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Ladies and gentlemen, welcome to the Oerlikon Q1 2021 Results Conference Call and live webcast. I am Alice, the Chorus Call operator. [Operator Instructions] the conference is being recorded. [Operator Instructions] At this time, it's my pleasure to hand over to Stephan Gick, Head of Investor Relations. Please go ahead, sir.
Good afternoon, and welcome to Oerlikon's Q1 Financial Results Call. With me in the call I have Ron Fischer, CEO; and Philipp Müller, CFO, of Oerlikon. Also joining us for the Q&A is Georg Stausberg, CEO of our Polymer Processing Solutions division. We start the call with a business update done by Roland, then Philipp will go through the financials, which we will then a follow-up with the Q&A. Roland, the floor is yours.
Thank you, Stephan. Good afternoon to everyone, and welcome to our first quarter results presentation. Quarter 1 was a solid operational quarter. Besides financial growth, we demonstrated technology leadership and executed on disciplined capital allocation by acquiring INglass.Let's go into some more details on the quarter. With a short summary on Page 3. The first quarter represents a solid start into the year, with Oerlikon returning to top line growth. Sales at CHF 568 million were up 7% and order intake at CHF 643 million increased 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, a book-to-bill ratio well above 1. Our group operational EBITDA increased by almost 50% year-over-year to CHF 88 million, 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, broadly in line with our expectations. We, therefore, confirm our full year guidance after the first quarter. 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 nonfilament is expected to grow. Our Server Solutions division is operating across the tooling, automotive, aviation and general industry end markets. The tooling and general industries' end markets see shorter cycle services recovering at varying rates. We expect them to recover by a mid- to high-single-digit percentage number this year. We introduced some new tooling products in the market in the first quarter. They have been well received with our industrial customers as they are continuing to look for improved performance to differentiate. In automotive, we experienced a high level of activity to date. Automotive demand was strong with good coverage across all our OEM and Tier 1 customers. In particular, we are seeing strong demand for our e-mobility and sustainability solutions. We see this continuing in the coming quarters. However, considering the current supply chain challenges, market production expectations might be impacted and might dry.And finally, last but not least, in aviation, the travel restrictions caused by the global pandemic continue to last. Our aviation sales were down 45% year-over-year in the first quarter. We expect to see a draft now and to return to a very moderate growth in the second half of the year at the earliest, supported by easing comparables. We have seen some very early signs of improvement in MRO, with demand for coating materials. So summing up, we see a resilient market environment for Polymer Processing Solutions, while Surface Solutions markets are recovering at varying rates. And now let's move on to Page 5, where we provide an update on our strategic priorities. Our strategy to drive profitable growth and expand market share is unchanged. As a result, we are focused on 3 key strategic priorities: sustainable innovation, cost containment and disciplined capital allocation. In terms of sustainable innovation, 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 Bulova thin film coating, which prevents hot corrosion for gas turbines. In terms of cost containment, we achieved a solid 420 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 INglass, 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. INglass is a market leader in hot runner systems, which are essential in the production of high-end lightweight plastic components. The company has about CHF 135 million sales and is margin accretive to Oerlikon. [indiscernible] technologies are complementary to Oerlikon's existing polymer flow control equipment. The addressable market for hot runner systems across all applications like automotive, consumer goods and others, is around CHF 2.5 billion and nearly doubles the existing addressable market of our division. With around a 5% market share, we have substantial room to grow our share in a market that organically grows above GDP. Our strategic rationale for the deal is obvious. INglass diversifies Polymer Processing Solutions into nonfilament markets and opens up markets outside of China. The deal enhances our growth profile by giving us success to growth areas such as e-mobility and pharma. The existing technology leadership enables INglass to grow market share and organically expand in the new end markets. We can further extend technology leadership by combining our R&D efforts across our polymer flow control business. And finally, the deal is financially very attractive as we expect earnings 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. For instance, the format to business of Surface Solutions, Coats and Metal Services of tools and moldings used to create high-quality polymer parts. With polymer flow control, we also can consider further M&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 who will take you through our financials in more details.
