OC Oerlikon Corporation AG

Ladies and gentlemen, welcome to the Erlikon Q3 2023 Results Conference Call and Live Webcast. I'm Sascha, the Caller's Call Operator. At this time, it is my pleasure to hand over to Stefan Gieck, Head of Investor Relations. Please go ahead.

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 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 third quarter results presentation. In Q3, we continue to execute our strategic objectives and successfully drove forward technical innovation and the integration of REERI. We are doing this in a difficult economic environment as industrial production and consumer spending continue to be subdued and currency headwinds persist. I will start the presentation with an overview of the group results, followed by an update on our end markets, the divisional results, and I'll conclude with our outlook. At the group level, orders were 567 million Swiss francs. Polymer Processing Solutions customers continued to delay their investment decisions. In Surface Solutions, orders were up 3% organically. Group sales decreased 11% at ConstantFX to 623 million Swiss francs. This includes a 5% contribution from our acquisition of REERI. In Surface Solutions, We achieved a slight FX adjusted organic sales increase in Q3 and a solid 7% growth in the first nine months of the year. This was more than offset by the declines in polymer processing solutions. Operational EBITDA was 98 million Swiss francs and EBITDA margin of 15.7%. Profitability was impacted by negative operating leverage, a strengthened Swiss franc and higher input costs. We're executing a clear set of cost and pricing actions, which will support our profitability in the coming quarters. We have seen first benefits in surface solutions, where margins improved sequentially. With that, let me provide you an update on our end markets. In polymer processing solutions, customers continue to delay their investment decisions, which is reflected in our order intake. On the filament side, 2023 is the fourth challenging year in a row for our customers. Chinese customers are exposed to higher stockpiles in the textile industry this year, and selective consumer spending as the increased cost of living has put pressure on discretionary spending budgets. This follows the past years, which were impacted by higher input costs, logistics challenges, tighter financing, and COVID-related lockdowns in China. As a result, we see Chinese filament customers holding back their expansion and replacement plans. They started postponing CapEx decisions and preserving cash in the second half of last year. To date, we have not yet seen a full recovery. but we do note increasing governmental stimulus for the machinery industry. We continue to expect an orderly recovery to happen in 2024. Our first positive indication is that price cost spreads of our customers improved this year. This means our customers have a positive cash margin on every ton of product they sell, which is a precondition for them to invest into our equipment. I will elaborate further on this topic later on in the presentation. In our non-fillment business, where markets and geographies are broadly diversified, we saw impacts from globally weakening PMIs. The non-woven and carpet yarns businesses are seeing some customers delay their investment decisions. Typically, orders are smaller with low financing needs and return faster when consumer demand picks back up. In flow control, where performance is closely related to car model launches, we saw impacts from a transitory reduction in car launches in the quarter. We expect car launches to accelerate again in 2024. In the surface solutions division, we are operating across the tooling, automotive, luxury, aviation, and general industries and markets. Particularly, the general and tooling industries have a close correlation to industrial production. Manufacturing PMIs in Europe and the US entered contraction zone in the second half of last year and have not recovered since. Also, in China, we see subdued momentum despite the opening in the beginning of the year. weak industrial activity had therefore an impact on our general industries and tooling sales in Q3. In automotive, we hear mixed signals from our customers, particularly in the premium segment. After a relatively slow start to the year, we have seen a catch-up in automotive in Q3. This is supported by light vehicle production growth, which industry forecasts expect to be mid-single digit this year. We continue to drive innovation, and Erlikon has made significant commercial progress with e-mobility solutions this year, particularly in battery shielding. In luxury, the integration of Riri is on track, and we achieved solid sales during Q3. We are currently seeing a slowing momentum in the fourth quarter related to China and destocking. This is underscored by some leading indicators like Swiss watch exports, while other indicators such as tax-free shopping remain strong. Midterm growth drivers for luxury remain well intact. Finally, in aviation, we see continued growth as rising flying hours are driving MRO activity. The China reopening and return to long-haul travel are a key factor as the industry returns towards 2019 levels. Early-con solutions will support more efficient and more sustainable aircraft engine technology. Summing up, the difficult market environment for polymer processing solutions will impact 2023 and to 2024 sales. We have taken proactive measures to preserve profitability and emerge even stronger. In surface solutions, we see continuous weak industrial momentum. We are confident that our value proposition of improving efficiency and sustainability is in demand, particularly in difficult times. Innovation and joint R&D with our customers will drive midterm growth. With that, let's move to page four, where we discuss the financials for our Surface Solutions Division. Orders improved 3% organically to 367 million Swiss francs, despite the softening industrial activity. The book-to-bill ratio was at one time as per the end of the quarter. In terms of sales, we achieved 1% organic growth in the quarter and 7% in the first nine months of the year. Growth was supported by the automotive, energy, luxury, and aviation end