2018 financial year and 2017–2021 strategy
Well positioned to reach 2021 targets
In 2018, Komax grew strongly, increased productivity, invested heavily in research and development, and drove forward capacity expansion and digitalization in a targeted way.
Beat Kälin, Chairman
Matijas Meyer, how would you summarize the 2018 financial year?
Matijas Meyer: Our market is growing by an average of 4%–6% annually. We generated organic growth of 13.9% in 2018. In other words, we managed to expand our market leadership further, which pleases me very much. Moreover, this wasn’t a case of achieving growth at any price to gain market share – we made sure that we had our eye on profitability at all times. Continuous productivity increases en- abled us to improve the EBIT margin from 13.5% to 14.0%. This rise was possible despite significantly less advantageous foreign currency developments than in the prior year: the EBIT margin increased by one percentage point in 2017, compared with a lower rise of 0.2 percentage points in 2018.
Beat Kälin, on the revenues front you have pretty much already reached the target you set for 2021. Will the Board of Directors now adjust that target?
Beat Kälin: We set ourselves the target of generating revenues of between CHF 500 million and 600 million by 2021. 2018 was a record year. So while we unveiled an impressive figure of CHF 479.7 million, that's still more than CHF 100 million short of the upper end of our strategic bandwidth. So from this perspective there is no need to adjust our medium-term 2017–2021 targets for the time being. What’s more, it should be remembered that we are not just looking to increase revenues – we have also defined strategic targets for EBIT, RONCE, and the payout ratio. The EBIT figure of CHF 67.3 million for 2018 shows that we still have some work ahead of us to reach the target range of CHF 80 million to 100 million by 2021.
And what will Komax do to ensure that these targets are met?
Matijas Meyer: We will continue to work on the optimization of our workflows in order to increase productivity step by step. I’m confident that our four new production and development sites in Switzerland, Germany, and Hungary will make an important contribution here. The new infrastructure will enable us to increase production while at the same time streamlining processes. That said, the impact of this will not feed through until 2020 and 2021, as the buildings in question will only be ready for occupation over the course of 2019. Grafenau and Dierikon are likely to be the last to complete this work. The building extensions at these two locations are expected to be finished towards the end of 2019.
Matijas Meyer, CEO
Have there been delays in any of these construction projects?
Matijas Meyer: These four projects to boost our production capacity have an investment volume of more than CHF 90 million. There are inevitably challenges with construction work of this magnitude – such as the weather, having to wait for official construction approvals, and the availability of specialized workers – and these can often result in delays. We experienced problems like this too, although we are only talking about delays of a few weeks or months, depending on the project in question. But equally important is the cost side, and here we are very much on track. However, some of the investment originally planned for 2018 will actually only take place in 2019. For this reason, investment expenditure in 2018 overall – i.e. not just for the buildings – amounted to “only” CHF 41 million, while planned investment for 2019 amounts to approximately CHF 90 million.
There’s always the option of increasing profitability by lowering expenditure on research and development …
Beat Kälin: That would be unsustainable, and would jeopardize our future success. In order to maintain or even increase our high profitability in the long term, it’s crucial that we launch new products every year with a view to bringing our customers competitive advantages. For this reason, we took the strategically important decision in 2017 to increase our investment on research and development from 7%–8% to 8%–9% of revenues. And we are persisting with that approach. Our customers are currently grappling with a number of different issues that are fundamentally changing the automotive industry and forcing them to increase their degree of automation in wire processing. E-mobility and autonomous driving are two of these issues. As the automotive industry is working on new technologies, we have a huge opportunity to shape this transformation. Even though this new generation of vehicles will not be seen on the roads for a few years yet, we need to invest now. Otherwise we will not be able to bring our products to market promptly when they are needed.
Will your customers be benefiting from new Komax products in 2019, too?
Matijas Meyer: Without wanting to give too much away at this stage, I can say that we will be offering our customers a broad range of new solutions. I am convinced that our customers will be able to further increase the level of automation in their plants as a result. These innovations will enable us to differentiate ourselves from the competition even more, thereby underscoring our technology leadership. And that will be the case over the next few years too, as our innovative employees are working continuously to renew and expand our product portfolio. Since 2017, our increased R&D budget has allowed us not only to optimize and develop existing solutions, but also to research completely new concepts. Over the next few years, the results of this work will deliver decisive benefits not just for our customers, but also for Komax itself. We are determined to remain Number 1 and increase our advantage even further.
“We are determined to remain Number 1 and increase our advantage even further.”
Industry 4.0 and the Internet of Things are the buzzwords right now – are these major themes at Komax too?
Matijas Meyer: Digital transformation is obviously a vital area for us, and one in which we are investing heavily. Our digitalization strategy is two-pronged, encompassing both internal and external digitalization. Within the Komax Group we are working to mold our system landscape and data structure into a stable, uniform fundament on which we can expand our digital services. As a parallel endeavor, we are developing various digital solutions that will enable us to increase the degree to which our customers’ activities are networked, while at the same time providing them with more targeted support in the production process. Among others, the issue of traceability is crucial here. Our customers would like to be able to document the production of a complete wire harness seamlessly. Because this would then make it possible for specific batches of affected products to be recalled in the event of any error, rather than thousands of vehicles of a particular model having to be recalled to garages for scrutiny as a precautionary measure.
