OC Oerlikon Corporation AG

Ladies and gentlemen, welcome to the Ehrlichon Q3 2024 Results, Score and Live webcast. I am George, the course call operator. I would like to remind you that all participants will be listen-only mode and the conference is being recorded. The presentation will be followed by a Q&A session. You can register for questions at any time by pressing star N1 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 Gick, Head of Investor Relations. Please go ahead.

Morning, ladies and gentlemen, and welcome to Ehrlichon's Q3 earnings call. I have here with me Michael Soos, our Executive Chairman, and Markus Richter, CFO of Ehrlichon. Michael will start the call with an update on our pure play execution. Markus will then provide an overview on our Q3 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 Michael. The floor is yours.

Thank you, Stevan. Good morning from my side and welcome for our Q3 call. And before... I will give you a little update to the PurePlay strategy. I'm happy to introduce you a new CFO, Markus Richter, who is running the OSS division almost for two years or a little longer than two years. He worked very close at that time with Phil Muller, who has now his first four weeks with ThyssenKrupp Elevators and we wish him from here all the best for his job. He contributed five years as a group CFO to our company. And now with Markus Richter, we look forward to going our pure play way. That's why we merged already the OSS financial structure function with the group function. And you will understand when I'm going a little further on that this is one step of several steps we are doing to prepare the pure play. So if I might remind you, on February this year when we announced that execution, where we're coming from, the five divisions in 2014, where we figured out who are really the divisions which have the potential for a market-leading position or where is a better ownership possible, and we divested successfully. We handed over special dividends and the good dividend payments the last nine, ten years. Overall, between 2019 and 2024, we further focused our business on these two market leading companies, OSS and OMF. And now we are on the last step to a pure play organization of Erlikon. And 1st of January onwards, we will do that in a way that Surface Solutions will be merged into the group. And OMF will be 100% subsidiary of the company. All steps are by end of the year organized that we can cut off the assets whenever we want to. We stick to our time plan, which was scheduled 12 to 36 months, because we want to do that in the best way for the company and for the shareholders and for our other stakeholders as our employees. Important on that is there will be no cost overruns. We will do that in a way that all the double layers are already on the way to be eliminated. And we keep only that cost, which will stay with us for the time being as the subsidiary will be with us. And with the cutoff of the subsidiary, this cost will move with the subsidiary. So with the new co and then the remain co, we'll have no cost burden out of the division world anymore. This, I think, is important. The organizational separation, by that way, is on track. It is finalized by end of the year. Cost efficiency, you will see in the numbers of Markus Richter that we are on a very good track on that. And if we simply look on the two divisions for a short moment, Surface Solutions is well positioned for profitable midterm growth. I have to say midterm because the markets we are in are flat. Actually, we are growing in our markets in the regions within their currencies. But with a strong Swiss franc, we eliminate part or a significant part of that growth with exchange rates from euro, dollar, Chinese RMB or Japanese yen towards our currency. Nevertheless, we have pretty strong performance on the execution of our businesses. Aero and defense, where we have a smaller portion in, are running very well. All the other portions like channel industry, automotive, tooling, luxury, they are flat or a little bit with headwind. But this is for term, mid and long term, we stick to our target of the 46% profitable sales growth. And as a Swiss company, we are staying with our Swiss franc and we suffer sometimes a little bit. On the other hand, we have as well some benefits by working in that currency. So on the main main fiber story, That's our position for attractive returns. We dropped, as you know, from 2022. Since today, we will see the drop on that most probably in 2024. Then from then onwards, we see a slightly growth. There are good signals for the future, but as we all know, nobody has a glass ball when we have a very difficult market environment with the situation in China, with the situation in Europe. By the way, European politics is everything else, but not easy to be followed. And for our customers, either it's automotive industry, it's general industry, it's all the supply bases to them. They have the same problems. We are well positioned by that because with the diversity strategy, which we have taken over a significant amount of years now, We have reduced our exposure in surface solutions from 70% to 80% in tools, cutting tools and molds towards 20% to 30%. And we have expanded that field in other industries, which makes us more resilient in this industry. And as I said on man-made fiber, we have the markets in China, India, mainly Turkey, And the Chinese market shows signals for the future, which are looking positive. Indian market, we have smaller projects, but it's still positive. But we cannot judge quarter per quarter. This is a process where we run 8 to 10 years cycles, and there is one quarter which is a little lower and the other quarter which is a little higher. It's more about the outlook in a long-running business. By taking that or saying that, We stick to that what we have presented in February. We stick to that what we have shown in the first two quarters of that year. And now how we do that with the numbers, I would like to hand over to Markus. Markus, give us a little more insight about the numbers.

