Earnings Call: Q1 2021

May 4, 2021

Ladies and gentlemen, welcome to the Oerlikon Q1 2021 Results Conference Call and Live Webcast. I am Alice, the Chorus Call operator. I would like The conference must not be recorded for publication or broadcast. At this time, it's my pleasure to hand over to Stephan Gielk, Head of Investor Relations. Please go ahead, sir. To Good afternoon, and welcome to Eirikom's Q1 financial results call. With me on the call, I have Ron Fischer, CEO to thank you for joining us today and Philipp Mueller, CFO of Verdecom. Also joining us for the Q and A is Georg Stalsberg, CEO of our Polymer Processing Solutions division. To start the call with a business update done by Roland, then Philippe will go through the financials, which we will then follow-up with a Q and A. To Ron, the floor is yours. Thank you, Stephan. Good afternoon to everyone, and welcome to our Q1 results presentation. Quarter 1 was a solid operational quarter. Besides financial growth, we demonstrated technology leadership to and executed on disciplined capital allocation by acquiring Inglis. Let's go into some more details on the quarter to share with a short summary on Page 3. The Q1 represents a solid start into the year with Oerlikon returning to top line growth. To Sales at CHF568 1,000,000 were up 7% and order intake at CHF643 1,000,000 to increase by 35%. Growth was driven by a strong performance of Polymer Processing Solutions. In the Service Solutions division, we saw trends improving throughout the quarter and achieved at the end the book to bill ratio well above 1. Our group operational EBITDA increased by almost 50% year over year to CHF 88,000,000, Leading to a margin of 15.6%. Continued cost containment And operating leverage supported our solid operational EBITDA margin expansion. All in all, it was a start into the year, to provide an update on our expectations. We, therefore, confirm our full year guidance after the Q1. To On the next few slides, I will give you a business update before Phil goes into the financial details for the quarter. And now let's move on to the market updates on the next page, Page 4. Our end markets continue to face varying recovery profiles. In Polymer Processing Solutions, we continue to enjoy stability in the filament market. The order books for 2023 are currently getting filled. Key players in China continue their downstream vertical integration into Filament. Outside of Filament, we see the nonwoven market growing, driven not only by the facial masks, But also by wipes, filters and other applications. For the full year, we reiterate our expectation of stable filament sales, while non filament is expected to grow. Our Service Solutions division is operating across to The tooling, automotive, aviation and general industry end markets. The tooling and general industries end markets to see shorter cycle services recovering at the right rates. We expect them to recover by a mid to highlight a few key points to high single digit percentage number this year. We introduced some new tooling products in the market in the Q1. They have been well received with our industrial customers as they are continuing to look for improved performance to differentiate. To take a look at the performance of the business. In automotive, we experienced a high level of activity to date. Automotive demand was strong with good coverage across to all our OEM and Tier 1 customers. In particular, we are seeing strong demand for our e mobility and sustainability solutions. To see this continuing in the coming quarters. However, considering the current supply chain challenges, Market production expectations might be impacted in my Turai. And finally, last but not least, in aviation, The driver restrictions caused by the global pandemic continue to last. Our aviation sales were down 45% year over year in to take a look at the Q1. We expect to see the draft now and to return to a very moderate growth in the second half of the year at the earliest, to Supported by easing comparables. We have seen some very early signs of improvement in MRO with demand to take a look at the results for the Q4. So summing up, we see a resilient market environment for polymer processing solutions, to While Service Solutions markets are recovering at providing rates. And now let's move on to Page 5, where we provide an update to take a look at our strategic priorities. Our strategy to drive profitable growth and expand market share is unchanged. To As a result, we are focused on 3 key strategic priorities: sustainable innovation, to discuss the cost containment and disciplined capital allocation. In terms of sustainable innovation, to We launched in Q1 an innovative heat shield for battery packs in e mobility applications. We also developed new materials used in semiconductor industry to process highly reactive gases, And we launched the Balora Thin Film Coating, which prevents hot corrosion for guest airlines. To In terms of cost containment, we achieved a solid 4 20 basis points operational EBITDA margin expansion this