OC Oerlikon Corporation AG

Ladies and gentlemen, welcome to the EarlyCon QT H1 2021 Results Conference Call and Live Webcast. I am Samza, the Chorus Call Operator. I would like to remind you that all participants will be in this and 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 Gick, Head of Investor Relations. Please go ahead, sir.

Good morning and welcome to EarlyCon Q2 Financial Results Call. With me in the call, I have Roland Fischer, CEO, and Philipp Müller, CFO of EarlyCon. 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 morning to everyone, and welcome to our Q2 results presentation today. The second quarter was a strong operational quarter. Besides financial growth, we demonstrated technology leadership and executed on-discipline capital education by acquiring the two companies Inglas and Kurdor. And now let's go into some more details on the quarter with a short summary on page three. Verticon achieved solid order intake and sales growth both on a year-over-year and quarter-over-quarter perspective. Sales of 628 million Swiss francs were up 23%, and order intake at 647 million Swiss francs increased by 7% year-over-year. Growth was driven by a strong performance in both of our divisions. In service solutions, we saw trends improving compared to Q1. and we expect further sequential sales growth in the second half of the year. This is supported by a book-to-bill ratio above one. In polymer processing solutions, we continue to experience a very strong market environment and are currently making excellent progress filling up all the books for 2023. Our group operational APTA of 111 million doubled compared to last year, and further improved compared to Q1. Continued cost containment and operating leverage supported a strong operational EBITDA margin expansion. All in all, we had a strong start into the year, supported by a solid operational execution and two accretive acquisitions. I am therefore pleased to increase our full-year sales guidance to approximately 2.65 billion Swiss francs. We are also expecting a higher EBITDA margin, around 16.5% for the year. This brings the group already in 2021 into our EBITDA margin target corridor. On the next few slides, I will give you a business update before Philip goes into the financial details for the quarter. And now let's move on to the market update on page four. Our end markets continue to face Orion recovery profiles. In polymer processing solutions, we continue to make good progress with our structural shift into more non-filament business. We see strong demand for plant engineering solutions in China, such as stable fiber and continuous polycondensation plants. We also see the BCF industry revitalizing in the U.S. Our shift into more non-filament is supported by a strong focus on innovation, on service business, and on accessing new growth markets. On top of that, demand in the filament market is also increasing. Key players in China continue their downstream integration. For the full year, we raised our expectations both in filament and non-filament sales, as Philip will present later on. We expect to reach a positive book-to-fill ratio by year-end. This should support a growth trajectory also in 2022, while we are currently filling order books for 2023. In the service solution division, we are operating across the tooling, automotive, aviation, and general industries and markets. The market recovery continues to vary by end markets. The tooling and general industries and markets see shorter cycle services recovering well. We expect them to recover by a mid to high single digit percentage number this year. We introduced some new tooling products for the market this year. They have been well received by our industrial customers as they are continuing to look for improved performance to differentiate. The recovery in general industries is broad-based. and we also see oil and gas gaining momentum. In automotive, we experienced a high level of activity in H1, driven by automotive production. We also were affected by a two-week shutdown of a major customer due to supply chain shortages. We see supply chain interruptions due to semiconductor and commodity shortages to intensify in Q3. Finally, In aviation, the travel restrictions caused by the global pandemic continued to impact our sales. Our aviation sales were down 14% year over year in the second quarter. We expect aviation to be stable on low levels in H2, with new COVID variants to potentially extend the recovery