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Dirk Lambrecht, Dätwyler Holding AG – CEO & Member of Executive Board [26]

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Yes. Okay. Sorry, food and beverage.

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Serge Rotzer, Crédit Suisse AG, Research Division – Research Analyst [27]

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Yes. This gives about CHF 120 million annual sales when I take the first 6 months when I double this. And now the capacity utilization increasing capacities, how much of incremental sales can we expect from these investments?

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Dirk Lambrecht, Dätwyler Holding AG – CEO & Member of Executive Board [28]

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I do not would like to disclose that. In detail, what I can tell you that it will be above the first half year level. And we are starting with this new customer with the formalization of the new lines in October. And together with the contracts, what we have in play that will lead to a growth in the second half year, but it will be more visible and on a higher level in 2021.

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Serge Rotzer, Crédit Suisse AG, Research Division – Research Analyst [29]

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Okay. Got it. And then probably the last one. You made a guidance that you said that second half will be on the same level like first half, do you mean on sales or on EBIT? And what level on what numbers or continuing numbers, I guess?

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Dirk Lambrecht, Dätwyler Holding AG – CEO & Member of Executive Board [30]

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Yes. I think that what we are talking about is on the sales and the absolute EBIT. And as I said, it’s quite difficult to predict how especially this volatile markets, like in the mobility and general industry are now performing. I think we have — what I can tell you, as I said, with the backlog in Health Care and with Nespresso. There the backlog, what we have there is that means we have to fully utilize all our capacities and especially in Health Care, what is very important to understand is that we’ll see additional positive change in the product mix to high-value products in the second half of the year. Which is really significantly increasing, and that will help us to increase the margin by the end of the year. And we will see what happens with the mobility sector. Yes.

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Serge Rotzer, Crédit Suisse AG, Research Division – Research Analyst [31]

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Okay. And this is including or excluding the restructuring costs, your guidance?

——————————————————————————–

Dirk Lambrecht, Dätwyler Holding AG – CEO & Member of Executive Board [32]

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Now that is here, let me say is a mix, is a running movement. Currently, I have that more or less included in the outlook.

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Serge Rotzer, Crédit Suisse AG, Research Division – Research Analyst [33]

——————————————————————————–

Okay. Got it.

——————————————————————————–

Dirk Lambrecht, Dätwyler Holding AG – CEO & Member of Executive Board [34]

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Depends a little bit on the size of this, yes. Okay.

——————————————————————————–

Serge Rotzer, Crédit Suisse AG, Research Division – Research Analyst [35]

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Yes, yes, it’s a volatile number still. Yes.

——————————————————————————–

Dirk Lambrecht, Dätwyler Holding AG – CEO & Member of Executive Board [36]

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Yes.

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Operator [37]

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The next question comes from Daniel Koenig from Mirabaud Securities.

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Daniel Koenig, Mirabaud Securities Limited, Research Division – Analyst [38]

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Yes. I have actually 2 questions. First, I was wondering on the Reichelt. I remember you were looking for value enhanced options what is the latest in terms of value enhanced options these investments? And then I was wondering what is your statement in terms of gross margin? What can we expect for the second half?

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Dirk Lambrecht, Dätwyler Holding AG – CEO & Member of Executive Board [39]

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That means as were related to Reichelt? The gross margin?

——————————————————————————–

Daniel Koenig, Mirabaud Securities Limited, Research Division – Analyst [40]

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Yes.

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Dirk Lambrecht, Dätwyler Holding AG – CEO & Member of Executive Board [41]

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I think with Reichelt, as I said — or the Reichelt is performing very well. And we have no pressure to divest this business. We have installed enough capacity in the last couple of years. And even we are using, let me say, different opportunities to further improve that. So from that perspective, there is no pressure as long as Reichelt as we see is moving in the right direction. And we will evaluate the options year-by-year how to proceed. But currently, we have no process in place, and there’s not a fixed timing for divestment. For the gross profit margin, I think Reichelt, as I said before, it’s — they have a very lean, very lean production there. They are able to have the cost under control and even with the higher turnover they were able to reduce the cost compared to the first half year of 2020. So overall, they did a very good job and typically, from the seasonal effects, they will see a better second half of the year if it comes to the gross profit.

