OC Oerlikon Corporation AG

Ladies and gentlemen, welcome to the Erlikon Q1 2021 results conference call and live webcast. I am Alice, the Chorus 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. For operator assistance, please press star and 0. The conference must not be recorded for publication or broadcast. At this time, it's my pleasure to hand over to Stefan Gieck, Head of Investor Relations. Please go ahead, sir.

Good afternoon, and welcome to Ehrlichon's Q1 Financial Results Call. With me in the call, I have Roland Fischer, CEO, and Philipp Müller, CFO of Ehrlichon. Also joining us for the Q&A is Georg Stahlsberg, CEO of our Polymer Processing Solutions Division. We start the call with a business update done by Roland, then Philipp will go through the financials, which we will then follow up with a Q&A. Roland, the floor is yours.

Thank you, Stefan. Good afternoon to everyone and welcome to our first quarter results presentation. Quarter one was a solid operational quarter. Besides financial growth, we demonstrated technology leadership and executed on discipline capital allocation by acquiring Inglas. Let's go into some more details on the quarter with a short summary on page three. The first quarter represents a solid start into the year with early corn returning to top-line growth. Sales at 568 million Swiss francs were up 7% and order intake at 643 million Swiss francs increased by 35%. Growth was driven by a strong performance of polymer processing solutions. In the service solution division, we saw trends improving throughout the quarter and achieved at the end a book-to-bill ratio well above 1. Our group operational APTA increased by almost 50% year-over-year to 88 million Swiss francs, leading to a margin of 15.6%. Continued cost containment and operating leverage supported our solid operational APTA margin expansion. All in all, it was a start into the year broadly in line with our expectations. We therefore confirm our full year guidance after the first quarter. On the next few slides, I will give you a business update before Phil goes into the financial details for the quarter. And now let's move on to the market updates on the next page, page four. Our end markets continue to face varying recovery profiles. In polymer processing solutions, we continue to enjoy stability in the filament market. The order books for 2023 are currently getting filled. Key players in China continue their downstream vertical integration into filament. Outside of filament, we see the nonwoven market growing, driven not only by the facial masks, but also by wipes, filters and other applications. For the full year, we reiterate our expectation of stable filament sales while non-filament is expected to grow our service solution division is operating across the tooling automotive aviation and general industry and markets the tooling and general industries and markets see shorter cycle services recovering at the right rates we expect them to recover by a mid to high single digit percentage number this year we introduce some new tooling products in the market in the first quarter. They have been well received with our industrial customers as they are continuing to look for improved performance to differentiate. In automotive, we experienced a high level of activity to date. Automotive demand was strong with good coverage across all our OEM and tier one customers. In particular, we are seeing strong demand for our immobility and sustainability solutions. We see this continuing in the coming quarters. However, considering the current supply chain challenges, market production expectations might be impacted and might vary. And finally, last but not least, in aviation, the travel restrictions caused by the global pandemic continue to last. Our aviation sales were down 45% year-over-year in the first quarter. We expect to see the draft now and to return to a very moderate growth in the second half of the year at the earliest, supported by easing comparables. We have seen some very early signs of improvement in MRO with demand for coating materials. So, summing up, we see a resilient market environment for polymer processing solutions, while service solutions markets are recovering at varying rates. And now let's move on to page five, where we provide an update on our strategic priorities. Our strategy to drive profitable growth and expand market share is unchanged. As a result, we are focused on three key strategic priorities, sustainable innovation, cost containment, and disciplined capital allocation. In terms of sustainable innovation, we launched in Q1 an innovative heat shield for battery packs in e-mobility applications. We also developed new materials used in semiconductor industry to process highly reactive gases, and we launched the Ballora thin film coating, which prevents hot corrosion for gas turbines. In terms of cost containment, we achieved a solid 420 basis points operation every day, margin expansion this quarter. And finally, Discipline capital allocation has been a key priority for Ehrlichon since many years. By acquiring InGlass, we have found an excellent way to diversify our polymer processing solutions division and to support growth over the cycle. I can provide some more details on the next page. InGlass is a market leader in hot runner systems, which are essential in the production of high-end lightweight plastic components. The company has about 135 million Swiss francs sales and is margin accretive to Oerlikon. The acquired technologies are complementary to Oerlikon's existing polymer flow control equipment. The addressable market for hot runner systems across all applications like automotive consumer goods and others is around 2.5 billion Swiss francs and nearly doubles the existing addressable market of our division. With around a 5% market share, we have substantial room to grow our share in a market that organically grows above GDP. Our strategic rationale for the deal is obvious. InGlass diversifies polymer processing solutions into non-filament markets and opens up markets outside of China. The deal enhances our growth profile by giving us access to growth areas such as e-mobility and pharma. The existing technology leadership enables InGlass to grow market share and organically expand in the UN markets. We can further extend technology leadership by combining our R&D efforts across our polymer flow control business. And finally, the deal is financially very attractive, as we expect earning per share accretion. We are truly excited about this opportunity and see it as a transformational catalyst for the group. There are also excellent cross-selling opportunities. For instance, the former tool business of Service Solutions codes the metal surfaces of tools and moldings used to create high-quality polymer parts. With polymer flow control, we also can consider further M&A into a fragmented market. We expect the closing of the deal to happen towards the end of the second quarter. And now, I will hand over to Phil, who will take you through our financials in more details.

