Ladies and gentlemen, welcome to the Oerlikon Q1 2024 Results Conference Call and live webcast. I am Sandra, the Chorus Call operator. I would like to remind you that all participants are in 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 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 Stephan Gick, Head of Investor Relations. Please go ahead, sir.
Good morning, ladies and gentlemen, and welcome to Oerlikon's Q1 results call. With me in the call, I have Philipp Müller, CFO of Oerlikon. 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, Stephan. Good morning, everyone, and welcome to our first quarter results presentation. In Q1, we continued 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, the divisional results, and I'll conclude with the outlook. At the group level, orders were CHF 642 million. 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 constant FX to CHF 550 million. 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, having 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 exports, 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 a 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. Oerlikon'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 midterm 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 our end markets and geographies are more broadly diversified, we saw the impacts from globally soft PMIs. The nonwoven, 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 CHF 391 million and sales of CHF 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 Riri consolidation, which was, to a large extent, offset by negative impact from foreign exchange. Operational EBITDA in the first quarter improved 8% to CHF 65 million. 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%+ 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%+ 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%+ 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 are 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 coating operations throughout 2024 and 2025. In addition to that, we will continue to manage structural and operating costs very tightly. Overall, we are 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 CHF 251 million. 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 CHF 179 million were down 47% at constant FX. 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 end markets. Surface Solutions achieved a stable top line in a difficult environment.
The integration of Riri 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%+ 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 play transformation announced in February. We are evaluating options for the separation of Polymer Processing Solutions. This includes a trade sale, an IPO, or a spin-off. 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 be 2024-2026.
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.
... We will now begin the question and answer session. Anyone who wishes to ask a question may press star and one on the touchtone 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 use only handsets and eventually turn off the volume of the webcast. Anyone with a question may press star and one at this time. The first question comes from Michael. Please go ahead.
Yes. Hi, thank you. Good morning, Philipp. Good morning, everyone. First, I have two questions. The first one on polymer processing. You said it's the order improvement, mostly driven by small and mid-sized orders. So I guess we're still waiting for the larger projects to kick in. What are your customers saying? What is your visibility there, and how fast can that come back? That would be the first question. And the second one is, when you say that the separation process of the businesses is on track, what does it really mean? I mean, what has happened in the past two sort of months? And how will you decide on the separation mechanism? I mean, what are the decision triggers there?
How dependent are they on the performance development of the business? Thank you.
Great. Good morning, Michael. The first one is, I think the around the globe and not just in China. You know, the new project discussions have just taken a different dynamic on again. I think the investment environment is a lot more positive. I think it's driven by what we've shown a number of times now, the improved economics for our customers, but certainly also specifically in China, is driven by the new actions of the Chinese government. So the stimulus actions that were specifically announced on 24th February are helping in this. I don't think it creates any artificial demand for us. I think it just helps our customers to make new investment decisions and specifically to upgrade existing equipment, which will be helpful for us. There's a variety of discussions.
You know, when we, when we highlight specifically what what was driving the first quarter, we were driving the first and, the, the medium size and the small orders, but I think also the large scale orders are on track. Michael, I just wanna make sure, do you still hear us?
Yes, there was just a very short cut, but-
Okay.
- That's fine. Thank you.
Okay, perfect. And then, your second question, Michael, is on the separation process. So I would describe it as, internally, we are preparing the company for the separation. And, you know that the two divisions are operationally very independent already, so I think there are few things to be done from a, from a customer segmentation standpoint or from an operational standpoint, almost nothing. But as it pertains to certain back-end functions, finance, HR, IT, and so we wanna make sure that the two divisions are fully prepared for a separation. And then timing of the separation will depend a little bit on the, on the market environment. I think to an extent, maybe, of where we are exactly on the filament cycle, how fast it's gonna recover now, I think that'll, that'll drive this decision a little bit.
Overall market environment and then, you know, we wanted to give ourselves a little bit more time in order not to box us in too much. But like I said in my prepared remarks, clearly the preference is to move faster rather than slower.
Okay, that's clear. Thanks a lot.
The next question comes from Alessandro Foletti from Octavian. Please go ahead.
Yes, good morning, Philipp. Thank you for taking my questions. Good morning, everybody. I'd like to start with the margin path towards 20% in Surface Solutions. So if I take your slide number five, basically, can you please give a little bit more detail on what will be the contribution of the different levers that you mentioned there, from, so to speak, the level we are now, around about 18% to the 20%?
