Annual Report 2018

Business Review Group

Profitable growth

With net revenue of CHF 1ʼ782.8 million, the Conzzeta Group achieved revenue growth of 20.2% in 2018. The operating result (EBIT) amounted to CHF 146.8 million and the EBIT margin was 8.2%, up from CHF 114.4 million and 7.6% respectively in the previous year (adjusted for divestment gain). After a strong start, the market environment over the course of the year became increasingly mixed from region to region and from one business area to another. The Group made progress towards implementing strategic and operational initiatives. However, ongoing efforts are needed in order to improve profitability more broadly and sustainably.

On a comparable basis, i.e., at constant exchange rates and adjusted for changes in the scope of consolidation, net revenue growth was 10.4%, after 14.3% in the previous year. After an exceptionally strong start to the year in a very favorable business environment for capital goods, benefiting from the delivery of various large orders in the Glass Processing segment and successful product launches in the Outdoor segment, revenue growth slowed significantly over the course of the year. In Asia and particularly China, increasing geopolitical and macroeconomic uncertainties had an adverse effect. However, thanks to the robust business development in Europe and America, net revenue in the second half of the year was up by 8.1% compared to the strong prior year's period, albeit with a declining margin due to a marked weakening in the Chemical Specialties segment. In terms of EBIT, the annual result increased over-proportionally by 28.3% after adjustment for the divestment gain of CHF 8.8 million generated in the Chemical Specialties segment in 2017. The return on net operating assets amounted to 23.1%, compared with 19.5% (adjusted) the previous year. The high order intake for capital goods weakened towards the end of the year, but still increased by 5.8% for the year as a whole. The order book in the Sheet Metal Processing segment was slightly higher, and in the Glass Processing segment slightly lower than the previous year.

Internationalization

Market orientation and the internationalization of business activities have been among the Group’s four priorities since the beginning of 2016. Building on a solid presence in Europe, this involves realizing growth opportunities and establishing a broader geographical base in order to offset the various regional economic fluctuations and market cycles. Significant revenue growth of 23.7% was achieved in the Americas in 2018. This was primarily driven by operational growth initiatives in the Sheet Metal Processing and Glass Processing segments. Also in Europe and Asia revenue rose by 22.1% and 14.5%, respectively, although in these regions the takeover of Otto Bock Kunststoff as of September 1, 2017 had a comparatively greater impact, alongside operational improvements in performance.

Since the introduction of the internationalization strategy in January 2016, revenue in the defined growth regions of Asia and the Americas has increased by 80.2% compared with the end of 2015. Europe accounted for 54.1% of net revenue in 2018, while Asia accounted for 27.6% and the Americas 18.3%. During the reporting year, measures to strengthen our presence and our capacity to take action in the regions were steadily pursued. In the Sheet Metal Processing segment, for example, the groundbreaking for an assembly plant and an experience center in the USA took place, and a renewed regional management structure was implemented for the FoamPartner business unit in connection with the integration of Otto Bock Kunststoff.

Strategic initiatives

We continued with the implementation of our growth strategies in 2018. In the Sheet Metal Processing segment, the consistant implementation of these strategies requires continuing efforts and investments in order to build-up market presence and develop new solutions and products, particularly in the field of automation. To this end, our presence in various countries in Asia and Europe was enhanced and various innovations were presented. Two Italian companies were taken over during the reporting year, namely TTM Laser S.p.A. with its applications for the three-dimensional processing of tubes and profiles, and Antil S.p.A. (70%), a specialist in the automated loading and unloading of sheet metal processing systems and corresponding storage systems.

In the Chemical Specialties segment, the integration of Otto Bock Kunststoff into the FoamPartner business unit was largely completed as planned. The implementation of the regional management structure in a challenging market environment necessitated various adjustments, which resulted in partially unplanned costs. Furthermore, the business environment in the automotive sector deteriorated towards the end of the year, resulting in an unsatisfactory earnings situation. In order to realize margin potential, the Board of Directors approved a plan in 2018 designed to optimize production infrastructure over the next two to three years. By taking over ISAtec GmbH in 2018, the Schmid Rhyner business unit secured the technology for metallic colors marketed under the WESSCO POLAR brand together with innovative possibilities for the design of high-quality packaging.

