Ladies and gentlemen, good afternoon. Q1 2018 results conference call and live webcast. I am Sherry, the conference call operator. I would like to remind you that all participants will be listen-only mode and the conference is being recorded. After the presentation, there will be a Q&A session. You can register for questions at any time by pressing star 1 on your telephone. Should you need assistance, please press star 0 to go on operator. The conference must not be recorded for publication or broadcast. At this time, it is my pleasure to hand over to Mr. Andreas Schwarzwälder, Head of Investor Relations at Oerlikon. Please go ahead, sir.
Thank you very much. Good afternoon, ladies and gentlemen, and welcome to Oerlikon's conference call on the results of the first quarter of 2018. Your hosts today are Roland Fischer, the Group CEO, Jürg Fedier, Group CFO, and myself, Andreas Schwarzwälder, Head of Investor Relations. As a reminder, all related documents on the Q1 results, including the following presentation, are available for download on our website. Today, we follow the well-known agenda. Roland Fischer will start with an overview and an update on the segment's performance, followed by Jürg Fedier, who will add some comments on the group's financial performance and confirming the full year guidance. After the presentations, we will host a Q&A session to answer your questions. Today's conference is being recorded, and the replay will be available on our website later today. Having said that, I now hand over to our CEO, Roland.
Thanks a lot, Andreas. Good afternoon to everybody on the line. Thank you for joining our first quarter 2018 earnings call. For the period January to March 2018, Oerlikon achieved an all-time high in order intake and sales, raising both by more than 35% year-on-year, a nearly 60% increase in order backlog. This excellent result is driven by all three segments. The Surface Solutions segment remained on its steady growth path. The Manmade Fibers segment significantly boosted its top line and operating profitability and achieved growth rates exceeding 100%. Last but not least, the Drive Systems segment realized about 20% gains in orders and sales. Profitability is following.
In the first quarter, we have been able to improve the group's EBITDA margin to over 15% after taking into account and absorbing our investments in the ramp-up of our additive manufacturing business. All three segments contributed to the excellent result and achieved all three double-digit EBITDA margins. In the first quarter of 2018, we were also continuing to deliver on our strategy. We completed two string of pearls acquisitions in the Surface Solutions segment. First, DIARC offers a company which offers thin film technologies that enhance Oerlikon Balzers portfolio for customers in the automotive and precision component industries, and will strengthen Oerlikon's footprint in Finland as well. With the second one, Sucotec, Oerlikon Balzers expands its offering with high-quality chemical vapor deposition systems, not PVD, but CVD technology for the tooling market.
In addition to that, we have opened a new coating center in Johor, Malaysia to meet the high demand from customers in the automotive, aerospace, medical, general industry, and electronics industries in Malaysia and in Singapore, and to strengthen Surface Solutions leadership position. The Manmade Fibers segment executed their market recovery schedule and secured large-scale orders. Finally, the Drive Systems segment continued to benefit from its repositioning strategy and executes its growth initiatives in all of its key markets and across all regions. Based on the group's strong performance in the first quarter, we are in a position to confirm our guidance for 2018. We expect the overall positive momentum in our end markets to continue in the upcoming quarters. Also, geopolitical tensions and protectionist policies could impact international trade and business in industrial sectors.
Now let me take to address another topic upfront that created a significant amount of media coverage and uncertainty in the capital markets after the first quarter. I'm talking about the identification of Viktor Vekselberg and Renova Group, a specially designated national, so-called SDN, pursuant to U.S. sanction rules effective April 6. I would like to reconfirm that Oerlikon is and was never considered a sanctioned nor a blocked party because Mr. Vekselberg's ownership interest in Oerlikon is less than 50%. U.S. persons and entities, as well as any other persons and entities, are therefore not restricted in their dealings with Oerlikon or in investing in Oerlikon. What we also can confirm is that from an operational point of view, our global customer base and our trusted U.S. customers in particular, continued to work with our solutions, equipment, and materials.