profile. And if we look historically, then it can take up to 12 months until a recovery in flights arrives in the supply chain. And in this context, I'm pleased that we have already now evidence of first customer inquiries coming back. We signed a 10-year contract with NTU and Q2 to code some of their next-generation aero engine components. While volumes are not material on group sales level, it is a very positive sign that leading aviation players put long-term trust into our technologies. So, summing all up, we see a strong market environment for polymer processing solutions. In service solutions, short cycle business is recovering and we see positive signs in the longer cycle markets, which is a positive indication for 2022. 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 Q2 a new machine for deposition of diamond coatings. It has two times higher productivity and capability to produce nano and micro grain diamond films for applications in aerospace. We also launched new powders for thermal barrier and bond coatings. In terms of cost management, we have achieved a 660 basis points expansion in operational APDA margin this quarter. And finally, disciplined capital allocation has been a key priority for Erlikon since many years. We paid again a stable dividend in Q2. Furthermore, by acquiring Inglas and Cordova, we have found an excellent way to diversify our business and position it in growth markets. We paid attractive multiples, and the acquisitions are accretive from day one. And now I will provide some more details about our acquisitions on the next slide. InGlass is a market leader in hot runner systems, which are essential in the production of high-end lightweight polymer components. The company has around 135 million sales generated in multiple industries, including automotive and customer goods. The acquired technologies are very complementary to Erlikon's existing polymer flow control equipment. Our gear pumps focus on precise thermal control, pressure management, and continuous flow of molten polymer. Together with the know-how of InGlass, we can further extend technology leadership by combining our R&D efforts in flow control. The acquisition also helps us to diversify our business beyond filament, where we reached already a high market share. In 2020, filament accounted for 70% of polymer processing solution sales. This number becomes 60% with InGlass. Our midterm ambition is a balanced ratio of 50-50. We target to reach that by organic growth initiatives and bolt-on M&A in non-filament areas. The addressable market of InGlass is around 2.5 billion CISRAMs. This nearly doubles the existing addressable market of our division. The acquisition gives us substantial room to grow share in a market that organically grows above GDP. We see in Inglas an annual high single digit percentage sales growth potential. And last but not least, Inglas opens up excellent cross-selling opportunities between our two divisions. For instance, the forming tool business of Service Solutions coats the metal surfaces of tools and moldings used to create high-quality polymer parts. We are truly excited about this opportunity and see it as a transformational catalyst for the division. The closing of the deal happened in the beginning of June, and Inglas already contributed positively to our second quarter. And now let's move on to the next page where we highlight Godor. Godor is the leading supplier of metalware to the luxury fashion industry. Customers include leading luxury brands producing leather goods such as leather bags and belts. While we are already present in high-end deco applications such as pants and watches, we want to expand beyond that. A key feature of the high-end deco industry is that trusted long-term customer relations and design expertise are very important. The deal is therefore strategically attractive for us as it allows us to leverage our technology through the Codor brand. EarlyCorn's leading technology and global footprint makes us a perfect match for Codor. Besides end-market diversification, the acquisition provides EarlyCorn access to further growth. The luxury leather goods market has an attractive mid- to high-single-digit percentage market growth. And finally, in terms of ESG, the combination of EarlyCorn and Codor will accelerate the luxury goods industry's shift to PVD as a much more greener technology. And with that, I now will hand over to Philipp, who will take you through our financials in more details.

