“… OUR TEAM HAS ACHIEVED AN ENORMOUS AMOUNT IN THE PAST YEARS …”

Interview with the board of directors

Markus Huemer (CEO), Heiko Gabbert (COO) and Peter Bernscher (CCO) talk about constantly facing new challenges and opportunities, successful organisational transformation, broad technological diversity, systematic innovation, active market development and fair collaboration.

Mr Huemer, how did the 2021 financial year go overall for POLYTEC? You had been quite optimistic after the 2020 crisis year. Are you satisfied with the company’s performance?

Markus Huemer: Looking at it objectively, I cannot be satisfied with an EBIT margin of 2.2 percent and ROCE of 3.7 percent. However, considering all the new challenges we had to face again and again over the recent years, we can be very proud of what our team has achieved, especially under these difficult circumstances. Without the profound transformation of the last few years – I am primarily thinking about initiatives such as ONE POLYTEC or the POLYTEC SOLUTION FORCE, but also our comprehensive digitalisation offensive – it would have been impossible to cope with the upheavals of 2021 in the short term while at the same time maintaining our forward orientation. But of course it gnaws away at the substance when – year after year – every time that things are looking up, the next backlash follows.

What do the results for 2021 look like against this background?

Markus Huemer: Sales revenues saw a minimal increase to roughly EUR 556 million; EBIT, at EUR 12.3 million, was slightly lower than last year and at least clearly positive. Adjusted for the deconsolidation result of EUR 17 million included in 2020, this means a significant increase in operating earnings power. We have to keep in mind that we generated sales revenues of just under EUR 680 million in 2017, meaning that we had to cope with a substantial decline, and that our product portfolio changed significantly at the same time. This required rapid adjustments of structural costs as well as a number of investments. It is an achievement that we keep delivering positive results year after year despite massive upheavals.

In all of this, it is not helpful that customers are imposing tight constraints on us – because the capital commitment is much too high in view of the possible returns. Our capital employed amounts to a considerable EUR 330 million on average. That is not satisfactory in the long run – either call-offs recover in the short term, or terms and conditions need to be discussed. Of course we are happy that our core customers achieve excellent results, but it would probably be advantageous to consider a fairer distribution.

What were the key external factors and main influences? After all, the corona crisis and the often-discussed chip shortage confronted the automotive industry with major challenges. In addition, raw material and energy prices keep increasing.

Markus Huemer: The challenges, however, did not start during the corona crisis, but as early as 2018, when diesel vehicles were banned in inner cities in Germany, leading to a noticeable change in consumers’ purchasing behaviour and consequently also our business in the powertrain segment. At the same time, this has been, and still is, a good opportunity because it resulted in quite exciting new requirements for innovation and new products. In 2020, corona hit, with the effects we all know. Just when we thought we had a good grip on them at the end of 2020, a painful shortage of many raw and other materials followed in 2021. Microchips are certainly the most prominent example, but nearly all other important raw materials and energy are also affected – and all of this comes with massive costs increases. At the same time, our customers were extremely volatile in calling off their orders. In most cases, high numbers were announced – on which we based both material requirement planning and capacity planning – and then reduced at the last minute, in extreme cases even completely cancelled. It is obvious that this caused massive challenges in production planning. But even that seemed to have levelled off to a certain extent in February – until the Russian invasion in Ukraine shocked the world. At this point, it is impossible to predict the effects of these acts of war in the medium term, except that the uncertainty will remain.

How do you react to reduced or highly volatile call-offs? Was it necessary to make further capacity adjustments?

Heiko Gabbert: Fortunately it was not necessary to close down plants completely. Rather, we focused on working as efficiently as possible at the existing plants. In doing so, we had to deal with tree central issues: adapting production planning to volatile call-off patterns, securing raw material supplies at a reasonably acceptable price level – and of course ongoing and intensive coordination with our customers. We even had to stop production temporarily and make short-term personnel adjustments, in particular for leasing personnel. At least we were able to use the country-specific short-time working regulations. Let us keep in mind here that we are talking about entire weeks of customer plant shutdowns. As a result, we also had to cut down production shifts at our locations and even to shut down entire plants. What makes it even more difficult for us: our customers can close entire plants, while at our facilities only subsegments are affected because normally we supply several customers from one plant. Effective overall planning becomes de facto impossible as a result. The situation is aggravated by an increased sick leave rate of up to 20 percent due to COVID-19. Luckily, our employees still show understanding for the measures taken, but their patience is being severely tried. I think it is needless to say that permanently starting up and shutting down production involves considerable expense.