Sure. Thank you, Michael. Good morning, everyone, and welcome to our third quarter results presentation, also from my side. In Q3, industrial production and consumer spending continue to be subdued and lost momentum. Despite the difficult economic environment, we continue to execute on the strategic priorities of driving efficiency and innovation. We achieved a strong profitability in both divisions. And following the first nine months, we will therefore raise our full year margin guidance to the high end of what we previously guided. I will start now with the financial update and an overview of the group results, followed by an update on our end markets, then the divisional results, and I will conclude with an outlook. At the group level, orders decreased 4% year over year at constant FX to 538 million Swiss francs. And this was mainly driven by slowing end markets and surface solutions. Polymer processing solutions orders continued to stabilize year over year, following 2023, where we saw our customers delaying their investment decisions. Group sales decreased 5% at constant FX to 580 million Swiss francs. This was driven by lower filament orders in the second half of 2023. Surface solutions achieved stable organic sales year over year despite very soft PMIs. Operational average DA margin was 16.9% in Q3, roughly stable compared to last year. In the context of reported sales being down 7% and the majority of our end markets being in a difficult position, this is an excellent result. It's a clear proof that we are managing costs extremely diligently and we will continue to do so. We achieved a double-digit EBITDA margin in polymer processing solutions and improved margin in surface solutions by 50 basis points. 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 and markets. Particularly the general and tooling industries show close correlation to industrial production. Euro area, US and Chinese PMIs showed sequential fading momentum in the third quarter after a solid start to the year. While US and China PMIs started to indicate contraction in Q3, Europe has been already in contraction for more than two years. Overall, EMIs remain in subdued conditions for the moment. 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 Alcrona Evo this year. 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 declined 3% year over year in the third quarter after having been stable in the first half. Industry agencies' forecasts have been further revised downward recently and expect a slight decrease 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, 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, inflation, and some geopolitical uncertainties which are dragging on spending power of the middle class. Some leading indicators like Swiss watch exports underscore this, while other indicators like tax-free shopping remain strong. Near-term, we closely monitor for impacts from the global rate-cutting cycle and stimuli measures in China. Mid-term, however, all growth drivers for the luxury segment remain well intact. With product quality, value for money, customization, and unique designs becoming more important to the luxury customers, Erlicon as a technology leader is well-positioned to grow in this segment. In aviation, we saw normalization of our customer stock levels in Q3. This follows high levels after supply chain bottlenecks in 2023, when the aviation industry accelerated its ramp up. Overall, we saw 12% passenger growth year to date, with industry agencies expecting 10% growth in 2024. Rising flying hours are driving MRO activity and demand for our solutions. we see plane manufacturers reinvesting and upgrading old equipment. Our products are 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, orders have stabilized at low levels with demand remaining soft in the third quarter. While filament orders came in, in line with the expected seasonality pattern in Q3, we saw softening momentum in non-filament driven by fading PMIs. This contributed to sequential softening in our orders. However, when it comes to filament orders, they were up 11% year over year in the third quarter. We see continued signs of momentum in small and mid-sized orders, and note that all midterm growth drivers for the business are well intact. Our market view is backed by governmental stimulus for the machinery industry in China. We also note that the price cost spreads of our customers improved and remain positive. This means our customers earn a positive cash margin on every ton of product they sell, which is naturally 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 impacts from globally softening PMIs in the third quarter. The continuous polymerization, staple fiber, and industrial yarn businesses are seeing some customers delay investment decisions. As a result, we saw orders decreasing to trough levels seen last time in 2016. While this limits further downside, recovery will depend on improving PMIs. Typically, orders here are smaller with lower financing needs and return faster when consumer demand picks back up. 