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Ladies and gentlemen, welcome to the Oerlikon Q2 H1 2021 Results Conference Call and Live Webcast. I am Sandra, the Chorus Call operator. [Operator Instructions] The conference must not be recorded for publication or broadcast.At this time, it's my pleasure to hand over to Stephan Gick, Head of Investor Relations. Please go ahead, sir.
Good morning and welcome to Oerlikon's Q2 financial results call. With me in the call, I have Roland Fischer, CEO; and Philipp Muller, CFO of Oerlikon. We start the call with business updates done by Roland. Then Philipp will go through the financials, which we will then follow up with the Q&A.Roland, the floor is yours.
Thank you, Stephan. Good morning to everyone and welcome to our Q2 results presentation today. The second quarter was a strong operational quarter. Besides financial growth, we demonstrated technology leadership and executed on disciplined capital allocation by acquiring the 2 companies, INglass and Coeurdor.And now let's go into some more details on the quarter with a short summary on Page 3. Oerlikon achieved solid order intake and sales growth, both on a year-over-year and quarter-over-quarter perspective. Sales of CHF 628 million were up 23% and order intake at CHF 647 million increased by 7% year-over-year. Growth was driven by a strong performance in both of our divisions.In Surface Solutions, we saw trends improving compared to Q1 and we expect further sequential sales growth in the second half of the year. This is supported by a book-to-bill ratio above 1. In Polymer Processing Solutions, we continue to experience a very strong market environment and are currently making excellent progress filling up order books for 2023.Our group operational EBITDA of CHF 111 million doubled compared to last year and further improved compared to Q1. Continued cost containment and operating leverage supported a strong operational EBITDA margin expansion. All in all, we had a strong start into the year, supported by a solid operational execution and 2 accretive acquisitions. I'm therefore pleased to increase our full year sales guidance to approximately CHF 2.65 billion. We are also expecting a higher EBITDA margin around 16.5% for the year. This brings the group already in 2021 into our EBITDA margin target corridor.On the next few slides, I will give you a business update before Philipp goes into the financial details for the quarter.And now let's move on to the market update on Page 4. Our end markets continue to face a riding recovery profile. In Polymer Processing Solutions, we continue to make good progress with our structural shift into more non-filament business. We see strong demand for plant engineering solutions in China, such as staple fiber and continuous polycondensation plants. We also see the BCF industry revitalizing in the U.S. Our shift into more non-filament is supported by a strong focus on innovation, on surface business and on accessing new growth markets.On top of that, demand in the filament market is also increasing. Key players in China continue their downstream integration. For the full year, we raised our expectation both in filament and non-filament sales, as Philipp will present later on. We expect to reach a positive book-to-bill ratio by year-end. This should support a growth trajectory also in 2022, while we are currently filling order books for 2023.In the Surface Solutions division, we are operating across the tooling, automotive, aviation and general industries end markets. The market recovery continues to arrive by end markets. The tooling and general industries end markets see shorter cycle services recovering well. We expect them to recover by a mid-to-high single-digit percentage number this year. We introduced some new tooling products for the market this year. They have been well received by our industrial customers as they are continuing to look for improved performance to differentiate.The recovery in general industries is broad-based and we also see oil and gas gaining momentum. In automotive, we experienced a high level of activity in H1, driven by automotive production. We also were affected by a 2 weeks shutdown of a major customer due to supply chain shortages. We see supply chain interruptions due to semiconductor and commodity shortages to intensify in Q3.Finally, in aviation, the travel restrictions caused by the global pandemic continued to impact our sales. Our aviation sales were down 14% year-over-year in the second quarter. We expect aviation to be stable on low levels in H2 with new COVID variants to potentially extend the recovery profile. And if we look historically, then it can take up to 12 months until a recovery in flights arrives in the supply chain. And in this context, I'm pleased that we have already now evidence of first customer inquiries coming back.We signed a 10-year contract with MTU in Q2 to coat some of their next-generation aero engine components. While volumes are not material on group sales level, it is a very positive sign that leading aviation players put long-term trust into our technologies. So summing all up, we see a strong market environment for Polymer Processing Solutions.In Surface Solutions, short-cycle business is recovering and we see positive signs in the longer cycle markets, which is a positive indication for 2022.