In the first year following its successful spin-off from Metall Zug, V-Zug stock embarked on a stellar trajectory, rising to more than CHF 150. But after the special economic situation brought about by the pandemic, in which home improvement was a major consumer focus, themes such as the supply chain problem, the return of inflation, and the consequences of war in Europe took the spotlight. Despite altered market conditions, V-Zug is pursuing its proven premium strategy unwaveringly. In an interview with schweizeraktien.net, CEO Peter Spirig and Head of Sustainability Marcel Niederberger reveal why the margin is recovering, how the company’s international expansion is developing, the likely date of the full electrification of the vehicle fleet, and why “green steel” is significantly improving the company’s CO2 footprint.
Mr Spirig, following the special economic situation induced by the pandemic, market conditions deteriorated noticeably in both 2022 and the first half of 2023. Do you see this as a perfectly normal cyclical downturn, or is it a case of the market for household devices having structurally changed?
It’s true that the pandemic was responsible for a special economic situation, namely from mid-2020 to the start of 2022. This was a global phenomenon, and one that worked to our advantage, as it benefited the area of renovation in particular. Renovations account for around a third of our revenues in Switzerland. So in a year-on-year comparison, there’s obviously been a weakening here. In addition, new construction activity and replacement investment each account for a third of revenues, with the latter exhibiting a stable development pattern as it is not really cyclical. On the newbuild side we have been observing a sideways trend for some time now. Here it was initially high land prices that weighed on supply, and then it was inflation and higher interest rates. Demand for housing has remained persistently high.
You are cutting production costs, other operating expenses and headcount on the one hand, and increasing efficiency through persistently high investment on the other, yet the EBIT margin of the dominant Household Appliances segment declined from 9.2% in 2021 to 0.9% in 2022. What were the reasons for this, and how will it be possible to get back to traditional margin levels?
The decline was down to much lower sales volumes and much higher purchase prices than in 2021. We were unable to fully compensate for these developments in 2022 through higher sales prices. As soon as the cycle has recovered somewhat, our absorption of fixed costs will improve and therefore so too will our profitability.
Looking at currency-adjusted revenue development, V-Zug has fared relatively well in a comparison with the much larger players Electrolux and Whirlpool, but the three stocks have followed the same trend and are currently trading at a low level. What are the differentiation features that will make you a more attractive proposition for investors in a lasting way?
We differentiate ourselves through premium products, which stand out thanks to their quality, design and simplicity. Swiss quality and the corresponding sophistication of design are highly valued both in and outside Switzerland, as is simplicity – something that is true of both the operation as well as the ownership side.
V-Zug has recently embarked on an internationalization drive to give the brand global resonance and open up new sales markets. The company has just recently established a presence in Copenhagen. What is your provisional assessment of progress in London and Paris, where you have been present for longer?
Things have progressed very well to date. We have increased the share of revenues accounted for by international markets to 20% of total sales. We consistently pursue a premium strategy in our international markets. We are present in the major metropolises, where we attract an upmarket clientele. London and Paris are good examples of this.
And how advanced are you with the planned studio openings in 2023, namely in Hamburg, Berlin, Vienna, Milan and Sydney?
All these V-Zug studios are currently at the construction stage. We will be opening for business between October 2023 and the first half of 2024.
What is your target for the proportion of total sales that international sales will account for in five years’ time? This has already risen from 9.4% in 2020 to 20.4%.
We are anticipating a further increase, but not at the kind of tempo that we have seen previously. In terms of the proportion of total sales, a figure of 25-30% looks realistic to us in the medium term. Switzerland will remain our principal market.
A strong franc is essentially nothing new for V-Zug, but for companies that base their production in Switzerland it nonetheless presents a challenge in respect of both profitability and competitiveness. How are you counteracting this problem?
That’s unquestionably a challenge. But it’s one that forces us – and other Swiss companies – to be particularly efficient and innovative on an ongoing basis. So we are differentiating ourselves not through what we charge, but through what we offer. Incidentally, I would point out that though our production is based in Switzerland, we obtain many of our materials and parts from abroad, as do other competitors.
How are things going with the site transformation?
The site transformation – which we are undertaking in partnership with the Tech Cluster Zug (TCZ) – is progressing according to plan. Our vertical factory will commence operations in 2024, which will greatly simplify the production process between the “Zephyr hangar” press hall (2020) and the “Mistral” assembly building (2016).
Let’s now turn to a key differentiation feature of V-Zug – the drive towards greater sustainability, which dates back some time now. In the Tech Cluster, for example, in addition to a consistent focus on CO2-neutral energy supply, you also use recycled concrete, which is further enriched with CO2 in order to achieve an even better environmental footprint. What can you tell us about the evolution of this strategic priority in your company, along with its implementation and targets?
