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Edited Transcript of DKSH.S earnings conference call or presentation 16-Jul-19 9:00am GMT

Half Year 2019 DKSH Holding AG Earnings Call

Zurich Jul 24, 2019 (Thomson StreetEvents) -- Edited Transcript of DKSH Holding AG earnings conference call or presentation Tuesday, July 16, 2019 at 9:00:00am GMT

TEXT version of Transcript

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Corporate Participants

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* Bernhard Schmitt

DKSH Holding Ltd. - CFO & Member of Executive Board

* Stefan P. Butz

DKSH Holding Ltd. - CEO, Head of Business Unit for Consumer Goods & Member of Executive Board

* Till Leisner

DKSH Holding Ltd. - Head of Group Investor & Media Relations

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Conference Call Participants

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* Alain-Sebastian Oberhuber

MainFirst Bank AG, Research Division - Head of Equity Research Switzerland & MD

* Aymeric Poulain

Kepler Cheuvreux, Research Division - Head of Support Services Research

* Daniel James Hobden

Crédit Suisse AG, Research Division - Research Analyst

* Marco Strittmatter

Zürcher Kantonalbank, Research Division - Analyst

* Pascal Furger

Bank Vontobel AG, Research Division - Analyst

* Rory Edward McKenzie

UBS Investment Bank, Research Division - European Support Services Analyst

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Presentation

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Operator [1]

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Ladies and gentlemen, welcome to the DKSH Presentation Full Year (sic - see press release, "half-year") Results 2019 Conference Call and Live Webcast. I am Sandra, the Chorus Call operator. (Operator Instructions) And the conference is being recorded. (Operator Instructions) The conference must not be recorded for publication or broadcast.

At this time, it's my pleasure to hand over to Till Leisner, Head of Investor Relations. Please go ahead, sir.

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Till Leisner, DKSH Holding Ltd. - Head of Group Investor & Media Relations [2]

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Thank you, Sandra, and good morning, everybody. It's a pleasure to welcome you to the 2019 Half Year Results Conference Call of DKSH. As Sandra said, I'm Till. And for those of you on the call, I have with me Stefan, our CEO; and Bernhard, our CFO.

Before we start, as usual, please have a look at the disclaimer of our presentation regarding forward-looking statements. For those who do not have the presentation in front of them, you will find them on our web page, www.dksh.com, in the Investor Relations section.

Let me give you a quick overview of today's agenda. First, Stefan will present you with the highlights of the first half and then give you an update on the business units. And then Bernhard will walk you through the financials and provide you with an outlook statement.

Before we go to the Q&A session, I kindly ask you to tell us your name when you have a question and the company that you're working for.

And with that, I would like to hand over to Stefan. Please go ahead.

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Stefan P. Butz, DKSH Holding Ltd. - CEO, Head of Business Unit for Consumer Goods & Member of Executive Board [3]

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Good morning, ladies and gentlemen. I'm very pleased to welcome you to DKSH half year conference 2019. We appreciate that you have taken time for us. Please let me go straight into the most important events of the first half of the year.

We have further developed our strategy. The 3 growth drivers that strengthen our business, the continuously growing middle class in Asia, the increased inter-Asian trade and the trend towards outsourcing are still intact and our business model is resilient. In order to drive strategic market expansion, we have accelerated our acquisition activities since 2017. We positioned ourselves in attractive segments and acquired profitable and complementarily businesses. In the first few months of this year alone, we have made 4 earnings-accretive acquisitions and we have a good M&A pipeline.

We have stepped up our digital business and will place a special focus on the topic of digitizing our processes and business activities. We will also focus more on big data and analytics in the future. We are continuously streamlining our organization to become more agile. We are also further developing our corporate culture, where teamwork empowerment, entrepreneurship and sustainability are essential values for us. We place customers and employees at the heart of our activities. In doing so, we are increasing the appeal of DKSH for the next generation.

Let me now elaborate on the 4 business units. We have further expanded our leading position in the 3 business units: Healthcare, Performance Materials, and Technology. Business Unit Performance Materials, in particular, performed very well with double-digit EBIT growth. And the Healthcare division improved with adjusted and EBIT growth of 8.6%. In sum, Business Unit Healthcare, Performance Materials, and Technology grew adjusted EBIT by more than 8%. This is a significant increase compared to last year.

In Business Unit Consumer Goods, we have intensified the restructuring, which is currently at a well-advanced stage. Net sales increased by 3.4%. Additionally, we opened up attractive business areas with 2 earnings-accretive acquisitions. Despite the challenges in the consumer goods market and the necessary restructuring, we grew underlying sales by 5.8% at group level. This growth is adjusted for the Healthcare business in China and includes organic growth acquisitions and a slightly positive exchange rate effect. We are confident that we will continue to deliver organic growth in the future and complement it with value-accretive acquisitions.

