Earnings Call: H2 2020

Mar 2, 2021

Thank you very much, and good morning. Let me welcome you to our 2020 Results and Media Analyst Conference. I'm joined by my colleague, Philippe Bute, Grouz Group CFO. Introductionary statement. This presentation may include forward looking statements that reflect the intentions, beliefs or current expectations and projections of Gerrit Holding about the future results of operations, financial conditions, liquidity performance and similar circumstances. Such statements are made on the basis of assumptions and expectations, which may prove to be erroneous, although Gerrit Holding believes them to be reasonable at this time. We have structured the presentation as follows. We will start with a brief introduction followed by the business update. Filip will afterwards present the financial results before I will elaborate more on market and strategy. After summarizing, we will end the presentation and continue with the Q and A section. Buried is a leading supplier of products and solutions for the wind energy, marine, industrial and aviation industry. About 80% of our sales is generated in the wind energy segment, where we offer a holistic portfolio of composite materials, Tools and Kitting Services for Windblades. In the other industry segments, aero, marine and industrial, We offer primarily lightweighting materials and structural engineering. We are strongly positioned, usually one of the top suppliers in the market segments we supply to. Let's continue with the business update and start with how Gurud managed through the global COVID-nineteen crisis. Our cross industry setup certainly helped us to navigate through the pandemic. While the marine and the aviation 3 had been hit severely. Global wind markets were strong most of last year. We faced several operational challenges and still experience bottlenecks with transportation and shipments. Throughout the crisis, the GURRE team kept a strong focus on supporting the business and our customers. We successfully commissioned new sites and installed new extruder lines partially fully remotely. Because of a strong focus on cost management, we accelerated the restructuring of the aero business. Despite all challenges, Gerd achieved an 8.9% sales increase last year. So let's continue with a view on the top financial KPIs. As already indicated, GURIT achieved a net sales growth of 8.9%, generating sales of CHF576.7 million. We grew our operating profit by 4.2 percent to €64,100,000 yielding an operative profit margin of 11.1%. Allow me a brief personal comment. I want to thank the more than 3,000 Gurud employees for their dedication and effort in a challenging last year. And although I have the honor to present our 2020 results today, I want to thank my predecessor, Rudolf Haughton, who was leading Goerd as a CEO last year, for achieving this great result together with the Goerd team. Now let's look a little bit more in detail at the different business segments. In Composite Materials, we achieved a sales increase of 16.1 percent to CHF276.2 million. This growth was primarily driven by a strong wind business. We saw a spiking demand for balsa wood. Increasing balsa costs and prices were boosting revenues. As indicated, the sales in the Marine business was hit negatively by COVID-nineteen. Key business steps in 2020 have been the implementation of market focused, customer centric organizations for both wind as well as marine and industrials. We see an accelerated substitution of PVC and balsa core materials by higher performing recyclable PET and consequently pended our PET capacities globally while securing longer term PET supply agreements with major wind customers. One of our key competitive advantages is our fully integrated PET value chain. From developing and building our own through this. The kitting business grew strongly by 25.4% and reached a net sale of 225,600,000. Gerd secured long term supply agreements with major customers and increase the kitting capacities with new locations in Mexico, China and India, which will be opened later this year. As the global leader in core kitting, we focus on innovations and modular designs. Combining both PET extrusion and core kitting in one location offers a competitive advantage for Gerrit going forward. Finally, a view on tooling. The business for wind blade molds follows a different cycle and is usually ahead of turbine and blade manufacturing. Gurud achieved a net sale of €98,700,000 which represents a decrease of 1.7%. Gurud kept a strong position as global market leader for wind blade molds and improved the market share with domestic customers in China. We invest in advanced technologies like Process Automation, Sensor Integration and Industry 4.0 Technology. On the picture below, you can see our team in Taicang, China standing in front of a more than 100 meter long wind blade mold. Clearly, an impressive view and the longest mold, which had been manufactured by our team so far, but more to come. With this view on the market segments, I'm concluding the part of the business review and hand over to my colleague, Philipp Berth. Thanks, Mittja. Good morning, everybody. Let me start with a quick summary on sales from what you have just heard from Mittya. Material sales grew 16.2 in the year driven by strong wind energy demand. Kitting grew 25.4% with strong growth in China and Europe. Sales in the second half were in line with prior year with strong growth in Europe, Offset by declines in the region what we call rest of the world. That includes, for example, Turkey. Tooling declined slightly by 1.7% with growing sales in the Chinese market. Aero was down 39.3% due to the sharp decline of the whole industry. In total, this leads to change rates in our continued operation. In 2019, we have bought a PET recycling operation in the second half of the year. And when we exclude this, our sales grew organically 8.6%. Going further down the P and L. Gross profit margin is 0.7 percentage points below prior year. The main driver here were our Tooling and Aero business. In tooling, we continue to see fewer sales of high content mold systems in the sales mix as we are gaining back market share in China. In aero, the reduction in gross profit margin is mainly due to the fact that we were not able to reduce fixed cost as