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 Q2 a new machine for deposition of diamond coatings. It has 2x higher productivity and capability to produce nonwoven micro-grain diamond films for applications in aerospace. We also launched new powders for thermal barrier bond coatings.In terms of cost management, we have achieved a 660 basis points expansion in operational EBITDA margin this quarter.And finally, disciplined capital allocation has been a key priority for Oerlikon since many years. We paid again a stable dividend in Q2. Furthermore, by acquiring in INglass and Coeurdor, we have found an excellent way to diversify our business and position it in growth markets. We paid attractive multiples and the acquisitions are accretive from day 1.And now I will provide some more details about our acquisitions on the next slide. INglass is a market leader in hot-runner systems which are essential in the production of high-end lightweight polymer components. The company has around CHF 135 million sales generated in multiple industries, including automotive and customer goods. The acquired technologies are very complimentary to Oerlikon's existing polymer flow control equipment. Our gear pumps focus on precise thermal control, pressure management and continuous flow of modern polymer. Together with the know-how of INglass, we can further extend technology leadership by combining our R&D efforts in flow control.The acquisition also helps us to diversify our business beyond filament, where we reached already a high market share. In 2020, filament accounted for 70% of Polymer Processing Solutions sales. This number becomes 60% with INglass. Our mid-term ambition is a balanced ratio of 50-50. It's harder to reach that by organic growth initiatives and bolt-on M&A in non-filament areas.The addressable market of INglass is around CHF 2.5 billion. This nearly doubles the existing addressable market of our division. The acquisition gives us substantial room to grow share in a market that organically grows above GDP. We see in INglass an annual high single-digit percentage sales growth potential.And last but not least, INglass opens up excellent cross-selling opportunities between our 2 divisions. For instance, performing to a business of Surface Solutions coats the metal services of tools and moldings used to create high-quality polymer parts. We are truly excited about this opportunity and see it as a transformational catalyst for the division. The closing of the deal happened in the beginning of June and INglass already contributed positively to our second quarter.And now let's move on to the next page where we highlight Coeurdor. Coeurdor is a leading supplier of metalware to the luxury fashion industry. Customers include leading luxury brands producing leather goods such as leather bags and belts. While we are already present in high-end deco applications such as pens and watches, we want to expand beyond that. A key feature of a high-end deco industry is that trusted long-term customer relations and design expertise are very important. The deal is, therefore, strategically attractive for us as it allows us to leverage our technology through the Coeurdor brand.Oerlikon's leading technology and global footprint makes us a perfect match for Coeurdor. Besides end market diversification, the acquisition provides Oerlikon access to further growth. The luxury level goods market has an attractive mid-to-high single-digit percentage market growth.And finally, in terms of ESG, the combination of Oerlikon and Coeurdor will accelerate the luxury goods industry's shift to PVD as a much more greener technology.And with that, I now will hand over to Philipp who will take you through our financials in more details.
Thank you, Roland. I will start with the group results and then, as usual, provide more details on the divisions.At the group level, orders were CHF 647 million, up 7%, driven by the recovery in Surface Solutions. Sales were CHF 628 million, up 23%. Both divisions contributed equally to our sales increase based on the market recovery in Surface solutions and continued strong demand in Polymer Processing Solutions. Our group book-to-bill ratio was above 1 for the third consecutive quarter.Operational EBITDA was CHF 111 million, a 98% increase versus the prior year. Our margin rate increased by 660 basis points to 17.7%, driven by operating leverage and tight cost management.Next, on Surface Solutions. As Roland highlighted, Surface Solutions end markets are recovering at varying rates. Orders were CHF 345 million, up 46% at constant FX, while sales increased 23% to CHF 320 million. In the first and second quarter 2021, we saw a solid pickup across our shorter cycle businesses. And as highlighted in our annual outlook in March, we expect the longer cycle 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 above 1 for the second consecutive quarter.In terms of end markets, our sales were driven by the recovery in tooling, automotive and general industry. Q3 is poised to benefit from a continued recovery in tooling and general industry. Automotive sales are expected to temporarily level out at current levels due to supply chain shortages. Operational EBITDA in Surface Solutions was CHF 60 million, up around 230% versus the prior year. This represents around 12 points of margin expansion, mainly driven by operating leverage and benefits from our structural cost reduction program.We expect to continue to generate solid operating leverage in the second half of the year. This will be partially offset by some short-term cost coming back and a lessened tailwind from the mix of our business.Next, on Polymer Processing Solutions. Orders in Polymer Processing Solutions were CHF 302 million. This is a strong level, above our historical average. It is down 17% versus the prior year. However, as a reminder, the second quarter last year saw a strong COVID-related catch-up effect. In the first half of the year, we generated CHF 618 million orders, which is up 21% year-over-year. We expect a sequential order increase in the second half, driven by continued strong demand for our products and services.Second quarter sales of CHF 309 million were up 25%. While this was mainly driven by strong organic end-market demand, INglass also already contributed CHF 12 million in June and supported our diversification into non-filament businesses.Second quarter operational EBITDA increased to CHF 49 million. Margins were up 80 basis points to 15.9% driven by INglass and better operating leverage. In Q3, we expect lower margins due to a