——————————————————————————–

Daniel Koenig, Mirabaud Securities Limited, Research Division – Analyst [42]

——————————————————————————–

Can I ask you on the gross profit for the full company? What will you — what do you foresee in terms of margins for the whole Dätwyler company?

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Dirk Lambrecht, Dätwyler Holding AG – CEO & Member of Executive Board [43]

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For the continued business, of course, as I said, due to the fact that we are expecting in the Health Care business more that we are bringing more value products to the market that we should be able to improve as well our gross profit in this direction. Additionally, what we will see and there we have some lagging effects is that is with material prices. Currently, we are mostly worked in the first 6 months based on the oil price, what significantly reduced in the second quarter. That this effect — that those effects, we will see in the second half of the year, which will help us to slightly increase the gross profit here. On the other hand, it depends on how fast now the mobility sector is growing, is that to the fact that they have a lower gross profit that could be yes, last year it was down. But it’s difficult to say today.

——————————————————————————–

Operator [44]

——————————————————————————–

(Operator Instructions) The next question comes from Rolf Renders from Helvea.

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Rolf Renders, Baader-Helvea Equity Research – Research Analyst [45]

——————————————————————————–

Thanks for a few questions. One, just to understand on your presentation, Page 9, on Industrial Solutions, there is total revenue figure of CHF 212 million, but I think you also mentioned CHF 208.7 million. I’m not sure if I got that correctly, but if that’s correct, what’s the difference between the 2 numbers?

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Walter Scherz, Dätwyler Holding AG – CFO & Member of Executive Board [46]

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Well, the CHF 212.0 million, as you can see in the half year report or the interim report. The CHF 212.0 million is actually the externally reported sale. However, what Dirk mentioned is actually when you go to page number and just flipping through it, Page #10, you have the CHF 208.7 million, which is net sales referred. And then obviously, we have Schattdorf, tooling and molding shop that is actually selling out from Schattdorf to the whole world. Which is also a turnover between the segments because Industrial Solutions is also selling tools to Health Care Solutions. That’s another CHF 3.3 million, which results to a total net result of CHF 212.0 million.

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Rolf Renders, Baader-Helvea Equity Research – Research Analyst [47]

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Okay. And then on Page 17, I think, yes, on your CapEx figure, and you mentioned, of course, you see the — after the big ramp up, it coming down. Now you indicated it to go up again. But I’m not sure if I got the right numbers for that. So for the full year, is that then more like CHF 70 million or more like CHF 100 million, what you mentioned?

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Walter Scherz, Dätwyler Holding AG – CFO & Member of Executive Board [48]

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Well, it will be higher than the mid-range figure of between CHF 60 million and CHF 70 million. We want to support in the Health Care market, as Dirk just mentioned, in its fight against COVID-19 and the additional investment is to cover additional demand for COVID-19 therapies and vaccines that Dirk mentioned before. The exact amount, we do not want to disclose due to competition.

——————————————————————————–

Dirk Lambrecht, Dätwyler Holding AG – CEO & Member of Executive Board [49]

——————————————————————————–

Yes. And partly of that additionally is for the ramp-up of further production lines for the food and beverage sector. So overall, that — what we are doing here will lead to some further investments, which are — was not expected before. However, that is direct linked with orders. That means that will help us in the mid and long term.

——————————————————————————–

Rolf Renders, Baader-Helvea Equity Research – Research Analyst [50]

——————————————————————————–

Okay. So that is not — it’s not that you now already foresee a shortage in capacity for Health Care. That’s not what I should understand. It’s more into the food and beverage.

——————————————————————————–

Dirk Lambrecht, Dätwyler Holding AG – CEO & Member of Executive Board [51]

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I think what we are facing, as I said before, that in the future, there will be billions of products may be needed for the Health Care sector, and Denmark is striving to get the capacities. And we are doing our best to bring the products to the market. However, overall, we believe there could be a shortage for such products. And that’s the reason why we’re investing further. And it’s quite difficult to say how much the amount will be exactly in the near future. But we are, as I said, we are quite confident that we are able to fulfill the customers’ demand.

——————————————————————————–

Rolf Renders, Baader-Helvea Equity Research – Research Analyst [52]

——————————————————————————–

Okay. That’s great. And if you make those extra CapEx then, what kind of return do you expect to make on the CapEx?

