OC Oerlikon Corporation AG

Ladies and gentlemen, welcome to the Erlicon Q3 2020 results conference call and live webcast. I am Alessandro, the course call operator. I would like to remind you that all participants will be in listen-only mode and the conference is being recorded. The presentation will be followed by a Q&A session. You can register for questions at any time by pressing star and 1 on your telephone. Webcast viewers may submit their questions in writing via the relative field. For operator assistance, please press star and zero. The conference must not be recorded for publication or broadcast. At this time, it's my pleasure to hand over to Mrs. Kerstin Flötner, Head of Corporate Communications and Investor Relations at Erlikon. Please go ahead, madam.

Good afternoon, ladies and gentlemen, and welcome to Ehrlichon's conference call on the 2020 third quarter results. In the light of the current developments, I do hope you're all well and staying safe. My name is Kirsten Flörtner, Head of Corporate Communications and Investor Relations. On a personal note, I'm delighted to be here and to guide you through my first set of results. With me today are Dr. Roland Fischer, Group CEO, and Philipp Müller, Group CFO. As a reminder, all related documents on the third quarter results, including the following presentation, are available for download on our website at www.earlycon.com. Today, Roland Fischer will outline Ehrlichon's strong progress in responding to the challenging market conditions. We will provide an update on the strong performance of the group and the progress we are making on our cost actions. Philipp Müller will then give you an overview of the financial performance during the third quarter and first nine months of 2020. After their presentations, We will host a Q&A session to answer your questions. Today's conference is being recorded and the replay will be available on our website later today. And now, handing over to Roland.