COVID-related project delay and higher freight and material costs which we expect to be transitory effects. This would be followed by a sequential step-up in margins in Q4. The project delay should be resolved by then and we are constantly indexing our pricing to material costs.Let's now move on to the next page. We will provide more color on our cash flow and return on capital employed.First half cash flow from operating activities was CHF 36 million. For net working capital, we experienced the usual seasonality, a buildup of net working capital for the revenues in the second half of the year. This is in line with our increased sales expectations for the second half and we are on track for our full year net working capital plans.In terms of CapEx, we spent CHF 45 million in the first half, which is roughly on pace for our full year guidance of around CHF 120 million. We expect operating free cash flow to strongly improve in the second half as EBITDA expands and net working capital seasonality reverses.Next, return on capital employed, which is, as you know, the primary compensation component in our long-term incentive plans. We improved ROCE to 6.4% as per the first half of the year. It includes the last 12 months of net operating profits and, as such, is still impacted by the pandemic. Also, it does not include the full earnings from the acquisitions yet. Capital employed is calculated from the balance sheet date. As such, the full impact of the acquisitions is included in the denominator. Including 12 months of pro rata contribution from INglass and Coeurdor in the numerator, we would have reached 7% ROCE. It shows that our improved cost management and highly focused approach to capital allocation are bearing the first fruits. Our clear goal is to reach double-digit ROCE in the medium term.With that, let's move to the balance sheet on the next slide. As per end of June, our company has a solid 33% equity ratio. Our net debt-to-EBITDA ratio was slightly above 1. This includes the impacts of our 2 acquisitions as well as the dividend, which we paid in Q2. We expect to end the year below 1x net leverage, in line with our commitment to continue to run the company with a strong balance sheet.In order to finance the acquisitions, we successfully placed senior unsecured bonds in May with a total value of CHF 575 million. This included CHF 125 million bond due in 2022 with a 0% interest rate, a CHF 250 million bond due in 2025 with a 0.375% interest rate, and a CHF 200 million bond due in 2028 with a 0.8% interest rate. The transaction allowed us to lock in current attractive market conditions for the long term.With that, I will conclude our presentation with our updated outlook. Following a strong first half year, we are increasing our full year guidance. We now expect group sales at approximately CHF 2.65 billion and group EBITDA margin to be approximately 16.5%. Book-to-bill is expected above 1, with orders around CHF 2.75 billion. We're increasing our guidance driven by both divisions. In Surface Solutions, we are raising our sales expectations towards the high end of CHF 1.25 billion to CHF 1.3 billion. This is driven by Coeurdor, while our core business performs in line with our expectations. The division reached more than 20% sales growth in Q2 and organic recovery is in line with our original assumptions.In terms of margins, we are increasing our guidance from 16.5% to 17.5% previously to now 18% to 18.5%. This is driven mainly by stronger effects from our cost-out measures and solid business mix. In Polymer Processing Solutions, we expect to reach a book-to-bill ratio above 1 by year-end. This is based on an improved CHF 1.45 billion orders guidance and around CHF 1.35 billion sales guidance. A bit less than half of the sales guidance increase is driven by INglass. The majority of the increase is organic.We see stronger-than-expected demand, both in filament and non-filament. Filament achieved 24% growth in the first half, while non-filament reached 22% organic growth. The strong non-filament growth shows that our initiatives to diversify the division are paying dividends. We will continue to drive this strategy.Looking into 2022, we see continued strong demand for Polymer Processing Solutions. This is underscored by the expected positive book-to-bill ratio in 2021. We also further increased our 2022 order book throughout the quarter. As a result, we see room for organic sales growth in 2022, driven by non-filament. We also expect increased sales in 2022 from including 12 months of sales from INglass versus only 7 months in 2021.In terms of operational EBITDA margins for Polymer Processing Solutions, we raised the guidance from 14% to 14.5% to 15%. This is driven by the accretive INglass acquisition.To recap on the quarter, we have made excellent progress towards our forward-looking priorities. Oerlikon delivered 23% sales growth in Q2, driven by both divisions. We have reached our EBITDA target corridor already in the first half of 2021 with a 16.9% margin. Adjusted ROCE of 7% shows improved momentum towards our double-digit target. We have executed 2 value-accretive and strategic acquisitions, and we paid out a stable dividend of CHF 0.35 per share.With that, let me end our results presentation and open it up for Q&A.
[Operator Instructions] The first question comes from Michael Foeth from Vontobel.
Well done on the results. I have sort of a few questions around your Surface Solutions automotive business. I was wondering if you can detail a little bit where the recovery comes from, sort of which subsegments in automotive, which processes, and if you can comment on the progress of your ePD coating business there as well. So that's around automotive. And also, if you can give us, as a second point, some information on the impact that you're seeing from the accelerated shift to electric vehicles in the next 6 to 12 months on your Surface Solutions business? And then I have a follow-up just on financials.