——————————————————————————–

Dirk Lambrecht, Dätwyler Holding AG – CEO & Member of Executive Board [53]

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Overall, say a return of investments will be below 3 years.

——————————————————————————–

Rolf Renders, Baader-Helvea Equity Research – Research Analyst [54]

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I’m not sure if I understand. I was more thinking of a percentage number.

——————————————————————————–

Dirk Lambrecht, Dätwyler Holding AG – CEO & Member of Executive Board [55]

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Yes. The CapEx — that is around 30% of what we are expecting here. It’s a mix of what we have for food and beverage and for the Health Care. Yes.

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Rolf Renders, Baader-Helvea Equity Research – Research Analyst [56]

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Okay. And if you look at external capital allocation, what is your hurdle there?

——————————————————————————–

Walter Scherz, Dätwyler Holding AG – CFO & Member of Executive Board [57]

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Rolf, can you actually elaborate on your question?

——————————————————————————–

Rolf Renders, Baader-Helvea Equity Research – Research Analyst [58]

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Yes. So for this internal organic growth, you expect to make 30% return? That’s how I understand it. And if you now look at external growth, so you’ll find a fitting company, which could add to your group, what kind of return do you expect to make on those acquisitions?

——————————————————————————–

Dirk Lambrecht, Dätwyler Holding AG – CEO & Member of Executive Board [59]

——————————————————————————–

Okay. Okay.

——————————————————————————–

Walter Scherz, Dätwyler Holding AG – CFO & Member of Executive Board [60]

——————————————————————————–

Okay. Sorry. So I think Dirk will…

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Dirk Lambrecht, Dätwyler Holding AG – CEO & Member of Executive Board [61]

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Yes. So I think that is, as we said in the past Rolf, I think when we are looking for further acquisitions and what that is what we are doing, of course, that should be above a minimum, let me say, on the average level of what we have with Dätwyler. However, as you know, that is always depends on what is an opportunity in the market. And if we see a company which has a full strategic fit, maybe it’s a little bit lower what we are facing today. But that is too early to say what is exact the rules for that. I think, first of all, we have a look as a culture to given, is a strategy given, and then we are discussing internally what it makes sense to go forward based on the DCF calculation, of course.

——————————————————————————–

Rolf Renders, Baader-Helvea Equity Research – Research Analyst [62]

——————————————————————————–

All right. And then maybe final question on Parco that used to be always very profitable also when you acquired it. Now with this rapid change in the market to which degree were you able to hold up the profitability?

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Dirk Lambrecht, Dätwyler Holding AG – CEO & Member of Executive Board [63]

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Parco is still going to rate very positive EBIT margin despite a significant decrease in revenue. So that shows how robust their business model is. And so with that, what we are facing there that is some time with a decline more than 50% in this business in the second quarter. But we are still generating a good margin. And they are acted very accordingly. They know how this business is running, and they have several influence in the last couple of years. And even as you know, we have considered and a downturn, like what we are facing now, we have considered that, of course, for the future, not for this year, but they are doing a very good job there. We have experienced people. So we are quite happy with that what they are doing. And then if that is a recovery, that, of course, it will help us dramatically. Yes.

——————————————————————————–

Rolf Renders, Baader-Helvea Equity Research – Research Analyst [64]

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Yes. All right. And good luck for the second half.

——————————————————————————–

Dirk Lambrecht, Dätwyler Holding AG – CEO & Member of Executive Board [65]

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Yes, thank you very Rolf.

——————————————————————————–

Walter Scherz, Dätwyler Holding AG – CFO & Member of Executive Board [66]

——————————————————————————–

Here at the same time, I see some chat messages coming in from Stefan Gaechter from MainFirst. We ask when you see better margins in Health Care in the second half of product mix where you’re referring to adjusted margins. Actually, we — Dirk was referring to the reported margins of 17.7%. So that obviously will increase due to the product mix. Because the 21.7% margin that was mentioned as well is actually including the ramp-up cost in Middletown.

And then I also see from [Ms. Elena Ganem] from MainFirst. First question, Nespresso, will increase capacity for work to align due to strong growth. Any comment here. What we can say in — on Nespresso is basically that we manufactured a traditional Nespresso capsules, Starbucks and also the VertuoLine capsules. Therefore, we actually grow in line with Nespresso’s growth in these markets. What we don’t produce is actually the pack. All the other ones, we are the other ones we are in.