quarter. And finally, disciplined capital allocation has been a key priority for Oerlikon since many years. By acquiring Inglaz, We have found an excellent way to diversify our Polymer Processing Solutions division and to support growth over the cycle. I can provide some more details on the next page. Inglaz is a market leader in hot runner systems, which are essential in the production of high end lightweight plastic components. The company has about CHF135 1,000,000 sales And is margin accretive to Oerlikon. The acquired technologies are complementary to Oerlikon's existing polymer flow control equipment. The addressable market for autonomous systems across all applications like automotive, consumer goods and others is around CHF 2,500,000,000 to and nearly doubles existing addressable market of our division. With around a 5% market share, to We have substantial room to grow our share in a market that organically grows above GDP. To Our strategic rationale for the deal is obvious. Inglaz diversifies polymer processing solutions into non filament markets to and opens up markets outside of China. The deal enhances our growth profile by giving us access to growth areas such as e mobility and pharma. The existing technology leadership enables Inglaz to grow market share and organically expand in the U. N. Markets. We can further extend technology leadership by combining our R and D efforts across our polymer flow control business. And finally, to So deal is financially very attractive as we expect earning per share accretion. We are truly excited about this opportunity and see it as a transformational catalyst for the group. There are also excellent cross selling opportunities. To introduce the formal tool business of Service Solutions coats the metal surfaces of tools and moldings to use the technology to create high quality polymer parts. With polymer flow control, we also can consider further M and A into a fragmented market. We expect the closing of the deal to happen towards the end of the second quarter. And now I will hand over to Phil, to take you through our financials in more details. Thank you, Roland. I will start with the group results to provide more details on the divisions. At the group level, orders were CHF643 1,000,000, up 35%, to provide an update on the financial results. Sales were $568,000,000 up 7%. To Polymer Processing Solutions significantly contributed to our sales increase based on strong execution and lower comps in the Q1 of 2020. To Our group book to bill ratio was above 1.1. Operational EBITDA was CHF88 1,000,000, to be up 46% versus the prior year. Our margin rate increased by 4 20 basis points to 15.6%. To take a look at the next few more details on surface solutions. As Roland highlighted, surface solutions end markets are recovering at varying rates. To Orders were $327,000,000 basically flat at constant FX, while sales to slightly decrease to CHF304 1,000,000. As indicated at our full year results, to turn the call over to the operator. We face challenging year over year revenue comparables. Aviation sales were still on a strong level in Q1 2020 to and only started to erode in the Q2 last year. In addition, we entered 2020 with a stronger longer cycle equipment backlog. To In the Q1 2021, we saw a solid pickup across our shorter cycle businesses, to thank you for joining us today. As anticipated during our annual outlook, we expect the longer cycle businesses to start to begin the Q2 of this year. Importantly, and a critical indicator for this development, to We achieved a book to bill ratio significantly above 1 in the Q1. Operational EBITDA in Surface Solutions was 54,000,000 to up 32% versus the prior year and around 500 basis points margin expansion. This is a solid result in the context of lower sales. To It is more evidence that the benefits of the structural cost reduction program are now visible in the division profitability. To Margins also benefited from a positive business mix and the continuation of some short term cost saving measures. To take a look at the Q1 of 2019. Over the remainder of the year, we expect these factors to normalize in line with our total year margin expectation. To Overall, we are on track to reach our full year guidance of $1,250,000,000 to $1,300,000,000 in sales to continue with 16.5 percent to 17.5 percent operational EBITDA margin. Next, on Polymer Processing Solutions. Orders in Polymer Processing Solutions were CHF 315,000,000, up 119% versus the prior year. The growth was driven by continued strength in the filament market and growth in our non filament businesses to as well as lower comparables from the Q1 last year. 1st quarter sales of $263,000,000 were up 29%. To take a look at the strategy to diversify into non filament is becoming increasingly visible with $30,000,000 of incremental sales coming from non filament. To As a reminder, no results from our Inglaz acquisition are included in our numbers. We will start consolidating Inglaz to begin from the closing of the transaction, which we expect towards the end of Q2. 