So let's start with the OSS automotive business. Here, we do see a certain regional pattern. I think China is up to speed across the entire portfolio. Here in Europe, we see a mix picture on the one hand side. Markets are developing, have developed obviously. But you all know and we know that big OEMs in Munich are extending the summer break by 1 week, or when we talk about Ori, they have since weeks and months deleted shifts due to this shortage topic, and this has an indirect impact for us as well.What we also see in the U.S., on the one hand side, yes, the economy is getting hotter, but the automotive market in the U.S. is somehow still behind our expectation. So that means it's not so much a topic or discussion about the different elements of our portfolio because if we can talk about the number of cars being produced and from that perspective, I think we are moving in the right direction. We see a substantial growth, but we are clearly below the pre-crisis level.When we talk about ePD, I think it's the nature of the beast. This is a topic for premium cars and we do make a certain progress. Munich-based OEM has acquired equipment -- batch equipment and this technology is in the process of being implemented. I think it's -- I'm not sure whether we are actually entitled to make such an announcement, but it's a big model of this Munich-based OEM -- has decided to go for this technology for his big ones, right? So -- and the e-mobility topic, this is something what we do not yet see in our current figures. This is something what's going to come.Yes, from a sheer quantity point of view, we talk about few 100,000 of cars compared to the entire community of worldwide car production. This is still a minor change. But we are preparing ourselves here for -- with different elements of our product portfolio for -- and you also have to keep in mind for -- at least for the next few years, 3, 4, 5 years, we talk primarily about hybrid applications. So the pure electrical vehicles are still on a lower level. What we expect that -- the whole world expects is a strong increase in hybrid applications. That means the combustion part of these type of cars is not going to disappear, but the new electrical drives are contributing here. Michael, does it answer...
Yes, absolutely. Very helpful. And then just a very short financial question for Philipp. You were talking about some short-term costs coming back in Q3. If you could just give us some information on what sort of costs are coming back and if they are just temporary in nature?
No. Michael, this is really what you would expect. We're really hoping that we can travel a little bit more, see customers, ramp up some marketing efforts. This has really cost us. This has been out of the system since the start of the pandemic. We've always expected that to come back. Frankly, we expected some of it to come back earlier, but the second quarter was still very, very slow. We're not talking about a huge amount, but that activity hopefully increases in the second half and then it's there to stay, and it provides a partial offset to the positives that we're seeing.
The next question comes from Alessandro Foletti from Octavian.
I have a couple. Maybe on the raw material and freight costs in Polymer Processing and the project delays, these are sort of 3 elements that you mentioned are there in Q3, but maybe only transitory. Can you sort of give an indication what is really relevant and what can be really passed on to clients?
Yes. I would say the more strategic parts of cost increases are much more longer term. So in other words, material cost increases, those are things that are indexed contractually with our customers and we don't expect a longer-term pressure on those items. On some of the shorter-term cost items, we expect some pressure and this is really specifically as it pertains to shipping globally. It's no secret that, obviously, shipping routes are very, very challenged at the moment. We face this on a day-to-day basis. In line with that, certain other things like freight cost, but also things like freight insurance or even wood that we use to fix our equipment within the containers to cost just skyrocketed. Some of that, we have to absorb ourselves. We think this is a very transitory effect. We expect the supply chains to ease quite a bit, especially the more strategic routes from China to Europe, which we utilize the most. So I think this is more of a Q3 effect.And then on the project delay, this is really an idiosyncratic project -- challenge on a project. We were not able to procure certain talent levels really globally from lower-cost countries. So we had to substitute that with workforce for much, much more expensive regions. And that's basically what we're reflecting here in the third quarter. We're expecting to catch up on the delays here, mitigate the delay, and then, like we said, in the fourth quarter not to experience that pressure anymore.
Okay. And in terms of split of the -- these 3 inputs is like 1/3, 1/3, 1/3, or it's, I don't know, the project delay accounting alone for 50% of the stepdown that you expect.
Yes. You can -- I don't think we want to go into the exact split of it, but you could expect that the project is the largest part of this.
All right. And maybe a small reminder on the additive manufacturing business, since I was asked before the call. Can you remind me what the dilution there in the Surface Solution margin, whether it is in the expected range, and sort of breakeven level sales and current sales levels, if you can?
Yes. Alessandro, I would say no changes to what we've previously said here. It's in the expected range in 2021. And I would also say the breakeven sales levels are similar to what we told you at the outlook at the end of last quarter, which is much lower than it was previously given the restructuring that we've done there last year, but we're still a little bit away from it.
Okay. And maybe my last one, if I may. You gave, Philipp, an indication on 2022 for polymer processing and maybe I was distracted. I don't know if you did the same for Surface Solution. And if yes, can you repeat, please? If not, can you give it?
