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Ladies and gentlemen, welcome to the Oerlikon Q1 2022 Results Conference Call and Live Webcast. I'm Alice, the Chorus Call operator. [Operator Instructions] 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 Roland Fischer, CEO; and Philipp Muller, CFO of Oerlikon. We'll start the call with a business update from Roland, then Philipp will highlight the key financials. We will then follow up with Q&A. With that, I would like to open our presentation and hand over to Roland. The floor is yours.
Thank you, Stephan. Good morning to everyone, and welcome to our first quarter results presentation. Q1 was a strong operational quarter. Besides profitable financial growth, we demonstrated technology leadership and further drove sustainability progress for our customers and our employees. But let's go into some more details on Q1 with a short summary on Page 3. Oerlikon achieved strong order intake and sales growth of 23%. This resulted in an order intake of CHF 790 million and almost CHF 700 million of sales. Growth was driven by strong performance in both of our divisions. In Surface Solutions, we increased our sales in several Industries, and we also saw trends in aviation continuing to improve. Impact from supply chain shortages were in line with our expectations. We expect sales growth throughout the year with a strong second half of the year. This is supported by a book-to-bill ratio above 1. In Polymer Processing Solutions, we significantly increased sales by 40% and margins by 330 basis points. This confirms our strategy of enhancing technology leadership in filament and extending end markets into nonfilament. Our group operational EBITDA of CHF 190 million increased by 31% compared to last year. This actually represents the highest first quarter EBITDA since we refocused our business on 2 divisions. Continued cost containment and operating leverage supported the margin expansion year-over-year. Summing up, we, as a team, have delivered a robust Q1, supported by our solid operational execution. Based on Q1 and current visibility, we confirm the 2022 group guidance. On the next few slides, I will give you a business update before Philipp goes into the financial details for the first quarter. Now let's move on to the market update on Page 4. Our end markets recover at different speeds. In Polymer Processing Solutions, we experienced strong demand. In the filament market, key filament producers continue with the vertical integration. Our latest technologies saves significant energy for our customers and our strategic priority. Overall, the filament equipment market has more than doubled in the last 20 years. The market growth is driven by a growing population and manmade fibers having better availability and lower resource intensity than natural fibers. Oerlikon is the technology leader in the filament equipment market, and we are about to leverage this knowledge into new nonfilament markets. In Q1, we continued the substantial organic growth in nonfilament. We see strong demand for plant engineering solutions, such as polycondensation plants. We also see a positive market development for carpet yarns, particularly in the U.S. Flow control, which includes our recent acquisition of INglass continues to perform strongly. In automotive, flow control benefits from the need to reduce vehicle weight through lightweight polymer components. In nonautomotive, we are capitalizing on customer synergies with Surface Solutions. Overall, Team Oerlikon is well on track in transforming Polymer Processing Solutions into a growth platform. Our order books are filled for 2023 and firmly on track for 2024. In the Surface Solutions division, we are operating across the tooling, automotive, aviation and general industries end markets. The recovery continues to differ by end markets. We achieved combined 15% order growth in Q1. The general industries end markets saw solid growth as our longer-cycle business starts to recover. The recovery in general industries is broad-based, including strong demand in luxury, semiconductors and energy. In automotive and tooling, we saw supply chain interruptions due to the shortages in the first quarter. As such, we were indirectly affected by temporary shutdowns of major customers. We are closely managing our operations and production capacities in order to efficiently deal with this situation. We see supply chain interruptions as transitory. The strong demand environment, alongside sustainable megatrends, give us confidence for underlying medium-term growth. We also see strong development in farming tools and polymer coatings, where we have a common customer base and synergies with Polymer Processing Solutions' flow control business. And finally, in aviation and space, sales continued to recover in Q1. Aviation remains still substantially below pre-pandemic levels. The initial recovery is mainly driven by demand for MRO services. So summing up, we see a strong market environment in the Polymer Processing Solutions. In Surface Solutions, we are closely monitoring and mitigating the impacts of transitory supply chain bottlenecks. We expect them to continue in Q2 and to ease in the second half of the year. Overall, the strong demand environment across our end markets is a very positive indication for medium-term growth. In terms of the Ukrainian-Russian war, we are monitoring the situation closely. We do have no employees in Ukraine and our annual sales in Russia were below CHF 5 million last year. We are, right now, in the process of discontinuing our Russian operations. And now, let's move on to Page 5, where we highlight progress on our strategic priorities. Our strategy to drive profitable growth, extend addressable