Thank you, Roland. I will start with the group results and then, as usual, provide more details on the divisions. At the group level, orders were 647 million Swiss francs, up 7%, driven by the recovery in surface solutions. Sales were 628 million, up 23%. Both divisions contributed equally to our sales increase based on the market recovery and surface solutions and continued strong demand in polymer processing solutions. Our group book-to-bill ratio was above one for the third consecutive quarter. Operational EBITDA was 111 million Swiss francs, a 98% increase versus the prior year. Our margin rate increased by 660 basis points to 17.7%, driven by operating leverage and tight cost management. Next on surface solutions. As Roland highlighted, surface solutions and markets are recovering at varying rates. Borders were $345 million, up 46% at Compton FX. while sales increased 23% to 320 million Swiss francs. In the first and second quarter 2021, we saw a solid pickup across our shorter cycle businesses. And as highlighted in our annual outlook in March, 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 above one for the second consecutive quarter. In terms of end markets, our sales were driven by the recovery in tooling, automotive, and general industry. Q3 is poised to benefit from a continued recovery in tooling and general industry. Automotive sales are expected to temporarily level out at current levels due to supply chain shortages. Operational ebudyne surface solutions was 60 million, up around 230% versus the prior year. This represents around 12 points of margin expansion, mainly driven by operating leverage and benefits from our structural cost reduction program. We expect to continue to generate solid operating leverage in the second half of the year. This will be partially offset by some short-term cost coming back and a lessened tailwind from the mix of our business. Next, on polymer processing solutions. Orders in polymer processing solutions were 302 million Swiss francs. This is a strong level above our historical average. It is down 17% versus the prior year. However, as a reminder, the second quarter last year saw a strong COVID-related catch-up effect. In the first half of the year, we generated 618 million orders, which is up 21% year over year. We expect a sequential order increase in the second half, driven by continued strong demand for our products and services. Second quarter sales of 309 million were up 25%. while this was mainly driven by strong organic and market demand. InGlass also already contributed 12 million in June and supported our diversification into non-filament businesses. Second quarter operational EBITDA increased to 49 million Swiss francs. Margins were up 80 basis points to 15.9%, driven by InGlass and better operating leverage. In Q3, We expect lower margins due to a COVID-related project delay and higher freight and material costs, which we expect to be transitory effects. This would be followed by a sequential step-up in margins in Q4. The project delay should be resolved by then, and we are constantly indexing our pricing to material costs. Let's now move on to the next page. We will provide more color on our cashflow and return on capital employed. First half cashflow from operating activities was 36 million Swiss francs. For networking capital, we experienced the usual seasonality, a buildup of networking capital for the revenues in the second half of the year. This is in line with our increased sales expectations for the second half. and we are on track for our full-year networking capital plans. In terms of CapEx, we spent 45 million Swiss francs in the first half, which is roughly on pace for our full-year guidance of around 120 million. We expect operating free cash flow to strongly improve in the second half as EBITDA expands and networking capital seasonality reverses. Next, we turn on capital employed, which is, as you know, the primary compensation component in our long-term incentive plans. We improved ROSI to 6.4% as per the first half of the year. It includes the last 12 months of net operating profits and, as such, is still impacted by the pandemic. It does not include the full earnings from the acquisitions yet. Capital employed is calculated from the balance sheet date. As such, the full impact of the acquisitions is included in the denominator. Including 12 months of pro rata contribution from InGlass and Curdor in the numerator, we would have reached 7% ROSI. It shows that our improved cost management and highly focused approach to capital allocation are bearing the first fruits. Our clear goal is to reach double digit ROC in the medium term. With that, let's move to the balance sheet on the next slide. As per end of June, our company has a solid 33% equity ratio. Our net debt to EBITDA ratio was slightly above one. This includes the impacts of our two acquisitions, as well as the dividend which we paid in Q2. We expect to end the year below one-time net leverage, in line with our commitment to continue to run the company with a strong balance sheet. In order to finance the acquisitions, we successfully placed senior unsecured bonds in May with a total value of 575 million Swiss francs. This included 125 million bond due in 2022 with a 0% interest rate. A 250 million bond due in 2025 with a 0.375% interest rate. And a 200 million bond due in 2028 with a 0.8% interest rate. The transaction allowed us to lock in current attractive market conditions for the long term. With that, I will conclude our presentation with our updated outlook. Following a strong first half year, we are increasing our full year guidance. We now expect group sales at approximately 2.65 billion Swiss francs and group EBITDA margin to be approximately 16.5%. Book-to-bill is expected above one, with orders around 2.75 billion Swiss francs. We're increasing our guidance, driven by both divisions. In surface solutions, we are raising our sales expectations towards the high end of 1.25 to 1.3 billion. This is driven by Kurd War, while our core business performs in line with our expectations. The division reached more than 20% sales growth in Q2, and organic recovery is in line with our original assumptions. In terms of margins, we are increasing our guidance from 16.5 to 17.5% previously, to now 18 to 18.5%. This is driven mainly by stronger effects from our cost out measures and solid business mix. In polymer processing solutions, we expect to reach a book to bill ratio above one by year end. This is based on an improved 1.45 billion orders guidance and around 1.35 billion sales guidance. A bit less than half of the sales guidance increase is driven by InGlass. The majority of the increase is organic. We see stronger than expected demand, both in filament and non-filament. Filament achieved 24% growth in the first half, while non-filament reached 22% organic growth. The strong non-filament growth shows that our initiatives to diversify the division are paying dividends. We will continue to drive this strategy. Looking into 2022, we see continued strong demand for polymer processing solutions. This is underscored by the expected positive book to bill ratio in 2021. We also further increased our 2022 order book throughout the quarter. As a result, we see room for organic sales growth in 2022 driven by non-filament. We also expect increased sales in 2022 from including 12 months of sales from InGlass versus only seven months in 2021. In terms of operational EBITDA margins for polymer processing solutions, we raised the guidance from 14% to 14.5 to 15%. This is driven by the accretive InGlass acquisition. To recap on the quarter, We have made excellent progress towards our forward-looking priorities. Erlikon delivered 23% sales growth in Q2, driven by both divisions. We have reached our EBITDA target corridor already in the first half of 2021 with a 16.9% margin. Adjusted ROSI of 7% shows improved momentum towards our double-digit target. We have executed two value accretive and strategic acquisitions. And we paid out a stable dividend of 35 robin per share. With that, let me end our results presentation and open it up for Q&A.