Orders we received or projects that were entitled after April 6, provide evidence to our continued business activities. For example, orders from a U.S. aerial platform manufacturer and a U.S. construction equipment manufacturer in the Drive Systems segment. In the Surface Solutions segment, we received several material orders from customers in the aviation, power generation, and general industry totaling multi-millions U.S. dollars since April 6. Last but not least, in the Manmade Fibers, we are in the final negotiations with a U.S. customer for a leading carpet yarn solution, and we are confident to conclude the project in the coming weeks. Now let's turn back to our Q1 performance and to the Surface Solutions segment performance in the first quarter 2018. The Surface Solutions segment continued its positive growth path and delivered another quarter of good performance with organic growth in the top line.
Orders increased by over 9% year-over-year to CHF 384 million. Sales increased by 9% to CHF 361 million. We noted a significant upward trend in general industries, specifically coating for precision equipment, semiconductors, and medical applications, and saw ongoing strong demand in tooling and automotive. The small-sized acquisitions in the first quarter and the positive raw material surcharge effect added in total roughly to CHF 12 million to the reported top line. We saw a positive growth contribution from coating services worldwide for tooling equipment and precision and medical components. However, on the other hand side, we saw a weaker market environment in power generation, resulting in a softer start in thermal spray materials in general. I now spend a second on the ramp-up of additive manufacturing business and the construction of new facilities continued, which are continued according to plan.
We have signed a five-year agreement with Boeing to develop standard materials and processes from powder management to finished products, and thus to enable the development of a wide range of safe, reliable and cost-effective structural titanium aerospace components. This is another milestone in our effort to industrialize and to drive adoption of additive manufacturing. Including the investments made to build up the additives business, the Surface Solutions segment sustained its operating profitability level well within the guided corridor of 18%-20%. We achieved an EBITDA of CHF 69 million and an EBITDA margin of 19.1%. From an end market point of view, we observed strong momentum in general industries worldwide. The tooling market shows continued good demand in all regions, which is supported by strategic initiatives and the adoption of new coating solutions.
The automotive business remains robust in Europe and Asia, we continue to see a lot of potential. We see ongoing moderate growth also in the aerospace market. However, as already indicated, power generation remains a challenging market environment, in particular for large gas turbines. From a regional point of view, Europe is showing strong growth, we see good development in Asia, in particular in Japan and India and in North America. Overall, we are pleased with the positive development of the Surface Solutions segment, which continued to be the main revenue and income generator for the group and delivered strong results in the first quarter of the year. Now let's move to the Manmade Fibers business. The Manmade Fibers segment showed a remarkable performance in the first quarter, mainly driven by the filament equipment business.
During the dynamic market recovery, Manmade Fibers has been able to capture a healthy share of market opportunities and to maintain its leading market position. The segment secured large-scale orders and benefited from positive market sentiments for upgrading of production capacities. The strong sales for filament spinning machines provided an accelerated project landscape for texturing machines as well. The segment's top-line growth of more than 100% was mainly led by business wins in China. However, a high level of demand was also noted in India and Turkey for filament equipment, as well as for texturing staple fibers and carpet yarn systems. In North America, a noticeable uptick in orders was registered, attributed to the healthy growth in the carpet yarn business in this market. This leads me to the Q1 2018 numbers, which form a remarkable picture as all key figures show a year-on-year improvement of more than 100%.
For orders increased strongly to a record level of CHF 373 million and sales to CHF 243 million. As indicated in previous earning calls, profitability now followed due to the increased sales volumes and the efficiency improvements after the successful ramp-up. Therefore, the EBITDA margin increased to 11.1% in Q1 2018, and the EBITDA stood at CHF 27 million. The market dynamics continued to improve in the first quarter of the year, in line with the trend we have seen towards the end of 2017. The filament equipment market in China saw strong demand as Tier 1 customers consolidated and positioned themselves aiming for leadership in terms of capacity, technology and efficiency. That's a kind of race, what takes place in China right now. As a result of the increased filament activities, the texturing equipment market was also positive.