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 slight positive momentum with our hot runners in Q3 year over year. Summing up, in surface solutions, we see a continued subdued industrial environment. While PMIs indicated early signs of improving growth momentum in the first half of 2024, that momentum faded in the third quarter, with PMIs back in contraction. In this context, surface solutions diversified end markets. Technologies and geographies are providing resilience. In polymer processing solutions, last year's difficult order environment will impact 2024 sales. Markets are at rough levels for the moment, and we continue to focus on profitability and innovation. We know that all historical growth drivers are well intact and we remain ready to drive the next up cycle. With that, let's move to the next page and the financial or surface solutions. In the third quarter, we achieved orders of 343 million and sales of 356 million Swiss francs. Softening PMIs had an impact on our business Despite that, we achieved roughly stable sales year over year at constant ethics. This solid achievement was driven by a robust performance in general industries, energies, and aviation, supported by innovation. Operational EBITDA in the third quarter was roughly stable at 64 million Swiss francs. This includes an operational EBITDA margin increase of 50 basis points to 18%. The improvement was driven by strong pricing, innovation, and continued cost discipline. Furthermore, our ongoing elimination of products which are subscale and dilutive in our materials portfolio is contributing positively to our margin. Our EBITDA margin in the first nine months improved by 130 basis points to 18.1%. In the context of a continuous difficult environment, this is a clear sign that our focus and actions on surface solutions margins are showing positive effects. Our management team is focused on these critical topics. With that, let's move to polymer processing. Orders in polymer processing solutions were 195 million Swiss francs. This is a 2% year-over-year decrease representing a continued stabilization at low levels following order postponements in 2023. Filament orders were up 11% year-over-year and came in in line with the expected seasonality pattern in Q3. We see continued signs of momentum in small and mid-sized filament orders. When it comes to non-filament, we saw softening momentum in orders driven by fading PMIs. This contributed to a sequential softening in the overall orders of polymer processing solutions. While polymer processing solutions orders have stabilized at low levels, demand is remaining soft for the moment. Government stimulus and improving price cost spreads for our filament customers make us confident that we are seeing the trough in the market. We note that all long-term growth drivers for the business are well intact. Second quarter sales of 224 million Swiss francs were down 11% at constant FX. This was mainly impacted by last year's difficult filament order environment and PMI's impact on non-filament. We expect sales trends to stabilize in the fourth quarter year over year, supported by our recent order stabilization. In terms of profitability, we achieved a 13.1% operational average DA 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 tightly. With that, let's move to our Q3 conclusion and 2024 outlook on the next page. We have made excellent progress towards our forward-looking priorities and executed operational and strategically. As we just heard, We are on track with our pure plate transformation announced in February and looking into various options for the separation of manmade fibers. When it comes to profitability, Q3 has been robust despite the challenging environment. In surface solution, we improved margins by an impressive 130 basis points in the first nine months despite the difficult environment. In polymer processing solutions, we delivered 13% average DA margin, which is strong and well above the last down cycle. Another key priority is resilience. Surface solutions and markets, geographies and technologies are today much more diversified than a decade ago. Diversification and innovation supported the division to report stable sales in Q3, despite sluggish PMIs. In processing solutions, orders have stabilized at low levels and demand is remaining soft for the moment. Government stimulus and improving price-cost spreads for our customers make us confident that we are seeing the trough in the market. We know that all long-term growth drivers for the business are well intact. Overall, we have made solid progress on our operational strategy and strategy execution in the first nine months. In order to reflect the recently softening PMIs in our 2024 sales guidance, we now guide for a high single digit to low teens percentage decrease year over year. In terms of profitability, our strong execution year to date leads us to increase our FHDA margin guidance to approximately 16%. This is the high end of our previous guidance. With that, let's open for the Q&A.

