OC Oerlikon Corporation AG

Good morning, ladies and gentlemen, and welcome to Erlikon's Q2 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 outlook. 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, Stephan. Good morning, everyone, and welcome to our second quarter results presentation. We continue to execute on our strategic priorities of driving efficiency and innovation. We achieved robust orders and strong profitability in a difficult economic environment as industrial production and consumer spending continue to be subdued. Following a strong start to the year, we will raise our full year margin guidance. In addition, we are driving forward our pure play strategy and we're fully on track with our plans. 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 increased 1% year over year at constant FX to 651 million Swiss francs. Q2 represents the second quarter where we see a sequential improvement in our polymer processing solutions orders after a prior period of five quarters where we saw our customers delaying their investment decisions. Group sales decreased 10 percent at constant effects to 616 million Swiss francs. This was driven by lower filament orders in the second half of 2023 and was in line with our expectations. Surface Solutions achieved higher organic sales year over year, despite soft PMIs. Operational EBITDA margin was 16.3% in Q2, slightly lower than last year. In the context of reported sales being down 12% and the majority of our end markets being in a difficult position, 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 the double-digit EBITDA margin in polymer processing solutions and improved margins in surface solutions by 230 basis points. With that, let me provide you an update on our end markets. In surface solutions, we're operating across the tooling, automotive, luxury, aviation, and general industries end markets. Particularly the general and tooling industries show close correlation to industrial production. Euro area, US, and Chinese PMIs showed sequential improvement in the first half of this year compared to the second half of 2023. Overall, they remain subdued, however, with momentum fading in recent weeks and months. The sluggish industrial activity had an impact on our general industries and tooling sales. Despite that, we made a very significant step in our innovation pipeline by successfully launching El Corona Evo in the first half. It features a 30% performance increase and will position us at the top of the tooling market for years to come. In automotive, global light vehicle production was stable in the first half. Industry agencies Forecasts have been recently revised downward but remain roughly stable for the 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, the market momentum remains relatively low for the time being, with customers acting in a wait-and-see mode. This is primarily related to the weakness in the Chinese end market, but also inflation and certain geopolitical uncertainties, which are dragging on spending power of the middle class. Some 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. With product quality, value for money, customization, and unique designs becoming more important to luxury customers, Erlikon as a technology leader is very well positioned to grow in this segment. In aviation, we saw 15% passenger growth year-to-date, with industry agencies expecting around 10% growth in 2024. Rising flying hours are driving a grow activity and demand for our solutions. We see plane manufacturers reinvesting and upgrading old equipment. Our product is supporting them to develop more efficient and more sustainable aircraft engine technology. In our polymer processing solutions division, 2023 has been impacted by large customers delaying their investment decisions. Meanwhile, we are confident that we have seen the trough of activity in the market. Q2 was the second quarter in a row where we saw a sequential improvement in order intake. Year over year, order development turned slightly positive. We see continued signs of momentum in small and mid-sized orders and continue to note that all mid-term growth drivers for the business are well intact. Our positive market view is backed by governmental stimulus for the machinery industry in China in the first half. We also note that the price-cost spreads of our customers improved and remain positive. This means our customers continue to earn a positive cash margin of every ton of product they sell, which naturally is a precondition for them to invest into our equipment. For the moment, we continue to focus on profitability and innovation and remain ready to drive the next upcycle. In our non-filament business, where our end markets and geographies are more broadly diversified, we saw the impact from globally soft PMIs in the last quarters. 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. I am pleased to see that we saw orders slightly improving in the second quarter sequentially. In flow control, our performance is closely related to car model launches. The recent slowing momentum in the automotive production is weighing on the reacceleration of car launch projects. Despite that, we saw positive momentum with our hot runners sequentially. Summing up, surface solution we see a continued subdued industrial environment. While PMIs indicated early signs of improving growth momentum in the beginning of the year, the momentum faded in recent months and weeks. In polymer processing solutions, last year's difficult order environment will impact 2024 sales. Compared to our expectation in the beginning of 2024, the sales outlook for our full year expectation has improved. It is backed by the second sequential order intake improvement we saw in the second quarter. We are confident that we have seen the trough of activity in the market. With that, let's move to page four, where I will discuss the financials for our Surface Solutions Division. In the second quarter, we achieved orders of $389 million and sales of $392 million. Despite soft PMIs, orders and sales improved by a low single-digit percentage year over year at constant effects. This solid achievement was supported by strong performance in equipment and materials for the aviation industry. Operational EBITDA in the second quarter improved by a strong 14 percent to 74 million Swiss francs. This includes an operational EBITDA margin increase of 230 basis points to 18.7 percent. The improvement was driven by strong pricing, innovation, and continued cost discipline. Our EBITDA margin in the first half improved by 180 basis points to 18.1%. In the context of a continued difficult environment, this is a clear sign that our focus and actions on surface solutions margins are gaining traction. Our management team is laser focused on this critical