Yeah, I think about, you know, kind of a maybe half driven by price and half really the cost side of things in to really get to 20%. You know, Alessandro, I think specifically on the services side, it's all about keeping total costs kind of flattish, maybe only slightly up as revenue grows. And I think that volume leverage and that very high gross margin service business allows us to get to the margins. And then I think on an ongoing business, on an ongoing basis, to stay at the 20%+ margin level, pricing will play a key role. I think we're hopefully not going to face sort of a shock hyperinflation environment again, but we will continue to see a cost inflation environment for years to come.
Our pricing mechanisms that we've really completely revamped on the services side and on the materials side will help us to stay ahead of the curve on this.
Okay, so it means although when you speak about price, the 50% price driven, that it is also sort of a mixed component? I.e., maybe more balances in percentage of sales or something, or not?
I just think that the pricing mechanism kicks in mostly on the services side, Alessandro.
Okay.
I think the, you know, on the equipment side, to measure it is hard. On the material side, as you know, we're doing a lot in terms of it, but there's also the material surcharges that we have. Specifically on services, we have completely revamped our pricing mechanisms. We've actually implemented a brand new pricing module in SAP for this and established a team around that. So I think we're gonna be a lot more thoughtful in terms of how we drive that in the future together with our customers.
Right, and, to finish off with this question on the, on the timing, can you say something more specific on the timing, or?
You know, we've always said when we think about midterm, also, when we talked about it at the Capital Markets Day, kind of in a 2020-2026 timeframe, and so without having a crystal ball handy here, that's kind of how I think about it. I think we're in the current year, we will make substantial progress towards that. You saw us in the first quarter already being in the full year guidance range that we've given for Surface Solutions, knowing that the first quarter is usually a relatively soft quarter because January and February are soft.
So I feel very good about where we're gonna be in the current year, and then we're gonna make progress next year, and then sort of just mathematically, if you're at 18% this year, you know, we're gonna be moving towards that goal of 20% here relatively quickly.
All right. Thank you very much. I have two more questions, one on order intake in polymer processing. Maybe first off, were there any, you know, orders that could have come in also in Q4 2023, and then sort of have been delayed just a couple of days and happened to come out in Q4? So was there-
None of that.
Anything that sort of?
No, none of that.
All right. So there is no sort of one-off situation, that it was really very low and very bad in Q4 and really better in Q1?
Correct.
All right. The second point is, can you sort of indicate if the Q1 trend is continuing now, or is it too much to ask for that?
Look, I mean, we don't guide on orders, but I think you can see from our commentary around really having seen the trough in the activity in the market and sort of, you know, you hear us emphasizing that improvement a lot. We see that more positive environment, and I think we feel very good where we are from a sales guidance standpoint for the division and for the total company for the year. So I think when you put all that together, I think we feel good about that outlook.
All right, great. Thank you. My last question on the split. When you divested Graziano, and I appreciate you were not there, but what happened after Graziano left the system was that basically the rest of Oerlikon was left with, give or take, if I remember correctly, CHF 13 million-CHF 15 million cost, which were sort of from corporate and overhead costs, et cetera, that had to be absorbed by the rest of the business. So I wonder if there is any risk of that, and I'm thinking more that since polymers is going to be split, that maybe Surface Solutions has to digest a higher cost base.
Yeah. There is no risk of that, Alessandro. I would say, when we talk about what we've done from a preparation standpoint, there is a crystal clear plan in place to take the proportional amount of cost out of the system in order to make sure there is zero undue burden on the Surface Solutions division going forward. That plan is already in place and very clear.
Right. And should I then also interpret your answer towards the sense that maybe there is additional gain, because then the cost base will be sort of downsized to a more lower level?
Look, I mean, I think that's maybe a little bit too early. I think you gotta think about it as on the remaining Oerlikon company, right? There will be a clear reduction in cost. Now, in the new standalone operation, depending on what that looks like, there might be a certain smaller addition of cost just because of certain functionalities that come out and so on. And the net-net of that, I'm assuming, is a positive, for sure. That's how we're gonna steer it. To give you the exact number is maybe a little bit too early.
All right. All right. Okay, good. Thank you.
Great. 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.
Ladies and gentlemen, the conference is now over. Thank you for choosing Chorus Call, and thank you for participating in the conference. You may now disconnect your lines. Goodbye.