The Outdoor segment continued to make progress in 2018 with the implementation of its five-year strategic plan, which commenced in 2016. Apart from the marked increase in revenue and operating result, the clear improvement in gross margin is a confident sign that financial performance can continue to improve over the remaining two-year term of the plan. The focus will be on achieving a significant increase in volume and revenue in order to absorb the costs associated with developing essential expertise in the areas of digitalization, retail and design, and the costs incurred to expand the workforce into international markets.

Finally, the Glass Processing segment recorded a significant improvement in 2018 compared with the previous year. Not least because of this, we were able to announce on January 25, 2019, that a binding agreement had been signed for the sale of the Glass Processing segment to the Finnish company Glaston Corporation, headquartered in Helsinki, for an enterprise value of EUR 68 million (CHF 78 million). A key aspect of Conzzeta’s Group strategy is establishing or safeguarding leading market positions in all business units as a prerequisite for long-term value creation. There will be new prospects for the Glass Processing segment when it joins Glaston and, subject to the transaction being completed, Conzzeta will be able to focus on developing its remaining segments.

Operational improvements and business excellence

All segments are aligned with the Group’s objective of achieving revenue growth of over 5%, an EBIT margin of 8% to 10%, and a return on net operating assets of over 15% across business cycles. The Sheet Metal Processing segment exceeded these targets in 2018, and the Outdoor and Glass Processing segments made significant progress, but they still fell short of the Group’s aspirations. However, the business environment, which has become more challenging, the still challenging competitive environment, and structural currency trends require that all business units continue their efforts to maintain or improve their margins by offering innovative, future-oriented products and solutions that meet the demands of the market.

At the same time, continued efforts to improve productivity and efficiency are needed. This was why business excellence (BEX) was defined as one of the Group’s four priorities in 2016, and in 2018 the set-up of the Group-wide BEX program was largely finished. The priority now is to implement overall and continuing improvements in all business units as part of a Group-wide organizational model. The BEX projects are being coordinated based on Six Sigma and lean methods. At the end of 2018, the portfolio included around a dozen initiatives, and three projects had already been completed.

The development of the BEX program generated a certain amount of start-up costs. However, it is expected that the initiatives will contribute significantly to results over the coming years. As a precursor to this, the Group is making a considerable effort to train so-called black belts and green belts. Employees who have undergone this training are deployed in BEX initiatives worldwide and support the business units to respond flexibly and in a timely way to new demands. The BEX organization allows the exchange of know-how and experience between countries and business units, and the results of BEX initiatives are systematically measured to ensure that process optimization is sustained.

Personnel development and key competencies

Personnel development was also defined as one of the Group’s four priorities in 2016. Accordingly, additional measures were implemented in the reporting year. In light of the existing growth strategy and operational challenges, the aim is to enhance management skills and promote internal succession planning for leadership positions. The Group competencies rolled out in 2017 as strategically relevant key skills for the development of a culture of performance and success (see the Strategy section) are now an established part of management training and are integral to assessments of the performance and potential of executives.

The Talent Development Program, which involved employees from all business units and regions, was conducted for a second time in 2018, with the third cycle starting in February 2019. In 2018, it was gratifying to see that an increased proportion of vacant positions could be filled with internal candidates. A leadership program was launched in January 2019 in collaboration with a renowned training partner for the approximately 80 members of the Global Management Team (GMT). In light of the rapidly changing business environment, the main emphasis of this training initiative is on digitalization, customer focus and problem-solving competence.

The compensation system for GMT members was harmonized across the Group in 2018, based on a systematic assessment and classification of the relevant managerial functions in the business units and among Group staff. In this context, the structure of compensation was also adjusted, and at the beginning of 2018, a portion of variable compensation was disbursed in the form of shares that are subject to a three-year vesting period. The new long-term incentive plan enhances the attractiveness of Conzzeta and the business units as employers and encourages employees to identify with the interests of shareholders.

Risk management and corporate responsibility

Conzzeta is committed to pursuing a value-oriented corporate management with a long-term perspective. In addition to responsible corporate behavior and a consistent focus on innovation and sustainable customer value, this requires careful management of risks, seamless adherence to the binding standards of conduct laid down in the Code of Conduct and appropriate consideration of the interests of all stakeholder groups.