We will now begin the question and answer session. Anyone who wishes to ask a question may press star and one on the 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. Questioners on the phone are requested to disable the loudspeaker while asking a question. Please limit yourself to one question at a time. In case of a follow-up, please wait for the first question to be answered in order to ask the next one. Our first question comes from Sebastian Vogel with UBS. Please go ahead.

Hello and good morning. The first question I have would be with regard to the separation or the planned separation. On the slide in which we are going into more detail, It looks like you're looking at a revenue number for polymer processing that's different from the reported number. I was just wondering if you can shed some light on what's driving the delta and what's the idea behind having these two different numbers there?

Basically, I mean, what we are saying is that we are separating the man-made fiber business, right? This does exclude address flow and the difference should be address flow, right? So they had around 140 million sales in 2023. And I assume you're referring to that one, right?

Exactly, yeah. So if you follow up there, but excluding means that that is the business that you plan to keep essentially in your surface solution while textile is for you, so to say, the rest of it, excluding this business, right?

Separation is on Mammoth Fibers, as I tried to explain as well when we started the story, because the Mammoth Fiber, different to all the other businesses we have, is a business which is somehow 30 customers. Main focus is on two, probably three market regions, that's India, China, probably in future Vietnam and others, and some Turkey. And the typical project size of that business, and it's a project business, is somehow between 30 on the lower end and 300 million on the upper end. And this is totally different to all of the other businesses, including Inkglass. And that's why we separated the two things from each other. And we will spin and separate or sell whatever the process will be, man-made fiber business.

Thanks for my squeeze in one follow-up, please. With regard to the updated margin guidance, if I sort of correctly calculated what it is implying for the fourth quarter, that's a bit of a different number compared to the one that you have seen in the third quarter. What are the thoughts behind this sort of different level there that is implied by the guidance?

So as you see and as you heard, we are very much on the cost discipline here. So this is why, despite the markets, we are confident to reach the 16% as the year-end guidance. And here we are also considering, however, the outlook for the markets. And also we see some of the orders picking up for the Q4. We expect OPP or manmade fibers also to pick up a little bit. So here we will see a different product mix than also for the year end. But the 16% is we're confident with.

Understood. Thank you.

What we just said, basically, if you look at the order intake in H1 of polymer processing solutions, right, so there might be some of that already coming in Q4, and this is exactly what Markus is saying, basically, is then driving a different mix because polymer processing solution is having a margin current at around 12% to 13%, and this is then leading to a mix, right? So this is a key effect, which should be considered for Q4.

Many thanks, and I'm happy to go back to the queue.

As a reminder, if you wish to register for a question, you may press star and one. Our next question comes from Alessandro Folletti with Octavian. Please go ahead.

Yes, good morning. Thank you for taking my question. I'm going to ask one, and I'll follow up if I may as well. On the in-glass business What's the intention there mid-term?

Mid-term, typically we do not communicate in a Q3 discussion. Quick-term we give somehow with the outlook of 25. So I think it's important that we focus the businesses, that for the business focus, Mammoth Fiber is a standalone business. And Inklaus remains as other businesses which we have in the company for the while in the company. We operate them including with our tool business very successfully and any other decisions if we change something we will always do in advance and announce that in advance. So I would like to avoid to do a Q3 discussion for speculation about single assets which we have in the company.

I understand, but when you first communicated the divestment, like now I don't remember, two, three quarters ago, the communication was a little bit different. Now you specifically say about man-made, at that time you indicated polymer processing as being up for disposal, so obviously polymer processing includes both businesses.