With a generational change at the beginning of the year, we focus on setting the pace even better for DKSH's future. Let me briefly present the most important events to you. The Board of Directors has been renewed with 3 new members: Jack Clemons, Wolfgang Baier and Marco Gadola, who is starting in January 2020. These new members bring valuable expertise on Asia, health care, consumer goods and supply chain management and perhaps most importantly, they help us to make better use of the opportunities in the field of digitization.

We have also strengthened our management team with Terry Seremetis. I'm pleased to have an experienced consumer goods specialist on board, who will take over the leadership of Business Unit Consumer Goods early August. The appointment of Laurent Sigismondi, our General Counsel, to the Executive Committee, underlines our continued commitment to good corporate governance. Together with our anchor shareholders, the Diethelm Keller Holding, these renewals ensure continuity and stability.

Let us now move on to an essential pillar of our growth strategy, acquisitions. Here, you see an overview of the acquisitions we have made in 2019. The acquisition of Auric Pacific's consumer goods business in Malaysia and Singapore completed in April 2019 is the largest transaction since the merger of DKSH in 2002 with annual net sales of CHF 185 million. DKSH has positioned itself in the attractive, high-margin foodservice and so-called retail sector and took over one of our largest competitors in Malaysia and Singapore.

Also in April, Business Unit Technology completed the acquisition of the distributor, SPC. With this transaction, we became the market leader for analytical instruments in Thailand.

In Business Unit Performance Materials, we strengthened our local presence in Benelux through the acquisition of Dols International, a specialty chemicals distributor based in the Netherlands. Up until then, we have had little presence there, and this means we have expanded our market coverage in Western Europe, also offering more regional solutions for our clients.

In Australia, DKSH made another acquisition in the consumer goods sector with CTD in July. With that transaction, we accelerated our expansion in the Pacific region.

In total, with these 4 acquisitions, we have already added almost CHF 300 million of high-margin sales at attractive multiples. The integration of the companies is going well and these acquisitions will further strengthen our business.

Let us now move from the acquisitions to our key figures for the first half of 2019. As you might remember, we withdrew from the Healthcare business in China last year. This effect alone reduces sales in the first half by around CHF 360 million compared to the same period of the previous year. Excluding this effect, we recorded a solid growth rate of 5.8%, a combination of organic and acquisitory growth as well as a small positive currency translation effect.

The adjusted operating profit, excluding the Healthcare business in China and excluding one-off restructuring costs in Business Unit Consumer Goods, amounted to CHF 124 million in the first half of the year. This is higher than in the previous year. The adjusted profit after tax of CHF 79.3 million was below the previous year due to currency fluctuations, the initial application of IFRS 16 and financing costs for acquisitions.

Let me now please give you an overview of the business units, starting with Healthcare. As I just mentioned, we withdrew from the Healthcare business in China last year. Adjusted for this effect, net sales grew by 7.7%. In all other markets, the business unit was able to increase sales. The adjusted operating profit grew by 8.6% to CHF 68 million, which led to a margin increase. We have strengthened our medical device business further; and further developed our own brands, making it possible to enter the Philippines in this business line. In 2018, we have partially automated the distribution center in Hong Kong. Towards the end of this year, we also plan upgrade of our Healthcare distribution center in Singapore.

Let me now proceed with the Business Unit Consumer Goods. The entire consumer goods industry is facing challenges, as you know. And we have recorded declining results in this sector in recent years. That is why we intensified the overdue restructuring and are pleased with the underlying progress. Despite all this, we increased sales by 3.4% to around CHF 2 billion in the first half of the year.

The restructuring initiated at the end of 2018 is well-advanced. Organizational adjustments, impairments and the closure of unprofitable business segments resulted in one-off costs of CHF 13.3 million in the first half of 2019. The adjusted EBIT, that is excluding these restructuring costs, is 7.9% below the previous year level. Already in the first half year, we reduced the EBIT decline of the previous year.

6 months ago, I explained to you the 3 main initiatives we are driving forward in the Business Unit Consumer Goods. First, through investments, we are positioning ourselves better for the future. Second, through acquisitions, we are developing additional and attractive segments. And third, we have intensified the restructuring in the business unit after a few years of declining profits.

By investments, we mean the expansion of our distribution network, the introduction of the transport management system and the expansion of our customer relationship management system, Echoplus. We also opened new markets, such as Indonesia and in the digital as well as in the e-commerce sector.