Peter Spirig (PS): In 2021 we drew up and adopted a sustainability roadmap with more than 20 quantifiable (medium-term/long-term) targets. Our progress here is measured on an annual basis, and disclosed transparently in the Sustainability Report. The Sustainability Report will be integrated into the Annual Report with effect from the 2023 reporting year.
Marcel Niederberger (MN): To give just a few examples: The reduction of CO2 emissions is going well. This has been assisted by the incentivising effect of our internal CO2 levy, which amounts to 120CHF/tCO2 in the CO2 funds. This has facilitated the implementation of a range of emission-cutting measures. We are likewise making good progress in ensuring a circular economy in product development. We are now seeing our first successes with our suppliers and have launched new business models such as “product as a service”. Diversity is continually strengthening at management level. Another area in which we are keen to improve is the reduction of workplace accidents.
Your first ever electric truck has been put into service. How has that experiment worked out? And what date are you setting for the full electrification of your vehicle fleet?
MN: Although we ordered our first e-truck back in March 2023, it will not enter service until the start of 2024. The conversion of our service fleet to e-vehicles is well underway, and we have accumulated positive experiences in practice. The biggest challenge is arranging the charging infrastructure close to where our service technicians live. Sometimes this just involves an installation in their own home (easy), but some technicians live in rental apartments with a shared underground parking (solvable), and then there are the inner-city environments with blue zone parking (challenging). But we should be able to master these infrastructural challenges in not too long a timeframe.
Steel is an important component in your products. But steel production is hugely energy-intensive, with this industry making a significant contribution to global emissions (8%). V-Zug therefore now uses “green steel”. Can you explain the difference, including with figures?
MN: We are pleased to be already using sustainable stainless steel. The key figures here relate to the recycling component and overall CO2 emissions. Based on current usage: approx. 90% recycling component (industry average approx. 45%) and 1.8tCO2/tSteel (industry: 5.4t, stainless steel from Asia: 7.8t).
With “Circle Green Steel” we are going a step further. Here the recycling component rises to almost 100%, which results in a CO2 intensity of 0.6tCO2. Production using this steel will start in the autumn. This project is partly being financed by our CO2 fund, with the aim of scaling this material and reducing costs in the medium term.
Let’s talk about the problem of plastic. Nowadays, oil-derived substances account for a significant proportion of not just clothing, but also shoes, protective covers, and shower curtains. When these are washed, fibres and particles are released that ultimately end up in bodies of water as toxic micro- and nano-plastics. These include PFAS compounds, also known as “forever chemicals”, as used in Gore-Tex. Among other things, these lead to infertility in marine species as well as humans, which explains why they are now being prohibited in a phased way in the US and the EU. What are you doing as a pioneer to contribute to the resolution of this planetary problem?
MN: Microplastic is a major global challenge, and the sources of microplastic are numerous. We welcome the fact that the textile industry is now rethinking the way it selects materials, albeit in some cases only in response to political pressure. The latter is apparent in various sustainability themes. Our fundamental conviction is that initiative is required at all levels: politically, in the private sector, and by each one of us as consumers. In Switzerland, microplastic is filtered in sewage treatment plants, and the resulting sludge is then thermally recycled. In our view, this is the right place and the right approach to focus on if we are to remove ever smaller particles of microplastic from the system. It’s a more rational and effective way than introducing filters in every washing machine or every household. Unfortunately, this downstream filtering is not undertaken everywhere in the world, but this is where the improvement is going to come from.
Are investors able to appreciate the company’s sustainability profile and the specific progress it is making in the area of decarbonization? What have been your findings in communications with institutional and private investors?
PS: There’s no doubt this is becoming an increasingly important theme. We are seeing a rise in the number of investors that are genuinely interested in these issues, and they are grateful for comprehensive information as well as personal exchanges. Our transparency in our Sustainability Report, which we have published ever since 2012, is highly valued by investors.
As an additional factor, there are a number of different rating agencies, and these vary considerably in their methods and metrics. ESG rating is a relatively young discipline, which will doubtless be optimized and professionalized over the coming years until we reach the kind of established level that we have with credit ratings. That’s something we support.
When unveiling the half-year report you talked of a “silver lining” at the end of the second quarter. How would you evaluate the business outlook for the second half of the year and 2024 now?
PS: We confirmed our medium-term targets when publishing the Annual and Half-year Reports, but deliberately refrained from issuing any guidance for the full 2023 and 2024 years, as the ongoing fluctuations in the economy mean that there is still a relatively high level of uncertainty.
What sales growth and earnings growth rates are you targeting over a horizon of 3-5 years, and what can you say about the dividend from today’s standpoint?
PS: In the medium-term outlook for 3-5 years we are confirming our medium-term targets: 3% organic growth, EBIT margin of 10-13%. We will only publish details on the dividend when we publish the annual results and send out invitations to the General Meeting.
Mr Spirig, Mr Niederberger, many thanks for your time and these interesting insights.