1st quarter operational EBITDA at Polymer Processing to CHF33 1,000,000. Margins increased more than 300 basis points to 12.4 percent driven by better operating leverage. To Overall, in Polymer Processing Solutions, we are on track to reach our full year guidance. With that, to conclude our Q1 results on the next page. We saw a strong exit rate from the Q1, particularly in Surface Solutions to And a continued positive trend in April. We continue to expect sequential improvements in our Surface Solutions end markets. To While supply chain shortages can have temporary impacts on our top line, we're expecting our Surface Solutions sales to also sequentially improve to take a look at the second half being stronger than the 1st 6 months of the year. Overall, we continue to expect CHF 1,100,000,000 to CHF 1,150,000,000 of sales. In terms of margins, we confirm our total year outlook for the group and the divisions. To We expect some of the positive effects in Surface Solutions in Q1 to balance out in line with our full year guidance. To Let me wrap up with our priorities. We continue to make progress on all of them. We delivered growth in Q1. We continue to improve our profitability to achieve our operational EBITDA margin target of 16% to 18%. Our improved profitability and tight capital allocation processes will have a positive impact on ROCE. We signed Inglaz a transformational M and A deal, and we continue to focus on expanding our margin market reach via M and A. To We paid a stable ordinary dividend and continue to operate the company with a very strong balance sheet. To Lastly, as you will have seen this morning, we mandated a consortium of banks to facilitate a Swiss bond offering. To take a look at the results of the Inglas acquisition and it will allow us to optimize our capital structure. To begin. With that, I will open it up for Q and A. Georg Stausberg will now join us and certainly be able to add more perspective to our In Glass acquisition to you will hear a tone to confirm that you have entered the queue. To enhance it and eventually turn off the volume from the webcast. Anyone who has a question may press star and one at this time. The first question comes from the line of Michael Firth with Vontobel. Please go ahead. Yes. Good afternoon, to Gentlemen, thank you. A few questions on Inglaz. In fact, first question is, can you to give some indication on how capital intensive the business is compared to the rest of the Surface Solutions to take your questions. And sort of hand in hand with that question is you're saying that it is margin accretive from day 1, but to take a look at the numbers. Is it also value accretive, meaning EVA positive as of day 1? So to That's the first question on Inglast. The second one on Inglast would be, you mentioned 5% market share there. Question is, to Would be on how you plan to integrate that business from an operational perspective into the group. To take your questions. Okay. I'll start maybe with the first one. That's a quick one. I think from a capital intensity standpoint, It's a little bit above the average of polymer processing solution, but it's right in line with where the group is. So think about sort of to mid to high single digit CapEx intensity, roughly speaking. And then you're absolutely right, it's margin accretive from the 1st day and it's obviously value accretive as well, both to comment from an EPS standpoint, but also from a total value creation standpoint. So and with that, I'll probably I'll hand it over to Roland for it. For the market topic, Michael, we said 5% market share with respect to the entire to talk to run a market of about €2,500,000,000 And here, we have to know you have to know that Inglaz is a market leader In the automotive application, what is an essential part of this €2,500,000,000 And here, we have a market share of about 20 to extend. And that's why we believe there is there are a lot of opportunities in for us to in penetrating also adjacent applications beyond automotive. And from that perspective, I think we are extremely happy About that deal and the topic of integration, maybe Georg, you can give us some insights here, right? With the integration, we see from day 1 already some good opportunities in cooperation with to conclude with our Service Solutions Bulsars business, as Bulsar already today is offering coatings for the forming tools for the Injection Molding Industry. So here we from day 1, we think that we will benefit from More transparency on the market, customer database or customer base that we can here offer to solutions. To Parallel to that, we have, let's say, ambitious organic growth ambitions to thank you for in class parallel also for our pump activities, which both are the legs now for the what we call flow control solutions, So that we will focus, 1st of all, parallel that for both of these businesses, we to focus on the organic growth, and we will implement a special group with a handful of engineers, Which then will start developing new products for new markets. We had already some kind of brainstorming