Thank you, Roland. I will start with the group results and then provide more details on the divisions. At the group level, orders were 643 million Swiss francs, up 35%, driven by polymer processing solutions. Sales were 568 million, up 7%. Polymer processing solutions significantly contributed to our sales increase based on strong execution and lower comps in the first quarter of 2020. Our group book-to-bill ratio was above 1.1. Operational EBITDA was 88 million Swiss francs, up 46% versus the prior year. Our margin rate increased by 420 basis points to 15.6%. Next, a few more details on Surface Solutions. As Roland highlighted, Surface Solutions and markets are recovering at varying rates. Orders were 327 million, basically flat and constant FX, while sales slightly decreased to 304 million Swiss francs. As indicated at our full year results, we faced challenging year-over-year revenue comparables. Aviation sales were still on a strong level in Q1 2020 and only started to erode in the second quarter last year. In addition, we entered 2020 with a stronger longer cycle equipment backlog. In the first quarter 2021, we saw a solid pickup across our shorter cycle businesses, especially with an acceleration in March. As anticipated during our annual outlook, we expect the longer cycle businesses to start picking up in the second half of this year. Importantly, and a critical indicator for this development, we achieved a book-to-bill ratio significantly above one in the first quarter. Operational EBITDA in Surface Solutions was 54 million, up 32% versus the prior year, and around 500 basis points margin expansion. This is a solid result in the context of lower sales. It is more evidence that the benefits of the structural cost reduction program are now visible in the division profitability. Margins also benefited from a positive business mix and the continuation of some short-term cost-saving measures. Over the remainder of the year, we expect these factors to normalize in line with our total year margin expectation. Overall, we are on track to reach our full-year guidance of $1.25 to $1.3 billion in sales, with 16.5 to 17.5% operational EBITDA margins. Next, on polymer processing solutions. Orders in polymer processing solutions were 315 million Swiss francs, 119% versus the prior year. The growth was driven by continued strength in the filament market and growth in our non-filament businesses, as well as lower comparables from the first quarter last year. First quarter sales of 263 million were up 29%. the strategy to diversify into non-filament is becoming increasingly visible, with 30 million of incremental sales coming from non-filament. As a reminder, no results from our InGlass acquisition are included in our numbers. We will start consolidating InGlass beginning from the closing of the transaction, which we expect towards the end of Q2. First quarter operational EBITDA at polymer processing solutions was 33 million Swiss francs. Margins increased more than 300 basis points to 12.4%, driven by better operating leverage. Overall, in polymer processing solutions, we are on track to reach our full year guidance. With that, let me conclude our first quarter results on the next page. We saw a strong exit rate from the first quarter, particularly in surface solutions. and a continued positive trend in April. We continue to expect sequential improvements in our surface solutions and markets. While supply chain shortages can have temporary impacts on our top line, we're expecting our surface solution sales to also sequentially improve throughout 2021, particularly in the service and materials businesses. In polymer processing solutions, we expect typical seasonal developments with the second half being stronger than the first six months of the year. Overall, we continue to expect 1.1 to 1.15 billion Swiss francs of sales. In terms of margins, we confirm our total year outlook for the group and the divisions. We expect some of the positive effects and surface solutions in Q1 to balance out in line with our full year guidance. Let me wrap up with our priorities. We continue to make progress on all of them. We delivered growth in Q1. We continue to improve our profitability to achieve our operational EBITDA margin target of 16% to 18%. Our improved profitability and tight capital allocation processes will have a positive impact on ROSI. We signed InGlass, a transformational M&A deal, and we continue to focus on expanding our market reach via M&A We paid a stable ordinary dividend and continue to operate the company with a very strong balance sheet. Lastly, as you will have seen this morning, we mandated a consortium of banks to facilitate a Swiss bond offering. We will use the proceeds to finance the InGlass acquisition and it will allow us to optimize our capital structure. With that, I will open it up for Q&A. Georg Stausberg will now join us. and certainly be able to add more perspective to our in-glass acquisition and our strategy to accelerate growth in polymer processing solutions.

