Datwyler, the specialist in system-critical elastomer components, put in a solid performance in the first half of 2022 thanks to its strong market position, despite a difficult environment with war in Ukraine and COVID lockdowns in China. During the reporting period Datwyler strategically further strengthened the basis for future profitable growth by acquiring QSR and Xinhui and expanding the manufacturing facility in India.
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Review
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Revenue growth in four out of five business units
Overall, revenue from continuing operations was up 11.7% year on year to CHF 541.6 million (previous year: CHF 485.0 million).Adjusted for negative currency effects of CHF 5.9 million and CHF 34.1 million of revenue from QSR and Xinhui consolidated for the first time, this is equivalent to organic growth of 5.9%. With the exception of Mobility, all business units exceeded last year's revenue. Datwyler coped well with the supply bottlenecks for raw materials and upstream products and was fully able to deliver at all times.
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Margin pressure due to higher input costs
Geopolitical developments and rising inflation pushed Datwyler's input costs up sharply at all sites in the first half of the year. Due to the delayed effect of the implemented price increases and cost savings, the margin came under pressure. The operating result (EBIT) from ongoing operations declined to CHF 72.5 million (previous year: CHF 88.8 million). This equates to an EBIT margin of 13.4% (previous year: 18.3%). It includes negative non-recurring effects from markdowns on inventories written up to market value in acquisition balance sheets and write-downs on assets due to the temporary closure of the Ukrainian subsidiary totaling some CHF 7.5 million. The net result amounted to CHF 57.4 million (previous year: CHF 66.8 million).
Datwyler put in a good performance in the first half as a pure specialist for system-critical elastomer components, despite the difficult overall conditions. Winning new projects and launching new product lines for additional revenue in the Mobility and Healthcare business units over the medium term are indications that we are strategically well placed. By acquiring QSR and Xinhui we are also gaining access to the rapidly growing market segment for electrical connector seals and the important Chinese healthcare market. The combination of expanding existing business activities and focused acquisitions will continue to form the basis for future profitable growth.
Dirk Lambrecht
CEO
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Healthcare Solutions
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Double-digit revenue growth in Healthcare Solutions
The Healthcare Solutions business area increased its revenue in the first half of 2022 to CHF 265.7 million (previous year: CHF 238.7 million). Adjusted for currency and acquisition effects, this equates to organic growth of 12.6% year on year. There was a slight rise in revenue from components for COVID vaccines. Because of the sharp rise in prices of all input factors, the operating result (EBIT) was up only slightly to CHF 58.0 million (previous year: CHF 56.9 million). As the price increases implemented only have an impact on the customer side with some delay, the EBIT margin was 21.8% (previous year: 23.8%).
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Integration of the Xinhui acquisition going to plan
The strategically important acquisition of Yantai Xinhui Packing opened up direct access to the rapidly growing Chinese healthcare market for Datwyler in the first half. Work on the integration is going to plan despite the pandemic, thanks to the existing local Datwyler employees. However, it will take some time to shift the product portfolio towards higher-value components with higher margins.
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Manufacturing capacity in India doubled
The second facility at Datwyler’s existing site in India will come on stream in the third quarter. This doubling of capacity forms the key foundation for the targeted revenue growth in the coming years. The medium-term project pipeline for high-value components from Datwyler’s FirstLine standard performed well as a result of more intensive market coverage and the new customer contacts established during the pandemic, along with a much broader customer base.
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Industrial Solutions
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Industrial Solutions includes QSR for the first time as the Connectors business unit
The Industrial Solutions business area increased its revenue in the first half of 2022 by 12.1% to CHF 279.5 million (previous year: CHF 249.3 million). Adjusted for CHF 2.5 million of positive currency effects and the CHF 28.7 million of revenue from QSR for two months that was consolidated for the first time, this equates to a slight organic decline in revenue from the previous three business units of 0.4%. Because of the materially higher input costs and the fact that price increases and cost-saving measures only take effect with a delay, the operating result (EBIT) fell to CHF 14.5 million (previous year: CHF 31.9 million), equivalent to an EBIT margin of 5.2% (previous year: 12.8%). This includes the negative non-recurring effects mentioned from the QSR acquisition and the Ukrainian site.
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Strategic acquisition of QSR
The strategic acquisition of QSR in the first half of 2022 has made Datwyler the leading global supplier of system-critical sealing solutions for electrical connectors for a wide range of industries. QSR now forms the independent Connectors business unit within the Industrial Solutions business area. There are attractive growth opportunities for QSR seals and components arising from several megatrends, such as electrification, connectivity, the Internet of Things, and Industry 4.0. QSR has five plants and support units in the US, Mexico, and China, and generated USD 164 million of revenue in 2021. As a result of the acquisition, debt rose by CHF 627.1 million compared to the end of 2021. At the same time, equity fell by CHF 578.5 million due to the direct offset of goodwill. As of 30 June 2022 the equity ratio was 28.2%. As demonstrated in the past, Datwyler constantly endeavours to reduce borrowing and restore the equity ratio.
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Mobility held back by decline in car production
The largest business unit, Mobility, had to deal with declining demand as well as higher input costs. The supply bottlenecks for raw materials and semiconductors meant that fewer cars were produced in the first half, 2% fewer globally and 12% fewer in Datwyler’s most important geographical market, Europe. Car production in China was also hit by COVID lockdowns. Despite the temporary pressure on margins, Datwyler is successfully working on shifting towards electromobility and winning a pleasingly large number of orders for new product lines in this market of the future. The Mobility business unit is also exploiting cross-selling opportunities with existing customers in the new Connectors business unit (QSR).
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Strong demand in General Industry and Food & Beverage
The General Industry and Food & Beverage business units continued to enjoy strong demand in the first half. General Industry saw strong demand for O-rings from a wide range of market segments, especially in the US oil and gas industry. In Food & Beverage, Datwyler maintained profitable revenue growth thanks to its leading position, although market growth has slowed after two strong years.
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Outlook
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Challenging second half
Datwyler assumes that the ongoing Russian war of aggression in Ukraine will continue to cause a great deal of uncertainty, low visibility, tighter supplies, and high prices for upstream products globally in the second half. On top of that comes the feared shortage of natural gas and electricity in Europe, which will lead to considerably higher costs. The Datwyler plants themselves have only a minor direct dependency on Russian natural gas, but there may be indirect impacts through customers and suppliers.
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Product mix effects in Healthcare Solutions dampen margin development
Assuming an orderly supply of energy, the situation in the markets relevant to Datwyler is varied. In the Connectors, General Industry, and Food & Beverage business units, the company assumes the trend in demand will stay positive. The Mobility business unit should benefit from increased car production in the second half as well, according to independent forecasts. Even so, global car industry production in 2022 will still be at least 10% below the pre-pandemic level. In its Healthcare business, Datwyler anticipates slowing growth, and hence a temporary negative change in the product mix, as a result of declining revenues from components for COVID vaccines. This, together with the costs of implementing the growth strategy, is dampening the potential for the EBIT margin for the company as a whole, despite the price increases successfully implemented in all business units. For the full year 2022, Datwyler, including the QSR and Yantai Xinhui Packing acquisitions, continues to aim for revenue between CHF 1'150 million and CHF 1'200 million and an EBIT margin of between 13% and 16%.