We will now begin the question and answer session. Anyone who wishes to ask a question may press star and one on the touchtone telephone. You will hear a tone to confirm that you have entered a queue. If you wish to remove yourself from the question queue, you may press star and two. Questions on the phone are requested using only handsets when asking a question, and they will eventually turn off the volume of the webcast. Anyone with a question may press star and one at this time. The first question comes from Michael Furth from Fontobel. Please go ahead, sir.

Yes, sir, thank you. Good morning, everyone, and well done on the results. I have sort of a few questions around your surface solutions automotive business. I was wondering if you can detail a little bit where the recovery comes from, sort of which sub-segments in automotive, which processes, and if you can comment on the progress of your EPD coating business there as well. So that's around automotive, and also if you can give us as a second point some information on the impact that you're seeing from the accelerated shift to electric vehicles in the next six to 12 months on your surface solutions business. And then I have a follow-up just on financials. Thank you.

So let's start with the OSS automotive business. Here we do see a certain regional pattern. I think China is up to speed across the entire portfolio. Here in Europe, we see a mixed picture on the one hand side. Markets are developing, have developed, obviously. But you all know and we know that big OEMs in Munich are extending the summer break by one week or when we talk about Audi, they have since weeks and months deleted shifts due to this shortage topic And this has an indirect impact for us as well. What we also see in the U.S., on the one hand side, yes, the economy is getting hotter, but the automotive market in the U.S. is somehow still behind our expectation. So that means it's not so much a topic or discussion about the different elements of our portfolio, because we can talk about the number of cars, being produced, and from that perspective, I think we are moving in the right direction. We see substantial growth, but we are clearly below the pre-crisis level. When we talk about EPD, I think it's the nature of the beast. This is a topic for premium cars, and we do make a certain progress, Munich-based OEMs, has acquired equipment, batch equipment, and this technology is in the process of being implemented. I think it's, I'm not sure whether we are actually entitled to make such an announcement, but the big model of this Munich-based OEM has decided to go for this technology, for his big ones, right? So, and the e-mobility topic, this is something what we do not yet see in our current figures. This is something what's going to come. Yes, from a sheer quantity point of view, we talk about a few hundred thousand of cars compared to the entire community of of worldwide car production. This is still a minor change, but we are preparing ourselves here with different elements of our product portfolio for, and you also have to keep in mind for at least for the next few years, three, four, five years, we talk primarily about hybrid applications, right? The pure electrical vehicles are still on a lower level. What we expect, and the whole world expects, is a strong increase in hybrid applications. That means the combustion part of these type of cars is not going to disappear, but the new electrical drives are contributing here. Thank you.

Yeah, absolutely. Very, very helpful. Thank you. And then just a very short financial question for Philip. You were talking about some short-term costs coming back in Q3. If you could just give us some information on what sort of costs are coming back and if they are just temporary in nature. Thank you.

No, Michael, this is really what you would expect. We're really hoping that we can travel a little bit more, see customers, ramp up some marketing efforts. This has been out of the system since the start of the pandemic. we've always expected that to come back. Frankly, we expected some of it to come back earlier, but the second quarter was still very, very slow. We're not talking about a huge amount, but that activity hopefully increases in the second half and then is there to stay and provides a partial offset to the positives that we're seeing.

Okay, it's very clear. Thank you. That's it from my side. Thank you.

The next question comes from Alessandro Folletti from Octavian. Please go ahead.

Yes, good morning, everybody. Thank you for taking my questions. I have a couple. Maybe on the raw material and freight costs in polymer processing and the project delays, these are sort of three elements that you mentioned are there in Q3, but maybe only transitory. Can you sort of give an indication what is really relevant and what can be really passed on to clients?

Yeah, I would say the more strategic parts of cost increases are much more longer term. So in other words, you know, material cost increases, those are things that are indexed contractually with our customers and we don't expect a longer term pressure on those items. On some of the shorter-term cost items, we expect some pressure, and this is really specifically as it pertains to shipping globally. You know, it's no secret that obviously shipping routes are very, very challenged at the moment. We face this on a day-to-day basis. In line with that, certain other things like freight cost, but also things like freight insurance or even, you know, wood that we use to fix our equipment within the containers, the cost has skyrocketed. Some of that we have to absorb ourselves. We think this is a very transitory effect. We expect the supply chains to ease quite a bit, especially the more strategic routes from China to Europe, which we utilize the most. So I think this is more of a Q3 effect. And then on the project delay, this is really an idiosyncratic challenge on a project. We were not able to procure certain talent levels really globally from lower-cost countries. So we had to substitute that with workforce from much, much more expensive regions. And that's basically what we're reflecting here in the third quarter. We're expecting to catch up on the delays here, mitigate the delay, and then, like we said in the fourth quarter, not to experience that pressure anymore.

Okay, and in terms of split of these three inputs, is it like one-third, one-third, one-third, or is, I don't know, the project delay accounting alone for 50% of the step-down that you expect?

Yeah, you can – I don't think we want to go into the exact split of it, but you can expect that the project is the largest part of this.

All right. Thank you for that. And maybe a small reminder on the additive manufacturing business. since I was asked before the call. Can you remind me what the dilution there in the surface solution margin, whether it is in the expected range and sort of breakeven level sales and current sales level, if you can?

Yeah, Alessandro, I would say no changes to what we've previously said here. It's in the expected range in 2021. And I would also say the breakeven sales levels are similar to what we told you, you know, at the outlook at the end of last quarter, which is much lower than it was previously given the restructuring that we've done there last year. But we're still a little bit away from it.

Okay. Thank you for that. And maybe my last one, if I may. You gave, Philippe, an indication on 2022 for polymer processing. And maybe I was distracted. I don't know if you did the same for surface solution. Yes, can you repeat, please? If not, can you give it?

