Dätwyler : Solid organic revenue growth – loss of Covid business pressures margins

After a favorable start to the year, Datwyler was confronted with a weakening economy and negative external one-time effects in the first half of 2023. The almost complete loss of the Covid business and the customers' reduction of their high safety stocks in nearly all sectors slowed revenue growth and led to underutilization at the recently expanded plants. In addition, the higher energy costs in 2023 and the temporary unfavorable development of the product mix had a negative impact on the margin. Thanks to the strong market positions and the recognized core competencies, Datwyler succeeded in winning a large number of promising new projects with existing and new customers in all the markets served.

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Organic revenue growth of 5.6% thanks to sustained price increases

Overall, Datwyler increased its revenue year-on-year in the first half of 2023 by 11.3% to CHF 602.7 million (previous year: CHF 541.6 million). The two companies acquired in the previous year, QSR and Xinhui, were taken into account for a six-month period for the first time. This resulted in a positive acquisition effect of CHF 55.0 million or 10.2%. The strong Swiss franc caused substantial negative currency effects of CHF 24.5 million or -4.5%. As a result, organic revenue growth stood at solid 5.6%, including a sustained positive price effect of 4.7%. At the level of EBIT, the higher employee and energy costs and the insufficient capacity utilization led to a decline to CHF 60.5 million (previous year: CHF 72.5 million). The EBIT margin fell to an unsatisfactory 10.0% (previous year: 13.4%), although the figures for May and June were above the average for the first few months. Due to the lower EBIT and the significantly higher financial expenses, the net result declined to CHF 32.1 million (previous year: CHF 57.4 million). The net result per share came to CHF 1.89 (previous year: CHF 3.38). The strong Swiss franc also had a significant negative impact on the profit figures.

Where appropriate,Datwylertook proactive measures to combat the margin pressure in the form ofchanges to cost structures and further price increases on the customer side. At the same time, however, the company maintained and selectively expanded its capacities and competencies for acquiring and implementing new customer projects and further developing its growth and innovation projects. Examples include the expansion of the healthcare product portfolio, new materials and products for electric vehicles, electroactive polymers and soft dry electrodes. The sustainability measures are a further competitive advantage which Datwyler is continuously advancing. In the reporting period, the internationally recognized rating agency EcoVadis awarded a Gold medal for the sustainability performance for the first time. This places Datwyler in the top 5% of more than 100'000 companies from 175 countries that are rated by EcoVadis each year. Furthermore, the ICT security management system is now certified to ISO/IEC 27001:2013.

The current year is characterized by an accumulation of negative external one-time effects. But our profitable growth potential remains intact due to the megatrends in our markets and the strong project pipeline in all business units. As soon as the environment normalizes, we will benefit from scaling effects thanks to our advanced investments.

Dirk Lambrecht
CEO

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Healthcare Solutions suffers overproportionally from the loss of the Covid business

The Healthcare Solutions business area was able to compensate the almost total loss of the Covid business through growth in its regular business (4.7%) and by implementing price increases (5.9%). It achieved this result despite the fact that healthcare customers also significantly reduced their safety stocks. Although reported revenue fell in comparison with the very strong first half of 2022 to CHF 253.8 million (previous year: CHF 265.7 million), when adjusted for currency and acquisition effects, this equates to slight organic growth of 0.6%. The loss of the high-margin Covid components led to underutilization of the recently expanded plants and a temporary unfavorable development of the product mix. As a result, EBIT declined to CHF 39.8 million (previous year: CHF 58.0 million) and the EBIT margin to 15.7% (previous year: 21.8%). However, the pandemic has also had a lasting positive effect on the business. Supply chain pressure and the pioneering investments have secured Datwyler access to all important pharmaceutical companies. Teh company is currently working on a large number of new projects with considerable future revenue potential. Thanks to its newly launched UltraShield film coating, Datwyler is also the only provider with two coating technologies and can therefore offer its customers the optimal solution according to their needs. Following its acquisition in 2022, the integration of Xinhui is going to plan and has strengthened the position in the rapidly growing healthcare market in China. Overall, with its advanced investments, Datwyler is ideally positioned to take advantage of the market growth forecast for the medium term. The company will benefit from scaling effects as soon as the environment normalizes.