topic. in order to achieve our 20%-plus ambition in the medium term. Let me move to polymer processing solutions. Orders in polymer processing solutions were 262 million Swiss francs. This is a 2% year-over-year improvement at ConstantFS and represents the second sequential quarterly improvement. In the first half of the year, we achieved a book-to-bill of 1.3. Improving momentum was supported by filament, where we saw continued momentum in small and medium-sized orders. Government stimulus and improving price-cost spreads of our customers make us confident that we have seen the trough in the market. Second quarter sales of 224 million Swiss francs were down 26% at constant effects. This was mainly impacted by last year's difficult order environment. We expect sales trends to stabilize in the second half. In terms of profitability, we achieved an 11.7 percent operational EBITDA margin. Considering the downturn and the significant reduction of our sales, this is an excellent achievement. It was supported by our proactive cost actions implemented last year, and we will continue to manage costs very diligently. With that, let's move to cash flow on the next slide. First half cash flow from operating activities was 105 million Swiss francs. Taking into account investments, we achieved 67 million operating free cash flow. This is a solid achievement, and it represents a strong improvement compared to the negative 141 million in the first half of last year. The year-over-year improvement was mainly driven by better networking capital. While networking capital continued to be a drag in the first due to the usual seasonal buildup for deliveries in the second half, the drag was much less intensive than last year. This was supported by our very tight networking capital management, as well as increasing customer advances related to the improving order intake and filament. As we have described a few times, decreasing customer advances in polymer processing solutions resulted in a total cash outflow of almost 350 million Swiss francs in 2022 and 23. Now that we have seen the trough, we expect that trend to reverse and customer advances to be a source of cash in the future. Given the usual seasonality of our business, we expect the second half of the year to be significantly more cash generative than the first half of the year. We remain fully committed to maintain a strong balance sheet and will continue to focus on cost management, networking capital, and cash. Sederis Paribus, we continue to expect a leverage ratio between 2.5 and three times by year end 2024. Next, on return on capital employed. Operational was 5%, representing a transitorily depressed level given the current filament downturn. The latter leads to cyclically lower earnings or net operating profit after tax and customer advances. Taking into account the one-off expenses from the fourth quarter 2023, reported ROSI was 1%. We continue to target a sustainable double-digit ROSI in the medium term, supported by the filament market recovery, continued cost containment, and disciplined execution of our capital allocation framework. Let's move to our outlook on the next slide. Following a strong first half year and our diversified portfolio, we are increasing our full-year guidance. We now expect EBITDA margin to be in the range of 15.5 to 16 percent. This represents an improvement compared to the 15% to 15.5% we previously expected and is supported by both divisions. We continue to guide for a high single-digit percentage sales decrease. In surface solutions, we expect flat sales year over year. Given the recent fading in PMIs and the slow momentum in automotive and luxury, this will represent a solid performance. we raised our EBITDA margin guidance from 17.5% to 18% to approximately 18%. This takes into account the strong progress we made here to date. In polymer processing solutions, we previously guided for a mid-20s percentage sales decrease. Following the strong start to the year, we now expect the sales decrease to be in the low 20s. With this improved top line outlook We also expect a better profitability for the division. We now expect to exceed 11 percent EBITDA margins. Let me now recap the first half year on the next slide. We have made excellent progress towards our forward-looking priorities and executed operationally and strategically. We are on track with our pure play transformation announced in February. We look into various options for the separation of polymer processing solutions. This includes a trade sale or a spinoff. In parallel, we are in the process of separating the division from an organizational standpoint. We have a very solid plan in place to adjust corporate costs to a smaller company setup and ensure future cost efficiency. As previously announced, We want to be ready to execute the separation sooner rather than later. Another key priority for our team is to bring surface solutions' EBITDA margins back to levels above 20%. We improved margins by an impressive 180 basis points in the first half, despite the difficult environment. The division is in good shape to reach the targeted 20% plus margin in the medium term. In polymer processing solutions, The early signs of improving end markets reported in Q1 were reconfirmed in the second quarter. Overall, we are confident that we have seen the trough of activity in the market. At the end of last year, we announced to realign our additive manufacturing business. The execution of that is now largely finalized. We improved the scalability of the business by transferring the European production to the U.S. North America is the largest additive manufacturing market globally and more mature in terms of transition to serious production. Finally, we achieved a strong improvement in operating free cash flow in the first half. In line with the past, we expect the second half of the year to be more cash generative than the first. We are on track with our plan to reach a leverage ratio between two and a half and three times per year end. Overall, we have made saw the progress on our operational and strategy execution in the first half. We are raising full year guidance and are on track with our transformation into an attractive pure play global leader. With that, let me open it up for a Q&A.

Ladies and gentlemen, we will now begin the question and answer session. Anyone who wishes to ask a question may press star and one or their touch on telephone. You will hear a tone to confirm that you have entered the queue. If you wish to remove yourself from the question queue, you may press star and two. Questions on the phone are requested to use only handsets while asking the question. Anyone who has a question may press star and one at this time. Our first question comes from Michael Folth and von Tobel. Please go ahead.