fast as the sales volume contracted. Here we have pulled forward closure of our ZULIO plant into this year to react to this reduction, and we run significant short work programs to mitigate the financial impact on the business. EBITDA is slightly below prior year, mainly due to the margin reduction in tooling, as explained before and lower sales in aero due to COVID-nineteen. This was offset by strong results in Materials and Kitting. When we look at operating profit, I'd like to mention that it includes onetime restructuring And impairment charges in our aero business of CHF 0.9 million in 2020 CHF 2,000,000 in 2019. If we adjust for this restructuring, our operating profit is CHF 1,500,000 above prior year. And on the next slide, I want to highlight the main reasons for this increase. As mentioned before, the operating profit includes onetime restructuring and impairment charges in our aero business, And this results in a net increase of €1,100,000 in profit year on year. Next, we have a positive impact on operating profit from increased sales prices due to increased material prices. The main impact comes from balsa. In balsa, we saw an accelerated increase of raw material prices in the second half of last year twenty nineteen. Last year in 2019, we were not Able to pass this increase on we were only able to pass this increase on with a time lag. Hence, you see a positive number here when you compare to last year. On the flip side, we see continued Pressure on sales price in the Chinese tooling business. The net effect, CHF5.4 million on operating profit you see here. Due to exchange rate changes, we have lost CHF3,500,000 of operating profit compared to prior year. This is mainly due to the strengthening of the Swiss francs against all currencies in the year. Overall, I would like to conclude that we are very happy with the solid operating performance for the year 2020, which was clearly at the high end of our expectations. Okay. Now let's move on to the area of cash flow. 1st, You will note a reduction in working capital in 2020 for the 2nd year in a row. The working capital movements are somewhat volatile, particularly in the area of trade account receivables around the cutoff dates of financial reporting. Due to this reason, we look at the development of net trade working capital more on an average basis on a longer timescale. You see this on the left graph on this slide. We continue to see improvements of our trade net working capital requirements, And 2020 looks very good. This is mainly because of tooling with better payment terms with Chinese customers compared to the rest of the world and the discontinuation of the Automotive business. However, in general, we experienced continued pressure to increase payment terms, which may hurt us going forward. Capital expenditure or CapEx Amounted to CHF 26,700,000. 80% of the CapEx is related to capacity increases and dedicated to core material, particularly PET and kitting footprint expansion in China and Mexico. Capital expenditures for next year, 2021, is again expected to be around €30,000,000 mainly for the setup of our India expansion. As a result, Free cash flow, which equals net cash flow from operation of the capital expenditures, amounted to CHF 45,800,000 for the year compared to CHF 42,800,000 last year. This is an increase of CHF 3,700,000 or 9% compared to prior year, which allows us to propose an increase of dividends and further significantly reduce our debts. To conclude the financials, a couple comments on the December balance sheet. Net debt decreased by CHF33 1,000,000 from prior year to CHF19.9 million this year. Our equity ratio improved compared to the prior year by 5.5 percentage points to 45.7%. The strengthening of the Swiss franc also had a significant impact on our balance sheet and as it reduced equity by CHF 10,600,000 compared to the prior year and reduced our equity ratio by 1.4 percentage points. Our gross debt to EBITDA ratio was at 0.9x, an improvement of 0.5x compared to prior year We were able to pay back CHF31 1,000,000 of loans in 2020. And as a final comment, our return on net asset has improved 3.8 percentage points compared to prior year, And this improvement is mainly due to our divestment of the automotive business. So In summary, we report a very solid financial year 2020 given the challenging economic environment, And our balance sheet builds a strong basis to continue on our growth plan. And with this, I hand over to Mitja for the strategy and market update. Thank you, Filip. Let's start with a high level perspective and a look at the global energy market. Several think tanks and institutions have developed scenarios and published studies on the potential penetration of renewable energy. What is visualized on the left of this chart is a tremendous growth outlook for renewable energy, increasing both its share of power generation from 25% to 86% in 2,050 as well as multiplying the absolute output of renewable energy. For wind energy, this means a huge growth from about 500 gigawatts to more than 6,000 gigawatts of installed capacity till 2,050. Depending on the transformation energy scenario, An additional yearly wind capacity between 102 100 gigawatts would be needed, which basically means doubling or even tripling of what had been installed on average during the last couple of years. These encouraging outlooks are being supported when considering recent announcements on different 0 emission targets. China targets 2,060 Japan, Korea and Canada all 2,050. President Biden signals that clean energy and environmental protection will have a much stronger focus in U. S. Politics. And the Ukraine deal quantifies goals for increasing offshore wind to more than 300 gigawatts by 2,050. Overall, a very positive long term perspective. So let's look a bit closer what happens in wind midterm. Last year, we saw an installation rush in China driven by the expiry of subsidiaries for onshore wind, the so called feed in tariffs. Figures of up to 72 gigawatts of grid connected turbines had been published in China. A closer look reveals that up to 25 gigawatts had been produced before 2020. So the net new turbine capacity in China can be estimated on a level of 45 to 55 gigawatts, driving global new capacity above 80 gigawatts last year. Consequently, 2021 