Thank you, Roland. I will start with the group results and then provide more details on the divisions. At the group level, orders were CHF 643 million, up 35%, driven by Polymer Processing Solutions. Sales were CHF 568 million, up 7%. Polymer Processing Solutions significantly contributed to our sales increase based on strong execution and lower comps in the first quarter of 2020. Our group book-to-bill ratio was above 1.1. Operational EBITDA was CHF 88 million, up 46% versus the prior year. Our margin rate increased by 420 basis points to 15.6%. Next, a few more details on Surface Solutions. As Roland highlighted, Surface Solutions' end markets are recovering at varying rates. Orders were CHF 327 million, basically flat at constant FX, while sales slightly decreased to CHF 304 million. As indicated at our full year results, we faced challenging year-over-year revenue comparables. Aviation sales were still on a strong level in Q1 2020 and only started to erode in the second quarter last year. In addition, we entered 2020 with a stronger, longer cycle equipment backlog. In the first quarter 2021, we saw a solid pickup across our shorter cycle businesses, especially with an acceleration in March. As anticipated during our annual outlook, we expect a longer cycle of businesses to start picking up in the second half of this year. Importantly, and a critical indicator for this development, we achieved a book-to-bill ratio significantly above 1 in the first quarter. Operational EBITDA in Surface Solutions was CHF 54 million, up 32% versus the prior year, and around 500 basis points margin expansion. This is a solid result in the context of lower sales. It is more evidence that the benefits of the structural cost reduction program are now visible in the division profitability. Margins also benefited from a positive business mix and the continuation of some short-term cost-saving measures. Over the remainder of the year, we expect these factors to normalize in line with our total year margin expectation. Overall, we are on track to reach our full year guidance of CHF 1.25 billion to CHF 1.3 billion in sales, with 16.5% to 17.5% operational EBITDA margin. Next, on Polymer Processing Solutions. Orders in Polymer Processing Solutions were CHF 315 million, up 119% versus the prior year. The growth was driven by continued strength in the filament market and growth in our nonfilament businesses as well as lower comparables from the first quarter last year. First quarter sales of CHF 263 million were up 29%. The strategy to diversify into nonfilament is becoming increasingly visible, with CHF 30 million of incremental sales coming from nonfilament. As a reminder, no results from our INglass acquisition are included in our numbers. We will start consolidating INglass, beginning from the closing of the transaction, which we expect towards the end of Q2. First quarter operational EBITDA at Polymer Processing Solutions was CHF 33 million. Margins increased more than 300 basis points to 12.4%, driven by better operating leverage. Overall, in Polymer Processing Solutions, we are on track to reach our full year guidance. With that, let me conclude our first quarter results on the next page. We saw a strong exit rate from the first quarter, particularly in Surface Solutions, and a continued positive trend in April. We continue to expect sequential improvements in our Surface Solutions end markets. While supply chain shortages can have temporary impacts on our top line, we're expecting our Surface Solutions sales to also sequentially improve throughout 2021, particularly in the service and materials businesses. In Polymer Processing Solutions, we expect typical seasonal developments with the second half being stronger than the first 6 months of the year. Overall, we continue to expect CHF 1.10 billion to CHF 1.15 billion of sales. In terms of margins, we confirm our total year outlook for the group and the divisions. We expect some of the positive effects in Surface Solutions in Q1 to balance out, in line with our full year guidance. 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 INglass, a transformational M&A deal, and we continue to focus on expanding our market reach via M&A. We paid a stable ordinary dividend and continue to operate the company with a very strong balance sheet. Lastly, as you will have seen this morning, we mandated a consortium of banks to facilitate a Swiss bond offering. We will use the proceeds to finance the INglass acquisition, and it will allow us to optimize our capital structure. With that, I will open it up for Q&A. Georg Stausberg will now join us and certainly be able to add more perspective to our INglass acquisition and our strategy to accelerate growth in Polymer Processing solutions.
[Operator Instructions] The first question comes from the line of Michael Foeth with Vontobel.
A few questions on INglass. In fact, first question is, can you give some indication on how capital-intensive the business is compared to the rest of the Surface Solutions business? And sort of hand-in-hand with that question is, you're saying that it is margin accretive from day 1, but is it also value accretive, meaning EVA positive as of day 1? So that's the first question on INglass. The second one on INglass would be, you mentioned 5% market share there. Question is, who are the large players in that market? Or is it a very fragmented market? And then the last question or third question would be on how you plan to integrate that business from an operational perspective into the group? That would be my 3 questions for now.
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 mid- to high-single-digit CapEx intensity, roughly speaking. And then you're absolutely right, it's margin accretive from the first day, and it's obviously value-accretive as well both 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...
For the market topic, Michael, we said 5% market share with respect to the entire hot runner market of about CHF 2.5 billion. And here, we have to know -- you have to know that INglass is a market leader in the automotive application, what is an essential part of this CHF 2.5 billion. And here, we have a market share of about 20%. And that's why we believe there is -- there are a lot of opportunities in for us 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?