We will now begin the question and answer session. Anyone who wishes to ask a question may press star and 1 on their pass-through telephone. You will hear a tone to confirm that you have entered the queue. If you wish to remove yourself from the question queue, you may press star and 2. Questioners on the phone are requested to use only handsets and eventually turned off the volume from the webcast. Anyone who has a question may press start and one at this time. The first question comes from the line of Michael Furth with Fontobo. Please go ahead.

Yes, good afternoon, gentlemen. Thank you. A few questions on InGlass. In fact, first question is, can you give some indication on how capital-intensive InGlass the business is compared to the rest of the Surface Solutions business? And sort of hand in hand with that question is you're saying that it is margin accretive from day one, but is it also value accretive, meaning EVA positive as of day one? So that's the first question. In Glass, the second one on In Glass would be, you mentioned 5% market share there. question is, who are the last players in that market? Or is it a very fragmented market? And, and then the last question or third question would be on how you plan to integrate that business from an operational perspective into the group? That would be my three questions for now.

Okay, okay. I'll start maybe with the first one. That's a that's a quick one. I think from a capital intensity standpoint, It's a little bit above the average of polymer processing solution, but it's right in line with where the group is. So think about sort of, you know, mid to high single digit CapEx intensity, roughly speaking. And then you're absolutely right. It's margin accretive from the first day, and it's obviously value accretive as well, both from an EPS standpoint but also from a total value creation standpoint. And with that, I'll probably hand it over to Roland for the market topic.

Michael? We said 5% market share. with respect to the entire hot runner market of about 2.5 billion. And here we have to know, you have to know that Inglas is a market leader in the automotive application, what is an essential part of this 2.5 billion. And here we have a market share of about 20%. And that's why we believe there are a lot of opportunities in for us. in penetrating also adjacent applications beyond automotive. And from that perspective, I think we are extremely happy about that deal. And the topic of integration, maybe Georg, you can give us some insights here.