We saw increasing demand for BCF carpet yarn solutions from the U.S. and Turkey, and positive market dynamics in staple fibers. All in all, this has resulted in a strong pipeline, with lead times going well into 2020. The strong results speak for the performance of the segment and its management. It demonstrates its ability to successfully manage the downturn and the fast and accelerated recovery. Now let's move to the Drive Systems business. The Drive Systems segment drove its business forward, achieving almost 20% growth in order intake and over 20% increase in sales for the first quarter. The business attracted new customers and won additional projects in the agriculture, transportation, automotive, and construction markets. In its largest market, agriculture, the segment noted higher demand in India, in the U.S., and Europe.
Strong growth was also registered in the transportation market, particularly for commercial vehicles in India and China. In the automotive sector, higher sales volumes for passenger cars in India and China supplemented the stable growth in Europe. Now talking about numbers. The Drive Systems segment achieved an order intake of CHF 217 million in the first quarter and sales of CHF 209 million. As a result of the operating leverage from increased sales and not to forget, the continued positive impact from repositioning initiatives, the segment achieved an EBITDA of CHF 26 million, an improvement of over 80% compared to the same period in 2017. The EBITDA margin stood at 12.4%, making Q1 the fourth consecutive quarter for Drive Systems with a double-digit margin.
The positive momentum in the e-drive market saw further stimulus where a jump in sales volume for Chinese new energy vehicles was noticed. In preparation for the launch of its first e-drive transmissions in China, the segment has signed an agreement to set up a new plant in the Jiangsu New and Hi-Tech Industrial Development Zone. A slight recovery in the oil and gas and mining industries was also observed, especially in the fracking industry. In terms of key end markets, we have seen continued global improvement in agriculture, with high levels in Europe and solid growth in the U.S. The construction sector also maintained its positive path with growth in the U.S. and Asia, especially in India. The transportation sector continued to show strong demand for commercial vehicles, mainly in China and India, and more moderately in Europe.
Heavy trucks are showing high increases, while rail continues to remain weak. In automotive, we see ongoing positive market sentiment while energy and mining markets showing slowly increasing demand from low levels, mentioning some activities in the fracking industry in the U.S. Overall, our Drive Systems business is today in very good shape. The team did an excellent job to execute the repositioning and to benefit from the market recovery. After this review on the segments' performances, let me hand over now to Jürg for additional comments on the Group's financials. Jürg, please go ahead.
Thank you, Roland, and good afternoon to all of you. Let me start the Group's financial review with a closer look at the first quarter figures. The before-mentioned positive development of all segments, not surprisingly, consolidate to a strong Group performance. They add up to an order intake of CHF 974 million in the first quarter of 2018. That's an increase of 37.8% year-on-year on a reported basis or 33.1% if adjusted for currency development. Sales came in at CHF 813 million. That's up 35.7% year-on-year on a reported basis. Driver of the top line development was growth in all segments, what you have heard as mentioned earlier by Roland. The book-to-bill for the group exceeded one for the eighth consecutive quarter. The EBITDA stands for the group at CHF 123 million.
That's an improvement of 43% when comparing to the first quarter of last year. The EBITDA margin, as you have seen and heard, stood at 15.1%. That's an increase of 80 basis points versus Q1 of last year. The operating profit on EBIT was CHF 72 million, which translates into an EBIT margin of 8.9%. The development of the exchange rate in the first quarter of 2018 compared to the same period of last year was beneficial for the company. This is mainly related to translation effects as we report in CHF, the appreciation of the euro, and to a lesser extent, the Chinese yuan against the CHF, was slightly compensated by the devaluation of the U.S. dollar against the CHF. Assuming these stable currencies, orders would have been at CHF 941 million.
