Between July and October, the shares of Phoenix Mecano endured a prolonged slump, but the price has since picked up and has just broken through the CHF 400 mark. Positive earnings development, the divestment of peripheral activities, and a share buyback programme are having an impact. schweizeraktien.net put a number of questions to CEO Rochus Kobler. He believes Phoenix Mecano is on a solid trajectory, and highlights a number of special factors and megatrends. As the 50th anniversary of the conglomerate approaches, the agile CEO and his team want to lay the basis for another 50 successful years.
Mr. Kobler, in its half-year report for the period ending 30 June, Phoenix Mecano once again unveiled a sharply improved result. Net profit for the period rose by an impressive 19.4%. At the same time, reported sales were virtually unchanged, and even declined slightly in the reporting currency (EUR). However, in organic terms and when adjusted for exchange rate movements, sales actually grew by 4.6%. Please provide our readers with a brief insider’s guide to the latest figures.
Our growth strategy is bearing fruit in our industrial activities. We are now much less exposed to investment cycles than we were in the past, because we now focus on areas of application that are driven by long-term megatrends. In addition, Phoenix Mecano has successfully transitioned from being a component supplier to a module and systems provider with advisory expertise. This enabled Phoenix Mecano to maintain a stable consolidated gross sales figure for the first half of the year, despite a slowing industrial economy and various divestments. In organic terms we actually continued to grow. We also further improved our net result from what was already a high prior-year level. But even more important to me than the year-on-year comparison is the trend that we are confirming: We are on track to deliver on our communicated medium-term targets for profitability, in particular a consolidated EBIT margin of 8-12% at Group level.
There was also a restatement for one of the US subsidiaries. How did this impact on the relevant figures, and what exactly was the reason for this restatement?
The reason for the restatement for last year (2022) was a number of irregularities in the booking of sales, material costs, receivables, liabilities, and accruals/deferrals at a US subsidiary. A number of these issues could also be found in the reporting for earlier years, so last year’s figures were corrected by means of a restatement. Last year – i.e. in the 2022 financial year – this led to a year-on-year reduction of EUR 4.7 million for the operating result in the first half, and a reduction of EUR 4.1 million for the net result of the period. The key thing to grasp is that any figures we report in the current year represent the pure operating performance of the Phoenix Mecano Group, without any one-off effects.
You have also divested a number of business units. What was the background to these decisions?
This year we have divested the Rugged Computing business area – which encompassed various companies in the Industrial Components segment – in its entirety. Going forward, we want to focus even more strongly on the core areas of automation technology and electrotechnical components in this segment, given their significant growth potential. Moreover, the divested companies were having difficulty achieving our profitability targets for capital employed (ROCE of 15%) in a sustainable way, as the corresponding business models tied up a great deal of capital and required significant investment. The timing was ideal for selling these business units at a good price and finding them the right home.
From a geographical standpoint, Phoenix Mecano is broadly diversified. You tick the box of customer proximity, which is a competitive advantage. However, the last few years have also seen a number of disruptions to supply chains, along with transportation problems. The world has also seen an increasing amount of geopolitical polarization recently, which in turn has given rise to trade obstacles such as tariffs and export restrictions, as well as a reshoring trend. This has also led to a number of price increases. To what extent was and is the company affected by all this, and how are you adjusting to the changed parameters?
The supply bottlenecks and exorbitant freight costs that characterized last year have now largely normalized. Indeed, prices have in some cases fallen back to the kind of levels recorded prior to the coronavirus crisis. In other cases, our strong market positions have allowed us to pass on higher costs to our customers even at the tender process stage. From a purely commercial perspective, tariffs and geopolitical tensions are not insurmountable challenges. Our global network of competence centres and distribution units helps us to master these challenges. We have reserve production capacity at various locations, which means we can respond flexibly to these developments or shifts in demand. That gives us a competitive edge in many areas.
Currency markets will inevitably do their own thing, as they are driven by all sorts of factors and can hardly be manipulated due to their sheer scale. You report in EUR but the stock trades in CHF, and your global business is no doubt also influenced by all sorts of other currency movements. How do you manage the complexity of all this for the benefit of shareholders?
We pursue a policy of natural hedging by trying to generate revenues and incur expenditure in the same currency. For example, 44% of all our sales revenues and a significant proportion of our costs are booked in EUR. But we also generate revenues and incur costs in US dollars and Chinese yuan, and we try to align the corresponding income and expense streams through operating measures. In situations where we are heavily exposed to a particular currency, we will use specific instruments to hedge against currency fluctuations.
You recorded a slight decline in new orders in the first half of the year. What does the situation look like as per November? What are you expecting for 2024 and 2025?
Where our industrial activities are concerned, new orders declined in the third quarter but from a very high level, whereas the DewertOkin Technology Group has achieved the turnaround and is now increasing new orders from a low level. We are expecting these contrary trends to persist for the time being and anticipate income remaining stable overall, despite divestments.
Megatrends such as digitalization, automation, and decarbonization are opening up opportunities for Phoenix Mecano that can obviously be exploited to profitable effect. How do you think demand in the coming years will be shaped by the rise of electrification, robotics, IoT, hydrogen technology, and other areas of application driven by technological and sustainability endeavours?