These initiatives have already helped us to improve the performance in recent quarters. All in all, these investments are on track. Take, for example, the new transport management system that we introduced in Thailand, Singapore, Hong Kong and Malaysia. Thanks to an improved interactive planning, deliveries and transport routes are optimized and fewer resources are, therefore, tied up. The system is currently being implemented as planned.

Our acquisition strategy is crucial since it gives us access to attractive business segments, such as the HORECA: hotels, restaurants and café sector. With Auric Pacific and CTD, we have made complementary and accretive acquisitions. In the long term, they will consolidate and expand DKSH consumer goods sector and market position.

As a third initiative, we have intensified the restructuring of the Consumer Goods business in the first half. This project is associated with increased expenses that have affected the half year results. However, the restructuring also forms the basis for improved future efficiency. Furthermore, as mentioned already, with Terry Seremetis, we have found an established new head of the business unit. With all these steps, we will sustainably set up our Business Unit Consumer Goods for a successful future.

Let me give you more details on the restructuring in the next slide. We have put in place programs on the larger DKSH market to sustainably increase the operating profit of our Consumer Goods business. In Hong Kong and Malaysia, the projects initiated end of last year have already shown first successes. In Thailand, the most complex DKSH market, we set the course for a turnaround in the second half of the year.

The programs are based on 3 main pillars. First, we are improving sales. We have optimized our brand portfolio and renegotiated the contract terms with individual manufacturers or even terminated contracts. We have separated from product so-called SKUs and closed unprofitable business in individual markets.

Second, we have analyzed and changed the process in the supply chain in our distribution network as well as in the distribution centers. I mentioned our new transport management system before. Inventories, for example, were also scrutinized. The progress we are making here is a central part.

Third, we are increasing the efficiency of our organizational structure and internal processes. We need to be leaner, more agile and reduce costs.

Additionally, we are nurturing a stronger performance culture with concrete KPIs and we are focusing more on individual accountability. As I mentioned, the different markets are at different stages in the implementation of this program. In Hong Kong, we are seeing the first encouraging results. And in Malaysia, the onetime restructuring costs should already be covered by the savings this year.

Let me summarize the development of the Business Unit Consumer Goods once again. We increased net sales and on the top, opened up attractive business segments with 2 earnings-accretive acquisitions. Even if the operating result of the business is still behind the previous year, we reduced the scope of the decline already in the first half year. Overall, we have launched targeted measures in the first half of 2019. We see that these effects and are, therefore, confident that they will have a positive impact in the future.

Now to the Business Unit Performance Materials. This business unit was able to build on a strong growth in the first half of 2019. In concrete terms, we achieved net sales of CHF 504.2 million, which is 6% more than in the previous year. Operating profit grew double digit by 12.3% to CHF 44.6 million, which attests to the positive earning operating leverage.

I would also like to highlight the strong growth in Asia. We have expanded the existing contracts, which -- with international manufacturers and gained new business. Among them are well-known names, such as Tate & Lyle, Evonik or Huntsman. By acquiring the specialty chemicals distributor Dols in the Netherlands, we have also expanded our market coverage in Western Europe.

Due to the increased demand for our services, we have expanded our global network of innovation centers by 5, for example, in Malaysia, China or Myanmar. We now have 44 of these innovation centers worldwide, which differentiates us. All this and our position in the relatively resistant areas of personal care, pharmaceuticals and the food industry gives us confidence for further positive development of the business unit.

Finally, I come to the Business Unit Technology. Here as well the focus in the first half of the year was on the expansion of the business. We recorded good growth in China and Korea, in particular. At CHF 198.7 million, net sales was 3.4% higher than in the previous year. The operating profit of CHF 7.4 million was below previous year's levels. We realized fewer projects in the first half and the majority of the ongoing projects were materialized in the second half of the year.

We are pleased that the acquisition of SPC has made us the leading provider of analytical instruments in Thailand. In this area, we offer laboratory technology and industry-specific services in the fields of pharmaceuticals, cosmetics as well as oil and gas. And this segment is particularly attractive for DKSH because more inter-Asian trade increases the quality requirements for local manufacturers. DKSH supports them with on-site analysis equipment or services in DKSH's own laboratories.

Before I give the floor to Bernhard, I would like to conclude by saying that something about our further development. You have seen that our employees are very focused and that we are working on the right levers. Therefore, we expect a stronger second half churn.

In sum, first, we are well-positioned in the Business Unit Healthcare, Performance Materials, and Technology. In the first half of the year, we recorded an EBIT growth of more than 8% and we expect a solid performance in all 3 areas in the second half as well.