markets and gain market share is unchanged. As a result, we are focusing our strategic priorities on growth, profitability and sustainability. In terms of growth, we continue to drive technology leadership and innovation in Q1. For instance, we launched new coatings for plastic processing tools in automotive. Also in e-mobility, we continue to successfully pioneer coating solutions for battery electric and fuel cell cars. With regards to diversification, we almost doubled sales for nonfilament in Polymer Processing Solutions. In Surface Solutions, we achieved growth in luxury, semiconductors and additive manufacturing. In terms of profitability, we achieved a further expansion in operational EBITDA margin. We paid a stable dividend in April, and continue to have a solid balance sheet. And finally, sustainability has been a key priority for Oerlikon since many years. We continued with the implementation of energy management systems in Q1. Our products are clearly at the core of improving the sustainability and efficiency of our customers. We highlighted this in the 2021 sustainability report that was recently published. Summing up on this slide, Team Oerlikon consistently executed on its strategic priorities. This is driving top and bottom line growth. And now before I hand over to Philipp, we have to take a look at some takeaways from our 2021 sustainability report on the next page. I'm pleased that external agencies are beginning to recognize our progress in sustainability. We had positive momentum with several rating upgrades in 2021. This is backed by a clear sustainability road map to 2030 for which we highlight our commitments on the left side. Our ambition is to become climate-neutral on Scope 1 and 2 emissions. We also launched a project to define the calculation of Scope 3 emissions in 2021. This will provide us with a base to formulate an action plan for future emission reduction. And I'm also pleased to see that we are already progressing well towards our targets. 54% of our group energy consumption is already today regulated with energy management system. We also reduced disposed waste from 42% to 31%. And last but not least, 72% of our R&D is already today aligned to ESG criteria. We intend to improve that to 100% by 2030. We show this as the direct benefits to our customers on the next slide. Besides improving our environmental footprint, we want to help customers to match their own greenhouse gas and energy reduction objectives. In Surface Solutions, our coatings are improving the sustainability footprint of our customers. They reduce weight, increase efficiency and extend component lifetime. For instance, they extend the lifetime of metal tools up to 160x. In planes, they increase efficiency of turbine engines by 5%. That means planes can fly 5% longer with the same amount of fuel. In Polymer Processing Solutions, our new equipment allows for up to 40% energy savings, which has already become a key requirement of our customers. Furthermore, our flow control solutions enable lightweight materials, which are used in e-mobility. It's important to note that manmade fibers enable water savings as they are much less resource-intensive than natural fibers. Summing up, both divisions help our customers to reach their sustainability objectives. As such, we are well positioned to benefit from sustainability megatrends. This, alongside improving commercial activity and strong operational execution, provides a positive factor for our midterm outlook and profitable growth. Team Oerlikon has done a fantastic job in preparing the organization for the next stage of structural growth. With that, I will now hand over to Philipp, who will take you through our financials in more details.
Thank you, Roland. As usual, I will start with the group results and then provide more details from the divisions. At the group level, orders were CHF 790 million, up 23%, driven by strong demand in Polymer Processing Solutions and the partial market recovery in Surface Solutions. Sales were also up 23% to CHF 698 million. Both divisions contributed to the sales increase. Our group book-to-bill ratio was above 1.1. Operational EBITDA was CHF 119 million, a 31% increase versus the prior year. Our margin rate increased by around 110 basis points to 17%, driven by operating leverage and tight cost management. As Roland highlighted, we are close to exiting our Russian operations. We, therefore, classified our Russian business as discontinued activities. This resulted in a low single-digit one-off expense. Operational EBITDA is adjusted for this impact. With that, let me go through some more details on Surface Solutions. Surface Solutions' end markets continue their recovery. However, global supply chains remained strained, which leads to certain delays at our customers. In this context, orders were CHF 376 million, up 15%, while sales increased 8% to CHF 328 million. We saw solid demand in general industries, and we also saw aviation continuing its recovery in Q1. Impacts from supply chain shortages were in line with our expectations. We expect sales growth throughout the year. This is supported by a book-to-bill ratio of over 1.1. To a certain extent, the situation remains difficult to predict. And the exact profile for the remainder of the year will depend on the geopolitical situation and the COVID pandemic. Specifically, in the second quarter, we expect certain production delays, driven by the current COVID lockdowns in China. We expect to catch up on the majority of these delays later in the year. Operational EBITDA in the first quarter improved 9% to CHF 59 million. Margins increased slightly with operating leverage and cost control being partially offset by negative business mix. These mix effects