Thank you, Kerstin, and welcome from my side as well. We acknowledge that you are reporting in times of a research COVID-19 pandemic, particular in Europe. So I'm even more pleased to be able to deliver positive results for the third quarter. This demonstrates the strength and resilience of Erlicon's business. Our man-made fiber division continues to see a positive market outlook in the core filament business. This is built upon long-term structural drivers such as customer consolidation and integrated downstream polymer capacity. The third quarter demonstrated man-made fibers' strong operational performance. Sales of 313 million Swiss francs in the third quarter brings sales for the first nine months to 765 million Swiss francs. The COVID-19 pandemic has accelerated the development of man-made fibers' non-woven business. During the first nine months, we have received orders of over 75 million Swiss francs and sales of over 50 million Swiss francs for nonwoven applications. We are pleased to be able to support the global fight against the virus. the nonwoven success is not limited to providing melt-blown systems for facial masks. We are seeing increased inquiries for nonwoven consumables, including the phantom lines for Procter & Gamble wet wipes. This can be used to clean and disinfect services. And now, let's move on to the more complex market situation for service solutions. The service solution division has experienced sequential recovery from the low point in the second quarter. The recovery is divergent across end markets and geographies. Automotive has recovered strongly in China, with encouraging developments in Europe. Tooling has experienced a recovery and to a lesser degree, general industry too. Meanwhile, our aerospace business has worsened as a result of continued restrictions on travel. With the current resurgence of the COVID-19 pandemic, planes are grounded and flying hours are limited. On balance, the end market recovery has enabled sales to grow sequentially. Tale, diversity and global footprint allows service solutions to weather the varying speed of recovery. We are well positioned to expand our market share against smaller and more exposed local competitors. Let me now elaborate a bit on our cost-out programs. As automotive markets softened already last year, we made an assessment of our business and proactively initiated actions on our cost base already in 2019. When the COVID-19 pandemic took hold, we adopted and accelerated our programs. The most important message I have here is that these cost-out measures are, to the biggest extent, structural in nature and will lead to sustainably lower cost bases for our visitors. The actions are not dependent on sales volumes. and the expected run-right savings of approximately 70 million Swiss francs per annum will continue even when sales increases again. Our strong focus on our cost program is evident with over 650 of the 800-plus planned headcount reduction completed at the end of September. In addition to the structural measures, we have put in place tight cost controls on discretionary spend. Operating expenses have been reduced by 165 million Swiss francs compared to the first nine months of 2019, reflecting operational gearing of 66%. Looking forward, our man-made fibers division is on track to deliver sales of over 1 billion Swiss francs and to improve margins over 2019. We have strengthened the Service Solutions Division with the addition of Markus Takke as Division CEO. He brings a strong track record of business transformation with experience in clean energy and gas turbines. He is well positioned in further development and integrates the Service Solutions business with an increasing customer focus. The Service Solutions Division has seen a sequential recovery. However, The varying picture across the end markets and the second wave of COVID-19 means we will not provide an update guidance even on the relatively near-term future as many countries prepare for new lockdowns. Let me provide you with some more details on our cost-out programs. As I have already previously explained, the program is focused on streamlining our headquarter functions and support functions, including shared service centers, rationalizing our legal entity structure, following a number of acquisitions, optimizing our footprint to benefit from scale and better service our customers, gaining additional procurement synergies, and last but not least, right-sizing our additive manufacturing business, adapting to market trends, and reinforcing where we can add value. The structural program is not limited to headcount, and is also designed to yield long-term benefits through efficient working practices and technology adoption. Headcount reduction and the simplification of our organization is a critical element, however. On these reductions, we are ahead of schedule. As of September 30th, we are more than 80% complete and now anticipate being 90% complete by the end of 2020. We have increased our estimates of annualized run rate every day savings to around 70 million Swiss francs. Implementation costs remain approximately at 60 million. Let me reiterate that these cost out measures are structural in nature and will yield a sustainably lower cost basis for our business. The actions are not dependent on sales volumes and the expected run rate savings will continue even when sales increase again. To give you some more further details on our structural programs. Headquarters and support functions program will reduce headcount by around 80 and to generate run rate APDA of 10 million Swiss francs. It includes initiatives like our shared service center concept and we are regionally reducing legal entities and gaining scale from centralizing administration functions such as accounting, tax and IT across three locations, China, Poland and the US. This is a great example of how sustainable our structural gains are when volume returns. As we have previously told you, we have looked very closely at our additive manufacturing business and what size and functionality we want to afford, given the market outlook. While we continue to believe in the promise of the underlying technology, some end markets are more promising than others. Accordingly, we have decided to stop all of our activities related to the medical business in the US. While the medical market is growing in additive manufacturing, it has its own specifics. We learned that in medical markets, our customers are unwilling to outsource additive manufacturing in the same way we see in other markets such as aerospace, automotive and general industries. The closure of this business alone reduced our structural cost in additive manufacturing by 10 billion Swiss francs. This helps us reach break even faster and at the lower sales level. Our focus on aerospace, automotive and general industries is already generating tangible results with OEM partnerships and first signs of larger serial orders taking us beyond prototyping. Elsewhere in service solutions, we plan to generate run rate savings of 45 million Swiss francs, which include but are not limited to headcount reduction of 600 FTEs. It includes improvements in plant utilization through further adoption of automation and digitalization, We will optimize our global production network and more closely align it with our customer footprint across core markets. The make-or-buy decisions will be more closely aligned between manufacturing and purchasing. We have continued to progress on the structural cost program. The contribution to the bottom line is a big enabler for returning to our medium-term operational everyday margin of 16 to 18%. This is alongside a strong man-made fiber business and recovery volume in service solutions business. In the third quarter, we have been pleased to see some of our markets start to recover at varying paces. The recovery is still in the early stages and whether these trends continue remain to be seen. There are further risks from the pandemic and from lower consumer demand. The strength of Man-Met Fiber's market positions continues to provide a stable base. Our order book in the filament business remains sticky with continued visibility out to 2023. The non-woven business continues to enjoy a positive market development this year. It has been a real breakthrough year for our non-woven business. The special filament business including industrial and carpet yarns, remain suppressed. In Service Solutions, the third quarter saw varying recovery patterns across markets and geographies. Looking at geographies, we noticed that the picture of recovery was particularly strong in China and contributed to the better results of our Asian business, where Service Solutions has a third of its sales. Also in Europe, The market situation improves sequentially. However, North America continues to show weak market conditions. The recovery in automotive has been a bright spot for us across all geographies. Following the summer seasonal shutdown, we have seen carmakers increase both sales and production levels sequentially. This is only 5-10% behind 2019 levels. The pattern we are seeing in September and early October give us cause for cautious optimism, including the sequential improvement in our sales in the third quarter, particularly after seasonal summer closures in August. General Industries has experienced a more modest pattern of recovery, and it also includes our energy business. And we have also seen a decline in the conditions in the aerospace market. Restrictions on passenger numbers heavily impacted on commercial airlines, which has had a knock-on impact for our business. Aircraft production rates and indirectly new engines combined with MRO due to low flying hours had a negative impact on our sales. Market conditions indicate a deeper crisis and a longer recovery pattern than anticipated last quarter. Erlikon has performed well during the third quarter. The actions we are taking are beginning to deliver results. Service Solutions is a leader in sustainable innovation with a strong technology portfolio. Our proactive cost measures will enable us to grow more profitably and with greater capital efficiency. We have taken additional steps to utilize our technology more efficiently and to increase our focus on the customers. Man-made fiber continues to demonstrate strength and during turbulent markets has been a stabilizing force. The progress made in the development of the non-woven business adds additional resilience to the division and positions it well for growth markets. The diversity and scale of our businesses allows us to be a strong partner for our customers and suppliers. Our healthy balance sheet positions us well for the future, and we will be ready to execute where the right growth and M&A opportunities present themselves. Following the commercial and market overview, let me now hand over to Philipp to present the group's financials.