Second, the effects from the Healthcare business in China will decrease in the second half. Our Healthcare business grew in all markets in the first half and we continue to see good growth opportunities here.

Third, the well-advanced restructuring in Consumer Goods will lead to more and more efficiency gains.

Fourth, Business Unit Performance Materials will continue to develop positively due to the expansion of existing contracts and new businesses.

And fifth, we expect more project completions in the Business Unit Technology in the second half of the year.

Last but not least, the 4 acquisitions will provide additional earning contributions and our pipeline of other acquisition candidates is looking promising. Based on all these developments and assuming stable market conditions, we expect a better second half of the year and an increase in operating profit for 2019 on group level from today's perspective.

I'm now handing over to Bernhard, who will familiarize you with the details of the financial figures for the first half of the year. Thank you very much for your attention.

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Bernhard Schmitt, DKSH Holding Ltd. - CFO & Member of Executive Board [4]

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Thank you, Stefan. Dear ladies and gentlemen, I would also like to welcome you to our presentation of the half year results 2019.

Net sales for the first 6 months 2019 matched last year's level at CHF 5.6 billion. The adjusted operating profit, in short, EBIT, of CHF 124 million was above previous year's level and the adjusted profit after tax was below last year at CHF 79.3 million. Our free cash flow and RONOC were below last year's level. More about that in a minute.

Now let's first take a closer look at the development of our net sales. As already communicated, we exited our Healthcare business in China in 2018. Because of this, CHF 361.2 million or 6.4% of net sales were missing compared to the last year's period. The organic growth rate in the first half of 2019 was 3.1%.

We consolidated the acquisition of Auric Pacific, SPC and Dols International for the first time in the second quarter of 2019. These 3 acquisitions added 1.2% to net sales growth. Exchange rate effects added an additional 1.2% to sales. In sum, net sales in the first half year of 2019 matched last year's level at CHF 5.6 billion.

Several onetime effects have led us to adjust our operating profit, the EBIT. This will make our numbers more comparable. We have adjusted the EBIT for the first half of 2018 by the China effect. In sum, these are CHF 17.1 million, resulting in an adjusted EBITDA of CHF 122.4 million for the first half year of 2018.

The EBIT of the first half year of 2019 was adjusted for restructuring cost in Consumer Goods. Organizational changes, impairments and the closing of unprofitable businesses resulted in onetime costs of CHF 13.3 million. The adjusted EBIT of CHF 124 million, therefore, was 1.3% higher than last year.

For the profit after tax, we used the same logic for the adjustments. We adjusted the profit after tax for the first half of 2018 by the China effect. In sum, this corresponds to CHF 11.1 million. As a result, the adjusted profit after tax for the first half of 2018 was CHF 86.4 million.

The profit after tax in the first half of 2019 was adjusted for restructuring costs in Consumer Goods amounting to CHF 11 million. The adjusted profit amounted to CHF 79.3 million and was below last year's level because of currency effects, first-time application of IFRS 16 and financing costs for the acquisitions. For profit after tax, the first-time application of IFRS 16 had a negative influence of CHF 1.7 million.

Let me quickly explain the IFRS 16 effect. As mentioned before, IFRS 16 as of 1st of January 2019, a positive impact on EBIT of around CHF 2.5 million. For profit after tax, it started a negative impact of CHF 1.7 million. Assuming no larger changes until the year-end, we expect the effect from IFRS 16 to most likely double for the full year of 2019.

Next, to our operating performance. Three events impacted our balance sheet. Firstly, unlike in the past years, we distributed our dividend in March. This time, in sum, around CHF 120.3 million, which in turn reduced our cash position.

Secondly, we paid CHF 175.1 million for the acquisitions of Auric Pacific, SPC and Dols. We have financed the acquisition of Auric at our listed entity in Malaysia primarily with debt.

And thirdly, the application of IFRS 16 extended the balance sheet by roughly CHF 240 million. We capitalized our operating leases, which resulted in integration of a right-of-use asset and lease liabilities. In sum, our balance sheet was expanded by 8.1% to CHF 5.3 billion.

The free cash flow, that's operating cash flow less capital expenditures, declined compared to previous year's and amounted to CHF 32.1 million. The 2 main factors for the decreases were: first, the reported profit after tax was lower; and secondly, in the first half of 2019, we increased capital expenditures for our infrastructure, such as the new distribution center in Singapore, which will open in last -- in late autumn. The main investments occurred already in the first half of the year. For the full year 2019, we expect investments of about CHF 40 million, which is similar to previous years.