During the reporting year, for the third time, the audit schedule set by the internal audit function established in 2015 was carried out for the full annual cycle. The tools used proved effective and will help to implement control standards and continuous operational improvements. In 2018, the Board of Directors again undertook an integral Group-wide risk assessment based on management reporting and the separate Group risk report, which contains the process of risk monitoring as well as the most significant risks. The risk management process, which has been implemented across the Group, encompasses the identification, evaluation and qualitative appraisal of operational, financial and strategic risks in all business units and at Group level. It is supported by risk monitoring, a plan of action and standardized reporting.

As at the end of 2018, the Group had identified four key risks:
–  Competitiveness: missing out on technologies and trends, disruptive changes in new technologies, business models and other areas such as digitization.
– Portfolio risk: unprofitable business areas, strategic misjudgements of markets, missed M&A opportunities and failed acquisitions.
– Geographic expansion: Insufficiently aggressive expansion of business in Asia and the US, resulting in continued subcritical mass and lost profits.
– Insufficient maintenance of adequate IT infrastructure and security (especially against cybercrime).

The 2018 revised Notes to the Consolidated Financial Statements include a new chapter on financial risk management with a detailed description of risk factors and their management (see Financial Report).

Conzzeta conducted a materiality analysis for the first time in 2018 in order to systematically evaluate environmental, social and governance (ESG) issues. The process and the Group’s nine key sustainability themes are presented in the new section entitled Responsibility. The materiality analysis serves as the basis for targeted and consistent reporting on the relevant themes, which will be developed further in 2019. In 2018, the Outdoor segment also published transparent sustainability goals for the next five years as part of its "We Care strategy". The new strategy involves four key priorities: 1) the protection of natural resources (reduced footprint); 2) ethical production; 3) animal welfare; and 4) minimizing harmful substances in supply chains and products (clean production).

Financial performance

The net revenue growth of 20.2% achieved by the Group in 2018 translates in absolute terms to an amount of CHF 299.4 million. Of this amount, CHF 154.5 million was attributable to organic growth, CHF 126.9 million was attributable to the net impact of changes in the scope of consolidation, and CHF 18.0 million was the result of a currency gain. Double-digit net revenue growth compared with the previous year was reported in all segments and at Group level in all three regions, Europe, America and Asia. On a comparable basis, i.e. adjusted for changes in the scope of consolidation and currency translation effects, three out of four segments reported significant revenue growth. By contrast, revenue in the Chemical Specialties segment decreased by 2.5% as business performance was weighed on by the slowdown in the automotive sector in Europe and Asia in the second half of the year.

With an operating result of CHF 146.8 million in 2018 and an EBIT margin of 8.2%, and excluding one-off effects, the Group achieved its medium-term aspirational target of 8% to 10% thanks to the further result improvement at a high level in the Sheet Metal Processing segment. EBIT in 2017 amounted to CHF 123.2 million and the margin was 8.2% (7.6% without the gain of CHF 8.8 million from the aforementioned divestment of the US joint venture). Although the operating result improved notably in the reporting year in three out of four segments, the respective contributions of the segments are still too uneven. The Sheet Metal Processing segment accounted for 90.3% of the operating result, largely because profitability slumped in the Chemical Specialties segment in 2018 from CHF 16.0 million (excluding the divestment gain) to CHF 5.8 million. The key reasons for this were high raw material costs, particularly in the first half of the year, reorganization costs of CHF 5.5 million in connection with the integration of Otto Bock Kunststoff, the establishment of the regional business model, and the aforementioned downturn in the automotive sector.

Overall, despite the progress achieved in 2018, the earnings situation indicates a continuing need for action to further improve segment results. Compared with the previous year, operating expenses did not increase at the same rate as net revenue, rising 18.8% to CHF 1ʼ658.3 million. This includes efforts to achieve further growth while at the same time improving efficiency.

The tax rate of 20.4% was slightly lower than the previous year, thanks partly to favorable regional earnings performance from a tax perspective. This helped to partially compensate for the weaker financial result. The Group result for 2018 was CHF 114.8 million, 17.9% above the previous year (CHF 97.4 million), although it included the aforementioned divestment gain. Minority interests amounted to CHF 18.2 million in the reporting year (previous year: CHF 13.7 million).