That's a difference of about 3.5% from ForEx compared to Q1 of 2018, and sales would have been at CHF 797 million, also lower by approximately 3-plus% compared to the Q1 2018 reported figure. The transaction and translation effect on EBITDA were 3.2 percentage points in the same magnitude as orders and sales, hence with no or marginal impact on the margin itself. The strong recovery in Manmade Fibers becomes visible when looking at the group's business split, as the segment increased its share compared to the same period of last year. The Surface Solutions segment accounted in Q1 2018 for about 44% of the group total sales. Manmade Fibers increased to about 30%, and Drive Systems represented approximately 26%.
When looking at the profitability, the upturn in both Manmade Fibers and Drive Systems become even more pronounced, as Manmade Fibers accounted back now for 22% and Drive Systems for 21% of the total EBITDA in Q1, while Surface Solutions delivered approximately 56% of the group's total profitability. From a regional point of view, our proportion in sales increased in Asia Pacific to about 37%, while declining in Europe and North America to 37%, respectively 19 percentage points. Sales in the rest of the world increased to about 7%. In line with the before-mentioned recovery in Manmade Fibers and Drive Systems, the share of our service and spare part business decreased correspondingly, as you would expect, to about 30% of group sales in Q1, compared to about 38% in the same period of last year.
Looking at the return on capital employed, the ROCE, OC Oerlikon's return profile shows a positive development. The group's first quarter performance resulted in a rolling 12 months return on capital employed of 9.6%, reflecting the higher operating profit over an only slightly increased asset base. This reflects our commitment to create value while executing along our strategy. Ladies and gentlemen, let me conclude with the 2018 outlook and a short summary before we start the Q&A session. We do expect a positive momentum in the global economy and in our end markets to prevail, despite the fact that certain risks in the global political and macroeconomic environment remain. We are in the position to confirm our full year expectations.
We expect to achieve order intake and sales for the full year 2018 up to CHF 3.4 billion and around CHF 3.2 billion respectively, and to deliver an improved operating profitability of around 15%, including the full absorption of investments into additive manufacturing. The underlying assumption for the segments also remained unchanged. The strong Q1 performance and our confirmed expectation provide the framework to sustain our growth and improve profitability in 2018. Ladies and gentlemen, this closes our official comments on the first quarter 2018. We thank you in advance for participating and are happy to open the lines now for questions. Operator, please go ahead.
We will now begin the question and answer session. Anyone who wishes to ask a question may press star and one on their touch-tone 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. Participants are requested to use only hands to ask a question. Anyone who has a question may press star and one at this time. First question is from Basi Rizvi, RBC. Please go ahead.
Hi. Good afternoon. Just a few from me, please. Firstly, on Manmade Fibers, it looks like the pipeline's filling up even more, and you're talking about being full out to 2020. Are you now at the point where you can give us a relative, kind of a bit of a steer as to what the quarterly run rate should be for sales and EBITDA, given you're managing your volumes? That should then leave the only variability really being on orders.
I'm not sure whether I really got it. You asked for the availability?
No. What should we expect as a quarterly run rate for sales and EBITDA?
We would need it to say, and I think we have said that in some of the comments before, that the current pattern of order intake is not to be just rolled over into second, third, and fourth quarter. Please look at it from a point of view of exactly what you said. The pipeline continues to fill and the visibility obviously gets greater for us going into 2019, 2020, and to a certain extent, even beyond that. Look at it from an overall point of view, if you talk about sales in March and the way we manage it from an overall capacity point of view. I think we said clearly over the last couple of quarters all the time that we are not on duty, even in a sharp recovering market, increase our capacity, and hence, to a certain extent, the fixed cost base going forward.