Yes. With integration, we see from day 1 already some good opportunities in cooperation with our Surface Solutions Balzers business, as Balzers 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 offer to solutions. Parallel to that, we have, let's say, ambitious organic growth ambitions for INglass 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, first of all, parallel that for both of these businesses, we 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 speed on new kind of technologies. So there are already some ideas out. And here, we will implement the synergy team starts developing on these products. Other than that, of course, if it comes to integration from day 1, we will start to integrate INglass into our 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. INglass, today, for some of the topics, like, for example, legal services, they do not have own sources, they very much depend on external sources. So that also, here, we see some potential for synergies.
And then maybe just one very, 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 yes, 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 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.
The next question comes from the line of Alessandro Foletti with Octavian.
Can you hear me now?
Yes.
Okay. Have a couple. Maybe, again, on INglass, 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 there, very similar technology.
So first of all, what OMF is doing is plastic processing. And what we are doing is a lot about melt distribution, melt piping. So our focus so far is melt distribution on extrusion processes. With INglass now, we get access to melt distribution and injection molding processes. 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 INglass business with what we are doing in our pump business, both is about precision manufacturing, both is about precision components, who have a big impact on the final quality in certain plastic processing applications.
Okay. And well, I guess this is a question -- we'll speak about it later on, I guess. Okay. My second question is more related to your overall full year guidance. That guidance was published before the INglass acquisition. 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 the 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 INglass. Our expectation is that we closed the transaction in the second quarter. And then accordingly, we'll give you -- at the latest, we'll give you an update on the exact amounts to be included in our financials for the year at the end of the second quarter.
All right. And then maybe on the Polymer Processing order intake, which was really very, very strong, and you mentioned it is not only because of the mask business, et cetera. But can you maybe give an indication if there is anything sort of special maybe that may not be really recurring in that level of order intake?
No. I think, Alessandro, I think 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, whilst this nonwoven business was really benefiting from the crisis to a bigger extent. And I think we gave the indication size-wise, low double-digit volume here. And this is beyond face mask. This is also for technical applications 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.
Yes. Alessandro, no large one-offs in the order intake.
[Operator Instructions] The next question comes from the line of Christian Obst with Baader Bank.
Again, on INglass, can you give us an idea what the amount of intangibles you're paying and the earn-out structure, how this will go on or affect the future? And then I have a more structural question concerning the organization or reorganization of Surface Solutions. We talked about that, of course, in the quarters before. But how are the management responsibilities 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&L responsibility organized within Surface Solutions? So is it around the customer industries? Is it around the brands? Is this around the regions? Can you give us some kind of an idea there?
I'll take the first one quickly on INglass and then hand it over to you, Roland. I think there's kind of 2 questions in there. The first one is on 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 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 earnout structure here. We found a highly incentivizing earn-out structure with the seller that would generate more value 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 will be decided over the next 24 months whether we achieve those additional targets or not. And then...
And the seller remains within the group, right?
No. The seller is an individual who has stepped back from management a while ago. 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.
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 structure that means a global responsibility for the product portfolio within the business unit, different technologies in different business units. And in future, effective 1st of January next year, we will go -- or will have a regional responsibility. That means we will have 3 strong regions, Europe, APAC, Southeast Asia and Americas, having a clear P&L responsibility and covering the entire Surface Solutions product portfolio.
Okay. So you are changing this structure in the course of this year?
Yes. Yes.
Next question comes from the line of Sebastian Vogel with UBS.
Can you hear me well?
Yes.
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, were there any difference between auto, general industry and tooling? Or were the trends as you have outlined with sort of okay, January and February and good March applicable to all these 3 subsegments?
By and large, a very similar development, yes.
Okay. A quick question. Can you remind me how much margin dilution additive manufacturing was adding in the first quarter 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 not sure if you can answer my next question. The margin improvement in Surface Solution at least sort of a directional way, can you sort of split how much operating leverage, how much the cost program and how much the mix was contributing to the improvement there?
If you're talking about the year-over-year improvement, Sebastian, 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 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 think we talked about that. We were at 15% of margins in the fourth quarter of last year. We said this was going to normalize a little bit. 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 division started into the year in the first quarter.
There are no more questions at this time. Gentlemen, back to you for any closing remarks.
Thank you, operator. This concludes today's call. In case of further questions, don't hesitate to contact us in the IR team. Thank you for your participation, and goodbye.
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