With integration, we see from day one already some good opportunities in cooperation with companies with our service solution Balsas business. As Balsas already today is offering coatings for the forming tools for the injection molding industry. So here we, from day one, we think that we will benefit from more transparency on the markets, customer database or customer base that we can here offer total solutions. Parallel to that, we have It's ambitious, organic growth ambitions for in-class parallel, also for our pump activities, which both are the legs now for what we call flow control solutions. So that we will focus, first of all, parallel that for both of these businesses, we focus on the organic growth and we will implement solutions a special group with a handful of engineers, which then will start developing new products for new markets. We had already some kind of brainstorming sessions with technicians from both businesses. We see opportunities, be it on color injection and injection molding processes, be it on new kinds of technologies. So there are already some ideas out, and here we will implement a synergy team, start developing on these products. Other than that, of course, if it comes to integration, from day one, we will start to integrate in class into our finance processes, be it on reporting, accounting. We will, from day one, start an IT integration so that we also then have a harmonized infrastructure here. These will be the main topics from an administrative point of view. In class today, for some of the topics, like, for example, legal services, they do not have own sources. They very much depend on external sources. So that also here we see some potential for synergies.

Thank you. And then maybe just one very, very quick follow-up. You talked about the acceleration in March of the short cycle business in service solutions. Is that a sequential acceleration or year-on-year acceleration?

It's both. I mean, but, yeah, you know, what we described, Michael, was a slow start into the year in January, February, really not idiosyncratic to us, but in the industry. And then we saw a significant sequential acceleration into March, which we had expected. But that is also true year over year, year over year, however, also to an extent driven by the comp where March 2020 started to slow down significantly because of COVID.

Sure. Okay. Thanks a lot.

The next question comes from the line of Alessandro Folletti with Octavian. Please go ahead. Mr. Folletti, your line is open. You may ask your question.

Okay. Sorry.

Can you hear me now?

Yes. Okay. Thank you. Thank you for taking my questions. I have a couple. Maybe again on InGlass, can you explain what you – were doing in the previous memory fiber business that was already similar to the HRS business.

Yeah, it's really around what we do from a flow control solution standpoint and from the pumps business. So, Georg, maybe you want to add some color to that. Very similar technology.

First of all, what OMF is doing is plastic processing. And what we are doing is a lot about melt distribution, melt piping. So our focus so far is melt distribution on extrusion processes. With InClass now, we get access to melt distribution and injection molding processes. but the skill set in order to do the design of such kind of melt pipes of melt distribution is almost the same. Plus, if I now compare the in-glass business with what we are doing in our pump business, both is about precision manufacturing, both is about precision components who have a big impact on the final quality in certain plastic processing applications.

Okay, and I guess this is a question, we'll speak about it later on, I guess. Okay, thank you for that. My second question is more related to your overall full-year guidance. That guidance was published before the in-glass acquisition, so I would assume that Whatever we include from the acquisition would come on top.

Yeah, I think, Alessandro, first of all, I think the guidance gives the range. And whatever comes out of this acquisition is coming on top, yes.

And, Alessandro, it will just depend on, you know, from what point on we consolidate InGlass. Our expectation is that we close the transaction in the second quarter. And then accordingly, we'll give you at the latest, we'll give you an update on the exact amounts to be included in our financials for the year at the end of the second quarter.

All right. Thank you very much. And then maybe on the polymer processing order intake, which was really very, very strong, and you mentioned it was not only because of the masks, business, et cetera, but can you maybe give an indication if there is anything sort of special or maybe that way may not be really recurring in that level of hoarding space.

No, I think, Alessandro, I think, you know, polymer processing business, it's a project business, and here you have, you know, bigger orders and smaller orders coming in this quarter or the other quarter, whilst this non-woven what was really benefiting from the crisis to a big extent. And I think we gave the indication size-wise, low triple-digit volume here. And this is beyond face masks. This is also for technical applications, for filtration and other stuff, right, and wipes and whatever. That means that this is not a one-off which is going to disappear with, you know, the course of corona going down.

Yeah. Alessandro, no large one-offs in the order intake.

Okay. Thank you. Thank you very much.

Yeah. As a reminder, if you wish to register for a question, please press star and one on your telephone. Star followed by one. The next question comes from the line of Christian Obst with Baader Bank. Please go ahead.