Please note that IFRS 16 had almost no impact on the free cash flow. The rental costs were reallocated in 2018 from the operating activities, the repayment of lease liabilities of CHF 42.6 million in 2019.

For the RONOC, the return on net operating capital, there were several effects that distorted year-on-year comparison. The reported RONOC decreased from 22.1% to 16.4%. Adjusted for the Healthcare business in China, the RONOC was 3.1% lower in the first half of 2018. Our Healthcare business has generally and significantly higher RONOC than the rest of our business.

In the first half of 2019, the restructuring cost at Business Unit Consumer Goods lowered the RONOC. This effect alone affected the figure by 2 percentage points. (inaudible) the acquisition had the reducing effect. Net assets increased with the takeover, but the corresponding profit from the new units were only booked for 3 months. Auric Pacific, SPC and Dols were fully consolidated for the first time in the second quarter. This corresponded to 0.3 percentage points. Adjusted for these effects, RONOC was 18.7% and on last year's level.

Let's now move on to the outlook as Stefan had briefly mentioned before. On group level, assuming stable markets, DKSH expects a higher operating result in 2019. We plan a tax rate of 27% to 29%, assuming there are no larger corporate tax changes in the countries we're operating in. As mentioned before, we expect capital expenditures of around CHF 40 million. Included in the sums are a couple of million for further automation of our distribution centers, for example, in Singapore.

With that, I conclude my speech and let us switch to the Q&A session.

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Till Leisner, DKSH Holding Ltd. - Head of Group Investor & Media Relations [5]

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Thank you very much. And can we please have the first question from the operator?

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Questions and Answers

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Operator [1]

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(Operator Instructions) The first question comes from Poulain, Aymeric, Kepler.

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Aymeric Poulain, Kepler Cheuvreux, Research Division - Head of Support Services Research [2]

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I've got three questions, if I may. The first one is on the central cost. There is quite a jump in the first half, so just wondered what this was related to. And if that half year central cost should be extrapolated for the second half.

The second question is on the restructuring of Consumer Goods. You mentioned the confidence in the payback of your initiative. And yet at the moment on the organic growth of the business, there's no real evidence of benefit, especially the sales push initiatives. So could you give us a bit more color on the specific reason why the organic growth has been dragged? What -- are there some restructuring effect? You mentioned termination of contract and the like so that would be helpful to have some more color on that -- on this moving part.

And on -- then the third question is on interest costs. There's clearly a jump. But that may also reflect some aging effects, which may have also flattered the margin of the Performance Materials business. So could you give us a bit more breakdown of the interest cost line pre IFRS 16 just to understand what's driving this jump?

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Bernhard Schmitt, DKSH Holding Ltd. - CFO & Member of Executive Board [3]

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Okay. Let me answer the central cost and the interest first and then I'll hand over to Stefan to answer the restructuring and organic growth questions on CG. So central costs last year included some subsidies from -- in China, which have not recurred this year. That's the main reason for the jump. And besides that, we had the normal cost increases from salary increases over the region. On the interest side, the biggest increase there was from financing of our acquisitions in Malaysia. That was the big piece of the Auric acquisition.

Auric was in 2 countries, Singapore and Malaysia. The Malaysia bit is financed through our listed entity, which we only own to 70%. And we, therefore, decided to do it -- to finance it in Malaysia in the listed entity with loans. That increased our interest costs by about CHF 2.5 million.

The other big jump in there, of course, is IFRS 16, which added roughly CHF 5 million, a little bit less, into the interest cost, which would, of course, continue also for the rest of the year. Does that answer your question on interest?

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Aymeric Poulain, Kepler Cheuvreux, Research Division - Head of Support Services Research [4]

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Just curious if there was any aging cost that, obviously on the other side of it, would have a margin boost in all of the trading-related. Because I think the margin of Performance Materials was very strong, but it may be related to a currency swing that you see at the interest line. And obviously, I'm just curious if there was any movement of that nature in the interest line.

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Bernhard Schmitt, DKSH Holding Ltd. - CFO & Member of Executive Board [5]

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There was some movement on the hedging costs, yes, a couple of millions worse than last year.

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Stefan P. Butz, DKSH Holding Ltd. - CEO, Head of Business Unit for Consumer Goods & Member of Executive Board [6]

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Aymeric, please let me answer your second question regarding the restructuring. Yes, you are right, we are very confident in our program. We reduced the run rate in EBIT already and we also expect higher results for H2.