We do expect, regardless of the pattern which you will see in order intake going forward, which to a certain extent, we do expect that to be for the following quarters in the short term to be a tick lower. We expect the sales to continue to trail around the CHF 1.1 billion. This obviously is related to the margin development. The margin development also in light of building down the current pipeline, we expect to be in the vicinity of about 11%-12% range, depending, again. We are not trying to make it more difficult and understandable, but reflecting again, the build-down and sequences of the build-down of the pipeline per se. You should expect then, as I said, on comparable levels going into 2019, seeing some better margin orders are flowing into the pipeline to continue to expand the margin going into 2019.
Great. Yeah, that's helpful on the run rate. Just going on to Surface Solutions, I was interested in, is there an impact from this equipment and service mix within the margin for this quarter that I need to be aware of? Or is it mainly the investments in additive that are influencing the margin?
There are always some minor adjustments, obviously, from a mix point of view. If you decompose the number on a high level base, it's really primarily attributable to the investment in additive manufacturing, yes.
Okay, great. Thanks. Just one more if I could, please. It was just on, you haven't announced anything with Drive, and I guess we'll hear an update when it comes. Assuming that something does happen with that in the future, then your balance sheet looks further underleveraged. Can you just remind us what your latest thoughts are on capital allocation and what you'll be thinking once you've completed the Drive transaction?
As you rightly said, you will get the information when it's done. We are in the midst of the process, nothing is decided, and it takes a little bit more time. Yes, our balance sheet is well known. It's stable, let's say this way. You know exactly where we are. We also always made it clear that we are focusing on the Surface Solutions and material business. Here, we are not purely focusing on organic growth, but also an inorganic one. The string of pearls topic was highlighted today. All the rest is heavy work and more I can't say right now.
Okay. Thank you.
Yeah.
As a reminder, if you wish to register for a question, please press star and one on your telephone. Next question is from Alessandro Fugnoli, Octavian. Please go ahead.
Yes. Good afternoon, gentlemen. I have a few questions for you. First question on Surface Solutions. I was wondering if there is any meaningful raw material effect in your numbers in this first quarter? That will be the first question. I have a question on Manmade Fibers. I understand that the orders that you have announced in January are not into this order intake, otherwise it would be much higher than what it is now. I was wondering if you can give a little bit more information here about how these orders will be booked, and why they are not booked all at once, and what will be the effect of this. Maybe I have another one or two questions, depending on your answers.
Alessandro, thanks for the question. Let me start on the material surcharge effect. Yes, we had, as you would have expected in light with the general commodity price increase and effect here, which was trailing around CHF 7 million for the segment. On the Manmade Fibers side, the reason again, let me just repeat the way we recognize those orders, and that's absolutely correct. The CHF 500 million which we announced from Hengyi and some of the other big players in China are not being reflected in there. Normally, the way we address that and the way we fully recognize and show it as an order intake is depending on a couple of factors. The first one is obviously that some prepayments have been properly made against it, that financing is being secured, and most important, that the orders have been taken up in the production schedule of the business.
We have said at the time already when we announced that going into the year, that this will be orders, which earliest will be turned into a POC in the period of 2019 and 2020. That's basically where we are. As I said, those negotiations are ongoing. Everything is fine. There's no risk related to it. We want to make sure we have complete fulfillment of those conditions before we recognize it in the books as well.
It's a staggered contract. It's a huge package, CHF 500 million.
Exactly.
It doesn't come in one shot, right?
Exactly.
Yeah.
Right. It means what you mentioned that there is no risk related, although cancellation risk is, let's say, controllable. I don't know how to formulate it out.
Cancellation risk is never controllable, but I can assure you that there is no risk of cancellation.
All right.
Yeah.
That's great. Can I ask you a question maybe related to this order boom that we have been seeing. Are these numbers that we have now? Or maybe differently, can you give an indication how much of these orders that you are now seeing are related to your normal business, and how much is related to other things like your initiatives to increase the service, your initiatives to enter polycondensation and so on?