The megatrends you refer to play a hugely important role for our Group. For example, our products are used in wind parks, photovoltaic systems, smart electricity networks, clean rooms for semiconductor production, and on the periphery of industrial automation solutions. We have been seeing strong demand from all these areas over the last few years. Meanwhile, demographic change is a further structural driver of the market for healthcare and comfort furniture, and one that is directly benefiting our DewertOkin Technology Group division. This brings together areas of application for drive solutions of the future in the context of the “smart home” and the digitalization of healthcare.
You have said that the company continues to enjoy a solid growth outlook as market leader in niche markets, and that you are striving to achieve double-digit percentage increases in EBIT. Can you spell out in a bit more detail for our readers precisely what this means?
Our aim as a corporate group is to play a market-leading role in selected niches and specific industrial areas of application. The global niches that we are targeting are characterized by high growth rates, high profitability, and equally high barriers to entry. This growth strategy is reaping long-term benefits. For the 2023 financial year we are expecting an increase in the operating result for continuing operations, excluding one-off costs and revenues. We are therefore on track to achieve our best operating result for 20 years.
Net debt practically halved to EUR 55.8 million in the 12 months to 30 June, 2023. Are you aiming to be completely debt-free? And if so, why?
The reduction of net debt is the logical consequence of our robust cash flow generation and one-off revenues from divestments. Our aim is to ensure a strong balance sheet with debt kept to a reasonable level. That’s why we launched a share buyback programme to return funds that are not immediately needed to shareholders.
When it comes to investment decisions, you follow the Economic Value Added model. EVA is derived from net profit minus capital costs. Many public companies do not bother with this metric, or at least not openly. But despite rises in interest rates, debt capital is still cheaper than equity capital. How do you reconcile this apparent contradiction?
It’s not a contradiction as far as we’re concerned. Internally we apply a simplified EVA model that takes into account our capital costs (WACC). As you know, these capital costs comprise both components of capital – equity and debt. Our WACC fell well below the level of 10% before tax during the years of the low-interest environment. But despite this, we never reduced our internal minimum target return (hurdle rate) before tax of 15% on invested capital. The result speaks for itself – we will achieve this target return at Group level this year.
According to the EVA philosophy, the only genuinely achieved profit is the figure remaining after capital costs. In the wider view, stock price rises and a corresponding increase in market capitalization are the result of such economic gains, which then gives us the metric of MVA, or Market Value Added. Legendary CEOs such as Jack Welch at General Electric were measured against this yardstick. Is this the path you’re following too?
As I said, we achieve greater profitability on the totality of capital employed than this capital costs us (i.e. ROCE > WACC before taxes). We therefore generate added value (EVA) for our investors. We also achieve greater profitability on equity capital than the modelled costs of this capital. This excess return results in a market capitalization that surpasses the value of the pure equity capital. This is what corresponds to the “Market Value Added” that you allude to. But this only constitutes a momentary snapshot, as the market cap also reflects the growth outlook by capitalizing future profits and profit increases. This is how familiar multiples such as the P/E ratio and other financial market metrics are derived. We are one of the few companies whose current market capitalization is below the level of capitalized profits actually achieved. In other words, either what we have achieved is not yet recognized, or the market does not believe we can generate profitable growth. But ultimately we cannot influence how the market thinks.
You have resolved upon a share buyback programme, which you started on 27 October. What were your motives for embarking on this course?
Our solid cash flow and income situation, together with the additional liquidity generated through divestments, has put us in a position to return funds that we do not need immediately to shareholders – in keeping with our long-term distribution policy. The Group’s ability to invest and make future dividend distributions will not be jeopardized by this.
You’re looking to halve CO2 emissions by 2030 and eliminate them completely by 2050. Among other measures, you are relying on PV systems to produce energy. What about the electrification of your vehicle fleet? Are you envisaging or investigating alternatives to plastic from renewable raw materials, e.g. natural resins or biopolymers?
We have set ourselves ambitious targets. To achieve these, in an initial step we are prioritizing those projects that have the most rapid and significant positive effect on the reduction of our CO2 emissions. So our particular focus is on the PV systems you mention. We have also identified numerous other areas of potential and launched the corresponding improvement initiatives. The aim of all these is to improve our CO2 footprint while at the same time delivering the highest possible profit contribution, i.e. “bottom-line effect”. The electrification of our small vehicle fleet plays a secondary role. But we have put the first electrical commercial vehicles into operation this year, and the feedback has been positive.
If you will permit a personal question, what motivated you personally to become CEO of Phoenix Mecano, and what long-term targets have you set yourself?
I’ve been with the Phoenix Mecano Group for more than 12 years now. I joined as COO and am now CEO. I find my current role very fulfilling. Together with my team, I want to ensure the lasting success of the Phoenix Mecano Group, by creating added value for our investors and ensuring that our employees find their work appealing and fulfilling. The Phoenix Mecano Group will soon be celebrating its 50th anniversary – and our shared goal is to lay the basis for a further 50 successful years.
What can you tell us about your shareholder base – for example the proportion of institutional investors, its geographical distribution, and any significant changes?
We have a strong anchor shareholder in the form of the founding Goldkamp family, which holds a good third of the shares and ensures stability. Just under another third of the shares are held by major institutional investors from Switzerland and the US, with the rest divided between individual investors, mainly based in Switzerland and Germany.
Many thanks for these informative and enlightening answers, Mr. Kobler.