were driven by significantly lower revenue in some of our high-margin businesses like thin film and PVD solutions. The lack of activity was due to the transitory disruptions of our customers' supply chains. Based on the current visibility, we expect these effects to normalize throughout the year as activity in these high-margin businesses returns to normal levels. Next, on Polymer Processing Solutions. Orders in Polymer Processing Solutions were CHF 415 million. This is up 31% versus the prior year. Both filament and nonfilament are growing. Sales of CHF 369 million were up over 40%. On the one hand, this was supported by strong organic end market demand and the solid order book we built up last year. On the other hand, INglass contributed and accelerated our diversification into nonfilament. Organically, sales were up 28% at constant exchange rates. We are on track to reach our full year guidance of CHF 1.5 billion in sales. In the second quarter, specifically, we expect certain shipment delays, driven by our own operations and our customers' operations in China. Operational EBITDA increased 78% to CHF 58 million. Margins were up 330 basis points to 15.7%, supported by operating leverage, the INglass acquisition and cost efficiency. With that, let me conclude the presentation on the next slide. The continued focus on executing our strategy has positioned Oerlikon well for profitable and sustainable growth. We're set up to deliver solid sales growth in both divisions in 2022 and the medium-term future. We're laser-focused on margins and capital returns. We achieved an operational EBITDA margin of 17%, a 170 basis points ahead of where we were in 2019. We expect further profitability improvements throughout 2022. In terms of sustainability, we are delivering on our own targets and are helping our customers to reach their objectives. We have positioned the company to benefit from sustainability megatrends. Based on our strong Q1 results and the current visibility, we confirm our group guidance for the year. We continue to expect group sales at approximately CHF 2.9 billion and group EBITDA margin to be approximately 17.5%. Naturally, the details of the remainder of the year are increasingly difficult to predict, given the geopolitical events and the COVID pandemic. Based on what we see today, we expect Surface Solutions to be closer to the lower end of its sales guidance of CHF 1.4 billion to CHF 1.45 billion. In Polymer Processing Solutions, we are very well on track with our guidance, supported by the strong start to the year and a full order backlog for the remainder of 2022. Last but not least, we are hosting a Capital Markets Day on May 17. We will use this opportunity to provide a deeper understanding of Oerlikon's businesses and their growth drivers. We also want to enhance the dialogue between the investor community and our divisional leadership team. With that, let me open it up for Q&A.
[Operator Instructions] Our first question comes from the line of Michael Foeth with Vontobel.
I have 2 questions, really. The first one is around CapEx and not only any potential changes to your own CapEx requirements that you would see in the current context, but also if you are seeing any changes at your customers or customers' plans, eventually, attempt to diversify, for example, the filament production to regions outside of China in the current geopolitical context. Anything -- any observations here would be helpful. And the second question would be regarding supply chains. If you can give us some insight on any recent changes that you may have observed in terms of availability or logistics cost developments that you observed during the months of March and April.
So Michael, I think the first part, no, we do not see any momentum in the OPP business to move out of China. This is not sensible, in no direction. And from that perspective, we also don't see any impact on our CapEx planning here. I think this is -- no, I cannot confirm that. And the second part, the supply chain, of course, and you're referring to bottlenecks. We obviously have in electronic parts, inverter. This takes special efforts in managing it. We are short, but we are able to serve our customers and to deliver. And the bigger part of the challenge actually comes out of logistical limitations, right? It's not so much that we are not able to produce our parts and our components and our equipment. It's more difficult to deliver it to bring it to the harbor on trucks and to get the containers and the vessels here. But as indicated, this is something what we expect to continue for the second quarter. And then in the second half, we expect that the situation will become better.
And Michael, just to follow up on your -- also on your first question there, we do certainly see a movement by certain customers to sort of build a filament supply chain outside of China, whether that's India, Bangladesh, Turkey and so on and so forth. But this doesn't affect our own CapEx, to Roland's point, but we're certainly seeing that, to an extent, that the independence from the Chinese supply chain there is critical for some countries. So I think that presents an interesting opportunity for us. But to Roland's point, it leaves our CapEx plans unchanged.
The next question comes from the line of Christian Obst with Baader Bank.
I have a question concerning working capital development. Can you give us some kind of an indication how working capital developed into the start of the year? What do you expect for the time to come? And how is your free cash flow planning? And are you working on any kind of stocks or a longer rate or a longer time frame where you have raw material and products in your balance sheet? Is there any kind of strategic change?