No, I think you're referring to this big contract, and this is filament. This is core business, normal standard business. What we are doing on top in terms of staple fiber, nonwoven, here we are generating a good progress. I think it was also clear from the very beginning, these are comparable smaller volumes comparing it with this big 500 chunk order, right?
In the CHF 370 of this first quarter?
No. There is just a normal product mix in filament BCF nonwoven. We have a certain amount of nonwoven in, we do not disclose the split across our product portfolio.
All right. Can I ask you just a very small question on the drive system business. You mentioned this factory that you want to open. Is this going to be a joint venture or fully owned? First question, maybe can you share a little bit of what kind of expectations you have for that sort of additional business in China?
The answer is a twofold one. What we are just referring here is an own factory for the e-drive business.
Which is upcoming. You know that we do have a joint venture with Kenway on this low-floor city bus topic. Here, this business is roaring as well. We have to look for a new site just to be prepared to serve the huge demand. This is to come.
No, this is part of the joint venture in this case?
The latter one is part of the joint venture with Kenway, yeah.
Right. Is it too early to share your views on how much business you will make with that?
Yes, it's too early because, again, we are not disclosing the business split across our product lines. Yeah.
All right. Okay, thank you.
Okay.
Once again, to ask a question, please press star and one on your telephone. The next question is from Andy Schneider, Z Capital. Please go ahead.
Hi. I have an add-on question on the Manmade business. Can you talk a little bit about the margin level of this order intake we're seeing now? In Q1, it's CHF 360 million. Is it considerably higher than this 11%-11.5% we are sailing right now? Can you talk a little bit about that?
Yeah. Not disclosing at the level of the individual project, but I can confirm you that over the last couple of quarters, we have seen now a gradual improvement in the margin profile coming out of the trough.
We are recovering back to levels which we have seen or close to levels which we have seen. Again, the only additional guidance which I can give you here at this point in time is that we said the way the business is being set up, the cost structure has been put in place that from a structural point of view, that would allow us to run the business again at a mid-teen EBITDA margin. I think everything which we have on hand, be it on the pipeline or what being negotiated right now, is leading in that direction.
Okay. Another question on Surface Solutions. There was an underlying sales growth of about 3.5%, which seems not that high given that the environment is quite good right now. You are expected to grow, let's say, two times GDP growth, which would certainly be higher than 3.5%. Do you expect an acceleration in the coming quarters?
Yes, that's exactly what we do. We guided a range, I think 5%-6%, if I'm not completely wrong. That is what we are believing in and what will happen from our perspective. You are right, we had a weaker or softer start, especially in the material business for power generation and big units, gas turbines, steam turbines, and all this ongoing discussions. I don't know the names, the name of the big players here. That was the reason. Yes, you're right. We are confirming the range of 5%-6%, what is in line, what we said and what is overachieving the general underlying industrial growth. That is fine.
Was it just some larger project in the power segment which were not there in Q1 and which will come back? Or is it the power sector as a whole and further acceleration in other sectors which will bring the growth back to higher levels?
Yeah, that is what we expect. We do see a good growth rate in other verticals. Still just to mention tooling, I think I mentioned some. This is good enough to support our guidance. That's fine.
Okay
what we expect.
Do you have already now, after four months, a better view where in the corridor of 18%-20% EBITDA margin and Surface you will land on? Is this 19%, so really midpoint, is this a good number we should put in our models? Or do you have a better view whether it will be rather at the lower end or at the higher end?
I do have a private opinion, which I cannot disclose here, right? We've no business, sorry for saying that, but we stick to the corridor. That is what we always said, and that is what is valid for the future as well.
Okay, thanks.
Ladies and gentlemen, that was the last question.
Thank you very much. This is Andreas speaking. Thank you for participating, and we look forward to talking to you either on roadshows or latest on August 7th, when we disclose our second quarter results. Thank you very much for joining, and have a good afternoon. Thanks. Bye-bye.
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