OC Oerlikon Corporation AG

Ladies and gentlemen, welcome to the Erlikon Q3 2022 results conference call and live webcast. I'm Alice, the Coruscant operator. 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, ladies and gentlemen, and welcome to Erlikon's Q3 results call. With me in the call, I have Philipp Müller, CFO of Erlikon. Philipp will start the call of the presentation, providing an update on our financials and end markets. We'll then follow up with Q&A. With that, I would like to open our presentation and hand over to Philipp. The floor is yours.

Thank you, Stefan. Good morning, everyone, and welcome to our third quarter results presentation. Q3 continued our strong track record of growth. We achieved the highest third quarter sales and EBITDA since we focused our company on two divisions. I will start with an overview of the group results, followed by more details on our end markets, the divisional results, an update on our strategic progress, and we'll conclude with the outlook. At the group level, orders were 764 million Swiss francs, driven by strong demand in polymer processing solutions. Sales were up 12% at constant FX to 742 million Swiss francs. Both divisions contributed to the sales increase. Foreign exchange rates, specifically the strong Swiss franc, post an increasing headwind toss. At the orders level, we had a four-point drag, and at the sales level, a six-point negative impact from FX. our group book-to-bill ratio remained above 1 in the third quarter. Operational EBITDA was 126 million Swiss francs, an 8% increase versus the prior year. EBITDA margin slightly improved to 17% in Q3. Positive operating leverage and tight cost management were partially offset by foreign exchange impacts, negative mix effects, and higher energy costs. In the first nine months, our margin rate improved 20 basis points versus the prior year to 17.1%. With that, let me provide you an update on our end markets. In polymer processing solutions, we experienced continued demand in Q3, which is reflected in our order intake. On the filament side, we have good order book coverage for 2023. At the same time, our Chinese customers are experiencing a very challenging environment. Given the significant inflation, global discretionary spend is decreasing, which is impacting demand. Even more pronounced is the impact on demand in China, driven by the zero COVID policy. Combined with higher input costs, lockdowns, logistics challenges, and tighter financing conditions, 2022 represents a uniquely challenging year for our clients. Accordingly, some of our Chinese customers are starting to reshuffle their investments, and some have started to postpone orders until they have more visibility. Depending on the length of the macro uncertainties, we see a scenario where more customers can postpone investment decisions into the future. With this outlook, We are proactively preparing the organization for a potential downturn. We are finalizing actions, which we will start to implement before the end of the year. In non-filament, we saw continued organic sales growth, which is up 5% in Q3. Flow control, which includes our recent acquisition of InGlass, continues to perform strongly. We also see strong demand for plant engineering solutions, For example, pulley condensation plans for packaging. In the surface solutions division, we're operating across the tooling, automotive, aviation, and general industries end markets. The general industries and tooling end markets had a strong first nine months. However, since July, manufacturing PMIs have declined significantly. we're expecting this weakening industrial activity to be partially offset by some bright spots in luxury and energy. In the automotive end market, we saw improved activity in the third quarter. This was related to the easing of global supply chain challenges. Industry forecasts expect sequential growth in the fourth quarter, but have been revised downwards over the past weeks, given some of the bigger macroeconomic concerns. We remain confident that the current production backlog in the industry will drive demand for the coming quarters. Finally, in aviation, we see continued volume growth as increasing flying hours are driving MRO activity. The production of new planes is supported by passenger growth and energy efficiency, partially offset by shortages at engine OEMs. Overall, aviation still remains substantially below pre-pandemic levels. Summing up, we saw a strong market environment in polymer processing solutions in Q3, and we are proactively preparing for various scenarios given the challenges in China. In surface solutions, we expect continued easing of end-market supply chain constraints to underpin growth in the fourth quarter. At the same time, where necessary, we will prepare the company for potentially lower demand due to weakening industrial activity in 2023. Clearly, when looking at the broader macroeconomic picture, there are concerns about growth. Given this, we are preparing decisive actions to make sure we stay as agile as possible and protect our margins. Now let's move on to page four with the financials for our Surface Solutions Division. Orders worth 346 million Swiss francs up 9% FX adjusted. Sales increased 13% in local currency to 347 million Swiss francs. We saw somewhat weaker demand in general industries and tooling. This was more than offset by the easing of supply chain shortages in automotive and the continued recovery of aviation in Q3. Operational EBITDA in the third quarter was stable at 59 million Swiss francs. EBITDA margin was 16.8%. The business saw negative impacts from FX and some impact from