Yes, Christian, I'll take that. We're obviously -- as you know, in the first quarter, we're not providing the full working capital reconciliation. But to be honest, I can tell you, in the first quarter, nothing out of the ordinary. So we had a working capital consumption just like we do pretty much every first quarter of any given year. We're building stock for deliveries, especially in the second half of the year. So I would say nothing out of the ordinary. Our total year, sort of, what we said about our cash flow expectations remains unchanged. We are building certain safety stock. We are preordering certain components just because the lead times are long. We're not doing that sort of on unspecified items, but on very standardized components, both in Polymer Processing Solutions and in our equipment business in Surface Solutions. The amounts there are not out of the ordinary. So it doesn't change our total cash construct for the year. I think it's prudent to do that. Last year, we did that as well, but we actually ended up executing through the vast majority up until December 31. I'd expect something similar this year.
Okay. Then concerning pricing going forward, is there any kind of material change? How do you handle your pricing in Surface Solutions or in Polymer Processing?
I mean we've talked about really fundamentally different approach over the last 6 months, I would say, just given everything that's going on in the world, right? We've talked about the input cost inflation that we're seeing and how we're transferring that on to our customers. I think now we're sort of in the seventh or eighth inning of that exercise. I think it's working very well. I think there is a reasonable discussions, and we're able to pass on the vast majority of the input cost inflation to our customers.
I think in Surface Solutions, it's obviously a lot more short-term negotiations, renegotiations of smaller items of pricing, more on the individual scale. And in Polymer Processing Solutions, it's really sort of more forward-looking and I think the majority of the price and cost effects and so on are still outstanding. But I would say we've tackled this very early, and we're not expecting a huge impact on to the year. We've given you kind of the low-to-mid-single-digit total price growth across the company, a little bit more in Surface Solutions, a little bit less in Polymer Processing, but that's still what we're seeing and the first quarter was in line with that too.
The next question comes from the line of Alessandro Foletti with Octavian.
I would like to ask you again about pricing, but maybe, first, a bit of a different perspective. You mentioned in your presentation, I believe, that you are booking orders already for 2024 in Polymer Processing. Can you tell me how that works exactly? Because obviously, your backlog is CHF 593 million in that business. It doesn't cover completely 2022 and 2023. So I guess you're talking about -- what you talked, soft order backlog normally. How does this work? What's the risk of then having pre-discussion with clients and then not having the order, at the end of the day, booked because they go somewhere else when you're ready to book it or? And then I'll come back, when you have answered, on the pricing.
Yes. We've never seen that, Alessandro, happening. Typically, it's a little bit the way we book the orders. I think you are very well familiar with it. We tend to have -- basically, when you think about the entire commercial construct, both customer-facing and facing our own supply chain, we basically have that intact. And then we will, depending on the project execution and specifically certain payment terms -- letters of credit certifications, we will book this into our order book. Or what we usually point to, what is maybe the more meaningful metric for you to look at in terms of the total runoff, is the remaining performance obligation, which we make at the end of the year and at the half year, that is significantly larger. And I think that gives you the indication of what we're talking about, and this is really why we are confident that we have a fully-sold order book here for the next year and then also for the years after that. To your question, specifically, I can't recall a single instance where a customer has changed that. It's when you think about the integration of a filament plant, it's technically almost impossible to then change equipment suppliers or something. So it's never happened.
And the second part of your question, Alessandro, surprising. You can be ensured that, at the moment, we are negotiating a deal. We anticipate and we take the right assumptions for the prices for material and got for the next 2 years. And for the OPP project business, the contract negotiation point of time is the right one to include the upcoming increases in prices. This is what we are doing.
Okay. So if I can just add something on this pricing issue then, does it mean that when the contract is signed and the pricing are fixed or you have sort of a mechanism on how to adjust because, I mean, unless you have really a very good crystal ball, that I would like to...
No, but I'll tell you, the way it works is, so imagine we're negotiating a contract with a customer today, right? And we will go through all the commercial discussions. We are on the back end talking to our suppliers and talking about costs there. So we'll lock in both basically at the same time. Now that's not 100% true -- cannot be 100% true, but for the vast majority of the cost locks, that's what it is. In addition to that, we have certain inflation clauses in our commercial contracts that will take care of other smaller cost increase items. But the large cost input components, frames, the large metal stuff and so on, large electrical components, that's basically locked in on both sides of the equation.