No, maybe I'll start a little bit with just what I had gone through and then hand it over to Roland. I think in polymer processing, we said, you know, obviously we will include the full results from InGlass versus just seven months of the results in 2021. So we're expecting growth from that. And then, you know, just based on the organic order book and so on, we're expecting organic growth in OPP as well, driven by non-filament. So I think we have a pretty positive outlook there. And in surface solutions, we didn't say anything specific. It's certainly too early to talk about it specifically. But as Roland alluded to, we're still quite a bit below our 2019 activity levels. we have no reason to believe that we will not recover to those levels over time. So in other words, I think that's a positive backdrop for 2022 as well.

All right. Mr. Fischer, did you want to add something on this one?

No, I think Philip made a more or less complete statement. I think here we are living in two different worlds. In the OPP business context, First of all, we are, you know, extremely successful in our structural shift to focusing more on non-filament business. And, you know, in the old days, years ago, it was not purely but 80%, 90% filament. This share is now, we think, going down to 60%. And the filament business itself is still booming today. We are, you know, negotiating contracts, filling up books, our books for 2023 is the first contract for 2024. That means this part of the business is stable for the next few, two, three years. It's growing. And even nicer, you know, our non-filament activities, whether it's non-woven, whether it's polyconization, now with InGlass, that's a 2.5 billion market we are opening up for us. That means here we have a lot of fantasy how we might, will grow in future.

Okay.

Thank you very much. The next question comes from Andy Schneider from Debt Capital. Please go ahead, sir.

Hi, everybody. I have a few questions. First on the recruiting, recruitment problems and shortages in the labor market. Do you experience a general salary inflation? Can you talk about that? How does it look like and versus what we've seen in the past?

Yeah, so I think this is a topic and has been a topic always actually. And it's what we see is a regional pattern, right? We do have a very dynamic market in Asia, in China, with a certain increase in salaries, but availability of people is not an issue. What is coming up now and what we see since the beginning of the year is in the U.S., where the market is getting hot and when you just travel, there are sign-on bonuses if you just show up, right, and to start work somewhere. And here we have in place measures in terms of adjustments, but also in terms of adjustments of the packages and working conditions to find the right people for our business.

It's manageable. I would say the same, Andy, if I can maybe just, you know, to Roland's point, specifically in the United States, no secret. One thing to note is certainly that the wage inflation is mostly on the unskilled labor. So we're seeing that, but to Roland's point, it's not a very material point. The other thing to note is we're certainly looking forward to September 6th. A lot of the unemployment benefits in the United States expire, so I think the expectation is that more people come back into the workforce soon. and that we will sort of see this go back to more normal, more reasonable levels as well. So we were impacted by it. Very, very challenging. Saw temporary wage inflation on that non-skilled part. Not overly material, and we're expecting it to normalize in the third quarter and then the fourth quarter.

So you basically reacted more by signing bonuses and less by a general increase in wages, which will stick more, I guess.

Yeah, I think, honestly, the turnover rate in these kinds of categories of labor, sort of with hourly rates and so on, and on the non-skilled part, is very flexible. So, you know, it's not so much in the European sense contracted or negotiated contracts that are longer term. We think it's a pretty transitory thing that probably won't impact us at any material level.

Okay. And on... on InGlass. Can you tell us what kind of growth you're seeing this year for InGlass in 2021? Set high single digit going forward. Are we there already in 2021 or is there a little bit more work needed from your side to bring it up to this high single digit growth rate over the coming years?

So now we are right now in the process of integrating the company. They do have quite a strong market position for the automotive application. What is, you know, important for us because this e-mobility topic is kicking in, the demand, increasing demand for lightweight high-end, lightweight polymer parts. But there are other applications, right, where the market position of in-glass today is not as strong as in the automotive industry. And here we have a high single digit growth rate. And actually we do expect and we are looking for additional opportunities to further grow this business. We have established a business unit for this type of business including our pump business. And this is one element of our diversification strategy. to become less dependent from filament.

And so we can expect the business to be around 145 to 150 million this year in sales. Yeah, I think that's right. With around 27.5 margin, is that still good or higher or lower now?

I think we gave you sort of the indication at the time of the transaction. No change to that. And the business is performing. Look, I mean, we've only consolidated for one month, but we're very pleased with what we're seeing here from a financial standpoint, but more importantly from a commercial standpoint and operational standpoint. So no change to what we previously expected.

Perfect. And if I might add one or the other question on the filament business. I think I ask you that every quarter. What are you seeing in terms of potential downturn coming in 2024 or 2025 after these big projects are finished? Is there something on the horizon yet or don't you see anything yet?

No, we do not see any indications for that. And as you always say, this type of business is a part of big petrochemical plants, which do have, also in China today, require a lengthy period of planning and approval and certifications for building up such a plant. And from that perspective, these players are thinking in five years' horizons to build up capacity And we are in the midst of it. And as I indicated, we are, I think 23 is almost filled, not completely, but yeah. And the first contracts go into 2024. And that is the time horizon we see. And here we do not have any indication of any downturn.

