OC Oerlikon Corporation AG

Ladies and gentlemen, welcome to the Erlikon Q2 H1 2023 results conference call and live webcast. I am Moira, the chorus call operator. At this time, it's my pleasure to hand over to Stefan Giek, Head of Investor Relations. Please go ahead, sir.

Good morning, ladies and gentlemen, and welcome to Erlikon's Q2 results call. With me in the call, I have Philip Muller, CFO of Erlikon. Philipp will start the call with a presentation, providing an update on our end markets, financials, and guidance. 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 second quarter results presentation. In Q2, we continued to execute on our strategic objectives and successfully drove forward the integration of REERI. This happened in an environment which became increasingly difficult. Western industrial production lost traction, and the Chinese economy had a slow post-COVID recovery. In parallel, inflation was persistent, and the Swiss franc strengthened significantly against all our major currencies. I will start the presentation with an overview of the group results, followed by an update on our end markets. the divisional results, and we'll conclude with our outlook. At the group level, orders were 657 million Swiss francs. Polymer Processing Solutions customers continued to delay their investment decisions. In Surface Solutions, orders were up 9% organic, with a book-to-bill ratio above one. We highlight the quite dramatic movements in FX here on the slide. driven by the strengthening Swiss franc. This has a significant adverse impact on our top line, and to an extent, also our markets. Group sales increased 4% in constant FX to 702 million Swiss francs. This includes a 6% contribution from our acquisition of REERI. In surface solutions, the FX adjusted organic sales increase was 8%, and a strong 10% in the first half of the year. This was offset by polymer processing solutions. Operational EBITDA was 111 million Swiss francs, with an EBITDA margin at 15.8%. Profitability was impacted by the strengthened Swiss franc, product mix, and higher input costs. Furthermore, surface solutions had a slower than expected where we sell a higher margin product portfolio. We remain very confident in our actions to drive profitability in the coming quarters. Price increases and cost actions will take some time to be fully visible in the margin, but we're executing a clear set of actions in our surface solutions business. With that, let me provide you an update on our end markets. In polymer processing solutions, Customers continue to delay investment decisions, which is reflected in our order intake. On the filament side, Chinese customers have experienced a difficult macro environment in the past year. They were exposed to higher input costs, logistics challenges, tighter financing, and to softer domestic consumer demand. In the first half of 2023 specifically, our customers were hampered by high stockpiles in the textile industry. Moreover, textile consumers are being selective as the increased cost of living has put pressure on their discretionary spending budgets. 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 meaningful recovery. Especially during this time, we continue to drive innovation that will extend our technology leadership. Efficient new machines will bring forward investment decisions as our customers look to stay competitive and need to save energy. Improving financing conditions in China and increased consumer demand will also drive investment decisions. We expect an order recovery to happen in 2024. In our non-filament business, we saw stable sales at constant currencies in the second quarter. This was supported by industrial elements, staple fibers, and our flow control business. Erlikon has a leading technology in hot runners and benefits from new electric vehicle models. Technology leadership is being leveraged into adjacent non-automotive markets such as durable goods. The non-movement and carpet yarns businesses are seeing some customers delay investment decisions. Typically, orders are smaller with lower financing needs and return faster when consumer demand picks back up. In the surface solutions division, we are operating across the tooling, automotive, luxury, aviation, and general industries and markets. We saw a higher share of materials and equipment sales to services. In the first half, our material sales increased 10%, while tooling services were down 5%. Services have particularly in the general and tooling industries a close correlation to industrial production. As such, we were impacted by Western PMIs, which remained in contraction and lost momentum throughout the first half of the year. In addition, the Chinese economy remained on a weak footing with a slower than expected post COVID recovery. In automotive, there are mixed signals from our customers. The second quarter was still partially impacted by a lag between carmakers production and reordering stock. Industry forecasts expect mid single digit light vehicle production growth for 2023. This is mainly driven by North America and Europe. APAC, where Erlikon has its largest automotive exposure, is forecasted to grow below average. Erlikon has made significant commercial progress with e-mobility solutions in the first half of the year, particularly in battery shielding. In luxury, we had a strong start to the year and saw limited destocking in our customers in March and April. Demand picked up again strongly since May. Leading indicators like Swiss watch exports or tax-free shopping underscore the positive momentum in luxury. This provides an exciting growth environment for corridor and our newly consolidated rear reacquisition. Finally, in aviation, we see continued volume growth as rising 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. Erlikon's leading technologies will support more efficient and more sustainable planes. Summing up, the difficult market environment for polymer processing solutions will impact 2023 and 2024 sales. We've taken proactive measures to preserve profitability and emerge even stronger. In surface solutions, we expect growth and luxury in aviation. This may be partially offset by softening industrial activity. Now let's move to page four with the financials for our surface solutions division. Orders improved 9% organically to 395 million Swiss francs. Despite the softening industrial activity, we achieved a slight order uptick quarter over quarter, leading to a book-to-bill above one. In terms of sales, we achieved 8% organic growth in the second quarter and a strong 10% in the first half of the year. Growth was supported by the aviation, energy, and luxury markets. We also saw solid equipment and material sales within general industries, Operational EBITDA in the quarter was stable at 63 million Swiss francs. EBITDA margin was 16.1%. The business was impacted by the strengthened Swiss franc, higher input costs, and negative sales mix effects from increased demand for equipment and materials. In addition, the slower than expected recovery in China had an impact on margins as we sell a high margin product portfolio in China specifically. Cost actions initiated in the fourth quarter of 2022 will support margins in the second half as they continue to phase