OC Oerlikon Corporation AG

Ladies and gentlemen, welcome to the Erlicon Q1 2024 results conference call and live webcast. I am Sandra, the chorus call operator. I would like to remind you that all participants have been listened only mode and the conference has been recorded. The presentation will be followed by a Q&A session. You can register for questions at any time by pressing star and one on your telephone. For operator assistance, please press star and zero. 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 Q1 results call. With me in the call, I have Philipp Müller, CFO of Ehrlichon. Philipp will start the call with a presentation providing an update on our end markets, financials, and outlook. We will then follow up with a 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 continue to execute on our strategic priorities of driving efficiency and innovation. We are doing this in a difficult economic environment, as industrial production and consumer spending continue to be subdued. and currency headwinds persist. In addition, we're driving forward the separation of the polymer processing solutions division, and we're on track with our plans. I will start the presentation today with an overview of the group results, followed by an update on our end markets with divisional results, and I'll conclude with the outlook. At the group level, Orders were 642 million Swiss francs. Q1 represents the first quarter where we see a sequential improvement in our polymer processing solutions orders after a period of five quarters where we saw our customers delaying their investment decisions. Group sales decreased 20% at ConstantFX to 550 million Swiss francs. This is in line with our expectation and driven by lower filament orders in the previous quarters. Surface Solutions achieved stable organic sales year-over-year despite soft PMIs. Operational EBITDA margin was 15.7% in Q1. This is about 80 basis points lower than last year. In the context of reported sales being down 25%, and the majority of our end markets being in a difficult spot, this is an excellent result. It's a clear proof that we're managing costs extremely diligently, and we will continue to do so. We achieved a double-digit EBITDA margin in polymer processing solutions and improved margins in surface solutions by 122 basis points. We will continue to execute a clear set of cost and pricing actions throughout this year. With that, let me provide you an update on our end markets. In surface solutions, we are operating across the tooling, automotive, luxury, aviation, and general industries end markets. Particularly, the general and tooling industries show close correlation to industrial production. Both the euro area and US PMIs are showing sequentially improving momentum compared to Q4. Remain, however, in overall subdued conditions for the moment. The sluggish industrial activity had an impact on our general industries and tooling sales in Q1. Despite that, we made a very significant step in our innovation pipeline by successfully launching Alcrona Evo. After 14 years, this is the successor to our extremely successful Alcrona Pro product. Alcrona Evo features a 30% performance increase and will position us at the top of the market for years to come. In automotive, global light vehicle production declined in the first quarter. We expect this to balance out during the remainder of the year. with industry agencies forecasting a slight growth for the full year. We continue to drive innovation to make future mobility more efficient and sustainable, be it in the vehicle body or in the battery hybrid or combustion powertrain technology. In luxury, our integration of Riri is on track. after Q4 haven't been impacted by destocking of our customers, we saw sales improving in Q1. For the time being, the market momentum remains relatively low with customers acting in a wait and see mode. This is related to the weakness in the Chinese end market, rising gold prices, inflation, and some geopolitical uncertainties. Certain leading indicators, like Swiss watch experts, underscore this, while other indicators, like tax-free shopping, remain strong. Midterm growth drivers for the luxury segment remain well intact. In aviation, we saw 19% passenger growth in the first two months, with industry agencies expecting 10% growth in 2024. Rising flying hours and certain quality issues in the industry are driving MRO activity and demand for our solutions. Ehrlichon's products are supporting a more efficient and more sustainable aircraft engine technology. In our polymer processing solutions division, the last 18 months have been impacted by large customers delaying their investment decisions. Meanwhile, we are confident that we have seen the trough of activity in the market. Q1 was improving sequentially, which represents a first improvement after five declining quarters. We see some initial signs of revitalization in small and mid-sized orders and continue to note that all of the mid-term growth drivers are well intact. Our more positive market view is backed by increasing governmental stimulus for the machinery industry in China. We also note that the price cost spreads of our customers further improved in 2024. This means our customers earn a positive cash margin on every ton of product they sell, which is a precondition for them to invest into our equipment. For the moment, we're focusing on profitability and innovation to be ready to drive the next upcycle. In our non-filament business, where markets and geographies are more broadly diversified, we saw the impacts from globally soft PMIs. The non-woven staple fiber and industrial yarn 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 flow control, where performance is closely related to car model launches, we saw positive impacts from a re-acceleration of car launches towards the end of the quarter. We expect positive momentum to continue throughout 2024. Summing up, In surface solutions, we see a continued subdued industrial environment. However, PMIs indicate early signs of improving growth momentum. In polymer processing solutions, last year's difficult order environment will impact 2024 sales in line with our guidance. The sequential order improvement we saw in Q1 is a first positive sign from the market. we are confident that we have seen the trough of activity in the market. With that, let's move to page four, where we discuss the financials for our surface solutions division. In the first quarter, we achieved orders of 391 million and sales of 371 million, representing a book-to-bill ratio of 1.05. Despite soft PMIs, we achieved a stable sales development year-over-year in organic, constant FX terms. In addition, we saw a positive contribution from two additional months of real reconsolidation, which was, to a large extent, offset by negative impact from foreign exchange. Operational EBITDA in the first quarter improved 8% to 65 million Swiss francs. This includes an operational EBITDA margin increase of close to 130 basis points to 17.6%. The improvement was driven by strong pricing and continued cost discipline. 