markets. Operational EBITDA in the quarter improved 6% to 63 million Swiss francs. EBITDA margin was roughly stable year over year at 17.1%. The business continued to be impacted by the strength in Swiss franc, higher input costs, and a difficult economic environment in China. The latter has an impact on margins as we sell a high margin product portfolio in China. The cost actions, which we initiated towards the end of last year as well as earlier this year, started to support margins. The continued pricing actions we are taking are also having first positive effects. Accordingly and sequentially, margins were up around 100 basis points. As I said earlier, we remain very confident in our actions to drive profitability in the midterm. The actions we are taking, operating leverage, portfolio optimization, and some normalization of activity in our service business will allow us to bring the surface solutions business back to strong margins in the midterm. Next, on polymer processing solutions. Orders in polymer processing solutions were 199 million Swiss francs. is down 49% in local currency, particularly as customers are postponing filament orders. Orders in non-filament decreased by a percentage in the context of weakening PMIs globally. Third quarter sales of 255 million Swiss francs were down 31% in constant effects. This was mainly driven by the lower order book in filament. We expect slightly stronger deliveries in the fourth quarter. Operational EBITDA was 28 million Swiss francs. Margins were 11.1%, impacted by operating leverage, the strengthened Swiss franc, and higher input costs. In line with last quarter, we passed through higher input costs only to a limited extent in order to maintain volume. This effect will strengthen in the fourth quarter. and it will be counteracted by first impacts of our previously announced cost-saving measures. Another factor which impacted our operational margin in Q3 were additional expenses to improve efficiency of a smaller joint venture, which we entered in 2019. In line with our strengthened capital allocation approach, we are currently reviewing this joint venture and are contemplating further steps in Q4. With that, let's conclude the presentation on the next slide. Our third quarter results reflect the current weakness in our end markets and currency headwinds. We are managing short-term headwinds with stringent cost containment and acceleration of our innovation pipeline. In surface solutions, We achieved 7% organic sales growth year-to-date despite contracting PMIs. Our EBITDA margin improved sequentially, which is supported by decided cost and pricing measures. In polymer processing solutions, we are executing in a challenging environment. We communicated on the challenging demand environment already last year. and we are proactively preparing our cost base. These actions are on track. The underlying trend of growth in filament is unchanged and makes us confident that this downturn is only transitory in nature. The chart in the middle of the slide highlights the cash margin that our filament customers earn on every ton of product they sell. The green line represents the average annual selling price of polyester products minus raw material costs minus conversion costs. Our customers saw a negative margin in 2015, which turned again positive in 2016. Given a certain time delay, this resulted in a challenging 2016 for Erlikon, which was followed by our order recovery in 2017. Looking at the current downturn, The margin of our filament customers was negative in 2022. It improved again into positive territory this year. This provides a positive indication of order recovery in 2024 in our view. Obviously, the situation of today is not perfectly comparable to 2016. While the downturn in 2016 was driven by overcapacity, This downturn is driven by the difficult market environment in China, as well as weakening global consumer demand and GDP. As such, the timing of the recovery is difficult to predict and will also depend on global economic recovery and the return of consumer demand. Despite the currently difficult market environment, we believe that mid-term we are absolutely in the right markets. We continue to execute on our mid-term strategy in both of our divisions. Latest market introductions were successful and include a carbon-based coating for processing non-ferrous metals, as well as our innovative EVO steam process for a more sustainable staple fiber production. Our innovation pipeline for the coming quarters is filled our product portfolio. In parallel, we continue to leverage our core competencies into new areas and geographies. This includes the lottery segment with Riri, battery shielding e-mobility, and double-digit sales growth in Americas, which is supported by the new organizational setup. In terms of profitability, we continue to execute on our midterm plan. Earlycon is positioned as a market leader in niche markets with technology entry barriers. This is a very solid base to generate attractive margins. Also, portfolio optimization will continue to help us realize margin upside, as we highlighted at the Capital Markets Day. Our recent exit from inline EPD was the first step. We are conducting a review of a number of portfolio investments in the fourth quarter and will decide on further optimizations. Depending on the outcome of these reviews, we might face certain one-off charges in Q4, which would be predominantly of a non-cash nature. These actions will support profitability in 2024. Finally, We are on track with our sustainability journey to reach our 2030 ESG targets. Our value proposition is to improve our customer's efficiency and sustainability. This is strongly in demand, both in difficult and good times, and will enable profitable midterm growth. Overall, we have made solid progress on our strategy execution the first nine months. For the full year, We continue to guide for an organic mid-single-digit sales decrease at constant currencies. The decrease will be closer to the mid-to-high end of the mid-single-digit, given challenging end markets. We note that the Swiss franc recently further strengthened. For EBITDA, we foresee a group margin of around 15.5%, unchanged from our prior expectations. With that, let me open it up for Q&A.