How did demand and the call-offs in the individual product lines and market segments develop in this environment?

Peter Bernscher: Due to the negative influences already described, our sales revenues from automotive parts fell roughly 15 percent short of expectations in 2021. The Powertrain Solutions, Painted Exterior and Underbody Solutions Product Lines were particularly affected. In contrast, sales revenues from commercial vehicles and tooling were on plan. A very positive counter-effect was a significant increase in sales revenues in the Smart Plastic Applications segment, exceeding our budget by a good 40 percent. That corroborates our strategy of stepping up our activities in the non-automotive segment.

You have already implied that business practices with the automotive industry should be reconsidered under the current circumstances. Which direction should this take?

Markus Huemer: It should become possible to pass on actual costs to the customer in an adequate way. As plastic suppliers, we do not even have a material price clause today as it is common in other industries – and that puts our profitability at risk. Our EBIT margin and ROCE clearly prove that. Because not only do we have to cope with a decline in volume and the cost of increased volatility, but at the same time we additionally have to deal with sharp increases in raw material and energy costs. In view of the high level of capital employed, this will not work in the long term and does not fit the picture when everyone always talks about sustainability and ethics in business. This is why our goal is a fair, viable and sustainable distribution of costs and earnings. Unfortunately, there is no lobby for large parts of the supplier industry.

Peter Bernscher: The situation is simply new and unfamiliar for everyone involved: looking at raw material and energy prices, the development has been largely linear and flat over many years – and all of a sudden we see massive upward outliers. The Ukraine crisis will possibly even intensify this trend, especially when it comes to energy. I think a new mode of clarifying such issues and of dealing with one another will have to be found here. Because the old business model simply doesn’t fit anymore. By the way, this also applies internally, not just externally. This is why we have merged the purchasing and sales departments and thus created increased sensitivity, discipline and power.

And what about consolidation within the industry – and consequently acquisition opportunities? In the past, times of crisis often held some potential for POLYTEC …

Markus Huemer: We are keeping an eye on the situation as usual, but at the moment there are no companies on the market that would be strategically interesting for us and available for a reasonable price. After the capacity reduction in 2020, smaller acquisitions in Europe also make little sense strategically.

How do you see the positioning of the company despite all adverse circumstances?

Markus Huemer: We have fundamentally transformed POLYTEC over the past years and made it fit for the future, and we are proud of that: in our market approach, we started a customer- and needs-based forward strategy with the POLYTEC SOLUTION FORCE. This was based on making the complexity inherent to our technological diversity controllable as part of ONE POLYTEC through a centrally managed organisation, which, however, operates in a decentralised way. This allows us to fully utilise this competitive advantage. Our comprehensive digitalisation initiative, which ensures that information and data are available throughout the group at any time and in high quality, played an important role in this process – because they are indispensable as a basis for decision-making, especially in the highly complex environment that we find ourselves in today. Our team has achieved an enormous amount with these and other initiatives, as our customers also agree. Unfortunately, the circumstances currently do now allow us to reap the rewards of our hard work. I can only express my respect for our employees for implementing all these changes so consistently despite the adverse circumstances, and for contributing to the further development of our company day by day.

You already mentioned that it is too early to make projections at this point – can the impact of the events in Ukraine on the automotive industry and your business nevertheless be estimated in any way?

Markus Huemer: We currently increasingly see drops in call-offs, but it is difficult to say to what extent they are due to general supply shortages among our customers or to the acts of war. However, the invasion of Ukraine has immediately and significantly intensified the trend. This only refers to the near future though. The impact of the current situation on the purchasing behaviour of end consumers in the medium to long term, and consequently on the demand for motor vehicles, on the raw material and energy markets, but also on the logistics chains, especially between Europe and Asia, remains to be seen. In any case, we have demonstrated over the past years that we can react very flexibly to volatile call-offs.

You have updated and revised your mission statement. Has anything changed in your strategy?