sessions with technicians from both businesses. We see opportunities, be it on color injection and injection molding processes, be it on new kind of technologies. So there are already some ideas out. And here, we will implement the synergy team start developing on these products. To Other than that, of course, if it comes to integration from day 1, we will start to integrate in class into our to Finance processes, be it on reporting, accounting. We will from day 1 start in IT integration so that we also then have a harmonized infrastructure here. These are will be the main topics from an administrative point of view. In class today for some of the topics like, for example, legal services, they do not have own sources. They very much depend on external sources. To So that also here we see some potential for synergies. Thank you. And then maybe just one very, to take a very quick follow-up. You talked about the acceleration in March of the short cycle business in Surface Solutions. Is that a sequential acceleration or year on year? It's both. I mean, but to What we described, Michael, was a slow start into the year in January, February, really not idiosyncratic to us, but in the industry. And then we saw a significant sequential to take a look at the acceleration into March, which we had expected, but that is also true year over year, year over year, however, also to an extent driven by the comp Where March 2020 started to slow down significantly because of COVID. Sure. Okay. Thanks a lot. The next question comes from the line of Alessandro Folletti with Octavian. Please go ahead. Mr. Foleti, your line is open. You may ask your question. Okay. Sorry. Can you hear me now? To Yes. Okay. Thank you. Thank you for taking my questions. I have a couple maybe. Again, on In Glass, Can you explain what you were doing in the previous memory fiber business that was Already similar to the HRS business. Yes, it's really around what we do from a flow control solution standpoint and from the pumps business. So, Georg, maybe you want to add some color Very similar technology. So first of all, what OMS is doing is plastic processing. And what we are doing is a lot about melt distribution, melt piping. To But the skill set in order to do the design of such kind of melt pipes, of melt distribution is almost the same. Plus, if I now compare the Inglaz business with what we are doing in our pump business, both is about precision manufacturing, both is about who have a big impact on the final quality in plastic in certain plastic processing applications. Okay. And well, I guess this is a question, yes, we'll speak about it later on, I guess. Okay. Thank you for that. My second question is more related to your to take your next question from the line of Alex. The guidance was published before So I would assume that whatever we include from the acquisition would come on top. Yes. I think, Alessandro, first of all, I think the guidance gives a range. And whatever comes Out of this acquisition is coming on top, yes. And Alessandro, it will just depend on from what point on we consolidate to thank you for joining us today. Our expectation is that we close the transaction in the Q2 and then accordingly we'll give you at the latest we'll give you an update on the exact to announce to be included in our financials for the year at the end of the second quarter. All right. Thank you very much. To And then maybe on the Polymer Processing order intake, which was really to Very, very strong. And you mentioned it was not only because of the masks business, etcetera. But can you maybe give an indication if there is anything sort of Special or maybe that way may not be really recurring in that level of ordering space. To No, I think Alessandro, I think you know, polymer processing business, it's a project business. And here you have bigger orders and smaller orders coming in this quarter or the other quarter, to Whilst this nonwoven business was really benefiting from the crisis to a big extent, And I think we gave the indication size wise, low triple digit volume here. And this is beyond face mask. This is also for technical Vacations for filtration and other stuff, right, and wipes and whatever. That means this is not a one off, Which is going to disappear with the course of corona going down. Alessandro, no large one offs in the order intake. Okay. Thank you. Thank you very much. The next question comes from the line of Christian Hoft with Baader Bank. Please go ahead. Yes. Hello, and greetings from Switzerland. To Again, on Inglaz, can you give us an idea about the amount of intangibles you are paying and the earnout structure, to How this will go on or affect the future? And then I have a more structural question concerning the organization or reorganization to take a look at the numbers of Surface Solutions. We talked about that, of course, in the quarters before. But how are the management responsibilities to now currently in Surface Solutions. On the website, you have the customer industries and then you are showing the brands and the