OC Oerlikon Corporation AG

Ladies and gentlemen, welcome to the Oerlikon Q1 2023 results conference call and live webcast. I am George, the chorus call operator. I would like to remind you that all participants will be listened only mode and the conference is being recorded. The presentation will be followed by Q&A session. The conference must not be recorded for publication or broadcast. At this time, it's my pleasure to hand over to Stefan Geek, head of investor relations. Please go ahead, sir.

Good morning, ladies and gentlemen, and welcome to Erlikon's Q1 results call. With me in the call, I have Philipp Müller, CFO of Erlikon. Philipp will start the call with a presentation providing an update on our end markets, financials, and strategic progress. We will 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 first quarter results presentation. In Q1, we made progress on our strategic objectives and delivered results in line with our expectations. I will start with an overview of the group results, followed by an update on our end markets, the divisional results, and we'll conclude with an update on our strategic priorities. At the group level, orders were 681 million Swiss francs. As we anticipated, polymer processing solutions customers are beginning to delay their investment decisions. In surface solutions, orders were up slightly, with the book-to-bill ratio above one. Sales were up 11% at constant FX to 735 million Swiss francs. This includes a 3% contribution from our acquisition of Riri. In surface solutions, The sales increase was driven by higher equipment sales and strong performance in the aviation markets. In polymer processing solutions, we executed well on the existing order book. Operational EBITDA was 116 million Swiss francs, impacted by mix and higher input costs. EBITDA margin was 15.8%. As expected, This is slightly below our target range of 16% to 16.5% for the fourth year. Margins in the coming quarters will be supported by structural price increases to pass on wage inflation and energy costs. The cost actions we took in 2022 will also phase in throughout the year and support margins. With that, let me provide you an update on our end markets. In polymer processing solutions, customers are delaying investment decisions, which is reflected in our order intake. On the filament side, we have a good order book coverage for the first half of 2023. Chinese customers have experienced a difficult macro environment in the past years. They were exposed to higher input costs, logistics challenges, tighter financing, to softer domestic consumer demand. As a result, We see Chinese filament customers postponing their capex decisions and preserving cash until they have more visibility. This started in the second half of last year, and to date, we have not yet seen a significant demand revitalization. Especially during this time, we continue to drive innovation that will extend our technology leadership. Efficient new machines will bring forward the investment decisions of our customers as they look to stay competitive. Improving financing conditions in China and increased consumer demand will also drive investment decisions. We expect an order uptick to happen in late 2023 or in early 2024. For the time being, we remain cautious and implement the cost measures we discussed to manage the expected lower sales volume as of the second half of the year. In non-filament, we saw continued organic sales growth, which was up 4% in Q1. This was supported by the flow control business. Erlikon's leading technology in hot runners is seeing continued growth in automotive, as carmakers bringing new electric vehicle models. Technology leadership is being leveraged into adjacent non-automotive markets, such as durable goods. The non-woven and industrial yarns businesses may see some customers delay investment decisions. Typically, orders are smaller here with lower financing needs and return faster when consumer demand picks up. In the surface solutions division, we're operating across the tooling, automotive, aviation, luxury, and general industries and markets. We saw a relatively slow start to the year on the service side of the general industries and tooling and markets. However, experienced higher equipment sales. The service business has closer correlation to industrial production. Manufacturing PMIs continue to indicate that industrial activity will be softer this year. This may be mitigated by activity in China, which improved in March after lockdowns and the national holidays. In automotive, the first quarter was still impacted by supply chain challenges and a lag between carmakers' production and reordering stock. Industry forecasts show a conservative level of growth. We expect improving demand to phase in across the year as shortages release and destocking stops. This is supported by positive indications from major European carmakers. Erlikon has also made significant commercial progress with e-mobility solutions, particularly in battery shielding. I will provide more details later in the presentation. In luxury, the China reopening is set to drive growth. Chinese customers are expected to spend more on luxury both domestically and as they travel to overseas destinations. Global Blue, which tracks tax-free shopping, showed same-store sales above 2019 levels in Europe and the Middle East, driven by mainland China consumers in the first quarter. This provides an exciting growth environment for corridor and our newly consolidated rear reacquisition. Finally, in aviation, we see continued volume growth, as increasing flying hours are driving MRO activity. The China reopening and return to long-haul travel is a key factor as the industry returns towards 2019 flying hours. Ehrlichon's leading technologies will support more efficient and more sustainable