When will the results of all this investment become apparent?
Matijas Meyer: We are in the middle of various different test phases right now. A number of new digital solutions will be launched in 2019. But we have not yet reached the stage where these can deliver seamless traceability.
Can Komax implement all of this on its own, or will you be looking to strengthen through acquisitions?
Beat Kälin: Acquisitions are an important component of our strategy. Since 2016, we have executed four acquisitions and concluded four asset deals. Overall, this has brought nine new companies and some 250 employees with a huge amount of additional expertise to the Komax Group. Acquisitions entail significant costs, as we set great store by the careful integration of the acquired companies and their workforces. But this effort is very much worth it – as is clear from the very positive development of the companies that have been integrated into the Komax Group over the last few years. So we will continue to seize any opportunity that arises to acquire companies capable of bringing us that much closer to the attainment of our strategic targets. The main focus of our acquisition activity is not digitalization, however.
“We are nowhere near exhausting all our potential.”
In what areas do you see a need for acquisitions?
Matijas Meyer: The driving force behind our acquisitions over the last few years has been the desire to close any existing gaps in our product portfolio. As a result, we can now offer our customers solutions along the entire value chain. Having achieved that position, we have no need to pursue this particular strategic priority further at the moment. We are also making very good organic progress with the strategic priority of “innovative production concepts” thanks to substantial investment in research and development. By contrast, when it comes to “global customer proximity” and the “development of non-automotive markets,” there will be situations where we can fulfil our potential more quickly with an acquisition.
Can you be more specific?
Matijas Meyer: To give you a simple example: the Asia and North/South America regions account for some 60% of the market. By contrast, we generate 60% of our revenues in Europe and North Africa. On the one hand, that’s very pleasing, and we have absolutely no intention of giving up any market share in either of these regions. But it also indicates that we still have growth potential in Asia and North/South America. This does not prevent us from carrying out acquisitions in Europe, however, if such acquisitions would help reinforce our position in one or several market segments. Whether or not our growth will be generated organically or with the assistance of acquisitions will depend on what kind of opportunities present themselves.
Does diversification play any role in your acquisition strategy?
Beat Kälin: The sale of the Medtech business unit, which was completed in 2016, reflected our decision to focus our efforts on the wire processing business. Nothing has changed in this respect since then. We are nowhere near exhausting all our potential. And the transformation of the automotive industry referred to earlier gives us the opportunity to grow further in our core market over the next few years and thus expand our leading market position. If we are to exploit this opportunity fully, we must remain focused and invest in a targeted way – which rules out diversification.
What strategic value do you attach to non-automotive market segments?
Beat Kälin: The aerospace, data/telecom, and industrial market segments are very important to us. Although the combined volume of these segments may be only a fifth of the size of the automotive market, the reciprocal synergy potential here is huge. For example, many types of wire that we are familiar with from the data/telecom area – and for which we have already developed processing solutions – are now increasingly being used in vehicles. These wires facilitate high data transmission rates, and are becoming increasingly prevalent as the industry continues to evolve in the direction of autonomous driving.
“At least half of our growth is generated in connection with new technologies, such as autonomous driving and e-mobility, and through the increasing pressure on our customers to embrace automation.”
After many years of exhibiting impressive growth, the automotive industry is by all accounts now experiencing a slowdown. To what extent can the other market segments compensate for this development?
Matijas Meyer: We generate more than 80% of our revenues with customers from the automotive industry. So although the other market segments are developing very positively and we are recording pleasing growth figures, they are too small in overall terms to offset fluctuations in automotive. What’s more, this is not likely to change in the future, as it is predicted that the automotive industry will continue to account for some 60% of all processed wires. In other words, if the automotive industry were to experience a sharp slowdown, Komax would inevitably be affected. That said, our business is not solely dependent on the number of vehicles produced. At least half of our growth is generated in connection with new technologies such as autonomous driving and e-mobility, and through the increasing pressure on our customers to embrace automation.
Your planned investment expenditure for 2019 amounts to around CHF 90 million. Will you be able to continue to afford a payout ratio of 50%–60% over the next few years?
Beat Kälin: Komax invested heavily in capacity expansion in 2018. But despite this outlay, our free cash flow was only negative to the tune of CHF 4.3 million. While this negative figure will certainly be greater in 2019 given that investment will be some CHF 50 million higher, the investment volume will then decline again sharply from 2020 onwards, with the corresponding boost to free cash flow. So given the company’s very strong financial base, there’s no reason from today’s standpoint why we shouldn’t adhere to a target payout ratio of 50%–60% of Group profit after taxes going forward, even in years with significant investment activity.
What will be the key areas of focus in the 2019 financial year?
Matijas Meyer: A number of issues will have high priority for me in 2019. These include the successful launch of various new products that are expected to give us additional unique selling propositions. Then there are the ongoing projects in the areas of research and development, and digitalization – these need to be driven forward so that we can continue to excite our customers with new developments over the coming years. The on-time completion of our four construction projects is another very important issue this year. Furthermore, I continue to attach great importance to pressing ahead with our operational excellence initiatives and delivering the corresponding profit increases. As it is not yet clear how any slowdown in global economic growth will affect the automotive industry over the medium term, it is important for Komax to be flexible so that it can react promptly to changing customer needs. All in all, I am confident that we are well positioned to master the challenges we face in 2019.