Maybe I'll start a little bit with just what I had gone through and then hand it over to Roland. I think in Polymer Processing, we said, obviously, you -- we will include the full results from INglass versus just 7 months of the results in 2021. So we're expecting growth from that. And then just based on the organic order book and some, we're expecting organic growth in OPP as well driven by non-filament. So I think we have a pretty positive outlook there. And in Surface Solutions, we didn't say anything specific. It's certainly too early to talk about it specifically. But as Roland alluded to, we're still quite a bit below our 2019 activity levels. We have no reason to believe that we will not recover to those levels over time. And then -- so in other words, I think that's a positive backdrop for 2022 as well.
All right. Mr. Fischer, do you want to add something on this one?
No. I think Philipp made a more or less complete statement. I think here we are living in 2 different worlds. In the OPP business, first of all, we are extremely successful in our structural shift from -- to focusing more on non-filament business. And in the old days, years ago, it was not purely, but 80%-90% filament. This share is now with INglass going down to 60%. And the filament business itself is still booming. We are negotiating contracts, filling up books. Our books for 2023 is the first contract for 2024. That means this part of the business is stable for the next few -- 2, 3 years; it's growing. And even nicer, our non-filament activities, whether it's nonwoven or whether it's polycondensation, now with INglass, that's a CHF 2.5 billion market we are opening up for us. That means here, we have a lot of fantasy, how we might -- will grow in future.
The next question comes from Andy Schnyder from zCapital.
I have a few add-on questions. First, on the recruiting -- recruitment problems and shortages in the labor market, do you experience a general salary inflation? Can you talk about that, how does it look like, and versus what we've seen in the past? Yes.
So I think this is a topic and has been a topic always actually. And it's -- what we see is a regional pattern, right. We do have a very dynamic market in Asia, in China, with a certain increase in salaries, but availability of people is not an issue. What is coming up now and what we see since the beginning of the year is in the U.S. where the market is getting hot. And when you just travel, there were sign-on bonuses if you just show up, right, and to start work somewhere. And here, we have in place measures in terms of adjustments, but also in terms of adjustments of the packages and working conditions to find the right people for our business. It's manageable.
I would say the same, Andy, if I can maybe just -- to Roland's point, specifically in the United States, no secret. One thing to note is certainly that the wage inflation is mostly on the unskilled labor. So we're seeing that, but to Roland's point, it's not a very material point. The other thing to note is we're certainly looking forward to September 6, a lot of the unemployment benefits in the United States expire. So I think the expectation is that more people come back into the workforce and that we will sort of see this go back to more normal, more reasonable levels as well. So we were impacted by it, very, very challenging, saw a temporary wage inflation on that non-skilled part, not overly material, and we're expecting it to normalize in the third quarter and then the fourth quarter.
So you basically reacted more by signing bonuses and less by general increase in wages, which will stick more I guess?
Yes. I think, honestly, the turnover rate in these kinds of categories of labor, sort of with hourly rates and so on, and on the non-skilled part, is very flexible. So it's not so much in the European sense contracted or negotiated contracts that are longer term. We think it's a pretty transitory thing that probably won't impact us at any material level.
Okay. Perfect. And on INglass, can you tell us what kind of growth you're seeing in this year for INglass in 2021? Is that high single-digit going forward? Are we there already in 2021? Or is there a little bit more work needed from your side to bring it up to this high single-digit growth rates over the coming years?
Now we are right now in the process of integrating the company. They do have quite a strong market position for the automotive application. What is important for us -- because this e-mobility topic is kicking in, the demand, increasing demand for lightweight high and lightweight polymer parts. But there are other applications, right, where the market position of INglass today is not as strong as in the automotive industry. And here, we have a high -- as you indicated, as you said, high single-digit growth rate. And actually, we do expect and we are looking for additional opportunities to further grow this business. We have established a business unit for this type of business, including our pump business, and this is one element of our diversification strategy to become less dependent from filament.
And so, we can expect the business to be around CHF 145 million to CHF 150 million this year in sales.
Yes, I think that's right.
Be for around 27.5% margin. Is that just still get -- or higher or lower?
I think we gave you sort of the indication at the time of the transaction no change to that and the business is performing -- look, I mean we've only consolidated for 1 month, but we're very pleased with what we're seeing here from a financial standpoint, but more importantly from a commercial standpoint and operational standpoint. So no change to what we previously expected.
Perfect. And if I might add one or the other question on the filament business. I think I ask you that every quarter. What are you seeing in terms of potential downturn coming in then 2024 or 2025 after these big projects are finished? Is there something on the horizon yet or don't you see anything yet?
No. We do not see any indications for that. And as you always say, yes, this type of business is a part of petrochemical -- big petrochemical plants, which do have, also in China today, lengthy -- need or require lengthy period of planning and approval and certifications for building up such a plant. And from that perspective, these players are thinking in 5 years horizons to build up capacity and we are in the midst of it. And as I indicated, we are -- I think '23 is almost filled, not completely, but yes, and it's the first contract to go into 2024. And that is the time horizon we see. And here we do not have any indication of any downturn.