Markus Huemer: Our strategy remains unchanged – with the exception of some further specification and minor adaptations to the changed environment. The consolidation of our market position, the development of new technologies and applications and our focus on customer benefits are still the central goals. But it was important to us to present our positioning and our identity more clearly and in more understandable terms, especially with respect to our employees. In addition, we wanted to summarise the changes of the past years in a concise manner. Identity was a crucial topic for us in this context because it is important for employees to know, especially in volatile times, who their employer is; likewise, customers and suppliers need to know what kind of partner they are dealing with. In all of this, the focus on the plastic industry remains unchanged of course, but we also want to expand our reach to other industries outside the automotive industry.

You announced some time ago that the mandate of CFO Peter Haidenek, which expires in 2022, will not be extended. What is the background of downsizing the Board of Directors?

Markus Huemer: Since the contracts of all Board members would have expired at the end of 2022, we addressed this topic early together with the Supervisory Board in order to ensure stability in the management, especially in these currently difficult times. One of the results of these considerations was a reduction of Board mandates because in the current environment there is an even greater need for rapid, close coordination. In addition, it seemed to be sensible in times of crisis to reassign the financial responsibilities directly to me as the CEO. The operating business will therefore be in the hands of Peter Bernscher and Heiko Gabbert in the future. This not only means an even stronger focus on process optimisation; at the same time, we also restructured both the purchasing-sales process and the area of sustainability. I myself will be responsible for finance and all service areas and will be supported by a strong Vice President Finance. The prerequisite for this reorganisation was, of course, the organisational optimisation as well as the centralisation of the past years.

Tell us about the development of the POLYTEC SOLUTION FORCE, which was introduced in 2020. Has the new market development model been well received by customers?

Peter Bernscher: Where we have good customer access and a well-coordinated team, we are really successful – I clearly consider this proof of concept. Now the challenge is to broaden the base of success. On a positive note, we now have access to even more sophisticated parts thanks to our structural competence. In areas such as New Mobility (i.e. air taxis, e-sport cars, people movers, cabin scooters, micromobility) and Smart Plastic Applications (energy, logistics) we also see enormous customer interest and the attractive opportunity to develop new and unconventional solutions. However, sales revenues in this segment of course depend on the success of the new providers; in addition, we are dealing with significantly longer realisation periods here. Likewise, we have to prepare for completely different business models as well as different forms of acquisition and collaboration with customers.

You have traditionally scored with technological diversity and innovation, which also play a key role in your strategy. What is happening in this area at the moment?

Heiko Gabbert: Technological diversity is, and will remain, a central success factor for POLYTEC because on this basis we can work on projects that exceed the capabilities of most of our competitors. Here we score through the combination of different technologies, further development of materials and functional integration, and concentrate on sustainable concepts to the best of our ability. For example, we produce underbody panels for electric vehicles in which the battery module and the underbody of the vehicle simply merge – that saves parts and thus leads to weight reduction. Implementing such projects involves a great deal of proactivity on our part and we also take risks – provided that customer benefit and marketability are given. This is something our customers really appreciate.

Peter Bernscher: We have now defined three central engineering streams and got them off the ground successfully. They address the issues that are most important in our view and also effective across the individual product lines: the first stream, high-voltage battery housings, is our response to powertrain electrification. The second stream focuses on developing high-performance materials and simulating their characteristics. That is a central requirement for the design of hybrid structural components as we need a 360-degree overview of the materials’ performance. The third stream deals with the sustainability of products, from material selection and consumption to production methods and recycling. All of this needs to be considered already in the development and comprehensively designed for the entire product chain. Clearly defined roadmaps and milestones are in place for all three streams because we want to deliver the results to the customer as fast as possible. Of course we also pursue various small advance development projects in addition to that.

Which role does e-mobility play?

Peter Bernscher: A crucial one, because e-mobility is a strong trend – if not a paradigm change – which holds as much potential for us as the previously mentioned area of new mobility. This is why we consider e-mobility a great opportunity. Components directly linked to combustion engines only account for about 20 percent of our portfolio today – by 2025 their share will drop to 7 to 8 percent and will be replaced by other products. Incidentally, electric vehicles contain many components that are similar to conventional vehicles – allowing us to draw on our deep expertise. Heat and cooling management, acoustic components and underbodies are just a few important examples. Another advantage: lightweight design is especially important for electric vehicles with respect to their range. Here, we simply transfer proven solutions to a new segment and apply our technology and knowledge in a useful way.