in. We also took pricing actions in January and in June and expect to see positive impacts from that going forward. As I said earlier, we remain very confident in our actions to drive profitability in the coming quarters. The actions we are taking and some normalization of activity in our service businesses will allow us to bring the surface solutions business back to strong margins. Next, on polymer processing solutions. Orders in polymer processing solutions were 263 million Swiss francs. This is down 33% in local currency as customers are postponing filament orders. Sales of 310 million Swiss francs were down 12% at Constant FX. While we still benefited from last year's strong filament order intake, we saw impacts from the Turkey earthquake in Q2. As indicated in the beginning of the year, the event in Turkey is leading to seasonal delays throughout 2023. We saw some postponements from Q2 into the second half of the year. Non-filament sales were stable year over year. Operational EBITDA was 44 million Swiss francs. Margins came in at 14.2%, impacted by sales mix, higher input costs, and the strength in Swiss franc. Cost measures booked in 2022 will support margins as lower sales volumes phase in during the second half. Next, let me give you an update on cash flow and ROCI. First half cash flow from operating activities was negative 79 million Swiss francs. As indicated at the beginning of the year, the networking capital impact was stronger than in other years, mainly due to the reduction in customer advance payments in our polymer processing solutions business. Compared to a year ago, customer advances have reduced by over 50% to 230 million Swiss francs. We expect some further drag in the second half of the year, however, much less than what we have seen in the first half. The other components of networking capital are expected to be a solid source of cash in the second half of the year. We are managing networking capital with a lot of focus and expect operating free cash flow to improve in the second half as networking capital seasonality reverses and headwinds and customer advances. are beginning to soften. Next, on return on capital employed, reported ROC of 3.7% was impacted by the restructuring provisions booked in Q4 last year. Operational ROC came in at 8.3% when we look at the organic operational performance of the company. This represents a slight decrease compared to last year, which is mainly related to the transitory reduction in customer advance payments. We continue to target a sustainable double-digit ROSI in the midterm, supported by the market recovery, continued cost containment, and disciplined execution on our new capital allocation framework. Let's move on to our full-year guidance update on the next slide. As you know, Our initial 2023 guide was based on the assumption of constant currencies. Given that we're now at mid-year and the quite dramatic shifts we have seen versus the Swiss franc, we are updating this assumption with actuals. We expect the strengthened Swiss franc to lead to an adverse FX impact of around 180 million Swiss francs year over year. As a result, we adjust our sales guidance to 2.75 to 2.8 billion Swiss francs. This includes a contribution of 135 million from REERI, which we consolidate as per March. Our organic sales growth guidance remains unchanged compared to the beginning of the year. While surface solutions will perform better than originally assumed, We're expecting this to be compensated by slightly lower sales in polymer processing solutions. In terms of EBITDA, we foresee a group margin of around 15.5%. FX has a negative impact on our margins. While our production currencies have a relatively good match with our FX exposure, the match is not perfect. As a Swiss HQ company, our cost base has a stronger exposure to the Swiss franc than our sales, for instance, due to overhead and R&D expenses. In addition, we are seeing some transitory impacts from mix and inflation. With that, let's conclude our presentation on the next few pages. During the first half, we made progress on the execution of our midterm strategy, while at the same time, we proactively addressed short-term macro headwinds. Despite contracting PMIs, surface solutions achieved 10% organic sales growth in the first half. We saw transitory headwinds in the division's margin and will address them with pricing and cost measures in the second half. The division polymer processing solutions is executing in a challenging environment. We communicated on the challenging demand environment already last year, and we're proactively preparing our cost base. The underlying macro trend of growth in filament is unchanged and makes us very confident that this downturn is only transitory in nature. We have managed down cycles in this business before. We know that downturns can be relatively sharp, but so can the recovery. I want to remind you that the division realized 54% sales growth in 2017 after the down year of 2016. So for us, we will continue to deliver on our innovation pipeline, and we have the flexibility to ramp up quickly when filament demand returns. Last but not least, on the group financing structure, As many of you know, we successfully placed two series of senior unsecured bonds in the second quarter. 220 million Swiss francs are due in 2026 and 120 million Swiss francs are due in 2029. These bonds are to repay outstanding debt and ensure continued strong financial foundation following the acquisition of REERI. Next, on our midterm outlook. We continue to execute our midterm growth strategy in both our divisions in the first half. Surface solutions drove geographic expansion and achieved 13% FX adjusted growth, for example, in the Americas. The division continues to leverage its core competencies into new areas, such as battery shielding and e-mobility. Another diversification represents the acquisition of REERI, which strengthens our foothold and leadership in luxury. While we currently see transitory costs and mixed headwinds, we remain committed to our midterm profitability targets for the division. Our recent exit from inline EPDs supported us in managing the portfolio towards higher margins. We are monitoring for further cost opportunities and will improve the product portfolio going forward. In polymer processing solutions, the midterm demand will be driven by rising GDP and limited to no alternative resources to manmade fibers. The filament equipment market has been growing with a 4% CAGR in the last 20 years. These midterm growth drivers remain intact. It is a niche market with high technology barriers and long-standing customer relationships. As you know, the business is very cash generative and provides a solid base to expand its technology into new non-filament markets. As such, the non-filament business was stable in the first half, supported by new e-mobility car models and the extension of our end markets. we will further expand the division into the new non-filament markets. Overall, we've made solid progress on our strategy execution in the first half. Our updated sales guidance implies a 6% organic sales card takers since 2020. And we reiterate our midterm guidance of 4% to 6% profitable sales growth. With that, let me open it up for a Q&A.