And the last question on the surface mix. You had some tailwinds now in H1 and H2. less so than in H2. Can you be more specific? Is that just a little bit stronger growth in Asia in thin film? Is that that?

It's at the end of the day, Andy, it's thin film. As you know, that is the shortest cycle part of our portfolio and tends to be with fairly very accretive margins. We're expecting more pickup in the second half on the somewhat longer cycle parts of the business. That's the more CapEx-relevant equipment, some of the materials, businesses, and so on. They tend to be a little bit less accretive. That's the mixed effect. I think there's obviously better operating leverage that basically we expect that to offset each other. And then I think as we go into next year, I think the mix effect will subside a lot more because the different parts of the portfolio are going to grow at a similar speed.

But we can still expect, just from a rating leverage standpoint, that margin should increase further, even though the mix is probably less favorable.

Yeah, absolutely. That's the plan, yeah.

Okay, perfect. Thanks.

The next question comes from Christian Obst from Baader Bank. Please go ahead, sir.

Hello, can you hear me?

Yes.

Okay, thank you. So most of the questions are already answered. Nevertheless, I have two smaller ones left. One is in the nonwoven business, there was a kind of a demand and margin spike, I would say. Do you see any kind of a cooling down there, either on the sales side or the demand side or on the margin side? This would be the first question. And the second one is concerning the dividend. Do you think that the M&A, do you exclude the M&A payments out of your dividend, expected dividend contribution going forward, right?

The second question, I'm not so sure that I get it, but I think the first one I can answer. I think the non-filament business you are talking or you are referring to consists of different types of business. Here we have a bunch of technologies. We have the carpet yarn topic. We have the non-woven topic. We have the stable fiber topic. We have the polyconization business.

More specifically, the nonwoven. I mean the nonwoven.

The nonwoven, okay. And this nonwoven mask application, of course, was a spike last year. We sold, I think in Europe, I think about 20 units, normally one or two per year. That was a spike that was contributing with a low triple-digit million in revenue. And this is now back to normal, right? But on the other hand side, Other elements of this non-woven bucket are growing, and we do expect, you know, continued growth in the non-filament over the course of the next years.

I think that's an important part. The boom with face mask equipment for the FFP2 mask is over. Nonetheless, we expect significant growth. growth in that non-movement application. So we've talked to you about the macro trends that were aligned with their hygienic products. So I think that business performs very, very well. And then to your second question, I think we We look at the topics, obviously, quite separately. I think the dividend is really more related to the ongoing business, the strength of our portfolio and the ability of our portfolio and our company to generate free cash flow. The M&A activities, you saw us financing that exclusively with debt financing now. And I think we're looking at our very, very healthy balance sheet and leverage and all of that, I think, are really the components then to determine the dividend for next year.

Thank you for that. Maybe another one on the cash flow. Do you have some kind of a free cash flow target for the group and the current structure going forward? So maybe between $150 million and $200 million over the course of the cycle?

I think that really depends on earnings and obviously the trajectory. I think we're going to see a significant earnings accretion in the current year. We see revenues up significantly versus last year. And then I would just give you the components that we've talked about. So I think as we see sales and earnings grow, In this fashion, I think we're going to see a relative networking consumption in those years. That's probably expected, maybe on receivables and inventory. But we're expecting to manage that very, very tightly. We've given you kind of our effective tax rate, about 25%, and then interest payments are relatively limited. We've just given you the substantial portion of our outstanding debt. It's the $575 million, and I've given you those interest rates. So I think those are the different components, and as revenues and earnings grow, I think we're expecting this portfolio to continue to generate very strong cash flow conversion.

Okay. Thank you for the details. All the best. Thank you. Thanks.

The next question comes from Sebastian Cooney from RBC. Please go ahead, sir.

Yeah, hi, gentlemen. I hope you can hear me. Yeah. Yeah. So first question on service solutions. So the guidance, the revenue guidance you give for the second half, the implied guidance, would mean that you need about, yeah, only 315 million of orders, right? The orders drop through very quickly into revenues. You had very strong orders in Q2, so you need fairly low orders in the second half to reach your revenue target. In my calculations, about 10% to 13% lower orders than in Q2. Could you explain why that is? Have you seen a lot of restocking, or do you expect actually a slowdown in one of the markets? That would be my first question.

Yeah, that's a good question. Sebastian, don't read too much into that. Because of the short cycle nature of the business, we really look more at sales as an indicator of that. So I think the forward-looking meaningfulness of orders in that business is very limited. By and large, we're just expecting orders to be in line with sales in that business, although the longer cycle components might be a little bit higher. And again, I think the backdrop for the business also for the next year is a positive one because we are only somewhere in the recovery from the pandemic on the overall business.