The same applies to new mobility. This segment is also interesting because lower speeds result in different requirements for the components, which of course offers the opportunity to increase the total share of plastic. We can manage the overall lower quantities, coupled with partially increased individualisation, very well with our technologies.

What does the situation in the non-automotive segment look like?

Peter Bernscher: As mentioned before, we have taken the right path by promoting the Smart Plastic Applications Product Line – because this segment grew significantly even in the difficult 2021 financial year. We are focused on two main topics in this area: energy storage and power output on the one hand and logistics on the other – both areas with strong growth dynamics. As decentralised energy production and e-mobility are on the rise, we see high demand for storage modules and charging infrastructure – and we can score with innovative plastic solutions for both. The same is true for logistics: in an economy that increasingly focuses on individual solutions, flexibility and customer proximity, it takes plenty of new logistics solutions to deliver products to the customer quickly and efficiently. Plastic is also the material of choice when it comes to lightweight and reusable containers. But we are also open to product ideas with economic and innovative potential outside these two segments. Overall, we expect sales revenues to increase by up to 40 percent for Smart Plastic Applications over a cycle of five years.

How do you expect the market to develop in the coming years – also against the backdrop of the situation in Ukraine?

Peter Bernscher: Prior to the invasion in Ukraine we saw an upward trend in call-offs, which indicated continued solid demand in the automotive market. The situation also appeared to ease for microchips. Based on this, we were very confident to return to an acceptable sales level. This has again been put into perspective with the crisis in Ukraine. In addition, the uncertainty related to corona continues. The bottom line is that we will have to live with a higher level of uncertainty for months or even years, so there is not much point in making projections.

The silver lining, despite everything, is that the automotive industry’s order books are full: order numbers are higher than they have been in many years, both for cars and commercial vehicles. Never before have we had such long delivery times and such a high production backlog of vehicles that have already been sold. This means that high quantities can be expected as soon as circumstances are somewhat more stable.

Sustainability and ESG were embedded even more firmly within POLYTEC last year, also in organisational terms.

Markus Huemer: We have been working intensively on this topic for years, and its significance is now also more clearly reflected in terms of structure. Since the main scope of control is the deployment of personnel and resources in operations, we allocated these responsibilities to Heiko Gabbert at the board level. Of course this does not mean that we view sustainability only in terms of operations, but rather on a much broader basis. The concept is also firmly anchored in our engineering strategy, for example.

Which aspects are most important in this context and what are your goals?

Heiko Gabbert: The new positioning is driven by three motives and concerns: first of all, aspects such as CO2 emissions, material selection, processing methods and recyclability are gaining importance for our customers, who therefore increasingly demand appropriate measures, certificates and ratings from us. Another important impetus is the EU Taxonomy Regulation as part of the EU Green Deal, which requires transparent and consistent reporting on different parameters from us. As a member of the plastic industry, we are familiar with such requirements and can already prove around 30 percent taxonomy eligibility in turnover, CapEx and OpEx, but of course we will take a very structured approach to this. And last, but not least, we have been striving to reduce our CO2 footprint for years – as has been shown by a wide range of energy-saving and recycling measures. Our long-term goal is CO2-neutral production, which we are tackling based on realistic measures and intermediate targets. Because we want to actually bring sustainability to life and not engage in greenwashing.

Could you tell us about specific sustainability projects? In December, for example, you concluded the first green financing for the machine park at the Ebensee plant.

Heiko Gabbert: We also want our electricity supply to be as green as possible: photovoltaic systems have been commissioned at our plants in Hörsching and Wolmirstedt, and another five are currently in the planning phase. Wherever possible, we also rely on green electricity when we purchase externally. In Western Europe we have succeeded in doing so at all our plants. In addition to the regenerative energy sources, we also want to find new alternatives and use additional decentralised energy supply options.

