OC Oerlikon Corporation AG

Ladies and gentlemen, welcome to the Ehrlichon Q2 half-year 2022 results conference call and live webcast. I am Sandra, the chorus call operator. 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 morning, ladies and gentlemen, and welcome to Ehrlichon's Q2 results call. With me in the call, I have Philipp Müller, CFO of Ehrlichon, Philip will start the call with the presentation, providing an update on our financials and end markets. We will then follow up with the Q&A. With that, I would like to open our presentation and hand over to Phil. The floor is yours.

Thank you, Stefan. Good morning, everyone, and welcome to our second quarter results presentation. Q2 continued our strong track record of growth. We achieved the highest sales and EBITDA since we refocused our company on two divisions. I will start with an overview of the group results on page two, followed by more details on our end markets, the division results, and the outlook for the remainder of the year. At the group level, orders were 773 million Swiss francs, up 19%, driven by strong demand in polymer processing solutions. Our sales were up 17%, to 734 million Swiss francs. Both divisions contributed to the sales increase. Our group book-to-bill ratio was 1.1 in the first half of the year. Operational EBITDA was 128 million Swiss francs, a 15% increase versus the prior year. EBITDA margin was 17.4% in Q2. Positive operating leverage and tight cost management were partially offset by negative mixed effects. In the first half year, our margin rate improved 30 basis points versus the prior year to 17.2%. With that, let me provide you an update on our end markets. In polymer processing solutions, we experienced strong demand and solid market fundamentals. On the filament side, our positive outlook is supported by the vertical integration at our customers and their need to invest in next-generation technologies. Our latest solutions see significant energy, reduce waste, and optimize space for our customers. Erlikon is the technology leader in the filament equipment market, and we are leveraging our know-how in other markets. In Q2, we saw continued substantial organic sales growth in non-filament, which was up 13%. We see strong demand for plant engineering solutions and carpet yarn. Flow control, which includes our recent acquisition of InGlass, continues to perform strongly. Overall, we are well on track with our plans to transform polymer processing solutions into a growth platform. In the surface solutions division, we are operating across the tooling, automotive, aviation, and general industries end markets. Growth differs by end market. The general industries end markets saw mid-teens growth, basically across industries and relatively evenly spread from a geographic viewpoint, except for China. We saw particularly strong demand in luxury, semiconductors, and energy. In the second quarter, we continued to see lower activity in the automotive end market due to global supply chain challenges. We were indirectly affected by temporary shutdowns of major customers. Industry forecasts expect sequential growth in the second half, but have been revised downwards over the past weeks, given some of the bigger macroeconomic concerns. Finally, in aviation, we see continued volume growth as increasing flying hours or driving MRO activity. Overall, aviation still remains substantially below pre-pandemic levels. In Q2, the lockdowns in China muted the growth profile in narrowbody, while the widebody market showed signs of increased activity. Summing up, we see a strong market environment in polymer processing solutions. In surface solutions, we expect some easing of supply chain constraints to underpin growth in the second half of the year. Clearly, when looking at the broader macroeconomic picture, there are some concerns about growth. However, so far, our immediate customers and our own operations have not experienced any slowdown. With the increased uncertainty, we continue to focus on a flexible cost structure and staying agile. Now let's move on to page four with the financials for our surface solutions division. Orders were 348 million Swiss francs up 3% FX adjusted while sales increased 12% in local currency to 352 million Swiss francs. We saw a solid demand in general industries and tooling and our aviation business continued its recovery in Q2. Impacts from supply chain shortages were in line with our expectations. We expect continued impacts from shortages in the second half of the year, though at a reduced intensity compared to the first half. To a certain extent, the situation remains difficult to predict. There are still a number of factors which make predictions into the future very difficult, primarily the impact from potential lockdowns and the war in the Ukraine. Operational EBITDA in the second quarter improved 4% to 63 million Swiss francs. EBITDA margin was at 17.7%. Operating leverage and cost control were offset by negative business mix. These mixed effects were driven by significantly lower sales in some of our high margin businesses like thin film coating solutions. The lack of activity was due to the transitory disruptions of our customers' operations. Based on current visibility, we expect these effects to reduce in the second half of the year as activity in these high margin businesses returns to normal levels. Margins were also impacted by rising input costs in the first half of the year. We are passing those costs on to our customers depending on the business This happens immediately or with a certain time delay. This time delay also negatively impacted margins in Q2. Next, on polymer processing solutions. Orders in polymer processing solutions were 425 million Swiss francs. This is up 40% versus the prior year. Both filament and non-filament are growing. Sales of 383 million Swiss francs were up over 27% in local currencies. On the one hand, this was supported by strong organic and market demand. On the other hand, InGlass contributed and accelerated our diversification into non-filament. Organically, sales were up 18% at constant exchange rates. We saw certain shipment delays driven by our operations and our customers' operations in China. This shifted some orders and sales from Q2 into the second half of the year. Overall, we are well on track to reach our full-year guidance of approximately 1.5 billion in sales. Operational EBITDA increased 33% to 65 million Swiss francs. margins were up 120 basis points to 17.1%, supported by operating leverage, cost efficiency, and the inglass acquisition. With that, let's move on to cash flow. First half, cash flow from operating activities was 22 million Swiss francs. On net working capital, we experienced the usual seasonality. A buildup of net working capital for the revenues in the second half of the year. The impact was a bit stronger than in other years due to higher raw material prices and a higher buildup of safety stock. We are managing net working capital with a lot of focus and are on track for our full year plans. We expect operating free cash flow to strongly improve in the second half as net working capital seasonality reverses. Next, on return on capital employed. which is, as you know, the primary compensation component in our long-term incentive plans. Organically, we improved ROSI to 10% at the end of the first half. Including last year's M&A transactions, ROSI was at 8.6%. So we're closer to the minimum target we have set ourselves, but not there yet. The positive trend gives you a strong indication that our improved cost management and highly focused approach to capital allocation are having an impact. Our clear goal is to reach double-digit ROCE on a sustainable basis. Let's move on to the balance sheet on the next slide. As per the first half of 2022, our company has a solid 33% equity ratio. Our net debt to EBITDA ratio was right at one time compared to 1.1 times a year ago. This includes the impact of networking capital, 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. With that, let's conclude the presentation with our outlook. The continued focus on executing our strategy has positioned Erlikon well for profitable and sustainable growth. We have delivered solid growth in the first half of the year and achieved the highest sales in EBITDA since we refocused our company on two divisions. We are laser focused on margins and returns. Our ROCE came in at 10% when excluding M&A. This progress is supported by our strong capital allocation framework. In terms of sustainability, we are delivering on our own targets and helping our customers to reach their objectives. We have positioned the company to benefit from sustainability megatrends. Based on our strong first half results and current visibility, we confirm our group guidance. We expect group sales at approximately 2.9 billion Swiss francs and group EBITDA margin to be approximately 17.5%. Naturally, the details of the remainder of the year are increasingly difficult to predict, given the geopolitical events and the COVID pandemic. As I said earlier, there are some broader concerns about growth, which have not impacted any of our activities yet. Based on what we see today, we expect Surface Solutions to be closer to the lower end of its sales and margin guidance. polymer processing solutions. We are very well on track with our guidance, support by the strong start to the year and a full order backlog for the remainder of 2022. With that, let me open it up for Q&A.