will be on a lower level as a result of the prebuilds in China. We anticipate a fast rebound on 80 plus gigawatt levels as early as next year, driven by the execution speed of the net zero plans as indicated before. Both a binding statement towards energy transition in the U. S. As well as the publication of China's 14th 5 year plan and the anticipated commitment on the massive expansion of renewable energy in China will strongly influence the growth trajectory for wind in the coming years. Now let's continue with a qualitative evaluation of the wind market trends and Gurud's strategic positioning. Technologically, we see rotors of wind turbines getting larger. Offshore diameters of up to 2 50 meters will become reality, onshore up to 200 meters. While split blade technology might help to mitigate the transportation problems, these long blades weigh above 60 tons each, which causes design and manufacturing related challenges itself. The end of life management and recyclability of wind blades has become a fundamental issue. 1,000 of rotor blades will be out of service soon and no sustainable solution is available yet. Gurud is getting engaged in customer discussions to address the end of life issue proactively. For new blade designs, we can contribute with our strong PET capabilities as well as working on next generation of organic core materials together with our customers. We developed our automation and digitalization roadmap, as illustrated here, combining different solutions in the fields of Industry 4.0, Automation, Robitized Systems and Blade Manufacturing Monitoring We have started to commercialize these products and achieved 1st sales already last year. We think Automated and digital tooling products will offer a significant business opportunity for Churit. Continuing the evaluation of market trends, we see a further consolidation of the onshore blade manufacturing footprint in best for countries. Offshore projects are often tied to local content requirements. And in the wind service business, we see rising demands for wind blade repairs. Gurud will strengthen the offering for wind blade repair kits with our designated product portfolio to participate from the rising service demands. We understand that both customer proximity and competitive footprint will be essential, so we continue with our strategic investments in our footprint. In China, we invested in tooling automation, added PET extrusion capacity as well as kitting capacity. In India, we are building, as we speak, 2 new locations strategically located to the wind hubs in the northern and southern part of the country. We will combine tooling, core materials and kitting under one roof. In Mexico, we are trying to maximize footprint synergies by combining our colocation strategy with customer proximity. As you can see on the picture, we are literally neighbors to the wind blade manufacturer as well as the turbine OEM. We think that these dedicated wind industrial parks are best practices for new greenfield investments, for example, for new offshore wind clusters to be developed. As another relevant market trend, we see our customers trying to reduce their supply chain complexity by focusing on less, more capable suppliers, Indicating key suppliers earlier in the development process is another objective. From a component supplier to become a solution provider for our customers. Besides our strong commitment to customer support and proximity, We are strengthening our engineering capacities and getting earlier engaged in new development projects for new wind blades. Outside of the wind industry, we see multiple industries gradually increasing their demand for Composite Materials. Gerrit is serving these markets today with a dedicated product portfolio, as you can see on the slide. We anticipate a significant growth opportunity for recyclable PET materials, especially for marine applications and building solutions, double digit figures, which can be expected in the next years. We are convinced that our newly established setup with a separate customer facing organization helps us to focus and execute on these business opportunities. Our company vision statement is clear, with passion for a sustainable future. We have developed a holistic sustainability strategy consisting of 5 pillars: the safety of our employees, Environmental Protection and Emission Reduction, Social Responsibility, Good Governance and Economic Performance. To implement a strategy, we have set up a sustainability organization, orchestrating the different work streams group wide in creating a transparent reporting of our ESG performance. We've just finished the last latest version of our sustainability report, a good read illustrating multiple examples of the great work which had been done by our teams. As a signal of our strong commitment towards sustainability, we announced today as we become climate neutral this year. In the first step, we focus on reducing our own emissions and will use 100% of renewable energy in all our locations worldwide. We will compensate for emissions that cannot be directly impacted by investing in a wind energy project in India. More details about this can be found in the sustainability report. Let me summarize. After an excellent and financially strong year 2020, Gurud is well positioned with a solid product portfolio and the robust balance sheet. Besides the temporary reduced wind market outlook in China and the normalization of balsa prices, both impacting our sales short term. Our confidence in the mid term growth outlook has not changed. We will continue to and our manufacturing footprint, grow our technological leadership position and our transition to become a system supplier to the wind industry. Furthermore, we see a positive market recovery in the Marine business and new growth opportunities in different industrial segments. The Aerospace has stabilized at a low level, and we expect a gradual longer term recovery. Our guidance for this year reflects the sales in the range of €530,000,000 to €580,000,000 and an operative profit margin between 9% 11%. Before I'm now ending with presentation. Let me briefly highlight that we are planning a Capital Markets Day, most likely in the last week of August here in Zurich. Thank you very much for your attention, and have a good day.