In terms of the top line growth, you're right, the organic growth is slightly negative. And this is primarily driven by the fact that we are cleaning up our portfolio. As I mentioned before in my speech, we are canceling some contracts or part of contracts with some clients, we are reducing some SKUs and we are closing some sub-business lines in several countries. And all of this obviously has a negative effect on the organic growth rate.

On top of that, the market in Thailand, if you look at the retail sales and private consumption, it's not very high. That is also slightly depressing the organic growth rate despite the fact that we are seeing some very good growth, for example, in Indochina -- or in Indonesia.

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Operator [7]

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The next question comes from Oberhuber, Alain, MainFirst.

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Alain-Sebastian Oberhuber, MainFirst Bank AG, Research Division - Head of Equity Research Switzerland & MD [8]

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Alain Oberhuber, MainFirst. I've also three questions. First, regarding the guidance you gave. Do I understand that correctly that the base '18 is around CHF 264 million and that's the base that you guide now for '19, which will be higher than this CHF 264 million EBIT?

The second question is regarding working capital. Is there a risk that we see an increase in working capital because we see a deterioration of the Consumer Goods business? Or Bernhard, could you guide us, how much we could expect by year-end working capital to be off, i.e., negative from cash flow?

The third question is regarding the Consumer Goods business. Stefan, when do you think that we will see again positive organic growth? Or do we expect that in Consumer Goods H1 next year? And maybe just a word on Maurice Lacroix, where do we stand there regarding profitability?

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Bernhard Schmitt, DKSH Holding Ltd. - CFO & Member of Executive Board [9]

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Okay. So let me try to answer the first two questions. For the guidance, the reported EBIT last year was CHF 264 million. We would -- the guidance is against the same logic as we have used in our press release. So that would be against CHF 255 million, which include -- which is corrected by the China effect last year and the restructuring we had in Consumer Goods last year.

For the working capital, for the cash flow guidance, I don't see a major change compared to the first half year. As I explained in my speech, the Healthcare typically have a much better RONOC. That means less working capital. And by not having China in there, of course, that has an effect. But that is already also covered in the first half year. The cash flow will be primarily driven by our profit after tax development, not so much -- I don't expect a big impact on working capital.

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Stefan P. Butz, DKSH Holding Ltd. - CEO, Head of Business Unit for Consumer Goods & Member of Executive Board [10]

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So Alain, I'm -- sorry, go ahead.

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Alain-Sebastian Oberhuber, MainFirst Bank AG, Research Division - Head of Equity Research Switzerland & MD [11]

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Excuse me, Stefan. Bernhard, just to follow up regarding the guidance, so you say that you expect in the current year a higher EBIT than the CHF 255 million adjusted EBIT we saw last year, that's correct?

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Bernhard Schmitt, DKSH Holding Ltd. - CFO & Member of Executive Board [12]

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Yes.

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Alain-Sebastian Oberhuber, MainFirst Bank AG, Research Division - Head of Equity Research Switzerland & MD [13]

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Okay.

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Stefan P. Butz, DKSH Holding Ltd. - CEO, Head of Business Unit for Consumer Goods & Member of Executive Board [14]

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Okay. Alain, then I would like to come to your CG question. When do we expect positive organic growth in Consumer Goods? So for this year, driven by the effects I just mentioned in the other question, we expect that sales are more or less on last year's level; and that in 2020, driven by our restructuring program and sales initiatives, we will see again positive organic growth rates in CG. And this should already start in H1.

And second part, second part of your question was regarding Maurice Lacroix. I guided at full year results announcement in Q1 that we do expect a black zero in Maurice Lacroix and I can reconfirm that. The new collection of the AIKON is in very good demand. I mean we have a very solid order book. And also the restructuring we have done in 2018, which reduced the cost base overall, we streamlined some distribution centers -- channels and so on and so forth will deliver a positive effect. So yes, objective is to close with a black zero on Maurice Lacroix for this year.

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Operator [15]

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The next question comes from Rory McKenzie, UBS.

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Rory Edward McKenzie, UBS Investment Bank, Research Division - European Support Services Analyst [16]

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It's Rory here. Maybe first two on consumer, please. You're, of course, making some very big changes to that business with some exits, some acquisitions and some new services or changing the mix probably. Can you talk about where you think the new division can get to in terms of the margins? And then related to that, when do you think you'll see a full payback on your investments in terms of the timeline of when you think you'll get to that maybe new margin?

And then secondly, I just wanted to ask about eSweets. You took an impairment there. Just kind of what's happened and how much has it deteriorated?