And the last question on the surface mix. You had some tailwinds now in H1 and less so than in H2. Can you be a bit more specific? Is that just a little bit stronger growth in Asia in thin-film, is that that?
It's at the end of the day, Andy, it's thin-film. As you know, that is the shortest cycle part of our portfolio and tends to be with fairly very accretive margins. We're expecting more pickup in the second half on the somewhat longer cycle parts of the business. That's the more CapEx-relevant equipment, some of the materials businesses and so on. They tend to be a little bit less accretive. And that's the mix effect. I think there's obviously better operating leverage that basically we expect that to offset each other. And then I think as we go into next year, I think the mix effect will subside a lot more because the different parts of the portfolio are going to grow at a similar speed.
But we can still expect, just from an operating leverage standpoint, that margin should increase further, even though the mix is probably less, right?
Yes, absolutely.
The next question comes from Christian Obst from Baader Bank.
So most of the questions are already answered. Nevertheless, I have 2 smaller ones left. One is, in the nonwoven business, there was some kind of a demand and margin spike I would say. Do you see any kind of a cooling down there, either on the sales side or the demand side or on the margin side? This would be the first question. And the second one is concerning the dividend. Do you think that the M&A -- do you exclude the M&A payments out of your dividend -- expected dividend contribution going forward, right?
The second question, I'm not so sure that I get it, but I think the first one I can answer. I think the non-filament business you are talking or you're referring to consists of different types of business. Here we have a bunch of technologies. We have the sort of carpet yarn topic, we have the nonwoven topic, we have the staple fiber topic, we have the polycondensation business.
More specific in the nonwoven. I mean the nonwoven.
The nonwoven, okay. And this nonwoven mask application, of course, was a spike last year. We sold, I think, in the order frankly about 20 units, normally 1 or 2 per year. So that was a spike that was contributing with a low triple-digit million revenue. And this is now back to normal, right. But on the other hand side, other elements of this nonwoven buckets are growing, and we do expect continued growth in the non-filament over the course of the next years.
I think that's an important part. So the boom with facemask equipment for the FFP2 masks is over. Nonetheless, we expect significant growth in that nonwoven applications. We've talked to you about the macro trends that were aligned with their hygienic products. So I think that business performs very, very well. And then to your second question, I think we look at the topics, obviously, quite separately. I think the dividend is really more related to the ongoing business, the strength of our portfolio and the ability of our portfolio and our company to generate free cash flow. The M&A activities, you saw us financing that exclusively with debt financing now. And I think we're looking at our very, very healthy balance sheet and leverage, and all of that I think are really the components then to determine the dividend for next year.
Another one on the cash flow. Do you have some kind of a free cash flow target for the group and the current structure going forward? So maybe between CHF 150 million and CHF 200 million over the course of the cycle?
I think that really depends on earnings and obviously the trajectory. I think we're going to see a significant earnings accretion in the current year. We see revenues up significantly versus last year. And then I would just give you the components that we've talked about. So I think as we see sales and earnings grow in this fashion, I think we're going to see a relative networking consumption in those years, that's probably expected maybe on receivables and inventory. But we will -- we're expecting to manage that very, very tightly. We've given you kind of a CapEx indication for the current year, about CHF 120 million. I think that will expand relatively. But a lot of the renewing CapEx that we spent between 2016 and 2019 we will continue to benefit from. So we will keep CapEx at a lower rang than what we've previously had. We have given you our tax -- effective tax rate, about 25%. So -- and then interest payments are relatively limited. We've just given you the substantial portion of our outstanding debt, it's the CHF 575 million, and I have given you those interest rates. So I think those are the different components. And as revenues and earnings grow, I think we're expecting this portfolio to continue to generate very strong cash flow conversion.
The next question comes from Sebastian Kuenne from RBC.
So first question on Surface Solutions. So the guidance -- the revenue guidance you gave for the second half, the implied guidance, would mean that you need about, yes, only CHF 315 million of orders, right? The orders dropped through very quickly into revenues. You had very strong orders in Q2. So you need fairly low orders in the second half to reach your revenue target. In my calculation, it's about 10% to 13% lower orders than in Q2. Could you explain why that is if -- have you seen a lot of restocking or do you expect actually a slowdown in one of the markets? That would be my first question.
Yes, that's a good question, Sebastian. Don't read too much into that. We try to -- because of the short-cycle nature of the business, we really look more at sales as an indicator of that. So I think the forward-looking meaningfulness of orders in that business is very limited. We're -- by and large, we're just expecting orders to be in line with sales in that business, although the longer cycle components might be a little bit higher. And again I think the backdrop for the business also for the next year is a positive one because we are only somewhere in the recovery from the pandemic on the overall business.