17.6% in Q1, which is usually a slow quarter, and in a continued difficult environment, is a clear sign that our focus and actions on surface solutions margins are gaining traction. Our management team continues to be laser focused on this critical topic. I want to provide some more context around the margin development on the next page and show clear action areas, which we will tackle to get to 20% plus margins. Let me move to the next slide. It shows the EBITDA margin development for surface solutions since 2019 and how we aim to reach 20% plus EBITDA margins in the midterm. In 2019, we achieved 16.9% EBITDA. During COVID, we executed certain very aggressive structural cost-out actions and achieved 18.3% EBITDA margins in 2021. So 140 basis points improvement, despite 14% lower sales in 2021 versus 2019 due to COVID. In 2022 and 2023, like many other companies, we have been exposed to an unprecedented hyperinflation, especially on the labor side, and significant strengthening of the Swiss franc. the input cost increases in labor and energy kicked in mainly in 2022. In terms of labor, which is by far the biggest cost driver of our services businesses, we saw dramatic increases in countries such as Germany and the US. Working with our customers, we had to take a wide-ranging set of pricing measures, which started to have an impact from the second half of 2023. And since then, we had to increase the frequency of these actions. Meanwhile, we have established dedicated pricing teams and corresponding technology. And we will continue to focus on pricing in order to reach our 20% plus EBITDA margin targets. Pricing will also be enabled by our accelerated innovation. Our R&D efforts now have a much stronger focus on commercialization. This allows us to price upcoming innovation at a significantly higher gross margin than our existing portfolio. In parallel, we're digitizing all of our business processes. We finished our global SAP rollout at the end of last year, and we are rolling out a digital twin for our coding operations throughout 2024 and 2025. In addition to that, we will continue to manage structural and operating costs very tightly. Overall, we're very confident in our actions to drive surface solutions profitability in the midterm. We fundamentally believe this business will yield a margin above 20%. With that, let's move on to polymer processing solutions. Orders in polymer processing solutions were 251 million Swiss francs. This is down 16% year over year, but up 38% sequentially. Improving momentum was supported by filament, where we saw some initial signs of revitalization in small and mid-sized orders. Government stimulus and improving price cost spreads of our customers make us confident that we have seen the trough in the market. First quarter sales. of 179 million Swiss francs were down 47% at constant effects. This was mainly impacted by last year's difficult order environment. Furthermore, the division saw delayed shipments due to tensions in the Red Sea. This will shift some sales into the second half and the remainder of 2024. In terms of profitability, we achieved a 10.5% operational EBITDA margin. Considering the downturn and basically the halving of our sales, this is an excellent achievement. It was supported by our proactive cost actions, which we implemented last year, and we will continue to manage costs very tightly. With that, let's conclude our first quarter results on the next slide. Our first quarter results reflect strong operational execution, as well as early signs of improving ant markets. Surface Solutions achieved a stable top line in a difficult environment. The integration of REERI is well on track, and the EBITDA margin has been significantly improved year over year. The division is in good shape to reach the targeted 20% plus margin in the midterm. In polymer processing solutions, we saw Q1 orders improving 38% sequentially. Improved momentum was supported by filament, where we saw some initial signs of revitalization in small and mid-sized orders. We also note recovering consumption in our customers and encouraging signs for governmental stimulus in the Chinese machinery industry. Furthermore, As you see in the diagram in the middle, the price cost spreads of our customers significantly improved since 2022. This means our customers earn a positive cash margin on every ton of product they sell, which is a precondition for them to invest into our equipment. Overall, we are confident that we have seen the trough of activity in the market. In terms of profitability, the division achieved a robust double-digit EBITDA margin despite cyclically lower sales. This means our proactive cost measures are bearing fruits. Last but not least, we are on track with our pure plate transformation announced in February. We're evaluating options for the separation of polymer processing solutions. This includes a trade sale an IPO or a spinoff. We clearly want to ensure that the separation creates value for all stakeholders, given that this is a unique asset. Polymer Processing Solutions is a market leader in a niche market that has been growing over the cycle at a 4% CAGR in the last 20 years. The business's capital returns are outstanding. The execution timeframe for the separation continues to 2024 to 2026. While we prefer sooner rather than later, timing will also depend on the separation mechanism and on the recovery speed of the filament end market. Overall, we have made solid progress on our operational and strategy execution in the first quarter. After a strong start to the year, we confirm our 2024 financial guidance. With that, let me open it up for Q&A.