But there's no longer lead times. I mean, you either expect lower orders or you expect longer lead times at the end of the year. Otherwise, the numbers would not add up. So if the lead times stay the same, you will have much lower orders in the second half.

Yeah, I think take it as an approximation. I think, again, we're expecting orders to be in line with sales and a positive business outlook. Okay.

Then for, okay, that's understood. For Polymer, you basically imply accelerated deliveries of just short of 400 million Swiss franc per quarter. Is this now running at max capacity, including the acquisitions? Is the million per quarter something you can deliver? on a sustained basis, or do you now think, well, we better increase capacity by 10 or 20% in that business? What's your plan there currently?

No, we are optimizing the existing capacity, what we have in our sites in China and in Germany. That means we are somehow here and there adding machine capacity We are optimizing the shift, optimizing the output. What we are not doing, what we will definitely not do is to go into huge infrastructural investments in terms of new sites or something like that. No, we have been able over the course of the last two, three years to constantly increase capacity by optimizing existing sites.

And remember, Sebastian, a lot of the growth is coming from the non-filament side, and that's obviously a little bit different. We see continued growth there also into next year and so on, and we're adjusting capacity. The only other thing that I would add is we feel very confident that we can deliver on the sales expectation in the second half, very confident. I think the one thing that we're watching very, very closely is, again, the shipping component. I think we have an ability just from how we account for things with percentage of completion to usually fulfill pretty closely on the financial dimension of that. But shipping and so on remains something that we just collectively have to be very, very focused on. But internally speaking, I think we're very confident that we can deliver on this.

Understood. And just for understanding, in the main plans for polymers, Do you run on one shift or two shifts, or what's the construction of the bigger plants there?

No, we are operating a two-shift mode in some areas, a three-shift mode. You know, the modern machines today can operate for, you know, four, five, six hours without any human beings. No, this is exactly what I'm talking about when I say re-optimizing capacity, yeah.

Understood. And last question also on polymer. You mentioned a COVID-related delivery delay, which will trigger a charge in the second half. I assume that is kind of a, yeah, you didn't meet the deadline for installation of the plant, I assume.

What's the scale of that charge? We gave you an indication that it'll have an impact on margins in the third quarter, but we'll give you a little bit more details when we're through it and have the full estimation done. But you're absolutely right. At the end of the day, it's a delay on a project, and it's really the rectification of that delay and what we need to do to make a hole on this. with the customer that will, you know, mean the additional cost. And that additional cost is just a lot higher due to COVID and sort of how we can rectify the situation.

Yeah. And with shipping being so difficult now, especially for routes to Asia and North America, wouldn't there be a risk that you have further delays in other projects that are now coming up in Q3, Q4 and with similar expectations?

No, no, no, no. This delay, by the way, the equipment is shipped, so there's no further issue. Obviously, if we have a delay on shipping that is due to COVID, that's a force majeure. This is something we're working through, obviously, with our customers. We're very transparent with that. They face this from a number of suppliers. We don't expect any impact from that. This here was really more a technical problem, and then the remediation of the issue was really the problem and the cost of that. So really two separate issues.

So a true one-off, this one. Yeah. Okay. Thank you so much. That's all.

The next question comes from . Please go ahead, sir.

Good morning. Thank you very much. Congratulations for those results. My first question would be concerning the diversification on polymer processing and the target of 50-50. Do you have an idea when you wish to achieve those 50-50 repetition and second things? Do you expect to go there in an inorganic way through M&A or through organic growth of flow control?

We do not have a fixed date over the course of the next years. You know where we are coming from. I told you where we are right now. And obviously, you know, filament is growing. This is also a nice part of the story. But non-filament is growing stronger. And the in-glass acquisition and this polymer processing part is a focus area. and it will be done organically and inorganically, and that means we have to see when another target is available. That is not predictable.

I understand. Thank you very much. And so should we expect more M&A acquisition in direction of flow control, or do you want to widen your diversification base in other potential subsegment for polymer processing?

No. There are more elements on the table today. We just talked about the business we do. But there is a topic like polymer recycling elements which are not contributing substantially to the business as of today. But we do have technology for recycling, mechanical recycling of PET equipment or bottles and stuff like that. Then, you know, this textile topic is coming over the course of the next few years, recycling of clothes. And here we talk about chemical recycling. Here we are engaged in startups in the UK, for instance. This is a company where we are now going from a lab how to say, application into a bigger prototype. But this is to come not today and not tomorrow, over the course of the next few years. And this is a typical non-filament growth area.

I understand. Thank you very much. I would have a second question regarding the aviation subsegment. And you mentioned seeing first now some clients returning and asking for quotes. So do you expect to see a first recovery somehow in Q4 or in 2022? Or when do you expect full recovery of the aviation segment?