But there's no longer lead times. I mean you either expect lower orders or you expect longer lead times at the end of the year. Otherwise, the numbers would not add up. Yes?
Yes, I know it...
So you're trying to say the same. You will have much lower orders in the second half.
Yes. I think take it as an approximation. I think again we're expecting orders to be lined with sales and a positive business outlook.
Okay. Then for -- okay. That's understood. For Polymer, you basically imply accelerated deliveries of just short of CHF 400 million sales per quarter. Is this now running at max capacity, including the acquisitions? Is the CHF 400 million per quarter something you can deliver on a sustained basis or do you now think, well we better increase capacity by 10% or 20% in that business? What's your plans there currently?
Now we are optimizing the existing capacity what we have in our sites in China and in Germany. That means we are somehow here and there adding machine capacity. We are optimizing the shifts, optimizing the output. What we are not doing, what we will definitely not do is to go into huge infrastructural investments in terms of new sites or something like that, no. We have been able, over the course of the last 2, 3 years, to constantly increase capacity by optimizing existing sites.
And remember, Sebastian, a lot of the growth is coming from the non-filament side and that's obviously a little bit different. We see continued growth there also into next year and so on, and we're adjusting capacity. The only thing -- the only other thing that I would add is we feel very confident that we can deliver on the sales expectation in the second half. We're very confident. I think the one thing that we're watching very, very closely is again the shipping component. I think we have an ability, just from how we account for things with percentage of completion, to usually fulfill pretty closely on the financial dimension of that. But shipping and so on remains something that we just collectively have to be very, very focused on. But internally speaking, I think we're very confident that we can deliver on this.
Understood. And just understanding in the main plants for pulling there, do you run on 1 shift or 2 shifts, or what's the construction in the bigger plants there?
We are operating a 2-shift mode, in some areas a 3-shift mode. Some modern machines today can operate for 4, 5, 6 hours without any human beings. No, this is exactly what I'm talking about when I say we're optimizing capacity, yes.
Understood. And the last question also on Polymer. You mentioned the COVID-related delivery delay which would trigger a charge in the second half. I assume that is kind of a -- yes, you didn't meet the deadline for installation of the plant, I assume. What's the scale of that charge?
We gave you an indication that it will have an impact on margins in the third quarter, but we'll give you a little bit more details when we're through it and have the full estimation done. But you're absolutely right, at the end of the day it's a delay and -- on a project. And it's really the rectification of that delay and what we need to do to make whole on this with the customer. But that will mean the additional cost and that additional cost is just a lot higher due to COVID and sort of how we can rectify the situation.
Yes. And with shipping being so difficult now, especially for routes to Asia and North America, wouldn't there be a risk that you have further delays in other projects that are now coming up in Q3, Q4 and not similar to that situation?
No. This delay -- by the way, the equipment is shipped, so there is no further issue. Obviously, if we have a delay on shipping that is due to COVID, that's a force majeure. So we don't -- this is something we're working through obviously with our customers. We're very transparent with that. They face this from a number of suppliers. We don't expect any impact from that. This year was really more a technical problem. And then the remediation of the issue was really the problem and the cost of that. So really 2 separate issues.
So a true one-offs, yes?
Yes.
The next question comes from Edouard Riva from ZKB.
My first question would be concerning the diversification on Polymer Processing and the target of 50-50. When -- do you have an idea when you wish to achieve those 50-50 repartition? And second thing, do you expect to go there in an inorganic way through M&A or through organic growth of flow control?
Both actually. We do not have a fixed date over the course of the next years. You know where we are coming from. I told you where we are right now. And obviously, the filament is growing. This is nice -- also a nice part of the story, but non-filament is growing stronger. And the INglass acquisition and this polymer processing part is a focus area, and it will be done organically and inorganically. And that means we have to see when another target is available that is not predictable.
Understand. And so should we expect more M&A acquisition in direction of flow control or do you want to widen your diversification base in other potential subsegment of -- for Polymer Processing?
No. It's -- there are more elements on the table today. And we just talked about the business we do. But there is a topic like polymer recycling, elements which are not contributing substantially to the business as of today. But we do have technology for recycling, mechanical recycling of PET equipment for bottles and stuff like that. Then this textile topic is coming over the course of the next few years, recycling of clothes, and here we talk about chemical recycling. Here we are engaged in start-ups in U.K. for instance. This is a company where we are now going from a lab to -- how to say, application into a bigger prototype. But this is to come not today and not tomorrow, over the course of the next few years. And this is a typical non-filament growth area.
Understand. I would have a second question regarding the aviation subsegment. And you mentioned seeing first now some clients returning and asking for quotes. So do you expect to see first recovery somehow in Q4 or in 2022 or when do you expect full recovery of the aviation segment subsequently?