And the second 1 also from Ms. Elena Ganem . Does the COVID situation helped Dätwyler to win market share in Health Care as multi-sourcing away from West Pharma?

Yes. I think that is not only due to the COVID. Of course, that is our target to increase our market share over the time. We expect especially in the year 2021 and ’22, that we should have a higher share of products compared to our share today for the future for this COVID-19 products. So I think I’m looking quite confident into the future that we can benefit from that, which will help us to accelerate our growth and to that we are able to increase our market share over the time.

And then last but not least, also from Main First, how do you currently see interest for your Reichelt asset as it is for sale?

Well, as Dirk just mentioned, Reichelt is performing well. There is no pressure to divest the business. The options for Reichelt are actually evaluated by the company every year, so to speak. But nevertheless, right, the interest is there. And in case of an attractive offer, we obviously analyzed the offer and then decide how to proceed. But as we said, there’s no pressure for us.

——————————————————————————–

Operator [67]

——————————————————————————–

The next question from the phone comes from Sebastian Vogel from UBS.

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Sebastian Vogel, UBS Investment Bank, Research Division – Director & Sell Side Equity Research Analyst [68]

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I have 2 questions and both are related to Health Care. The first 1 is with these additional capacity you’re planning, how the…

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Dirk Lambrecht, Dätwyler Holding AG – CEO & Member of Executive Board [69]

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Sebastian.

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Sebastian Vogel, UBS Investment Bank, Research Division – Director & Sell Side Equity Research Analyst [70]

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Yes.

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Dirk Lambrecht, Dätwyler Holding AG – CEO & Member of Executive Board [71]

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Could you — sorry, could you start again that was not loud enough here?

——————————————————————————–

Sebastian Vogel, UBS Investment Bank, Research Division – Director & Sell Side Equity Research Analyst [72]

——————————————————————————–

Okay. Can you hear me now better?

——————————————————————————–

Dirk Lambrecht, Dätwyler Holding AG – CEO & Member of Executive Board [73]

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Yes. Now, it’s great. Yes, thank you.

——————————————————————————–

Sebastian Vogel, UBS Investment Bank, Research Division – Director & Sell Side Equity Research Analyst [74]

——————————————————————————–

Perfect. I have got 2 questions both related to Health Care. The first 1 is, how much of additional revenues you think you can cater with the additional capacities you’re installing over the second half of this year? And the second question is with regard to the CHF 8 million ramp-up cost in the U.S. facility. Is it now the end of these ramp up costs? Or should we expect these sort of position to see again in the second half of this year or next year as well?

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Dirk Lambrecht, Dätwyler Holding AG – CEO & Member of Executive Board [75]

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So I think with starting with this turnover for Health Care for the COVID-19 in the second half. Please understand that we would not — don’t like to disclose these figures, yes, due to competition. And if we’re having a look to the ramp-up costs, I think what we are facing currently that we believe that we can accelerate, let me say, the ramp-up is due to the COVID-19 situation that should help us in 2021. And of course, as I said before, our clear target is to achieve the breakeven with this facility and the second half of 2021. Yes. And I expect that if it comes to the onetime cost for Health Care and the second half of this year should be lower than the first half year.

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Operator [76]

——————————————————————————–

The next question comes from [Marc Poser from BTIG].

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Unidentified Analyst, [77]

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I would have a couple of questions around mobility. You have the claim that every second car has part of you. So I would wonder if you could distinguish between the content that you have within conventional cars, hybrid cars and totally electrified cars with the price tag so that we can kind of get a feel for what the content looks like. And maybe you could also talk a bit about the projects. You said that you would carefully watch the next couple of, once you said weeks and another time you said months in order to assess the recuperation of the mobility sector, but the projects are long-lasting. So can you maybe describe the nature of the project where you designed in or participating already in order for us to assess the turnaround of the mobility sector a bit more? And maybe as a third question, I would wonder about M&A. Historically, you’ve grown successfully with the central acquisitions. Can you maybe give us a feel for the next couple of quarters? I mean, there is opportunities, I assume, especially in the mobility sector, how do you assess the situation there?