Now, I'm pretty sure if I look back on February that we referred very much on man-made fibers and we prioritized that all the time. And the whole story was on man-made fibers. It was also on the different differentiation market leading in certain markets east versus. So the differentiation was 35,000 customers in OSS. whether 30 customers, 500 to 5 million, whatever size-wise, on a single order in OSS versus 30 to 300 million. So project business one hand, day-to-day business with 400, 500 plus coders globally with a materials business. So total different businesses. The only thing in common on both businesses was that they're both market leaders. They have both strong material competence And that was in common. And that was why these businesses have been together until now. While we have carved out before business like drives or pumps, where we had a me-too position, another market-leading position. And at that time, we did that pretty successfully, looking for who is the best owner. And you're remembering in the question of pumps. We did that with Atlas Copco very successfully. And the question of drives, we did that with Dena. So we don't simply shut down something. We always look for a better ownership. And the Inglas, to be precise again, Inglas was originally acquired in a mixture of working with our most customers on one hand, where we do the coding, and on the other hand, with the polymer activities, which we have in pumps in OMF. But from a business model, it doesn't fit to that. And I'm pretty sure if I look back at what I was saying and what I have said in February, that's very much in line that we said we will separate the man-made fiber business, which was at that time polymer processing. And being very precise, again, it's about man-made fiber business. I would say there's no differentiation, but you can study what I have said. It was recorded.

Okay, thank you. On the EBITDA margin, I know you have changed the guidance, I understand that, because of the mix with polymers doing slightly better. But now, what worries me is the progression going forward, specifically in surface solution, considering that the market is weakening. I don't know, you've mentioned the PMI's several times today in the call. So I have to assume that Q4 is not yet a recovery and probably Q1, maybe Q2 is not yet a recovery. How confident are you that you can maintain the margins going forward, even if your sales line in surface goes down even more?

Obviously very confident. This is why we raised the guidance today to the approximately 16%. And due to our cost measures and due to our innovation, we feel confident that despite the difficult market environment, we are able to achieve the 16%. As you were also leaning towards 2025, here we would give, as usual, the update in February next year for that.

I would like to add. Let me add a little bit. But I think what's not perceived proper yet, that there's a significant margin increase in OSS throughout the year. And this is consistent. And even in this quarter, we improved the margin. Why? Because there are three elements which are paying out. The one is the regionalization, which we embarked end of 2021 towards 2022, where we are closing our markets. The second is the innovation pipeline, which we have, and the third is the strong execution performance people are showing. And the fourth element is the diversification cost, which we had in the past to get into different businesses. Out of that 70-75% tooling, molding business, into tooling today below 30%, into more general industry, automotive, luxury, aerospace, future defense, hydrogen. These are things to come. There are still some costs within our margins. Because if you go in new markets, you have to develop the market know-how. You have to develop the intimacy with the customers. What is their demand profile and how our solutions can work with them? Because the PVD, CVD, and sun spray coatings are required in a lot of applications, not only in the applications where we are in. And with the question of more sustainability and more performance, it's even increasing this demand profile. So this is the story we are working. That's why we are pretty confident that we can keep our margin profile. The cases you have to look at on the Polymer side, I think the team there did a great job by declining several hundred million in revenue, which is with the long-term projects. When the projects are out, the next project is coming in. So the whole system reacts much, much slower. That within this business, that we show a very strong EBITDA margin. And if you remember the last two cycles, in 2016, the last drop, and in 2009, which was far before my time, in 2009, there was catastrophe. In 2016, there was negative red EBITDA and fairly red EBIT, negative numbers. In this year, in 2024, we have a good EBIT and a very good EBITDA number and a good EBIT number. So as well here, Whatever we have done, and it's not always that you react on a quarter base, you react on a longer base, that the move of costs into the markets where we are in, the restructuring which we have done in 2023, they are paying back. So sometimes you have to invest and sometimes you take benefit from. And all that is strengthening our underlying margin quality. And this is the first and above target, to be profitable. We are growing, by the way, but some of the growth, what we are doing, has been, as I have to repeat, has been eaten up by the currency. And if I look back the last three years, if the numbers I'm right, there was somehow almost 400 million revenue, which was eliminated by exchange rate. And if you take the 400 million, if it was reported in dollars or in euros or whatever, that is an equivalent of another 70, 80 million FTAs. On the other hand, we're a Swiss company. We're sitting in Switzerland. We are charging and have costs in Swiss. We have in Tijino, in the Deutschweiz, we have thousands of jobs there. And this is a cost position as well. But we are, as a tech company, we see as well the obligation. to stay in our own country and to make business out from our own country. So in some years, we are in a tailwind situation. In the last couple of years, we've been in a headwind situation because the strength is very strong and the cost position we have there. But all of that is included in our strong margin. So you see how well-performing the business is. And that's not only one market, but besides... aerospace and defense and probably oil and gas, all other markets are flat or struggling. And within the struggling markets, we even get market share against competition. That shows how strong the execution power of the early team is. And I'm pretty proud about that. And if I can use that, I even want to thank my team for that. I did that in the morning already in the press conference. And I have to do it a second time because I'm really proud about the early content.