higher input costs, specifically energy. As previously explained, we had largely hedged our energy costs, particularly where we have bigger operations. There have been some disproportionate effects from smaller countries where we don't have hedging or where our hedging counterparties have filed for insolvency. We continue to follow a systematic approach to passing on input cost inflation, and we have been very successful to date with this approach. Given the weakening overall demand environment, we expect that the discussions with our customers will get more challenging and pricing adjustments might take more time to execute. Accordingly, we also accelerate our efforts to streamline our organization and portfolio. we expect to take another set of decisive actions in the fourth quarter. Depending on the execution of these actions, we expect to incur certain one-off charges in Q4. Next, on polymer processing solutions. Orders in polymer processing solutions were 418 million Swiss francs. Q3 reflects the third highest order intake on record. Orders were down year over year due to the strong comparable of the record quarterly order intake one year ago. Orders in the first nine months are up 15% in local currencies to 1.3 billion Swiss francs. Sales of 395 million Swiss francs were up over 12% at ConstantFX, both filament and non-filament delivered growth. with year-to-date sales of 1.2 billion Swiss francs. We are well on track to meet or even to slightly exceed our full year expectation. Operational EBITDA increased over 17% to 65 million Swiss francs. Margins were up 160 basis points to 16.4%, supported by operating leverage and cost efficiency. We continue to have a strong order book for 2023. As our customers are weighing the timing of their investment decisions, we are preparing the organization proactively and will take decisive actions here as well. Next, let me give you an update on our strategy execution. As highlighted at our recent Capital Markets Day, We are focusing our strategic priorities on growth, diversification, profitability, and sustainability. The continued focus on executing our strategy has positioned Erlikon well for profitable and sustainable growth. Our third quarter sales exceed 2019 levels by 19% when adjusting for FX and M&A. This is at the top end of our 4% to 6% annual growth guidance. The market sweet spots where we are focused are attractive and provide structural growth. The customer need for sustainability and efficiency is driving growth in surface solutions. Polymer processing solutions demand is driven by rising GDP and limited alternative resources for textiles. The division has executed well on the market extension into the non-filament space. Additionally, the current environment presents some very interesting M&A opportunities, which we are actively evaluating. EBITDA and margins are well above pre-pandemic levels. This reflects the improved cost base, continued cost discipline, and resulting operating leverage. Erlikon's enhanced capital allocation framework is already yielding benefits in profitability and capital efficiency. ROSI has been improving on a quarterly basis towards our medium-term target. Last but not least, we are driving sustainability progress. Customers are increasingly incorporating sustainability considerations into their purchasing decisions. Ehrlichon's sustainable innovation framework is enhancing the next generation of products and services. Customer and investor ratings are starting to reflect the underlying sustainability credentials of Erlikon. ISS ESG significantly improved our rating from D plus to C, putting Erlikon near the top of industrial machinery businesses. Summing up, we have made strong progress and our strategy execution is on track. With that, let me conclude on the next slide. Our strong financial performance year to date provides a clear proof point that our strategy execution is paying off. We are committed to 4% to 6% of profitable sales growth over the midterm. The environment in which we operate has deteriorated significantly since the summer. Manufacturing PMIs show contraction in China and Europe and have declined substantially in North America. In polymer processing solutions, some of our Chinese customers are starting to reshuffle their investments and have started to postpone orders until they have more visibility. We are increasingly cautious on the future developments and are considering various scenarios to manage a potential downturn. While we will continue to work on our pricing structures with our customers to pass on input cost inflation, We will also adjust our cost structure and organization where we see fit. As explained earlier, we will take decisive actions, which may result in certain one-off charges in Q4. We are trying to be very proactive in preparing for various economic scenarios, but we remain very confident in our company's ability to outgrow and execute well in our respective markets. For the full year 2022, we now expect to slightly exceed our previous group sales guidance of 2.9 billion Swiss francs. This is driven by strong execution in polymer processing solutions. We expect EBITDA margin to be between 17 and 17.5%. Year-to-date, we delivered margins of 17.1%. As described earlier, we are seeing a negative impact from FX as well as certain transitory impacts from rising input costs and surface solutions, which are only partially compensated by operating leverage and cost discipline. In closing, I'd like to thank the global ERDCON team for their strong performance and execution in a demanding operating environment during the quarter. With that, let me open it up for Q&A.