Financing, investments and divestitures

The Group generated an operating free cash flow of CHF 83.4 million in 2018, against CHF 65.4 million in the previous year. Investments in fixed and intangible assets amounted to CHF 72.2 million, up from CHF 37.3 million the previous year. Notable single investments in 2018 included a showroom in Seon and the upgrade and expansion of sales locations in the Outdoor segment, the start of construction of the US assembly plant near Chicago, the ongoing renovation of a factory hall at the Niederönz site and the expansion of distribution infrastructure in the Sheet Metal Processing segment, and the expansion of production facilities in China and the USA for the FoamPartner business unit in the Chemical Specialties segment. The reinvestment rate climbed to 2.0% from 1.3% in the previous year.

At the end of 2018, the Group had cash and cash equivalents of CHF 389.6 million and the equity ratio stood at 67.8%. Even after the acquisitions and investments made over the course of the year, Conzzeta has a solid balance sheet that will help sustain the future development of its businesses and provide a basis for actively shaping its portfolio. Possible acquisitions continue to be most likely in the Sheet Metal Processing and Chemical Specialties segments.

Around 7% of Conzzeta’s workforce is employed in research and development. They work closely with colleagues in other specialist units to create the foundations for innovative and customized products and solutions. In particular, the Group’s efforts in the context of the progressive digital transformation are considerable in all business units, and these efforts are being coordinated by the Group Digital Council. Innovation at all levels is a key prerequisite for the survival of all business units in an increasingly globalized competitive environment.

Appropriation of profit

Conzzeta aims for a payout ratio of between one-third and half of Group result. Group result for 2018 amounted to  CHF 46.76 for each class A registered share and CHF 9.35 for each class B registered share, compared with CHF 40.47 and CHF 8.09, respectively, the previous year. In keeping with its dividend policy and taking into account current business performance, the Board of Directors is proposing to the Annual General Meeting on April 16, 2019, a 12.5% higher dividend of CHF 18.00 per class A registered share and CHF 3.60 per class B registered share.

Employees

At the end of 2018, the Conzzeta Group had 5ʼ259 employees worldwide, compared with 4ʼ717 the previous year. The increase is largely due to the higher headcount in the Sheet Metal Processing and Outdoor segments. The headcount in the Chemical Specialties and Glass Processing segments increased only marginally. Traditionally, Conzzeta Group companies have participated in apprentice training programs. At the end of 2018, 175 apprentices were in training at 13 locations in a total of 25 disciplines.

The expertise, flexibility and commitment of our employees are the key factors in ensuring the long-term success of the Conzzeta Group companies. The Board of Directors and Executive Committee take this opportunity to thank the employees for their dedication and efforts in 2018. Considerable effort will also, however, be required in the future in order to implement the Group’s operational and strategic initiatives in a competitive environment that continues to be challenging.

Outlook

All of the Conzzeta Group’s business units are working on the realization of differentiated plans with the aim of consolidating their market position and increasing profitability on a lasting basis. In the medium term, the benchmark is the Group’s ambition to achieve revenue growth in excess of 5%, an EBIT margin of 8% to 10% and a return on net operating assets of over 15%. Consistent with the Group’s strategy, an appropriate contribution to the result is expected from every business unit across the business cycle. In 2019, it will be specifically important to improve the profitability of the Chemical Specialties and Outdoor segments in order to even up the earnings contributions of the respective segments.

Business performance is generally influenced by the specific market environment of each individual area of activity. The robust economic trend at the beginning of 2018 and the favorable investment climate in all regions declined sharply in the second half of the year. A clear drop in demand is also apparent especially in the automotive sector, particularly in China and Europe. Performance in 2019 will depend to a not insubstantial degree on whether constructive political solutions can be found, and on the extent to which the economic downturn in China can be absorbed.

Geopolitical and macroeconomic uncertainties have gained in importance for 2019. For the businesses continued after the announced divestment of the Glass Processing segment, Conzzeta currently expects net revenue in 2019 at the level of the previous year. Not including any potential one-off effects from the divestment, the operating result is anticipated to be more broadly based across the segments with a slight improvement in the EBIT margin.

Segment Sheet Metal Processing Strategy

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