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Stefan P. Butz, DKSH Holding Ltd. - CEO, Head of Business Unit for Consumer Goods & Member of Executive Board [17]

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Okay. In terms of Consumer Goods, I mean we do expect that the business unit is coming back to historic margins. Until all the effects come into play in 2020, it might not happen in 2020, but we -- at 2020 -- or in 2022, we do expect that we come back to historic margin levels.

And the question regarding eSweets, Bernhard is going to answer that.

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Bernhard Schmitt, DKSH Holding Ltd. - CFO & Member of Executive Board [18]

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Yes. We bought eSweets in China. That was an e-commerce business where we were trying to get into the market for sweets, as the name says. And we have been quite successful initially. We are selling their chocolate truffles and some other products directly in Internet channel only.

Lately, the sales have dropped there a bit, which then led us to the assumption or the conclusion that we cannot keep the current valuation up. We are still working on coming back to previous levels. But this will take a little time. So to be prudent, we took an impairment on that investment. We are not giving it up. We are continuing to grow if we can.

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Rory Edward McKenzie, UBS Investment Bank, Research Division - European Support Services Analyst [19]

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Okay. Maybe two follow-ups, if I may. What do you see as the historic margin? Obviously, gifting market changed a lot within your luxury and lifestyle business. So I take that the margins of over 4% that you had in 2012, that seems probably unattainable. But would you be seeing, what, 3.5% as a kind of fair average margin in consumer?

And on eSweets, sorry, what exactly changed? Just did you feel your proposition stopped being in the right place of the market? Why would it suddenly seem to get worse?

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Stefan P. Butz, DKSH Holding Ltd. - CEO, Head of Business Unit for Consumer Goods & Member of Executive Board [20]

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Okay. In terms of the margin, yes, historically in a few years, the margin was inflated by very high margin in the luxury and lifestyle business, which is at this point of time a significantly lower part of the portfolio as well as the collapse of the watch market in the most recent years, I mean, never really came back. So when I talk about historic margins, it focuses on the core business. And that margin range is somewhere between 2.5% and 3%.

Regarding our value proposition, as I was saying before, if you look into our investments, what we invest into our route-to-market, so expanding our capillary distribution, I think we deliver a unique value proposition to our client. We are continuously expanding that footprint that gives them access to more stores than most of our competitors, especially if you look at it from a regional perspective. So that's the reason why we believe in our value proposition, which will be completely rebuilt then over the next 1.5 years, as I was indicating before.

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Operator [21]

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The next question comes from Fan, Kate, Crédit Suisse.

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Daniel James Hobden, Crédit Suisse AG, Research Division - Research Analyst [22]

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It's Dan Hobden from Crédit Suisse. Just two questions, if I may, on the consumer division, so picking up maybe what people have said. So when you speak about CHF 13 million worth of restructuring charges and heavily H1 weighted, I was wondering, could you give us some guidance as to how many or how much more restructuring charges you feel will be required in 2019?

And then with the new head of the business unit starting in August, is there a chance that he comes in and has an adjustment to this and, therefore, makes further strategic changes to run that division?

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Stefan P. Butz, DKSH Holding Ltd. - CEO, Head of Business Unit for Consumer Goods & Member of Executive Board [23]

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Okay. Thank you very much, Dan, for your questions. As we were saying before, we consider the restructuring as very well advanced. And the restructuring charges in H1 are more or less on the level what we indicated in Q1 after the full year presentation.

We do not expect at this point of time any major further restructuring in H2. Maybe there is low single-digit, which partly may be driven also by Terry Seremetis, who is coming in. But I can calm you down since Terry knows our business very well and we have also already been in exchange, so he's very well-informed. So we are very confident that max, there's a very low single-digit number, which might come in, into H2 since we are -- since we progressed so well already.

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Operator [24]

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So far, there are no other questions. (Operator Instructions) We have now a question from Pascal Furger, Vontobel.

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Pascal Furger, Bank Vontobel AG, Research Division - Analyst [25]

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First, a question on Thailand. So here, just doing a small calculation that we arrive at a negative organic growth of around 3.5%. Is this possible? And could you give us here, please, some more color on the performance in Thailand by division?

And then maybe a more general question on the lifestyle segment. I know you do not communicate on individual contracts. But here, for instance, Levi's was warning for a softer second half of the year. And also they tried to basically to more cut out the middleman and directly sell their clothes to customers.

So my question is here at the lifestyle segment, is this something which you see more challenges coming up? And other than that, do you see basically more customers at least try to cut you out in this regard?