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Dirk Lambrecht, Dätwyler Holding AG – CEO & Member of Executive Board [78]

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Yes. [Marc], thank you very much for your couple of questions. When I’m — first of all, you said, I’d say sometimes weeks and sometime months, when I’m talking about that, I’m not talking about projects. And when I’m talking about weeks and months, what we have to facing. Here, of course, I’m talking always about what would be the market development within existing product lines what we have in place in which we have already placed at our customer side. As you know, I’m sure in the mobility sector, if we are talking about projects that typically that needs somewhere between, let me say, 2 and 4 years before a project comes to the market. And therefore, of course, we will see in 2020, what we have — what we did in 2016 or ’17, ’18. So from that perspective, I think we are working in different directions. We have, let me say, a long list of projects in different applications that related to the type of engine in the car. If we are talking about the combustion engines or the full electric vehicles, that battery electric vehicles and hybrids, where we are working on all levels quite successfully. What we are facing here is that the content in a car with an electrical vehicle is approximately the same value, what we are facing today within a traditional car is less — the quantity is not on the same level, but the value of such products are higher. So overall, it’s good. And of course, if we are looking to the hybrid versions that is helpful because then, of course, the content by car is higher for us. That is how we see that. And so that means we are working very close with different institutions even on fuel cell development because there’s a couple companies which still believe in the long term that fuel cell could be the engine for the future.

If we are having a look to the M&A sector, of course, that is always an important topic for us. We are not looking so deep into M&A for the mobility or for, let me say, more precise for the automotive sector. I think we are good positioned, especially with the last moves in Brazil and especially with our company — former company out in Germany, which is now a Dätwyler brand where we have the 2 components products of LSR and plastics for example. There is a high demand of such types of products in the future. So from that perspective, I think we are well positioned in the mobility sector. We are focusing our M&A targets more in the direction of a general industry into new technologies and markets and as well in the direction of Health Care. And we have some discussions, but it said during this COVID times, you can imagine it’s quite difficult, even if you would be willing to go into due diligence. It’s not possible in a physical one. So therefore, we are working on projects, but it’s too early to say something more in this direction. If I miss something, Marc?

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Unidentified Analyst, [79]

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Yes, if you maybe you could — the content per car, and you don’t have to mention the hybrid content, but in the conventional and e-cars, you said the content is approximately at the same level. What is it about? Is it in the range of CHF 15 to CHF 20? Or is it rather more towards CHF 50?

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Dirk Lambrecht, Dätwyler Holding AG – CEO & Member of Executive Board [80]

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Slightly below the figures which you mentioned first.

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Operator [81]

——————————————————————————–

We have a follow-up question from Serge Rotzer from Crédit Suisse.

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Serge Rotzer, Crédit Suisse AG, Research Division – Research Analyst [82]

——————————————————————————–

A quick follow-up on the high backlog you mentioned on Health Care and the food and beverage with the new customer. I’m wondering how firm is this backlog or these orders lasting into next year. Point 1. And point 2 and to what quality to which margin level we have to expect? Or how does this work? Can you elaborate on that, please?

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Dirk Lambrecht, Dätwyler Holding AG – CEO & Member of Executive Board [83]

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I do not like to disclose everything because that’s the only thing what I can tell you that this capacity, what we’re investing is partly going in this year in the last quarter. And of course, it will be more visible in the year 2021. However, what we are doing here, we tried out, let me say, to play more driving the volume, of course, that will maybe lead to a lower — that will lead to a lower margin. However, overall, absolute, we see in the next couple of years and increasing value here.

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Operator [84]

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Gentlemen, this was the last question.

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Dirk Lambrecht, Dätwyler Holding AG – CEO & Member of Executive Board [85]

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Okay. Then thank you very much for all your great questions, and I wish you a good second half year and stay healthy. I’m looking forward to see you, as I mentioned, to our Capital Market Day. And latest, let me say to our yearly results. Thank you very much for your attention as well from my colleague, Walter.

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Walter Scherz, Dätwyler Holding AG – CFO & Member of Executive Board [86]

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Thank you very much. Have a good afternoon. Bye.

——————————————————————————–

Dirk Lambrecht, Dätwyler Holding AG – CEO & Member of Executive Board [87]

——————————————————————————–

Thank you. Bye.

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Operator [88]

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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.

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