Full recovery of aviation, and now referring to experts, maybe 2024, 2025. I think we have to be, you know, to cut the elephant into slices. We do have in China and the US a domestic air traffic which is at the level of 80, maybe 80% of the pre-crisis level. You know, the long distance flights are still extremely down. And a recovery here, and we just had a few days ago an intensive discussion to a pre-crisis level will take at least another two to three years. But that doesn't mean that there are, you know, first positive signs of business coming back. And I think you're referring to the contract with M2 where we have successfully managed to enter the PVD coding of latest error engine This is a great, great story. But I think we also have been clear it's not yet material for, you know, contributing too much to the business as of today. This is going to come over the course of the next year.

Yeah, I think what's very positive for us is what Roland is mentioning. So narrow body, which is the type of aircraft that's more engaged in the domestic travel and, you know, within Europe and within China and within the United States. the recovery of the activity is much stronger. Our portfolio, and obviously freight is very, very strong, freight and logistics. And so our portfolio is a little bit more geared towards that part, and we're expecting that to recover more quickly. If we're believing some of those external sources, then the overall activity on that part by the end of the year could be somewhere between 80 and 90%. So that bodes well for you know, second half of the year, order activity, and then next year, obviously, parts of our portfolio recovering. And then again, the wide-body transcontinental travel, that will probably not be a significant recovery until later on. But so I think parts of our portfolio are going to recover. That'll help us tremendously with cost absorption and obviously revenues next year, but not all of the aero portfolio.

Thank you very much for that explanation. And finally, I would have a third and final question, which is a kind of a double question. For the sub-segment of the surface solution, where should we, I mean, this tooling, automotive, aviation, general industry, where should we locate Cordo, I guess, general industry? And my second question is, in which of these also sub-segment is AM mostly focused?

So I think Cordor is a luxury goods market business. We have been active with our high-end deco applications for pants and watches, just to mention two applications. But Cordor is clearly beyond what we did so far. Here we talk about all the fancy and famous big brands expensive brands which are providing leather goods, whether it's a bag or a belt or whatever. And these type of products are using metal applications which are coated and somehow designed in a very special way. And here, Codor is one of the big players. And this opens up an opportunity for us to penetrate this type of market, it's growing with a mid-high single digit growth rate per year. And this is something what we will cover from now on, right?

So, yeah. And Edward, you're absolutely right. Curt Orr is in general industry for the moment. To Roland's point, I think as that becomes much more material and obviously a real growth driver, we might separate that out for the moment. It's in general industries. An additive to your question is depending on the end market that we're selling it to. You know that we have a lot of success there in airspace, radio frequency components, but also in power gen, even some in automotive. So it'll be in the end market that it belongs to.

I understand. Thank you very much.

The last question for today's call comes from Sebastian Fogel from UBS. Please go ahead, sir.

Hello, good morning. Can you hear me? Yeah, perfect. I got two questions. On your outlook or your guidance slide, and you also referred in your presentation about it, the strong effects of the cost-out measures that you're referring there, can you shed a little bit more light what you mean by that? Yeah, a little bit of a better understanding. And the second question would be as well on surface solution and the guidance for the full year. If I was calculating correctly, that would sort of imply something around like 8% in organic terms for the second half. As I said earlier on, some long cycle stuff is coming back, early cycle stuff maybe not so much, but is that number not a bit conservative in UI?

Yeah, I'll probably take the first one. I think the, you know, we had gone through kind of the overall margin expansion opportunity from the structural cost out measures. where, again, we saw about 35 to 40 million off the benefits already in the second half of last year, right? And then you look at what we're indicating here, that's an approximately 400 basis points margin expansion in surface solutions for the year. and kind of the expectation above and beyond of what we had previously indicated is really attributable to the cost of measures. And I think that our teams have executed very, very fast and very, very thoroughly and in many areas overachieved really the structural cost reduction that we had anticipated. So I think that's one. And then on the conservative outlook for the second half, I think there's still a variety of estimates out there. Specifically, the fourth quarter, I think, is still a TBD. I would tell you so far what we have seen. The market reaction and market development has been pretty closely aligned with what we talked about at the beginning of the year. We were pretty close on that, and I think we're going to keep with that stance. And, you know, then frankly for us, it also, it doesn't really impact us as much whether the recovery happens in the fourth quarter or in the first quarter of 2022. I think we're very well positioned with customers. We will capture that growth when it happens.

Understood. One follow-up to your earlier remarks on the cost-out measures. As you said, there were some overachievements being seen Is that down to a real number that you say instead of the previously target 45 millions of cost out for the segment you rather sort of aim for, you have now seen something more like 50 or is it not really possible to either to an extent where you'd say, okay, it doesn't necessarily mean that we need to raise the previously indicated number there.

Well, I mean, we updated the margin rate guidance. So I think that gives you an indication.

Got it. Many thanks.

Great. Thank you, Sebastian. 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.

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