Right. Okay. And if I may, on the -- you mentioned also synergies in -- with the flow control business. I know that some of your clients in Surface Solutions could actually be clients of INglass. And you mentioned that specifically in the presentation. Can you give an indication how relevant that was already or what the relevance could be?
I think, in general, I think the phenomena is easily to be explained. INglass is providing their equipment for both machines companies. And on the other hand side, these moulds are actually partially today coated, partially uncoated. And in line with the increasing demand on these lightweight plastic parts in terms of quality, but also in terms of efficiency, there is a clear trend that more and more moulds are going to be coated. And we're here even working on new type of coatings. We just launched and brought a new one into the market, optimizing this mould process here. And this is something what we clearly take as an extremely positive effect here for cross-fertilizing of the 2 businesses.
Right. So I take it that for the moment, it still is, let's say, in terms of amount -- million amount, not yet very, very relevant.
No, I think at the overall company level, you don't see it, but we're actually slightly ahead of what we had in our deal model.
Right. And would these synergies then -- the way I understand it is, like, they would go rather into the Surface Solution business in terms of more sales there.
That's right. Those sales for coating solutions will remain in Surface Solutions.
Okay. Can I take the chance to ask you a last one? On the -- you mentioned -- among the elements that drove profitability, you mentioned cost efficiency. And I was wondering if you are at the end of the rope there or if you have additional measures that you can enact now and maybe over the next quarters into next year. And if you can sort of quantify the amount that you think you're able to optimize.
Yes. I think what we've explained is on the cost efficiency side, if I understand the question correctly, the restructuring programs that we ran inside the company are done. I think that's very important for us. We've achieved what we wanted to achieve. And obviously, as a company, we do not want to be in a lingering state of, sort of, constant restructuring. So the restructuring actions are done. The biggest, really, item for the next couple of years is for us digitizing a lot more of our backbone. We are going through a significant number of SAP ERP upgrades.
And I think that leads to process improvements, process standardization, specifically on our more distributed business, the Surface Solutions business. I think that's the next step really. I think what it will lead to is us really being able to generate strong operating leverage. So I don't know that we're going to take out an additional amount of SG&A through that, but I think it will allow us to increase total structural costs, not just SG&A, significantly less fast than the top line is going to grow. And I think that's what we're aiming for.
The next question comes from the line of Sebastian Vogel with UBS.
Can you hear me?
Yes.
Perfect. I got 3 questions. The first one would be on the guidance. You were outlining the group guidance, also on the top line guidance for the segments. I didn't hear something on the margins for the different segments and your guidance on that one, maybe I missed it. But could you clarify if your thinking has changed compared to the full year numbers? Also in the full year guidance, you included a CapEx indication, is that also still valid? That would be my first question.
Yes. And I think the short answer is yes. I mean I think we said Polymer Processing might be -- we feel very confident. I think Surface Solutions top line -- I think Surface Solutions, we talked about, could be towards the lower end of the sales guidance from a margin range. Both are unchanged and the company guidance from a margin range is unchanged as well, and so is the CapEx guide, unchanged.
Got it. As well, you mentioned in the slide deck, when you were talking about Polymer Processing, the potential impact from China that you see potentially some sales being moved from the second quarter into the second half of 2022. Is there some chance to sort of give more of a quantitative flavor of how much of volumes can be sort of been meant by that?
So phenomena you are referring to is correct. And it goes back to the sheer fact that we face logistical challenges, right? We do have equipment and stuff in our sites and we are not able completely to deliver it in time to the customers. And this is -- we don't quantify the number, but this is on a monthly basis, a certain amount, but substantially for the entire OPP business, it's minor, and we expect that this phenomena is of temporary effect. That means as -- now referring to 2020, when this pandemic topic kicked in, we had a substantial impact for 1 or 2 months and then we have been able to recover. This is what we assume here as well.
Understood. Then a tiny housekeeping question in the end. This restructuring cost, discontinued line at Surface Solutions that you have, I guess, shown in the appendix, what sort of level could we expect for the full year 2022? It's just like taking the Q1 number up by 4? Or is there any sort of seasonality or whatsoever linked to that number that we should keep in mind?
No. It really was more of a Q1 event. We had certain integration, M&A costs that we don't expect to repeat. And then we had obviously the costs related to the discontinuation of our Russian business. That's also -- that's done. We have accounted for that. So I would not multiply that by 4. Keep in mind, those are also -- those are not cash costs. This is pure booking.
Great. So 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.
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