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Stefan P. Butz, DKSH Holding Ltd. - CEO, Head of Business Unit for Consumer Goods & Member of Executive Board [26]

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Okay. Thank you very much, Pascal, for your questions. So in turn, let's start with lifestyle first. In -- Levi's is a long-term, very well-established partner for us. And yes, the -- some of the sales are based also on Chinese tourists coming especially into Levi's. But I can share with you that we are still seeing some very good growth in our Levi's numbers in Thailand and also driven and supported by the new openings in Cambodia and Myanmar, where we opened just new markets for them. So we are very positive that especially this account is developing nicely for us.

In terms of Thailand overall, I mean in total, we are still seeing growth in Thailand, which is driven by good development in Performance Materials, in Technology and some lower growth in Healthcare. In Consumer Goods, and I think if you look into the same -- if you look into consumer confidence in Thailand as well as same-store sales of the major retailers, you see that the sales are kind of depressed in the CG market and that's also reflected in our numbers.

But if I put all of this together, we are still seeing some growth in Thailand, but we are a little bit cautious looking at the most recent developments there. Long term, we are very positive for Thailand as well.

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Operator [27]

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The next question comes from Marco Strittmatter, ZKB.

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Marco Strittmatter, Zürcher Kantonalbank, Research Division - Analyst [28]

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Just to reconcile how you -- if you take the EBIT of CHF 255 million you mentioned as a target or as the base to improve, does this mean that in the second half of the year,

you expect a negative China effect of around CHF 10 million? Am I implying this correctly? And how much was it in the second half year of '18, the China effect on EBIT?

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Bernhard Schmitt, DKSH Holding Ltd. - CFO & Member of Executive Board [29]

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Okay. The total China effect for the second half of the year will be lower than in the first half of the year 2019. The adjustment in 2018 would be a China effect of a little bit short of CHF 30 million and a restructuring charge we took last year as well in Consumer Goods. And that in total net out to about CHF 10 million. That's why we got to CHF 255 million.

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Operator [30]

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And we have a follow-up question from Alain Oberhuber, MainFirst.

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Alain-Sebastian Oberhuber, MainFirst Bank AG, Research Division - Head of Equity Research Switzerland & MD [31]

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Yes, Bernhard, just to come back on that regarding the adjustments. So in H1, we have seen CHF 30 million, 3-0, of adjustments. Now if we go then into the full year question is we could expect CHF 2 million to CHF 3 million incremental restructuring. That's what you guide now. And how much will be then in the second half the Healthcare China impact, i.e., on an annual basis, how much will be then the adjustments?

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Bernhard Schmitt, DKSH Holding Ltd. - CFO & Member of Executive Board [32]

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Alain, let me ask the second question -- answer the second question first. The sales impact will be around CHF 500 million to CHF 550 million and total EBIT impact would be around CHF 25 million.

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Stefan P. Butz, DKSH Holding Ltd. - CEO, Head of Business Unit for Consumer Goods & Member of Executive Board [33]

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For full year.

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Alain-Sebastian Oberhuber, MainFirst Bank AG, Research Division - Head of Equity Research Switzerland & MD [34]

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For full year?

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Bernhard Schmitt, DKSH Holding Ltd. - CFO & Member of Executive Board [35]

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Yes, full year. The first question was? Restructuring costs, second half, that will be quite low. Yes, that will not be a major -- we don't expect a major posting there again.

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Alain-Sebastian Oberhuber, MainFirst Bank AG, Research Division - Head of Equity Research Switzerland & MD [36]

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Okay. So to add that together, so Healthcare China will be on a full year basis CHF 25 million adjustment. And then probably for the full year, the restructuring in Consumer Goods will be in total CHF 50 million, CHF 60 million. So we are going for more than CHF 40 million adjustments, restructuring in Healthcare China. That's correct?

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Bernhard Schmitt, DKSH Holding Ltd. - CFO & Member of Executive Board [37]

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Yes. If I get it right, yes.

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Operator [38]

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(Operator Instructions) And gentlemen, so far, there are no more questions.

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Stefan P. Butz, DKSH Holding Ltd. - CEO, Head of Business Unit for Consumer Goods & Member of Executive Board [39]

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Okay. Perfect. Then thank you very much for your time. And yes, we look forward to meeting most of you then during the rest of the week. Thank you very much, and have a great day.

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Bernhard Schmitt, DKSH Holding Ltd. - CFO & Member of Executive Board [40]

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Thanks a lot.

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Stefan P. Butz, DKSH Holding Ltd. - CEO, Head of Business Unit for Consumer Goods & Member of Executive Board [41]

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Thanks.

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Operator [42]

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Ladies and gentlemen, the conference call is now over. Thank you for choosing Chorus Call, and thank you for participating in the conference. You may now disconnect your lines. Goodbye.