All right. Thank you very much. I wish you good luck.

Our next question comes from Christian Arnold with Stifel. Please go ahead.

Yes. Good morning, gentlemen. One question from my side. appreciate very much what you just mentioned about this sustainable higher profitability you you actually achieved great execution still i have to ask a question about maybe a potential one-off we are going to see um in the non-filament business i mean this ink loss you you acquired i think back in 21 uh for a price of 360 million if i recall correctly and uh generated some goodwill of 215 million. At that time, I think we had sales of 135 million. And now we are at 140 million, so no growth here. And probably going forward, our 24, we actually will be below that number. So I wonder, do we face here a potential goodwill impairment to have to revalue that asset? Thank you very much.

I think key for that asset is obviously your right, is the number when we acquired it. This has been then growing back in 2022, beginning of 23, to levels of around 165, 170 million sales. And now, obviously, given its automotive exposure, it's currently suffering from difficult end markets. But I think from the first two years after we acquired it, it has shown a stellar performance. And right now, like all other companies exposed to difficult end markets, it's feeling it, right? But generally, it's a very good asset here, right?

But to answer your story very short, there is no impairment. It's a perfect asset.

Okay, so no risk of restructuring or impairment here.

No, there is no. So to take me clear, this asset that is performing very well, has high profitability, it goes through the market. Yes, there is a certain, if you have 60% of all lightning systems in the car industry and the car industry is postponing some projects, you're postponing as well. But this is not that these projects are disappearing. So we're super happy with that. I said that the performance of the last two years was very good. It's a very strange idea that there is a one-off. There is no. Okay. Thank you very much.

Our last question comes from Sebastian Vogel with UBS. Please go ahead.

Many thanks. A follow-up on the general side of things. Just to get your view right on the textile recovery, which you mentioned at the beginning, can you just repeat again what you expect for the overall textile industry for the next 12 to 18 months, please?

We guide it obviously for the year end, consistent with that. Textile industries, we see that the Order levels are on a relatively low level, especially small and mid-sized orders we mentioned. To be really through the trough, obviously, we also need some more high-value orders coming in. But so far, the hesitancy from the investors is there to postpone a little these investment decisions at this point. However, as we also mentioned, the underlying topics are all there and intact. So it's a question of time that it picks up again.

I think key is basically end markets are difficult to predict. I think for the moment they are soft, but despite that we are focusing on what we can impact. This is profitability. Here we have delivered a very strong 13% everyday margin in Q3. We are also focusing on innovation because this can drive the next cycle. So we are kind of focusing on what we can impact and here we are delivering and we are ready for the recovery when it comes.

Got it, and if I may add a follow-up there, sort of the same question, next 12 to 18 months for your surface solution business, what is your view there that the next sort of three quarters will be tough and then we see some sort of recovery or do you have any sort of different view that you can share there?

Also here, I think we have included our view both in the sales and in the margin guidance and for 2025 looking forward, we stick to the process that we give an update in February in due time.

Got it. Many thanks.

Thank you.

Ladies and gentlemen, this was our last question. I would like now to turn the conference back over to Stefan Geek for any closing remarks.

Thank you, everybody. This concludes today's call. In case of further questions, don't hesitate to contact us in the IR team. Thank you for your attention today and goodbye.

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