new planes. Summing up, the difficult market environment for polymer processing solutions and filament will impact 2023 and 2024 sales. We've taken proactive measures to preserve profitability and emerge even stronger. In surface solutions, we expect growth in automotive, luxury, and aviation. This may be balanced by softening industrial activity. Now let's move on to page four with the financials for our surface solutions division. Orders worth 382 million Swiss francs, up 6% FX adjusted. Sales increased 17% in local currency to 369 million Swiss francs. Book-to-bill was above 1. Softening industrial activity had an impact on service revenues and general industries and tooling. This was more than offset by higher equipment sales in Q1. Aviation continued to recover in Q1, and we saw a strong quarter in energy. Luxury included one month of the rear reacquisition. Operational EBITDA in the third quarter declined 3% to 59 million Swiss francs. EBITDA margin was 15.8%. The business was impacted by higher input costs and saw negative sales mix effects from increased demand for equipment and materials. January and February were weak service months. However, the trend in margin April makes us confident that we're looking at a more favorable mix equation for the remainder of the year. Cost actions, initiated in the fourth quarter of 2022, will support margins during 2023 as they phase in. We also took pricing actions during the quarter and plan a further round of price increases this summer. Next, employment processing solutions. Orders in polymer processing solutions were 298 million Swiss francs. This is down 24% in local currency, with customers postponing orders in filaments, as anticipated. Sales of 366 million Swiss francs were up around 5% in cuts at FX. This was against a strong comp and demonstrates solid execution by the team. Non-filament sales were up 9% of constant currencies. Operational EBITDA was 55 million Swiss francs. Margins were 15.1%, impacted by sales mix and higher input costs. Cost measures booked in 2022 will support margins as lower sales volumes phase in later in 2023. Next, let me give you an update on our strategic priorities. A key pillar of the EARLYCON strategy is to leverage core competencies into new areas. One prospective new area is battery shielding. Car makers urgently need solutions that protect passengers from battery fires. We indicated our battery shielding development last year at the Capital Markets Day, where we outlined exciting new products for electric vehicles. These products will be key drivers of our midterm growth ambition in automotive. As you see at the top left of the slide, Erlikon has technology leadership in carbon friction materials and coatings for automotive applications, including synchronizers and transmission components. Erlikon accelerated the application of this technology into e-mobility with a small acquisition in 2020. The platform which we acquired specializes in the development of thermal insulation material solutions for EVs. With our global automotive business and longstanding relations with auto OEMs, we were well positioned to accelerate and industrialize the development of battery shielding. Our newly developed solutions protect passengers from fire, electrocution, and toxic gases. They are ESG-compliant, thinner, and lighter than alternative solutions. We are pleased that we're signing our first two supply contracts with two European auto OEMs. We are also in conversations with a number of additional carmakers around the world. Just for this solution, we see an annual sales opportunity well in excess of 50 million Swiss francs. Next. on our sustainability progress. Ehrlichon published the 2022 sustainability report at the end of March. We made significant progress towards our 2030 targets. We reduced our greenhouse gas emission intensity by 17% versus the baseline. This was driven by energy management systems rollout, energy efficiency actions, and the increased use of renewable energy. In particular, the energy efficiency measures reduced our energy intensity per million Swiss francs of sales by around 7% in 2022. This supports both our sustainability and financial goals. We increased the percentage of R&D investments that cover ESG criteria. This will drive future sales through more sustainable products that help our customers be more resource efficient. We also made progress on our Scope 3 project, our diversity goals, and our supply chain. With that, let me conclude the presentation on the next slide. During the quarter, we made progress on the execution of our midterm strategy, while at the same time, we proactively addressed short-term macro headwinds. Polymer Processing Solutions has executed well and delivered a Q1 in line with our expectations. We are executing the cost-out program that brings the flexibility support margins at transitorily lower filament volume. The division continues to deliver innovations and has the flexibility to ramp up quickly when demand returns. The non-filament business continued to deliver growth, supported by new e-mobility car models and market extensions. In surface solutions, cost and pricing measures will support margins throughout the year, in line with our expectations. We expect growth from the easing of shortages in automotive, recovery in aviation, and luxury expansion to be partially offset by lower industrial production in 2023. In terms of strategy execution, we are successfully leveraging our core competencies into new areas like luxury and battery shielding. These areas will drive sales growth in the midterm. On ESG, we are on track with our 2030 targets. These measures support both our sustainability and financial ambitions. Overall, we have made solid progress and our strategy execution is on track. We confirm our 2023 guidance.