management there. So how is P and L responsibility organized within Surface Solutions? So is it around The customer industries, is it around the brands, is it around the regions? Can you give us some kind of an idea there? Thank you. To I'll take the first one quickly on Inglis and then hand it over to you, Roland. I think there's kind of 2 questions in there. The first one is on the to take a look at the level of intangibles, as you would imagine, we're going through the evaluation right now. We're doing the purchase accounting. And then I think as soon as we have the purchase accounting to Pretty much finalized, we'll give you an update on what that means for the future. But I think the other point is a little separate. That's the earn out structure here. To We found a highly incentivizing earn out structure with the seller that would generate more value to take a look at the numbers for us and more value for the seller if we achieve those additional targets. And so that doesn't necessarily affect the immediate purchase accounting, But we'll be decided over the next 24 months whether we achieve those additional targets or not. And then And the seller remains This was in the group, right? No. The seller is an individual who has stepped back from management a while ago. To take a look. He will stay very closely connected with us in terms of technology development and market development, and we're very, very happy with that. And then the immediate management team, which is not the seller, which will stay with us. Okay. Thank you. And the second part of the question Concerning the Service Solutions structure is actually easily to be answered. Today, we do have our business unit to start with the structure that means a global responsibility for the product portfolio within the business unit, to Different technologies and different business units. And in future, effective 1st January next year, We will go or we'll have a regional responsibility. That means, we will have 3 to thank you for joining us today. Europe, APAC, Southeast Asia and Americas Having a clear P and L responsibility and covering the entire Service Solution product portfolio. Okay. So you are changing the structure and the course of this year? Yes. Yes. Okay. Interesting. Yes. Thank you very much. All the best. The next question comes from the line of Sebastian Vogel with UBS. To please go ahead. Hello and good afternoon. Can you hear me well? Yes. Perfect. A quick I've got 3 questions. A quick first one, when you were describing how the Surface Solution had done over the course of Q1 or within Q1, to And were there any difference between auto, general industry and tooling or were the trends as you have outlined with sort of okay January February and good March Applicable to all these 3 sub segments? By and large, very similar development, yes. Okay. Quick question, can you remind me how much margin dilution, Alta Manufacturing was adding in the Q1 as sort of a rough ballpark figure if possible? We're not going to go into the quarterly numbers for that anymore, but I'll tell you, we're on track for what we told you for the total year for additive manufacturing. Okay. And I'm not sure if you can answer my to ask a question. The margin improvement in Surface Solution, as sort of at least sort of a directional way, can you sort of split how much operating leverage, how much the cost How much the mix was contributing to the improvement there? You're talking about the year over year improvement, Sebastien, right? Yes, pretty much. Look, I mean, I would say, without getting into all of the granularity, think about the negative volume leverage because sales were lower And the mix being kind of similar effects and they're basically offsetting each other. And then you have the large to Part of the margin enhancement in Surface Solutions is really the structural cost program. Perfect. And then just one very last one and a quick one. There was a sequential drop in the margin at Polymer Processing. Can you explain what was the main contributing factor for that? I think there's a couple of things. We obviously had a very, very strong end to last year. I to I think we talked about that we were at 15% of margins in the Q4 of last year. We said this was going to normalize a little bit. To Typically in polymer processing, our first half is a little bit softer both from a volume standpoint and then from a margin standpoint than the second half. At the same time, I think we had significant margin expansion year over year and we're very happy with the way that that division started into the year in the Q1. Understood. Many thanks. There are no more questions at this time. Gentlemen, back to you for any closing remarks. To Thank you, operator. This concludes today's call. In case of further questions, don't hesitate to contact us in the IR team. To Thank you for your participation and goodbye. To turn the call over to the operator. Thank you for choosing Chorus Call and thank you for participating in the conference. You may now disconnect your lines. Goodbye.