I think full recovery of aviation, and now referring to experts, maybe 2024 or 2025. I think we have to be -- to cut the elephant into slices. We do have in China and the U.S. domestic air traffic, which is at the level of some 80% -- maybe 80% of the pre-crisis level. The long-distance flights are still extremely down. And a recovery here -- and we just had a few days ago an intensive discussion -- to a pre-crisis level will take at least another 2 to 3 years. But that doesn't mean that there are first positive signs of business coming back. And I think you're referring to the contract with MTU where we have successfully managed to enter the PVD coating of latest aero engine technologies. This is a great story. But I think we also have been clear it's not yet material -- contributing too much to the business as of today. This is going to come over the course of the next few years.
Yes. I think what's very positive for us is what Roland is mentioning. So, narrow-body, which is the type of aircraft that's more engaged in the domestic travel and within Europe and within China and within United States. The recovery of the activity is much stronger. Our portfolio -- and obviously freight is very, very strong -- freight and logistics. And so our portfolio is a little bit more geared towards that part and we're expecting that to recover more quickly. If we're believing some of those external sources, then the overall activity on that part by the end of the year could be somewhere between 80% and 90%. So that bodes well for second half of the year order activity and then next year obviously parts of our portfolio recovering. And then again the wide-body transcontinental travel, that will probably not be a significant recovery until later on. But so I think parts of our portfolio are going to recover. That will help us tremendously with cost absorption and obviously revenues next year, but not all of the aero portfolio.
And finally, I would have a third and final question, which is kind of a double question. For the subsegment of the Surface Solution, where should we -- I mean, this tooling, automotive, aviation, general industry, where should we locate Coeurdor? I guess, general industry? And my second question is, where -- in which of the subsegment is AM mostly focused?
So I think Coeurdor is a luxury goods market business. We have been active with our high-end deco applications for pens and watches, just to mention 2 applications. But Coeurdor is clearly beyond what we did. So far here we talk about all the fancy and famous big expensive brands which are providing leather goods, whether it's bag or a belt or whatever. And these are -- these type of products are using metal applications which are coated and some are designed in a highly -- in a very special way. And then here, Coeurdor is one of the big players. And this opens up an opportunity for us to penetrate this type of market. It's growing with a mid-high single-digit growth rate per year and this is something what we will cover from now on, right. So, yes.
And Edouard, I would -- you're absolutely right. Coeurdor is in general industry for the moment. To Roland's point, I think as that becomes much more material and obviously a real growth driver, we might separate that out for the moment. It's in general industries. An additive to your question is depending on the end market that we're selling into. You know that we have a lot of success there in airspace, radio frequency components, but also in power gen, even some in automotive. So it will be in the end market that it belongs so.
The last question for today's call comes from Sebastian Vogel from UBS.
I got 2 questions. On your outlook or in your guidance slide and you earlier also referred in your presentation about it, the stronger effects of the cost-out measures that you're referring there, can you shed a little bit more light what you mean by that, a little bit of a better understanding? And then the second question would be as well on Surface Solution and the guidance for the full year. If I was calculating correctly, that would sort of imply something around like 8% in organic terms for the second half. As you said earlier on some long cycle stuff is coming back, early cycle stuff maybe not so much. But is that number not a bit conservative in your eye?
I'll probably take the first one. I think the -- we had gone through the overall margin expansion opportunity from the structural cost-out measures where again we saw about CHF 35 million to CHF 40 million of the benefits already in the second half of last year, right. And then you look at what we're indicating here, that's an approximately 400 basis points margin expansion in Surface Solutions for the year and kind of the expectation above and beyond of what we have previously indicated is really attributable to the cost-out measures. And I think that our teams have executed very, very fast and very, very thoroughly, and in many areas overachieved really the structural cost reduction that we had anticipated. So I think that's one.And then on the conservative outlook for the second half, I think there's still a variety of estimates out there. Specifically, the fourth quarter I think is still a TBD. I would tell you so far what we have seen, the market reaction and market development has been pretty closely aligned with what we talked about at the beginning of the year. We were pretty close on that and I think we're going to keep with that stance. And that frankly for us, it also -- it doesn't really impact us as much whether the recovery happens in the fourth quarter or in the first quarter 2022. I think we're very well positioned with customers. We will capture that growth when it happens.
Understood. One follow-up to your earlier remark on the cost-out measures. You said there were some overachievements being seen. Is that bordered down to a number that you say instead of the previously targeted CHF 45 million of cost-out for the segment you rather sort of aim for? You have now seen something like more like CHF 50 million or is it not really possible to -- or is it to an extent where you say, okay, it doesn't necessarily mean that we need to raise the previously indicated number there?
Well, we updated the margin rate guidance. So I think that gives you an indication.
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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