With the green investment in Ebensee – which apart from additional machinery primarily concerned a new recycling plant – we succeeded in completely closing the material cycle. We can now take back used, no-longer-functional products from customers and reuse nearly 100 percent. As a result, the location in Ebensee combines two central elements of sustainable business operations: CO2-neutral production and material recycling, for a product that is not even an automotive product …

Let’s take a brief look at your international plants – specifically the new plant in South Africa and the plant in China. For example, what was the impact of the economic slowdown in China? And how is production in South Africa, which was started in 2021, progressing?

Heiko Gabbert: Our location in China continues to develop positively; we recorded additional orders and ramp-ups, even in the non-automotive segment. We are now also manufacturing transport boxes as a new product at this location, for the same customer as in Ebensee, only slightly modified for the Chinese market. Despite all the difficulties caused by corona – such as comprehensive lockdowns – we were always able to maintain operations with our own employees. It would hardly have been possible any other way since using employees or experts from Europe would have been impossible due the quarantine regulations. In this way, we also supported new ramp-ups partially remotely.

In South Africa, we were pleased to see a very smooth ramp-up of production in mid-2021. However, due to significant delays on the part of the customer we have only generated relatively low sales revenues there to date. Overall, we lost about half a year, and the real ramp-up is only just starting now. The fact that the construction of this plant went so well despite corona was a tremendous achievement by our teams in South Africa and Europe and of our suppliers.

Were you able to continue your investment programme as planned in 2021 and to catch up on the investments postponed in 2020? Which investments are planned for the years to come?

Markus Huemer: Our investments totalled nearly EUR 36 million in 2021. A central project was the new plant in South Africa, whose construction had already started at the end of 2019. Overall, we invested roughly EUR 14 million in this new plant, EUR 4 million of it in the last year. Another EUR 13 million was used for the project in Ebensee, which was funded through “green financing” for the first time. In addition, we invested in machinery, for which we were also able to utilise funding programmes.

Heiko Gabbert: However, we will definitely invest less in the coming year than in 2021. As a general rule, we analyse investments very thoroughly and limit ourselves to urgently necessary projects; especially when it comes to replacement investments, we are rather cautious. There will be no plant expansions in 2022. .

What do your financing and capital resources look like? You maintained your equity ratio at a very high level …

Markus Huemer: We even increased the equity ratio by 0.7 percentage points to 42.0 percent, which puts us at a very solid level. In addition, we own all of the most important properties and equipment, so we feel well secured overall. We also repaid EUR 24 million of our promissory note loan in 2021, followed by another EUR 21 million in March 2022, which is quite a challenge in the current environment. These repayments were refinanced using asset-based instruments. Now no further tranches are due until November 2023. Up until 2025, some EUR 80 million from promissory note loans with different maturities remains outstanding – we will clarify the refinancing of these amounts in the course of this year.

After a low in March 2020 due to corona, your share picked up continuously until mid-2021, when it reached more than EUR 12, but the price has since dropped again. Currently it stands below the level of the beginning of 2020. How do you interpret this development?

Markus Huemer: The performance of our share reflects the current challenges and risks of the automotive and automotive supply industries. We see the positive development in the first half of 2021 as a confirmation of our successful transformation path. Conversely, the downward trend of our share in the second half of the year shows the conflicting environment in which supply industry is operating. If you believe in the automotive industry – as suggested by the continued high demand for vehicles –, you also have to believe in POLYTEC because we are excellently positioned to use the arising opportunities. In any case, we do everything to ensure through our solid business performance that our share price returns towards the carrying value, which is significantly higher.

What about dividends – also in view of the war in Ukraine?

Markus Huemer: Together with the Supervisory Board we will recommend a dividend of 10 cents per share for 2021 to the Annual General Meeting. This way, we would like to share our positive results with our shareholders and at the same time adhere to our dividend policy, which provides for a payout in the range of 30 percent of the annual profit.

In closing, what is your outlook for 2022 and the years to come?

Markus Huemer: At present, developments are impossible to predict because no qualified projections can be made in view of the ongoing upheavals in the wake of corona and the war in Ukraine. It goes without saying that we will do everything in our power to achieve solid results under the given circumstances as we did last year. At any rate, we will respond flexibly and promptly to the ongoing changes in our environment. In doing so, we will coordinate closely with our customers and suppliers in order to cope with the current challenges together.