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Significant increase in EBIT at Industrial Solutions

Thanks to the first-time inclusion of QSR for six months, the Industrial Solutions business area increased its revenue by 25.9% to CHF 351.8 million (previous year: CHF 279.5 million). Adjusted for acquisitions and currency effects, organic growth amounted to 10.1%. The positive effect of the price increases implemented was 3.8%. At CHF 20.7 million, absolute EBIT was significantly higher than in the previous year (CHF 14.5 million). As a result, the EBIT margin improved accordingly to 5.9% (previous year: 5.2%). Despite the economic recovery in China being slower than expected, the Mobility business unit was able to increase its revenue substantially. By strengthening the presence in China with local development engineers, Datwyler was able to acquire leading electric vehicle manufacturers as new customers. The product pipeline is developing encouragingly and the share of electric vehicle projects is increasing continuously. To ensure optimal production of the future Mobility product portfolio, Datwyler is working to optimize and consolidate the plants.

In the current year, the integration of QSR is going to plan so far. The optimization measures implemented are having an impact and enabling continuous improvement of the margin. The cross-selling projects between the new Connectors business unit and the Mobility business unit are developing encouragingly. The General Industry business unit also acquired promising new projects with existing and new customers in the first half of 2023. Furthermore, the longstanding customer Stihl named Datwyler Supplier of the Year for 2022. Due to the inflationary environment and destocking by customers, current General Industry revenues are down year-on-year, especially in Europe. The Food & Beverage business unit once again grew much faster than the market average in the first six months of the year. However, changes in the product mix and contract-based increases in electricity costs at the Swiss plant limited the margin potential in 2023. Part of the additional costs was compensated through continuous optimization of the plants and processes.

The negative external one-time effects mentioned at the start of this letter will also impact the second half of 2023. Personnel cost inflation, for example, remains high. The risk of a further weakening of the economy and currency trends continue to call for caution. Despite the positive impact of the price increases and optimization measures implemented, Datwyler's short-term revenue and margin potential is therefore limited in the seasonally weaker second half of the year. For the full year 2023, the company is aiming for revenue of around CHF 1'175 million and an EBIT margin of around 11%.

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Intact growth trends and strong strategic positions

In the medium term, Datwyler remains convinced of its profitable growth potential and confirms its medium-term targets. The large number of promising new projects with existing and new customers in all the markets served shows that growth trends are intact in our markets. With a clear focus on system-critical elastomer components, Datwyler makes a key contribution to the functionality and quality of the customers' systems while at the same time accounting for a very low proportion of these systems' overall costs. Moreover, the company also enjoy strong strategic positions in attractive markets with long-term growth trends and high entry barriers. Datwyler generates more than two-thirds of its revenue as a principal strategic supplier of global market and innovation leaders in low cyclical markets and technologies that are enjoying long-term growth, such as healthcare, food & beverage, automation and electrification. The Datwyler business model enables the creation of strong synergies and, consequently, competitive advantages through interdisciplinary research and development, materials expertise and solution design, through uniform production and IT systems, and through central procurement of similar raw materials and production equipment. Due to the advanced expansion of our production capacities, particularly in the areas of Healthcare Solutions and Food & Beverage, the company has put itself in a very good position to seize future growth opportunities once destocking by the customers is completed and the environment has normalized. This growth will be achievable with hardly any further investment. In addition, the negative effect of electricity costs at the Swiss plant will disappear again from 2024, which will have a significant positive impact on margins in the Food & Beverage business unit. The companies QSR and Xinhui, which were acquired in 2022, open up additional potential in the new Connectors product segment and the attractive Chinese healthcare market.