Yes, hello and greetings from Switzerland. Again, on InGlass, can you give us an idea about the amount of intangibles you are paying and the earn-out structure, how this will go on or affect the future? And then I have a more structural question concerning the organization or reorganization of surface solutions. We talked about that, of course, in the quarters before, but How are the management responsibilities now currently in Surface Solutions? On the website, you have the customer industries, and then you are showing the brands and the management there. So how is P&L responsibility organized within Surface Solutions? So is it around the customer industries? Is it around the brands? Is it around the regions? Can you give us some kind of an idea there? Thank you.

I'll take the first one quickly on InGlass and then hand it over to you, Roland. You know, I think there's kind of two questions in there. The first one is on the level of intangibles. As you would imagine, we're going through the evaluation right now. We're doing the purchase accounting. And then I think as soon as we have the purchase accounting pretty much finalized, we'll give you an update on what that means for the future. But I think the other point is a little separate. That's the earn-out structure here. We found a highly incentivizing earn-out structure with the seller that would generate more value for us and more value for the seller if we achieve those additional targets. And so, you know, that doesn't necessarily affect the immediate purchase accounting, but we'll be decided over the next 24 months whether we achieve those additional targets or not.

And the seller remains within the group, right? Correct.

No, the seller is an individual who has stepped back from management a lot ago. He will stay very closely connected with us in terms of technology development and market development, and we're very, very happy with that. And then the immediate management team, which is not the seller, which will stay with us.

Okay. Thank you. And the second part of the question concerning the service solution structure is actually easily to be answered. Today, we do have our business unit structure. That means a global responsibility for the product portfolio within the business unit, different technologies in different business units. And in future, effective 1st of January next year, we will have a regional responsibility. That means we will have three strong regions, Europe, APAC, Southeast Asia, and Americas, having a clear P&L responsibility and covering the entire service solution product portfolio.

Oh, okay. So you are changing the structure in the course of this year? Yes, yes. Okay, interesting. Yeah, thank you very much. All the best.

The next question comes from the line of Sebastian Vogel with UBS. Please go ahead.

Hello and good afternoon. Can you hear me well?

Yes.

Perfect. I've got three questions. A quick first one. When you were describing how the surface solution had done over the course of Q1 or within Q1, were there any difference between auto, general industry and tooling or were the trends as you have outlined with sort of Okay, January, February, and good March applicable to all these three sub-segments?

By and large, very similar development, yeah.

Okay. Quick question. Can you remind me how much margin diluted dilution additive manufacturing was adding in the first quarter as sort of a rough ballpark figure if possible?

You know, we're not going to go into the quarterly numbers for that anymore, but I'll tell you we're on track for what we told you for the total year for additive manufacturing.

Okay. And I'm not sure if you can answer my next question. Demand improvement in surface solution, at least sort of a directional way, can you sort of split how much operating leverage, how much the cost program, and how much the mix was contributing to the improvement there?

You're talking about the year-over-year improvement, Sebastian, right?

Yeah, pretty much.

Look, I mean, I would say without getting into all of the granularity, think about the negative volume leverage because sales were lower and the mix being kind of similar effects, and they're basically offsetting each other. And then you have the large part of the margin enhancement and surface solutions is really the structural cost program.

Perfect. And then just one very last one and a quick one. There was a sequential drop in the margin at polymer processing. Can you explain what was the main contributing factor for that?

You know, I think there's a couple of things. We obviously had a very, very strong end to last year. I think, you know, we talked about that. We were at 15% of margins in the fourth quarter of last year. We said this was going to normalize a little bit. Typically in polymer processing, Our first half is a little bit softer, both from a volume standpoint and then from a margin standpoint than the second half. At the same time, I think we had significant margin expansion year over year, and we're very happy with the way that that division started into the year in the first quarter.

Understood. Many thanks.

There are no more questions at this time. Gentlemen, back to you for any closing remarks.

Thank you, operator. This concludes today's call. In case of further questions, don't hesitate to contact us in the IR team. Thank you for your participation and goodbye.

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