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Ladies and gentlemen, welcome to the Oerlikon Q3 2022 Results Conference Call and Live Webcast. I am Alice, the Chorus Call operator. [Operator Instructions] And 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 morning, ladies and gentlemen, and welcome to Oerlikon's Q3 results call. With me in the call I have Philipp Muller, CFO of Oerlikon. Philipp will start the call with a presentation, providing an update on our financials and end markets. We will then follow up with the Q&A. With that I would like to open our presentation and hand over to Philipp. The floor is yours.
Thank you, Stephan. Good morning, everyone, and welcome to our third quarter results presentation. Q3 continued our strong track record of growth. We achieved the highest third quarter sales and EBITDA since we focused our company on 2 divisions. I will start with an overview of the group results, followed by more details on our end markets, the divisional results and update on our strategic progress and will conclude with the outlook. At the group level, orders were CHF 764 million, driven by strong demand in Polymer Processing Solutions. Sales were up 12% at constant FX to CHF 742 million. Both divisions contributed to the sales increase. Foreign exchange rates, specifically the strong Swiss franc, post an increasing headwind to us. At the orders level, we had a 4 point drag and at the sales level, a 6 point negative impact from FX. Our group book-to-bill ratio remained above 1 in the third quarter. Operational EBITDA was CHF 126 million, an 8% increase versus the prior year. EBITDA margin slightly improved to 17% in Q3. Positive operating leverage and tight cost management were partially offset by foreign exchange impacts, negative mix effects and higher energy costs. In the first 9 months, our margin rate improved 20 basis points versus the prior year to 17.1%. With that, let me provide you an update on our end markets. In Polymer Processing Solutions, we experienced continued demand in Q3, which is reflected in our order intake. On the filament side, we have good order book coverage for 2023. At the same time, our Chinese customers are experiencing a very challenging environment. Given the significant inflation, global discretionary spend is decreasing, which is impacting demand. Even more pronounced is the impact on demand in China, driven by the Zero COVID policy, combined with higher input costs, lockdowns, logistics challenges and tighter financing conditions. 2022 represents a uniquely challenging year for our clients. Accordingly, some of our Chinese customers are starting to reshuffle their investments and some have started to postpone orders until they have more visibility. Depending on the length of the macro uncertainties, we see a scenario where more customers can postpone investment decisions into the future. With this outlook, we are proactively preparing the organization for a potential downturn. We are finalizing actions, which we will start to implement before the end of the year. In non-filament, we saw continued organic sales growth, which is up 5% in Q3. Flow Control, which includes our recent acquisition of INglass continues to perform strongly. We also see strong demand for plant engineering solutions, for example, polycondensation plants for packaging. In the Surface Solutions division, we're operating across the tooling, automotive, aviation and general industries end markets. The general industries and tooling end markets had a strong first 9 months. However, since July, manufacturing PMIs have declined significantly. We're expecting this weakening industrial activity to be partially offset by some bright spots in luxury and energy. In the automotive end market, we saw improved activity in the third quarter. This was related to the easing of global supply chain challenges. Industry forecasts expect sequential growth in the fourth quarter, but have been revised downwards over the past weeks given some of the bigger macroeconomic concerns. We remain confident that the current production backlog in the industry will drive demand for the coming quarters. Finally, in aviation, we see continued volume growth as increasing flying hours are driving MRO activity. The production of new planes is supported by passenger growth and energy efficiency, partially offset by shortages at engine OEMs. Overall aviation still remained substantially below pre-pandemic levels. Summing up, we saw a strong market environment in Polymer Processing Solutions in Q3, and we are proactively preparing for various scenarios given the challenges in China. In Surface Solutions, we expect continued easing of end market supply chain constraints to underpin growth in the fourth quarter. At the same time, where necessary, we will prepare the company for potentially lower demand due to weakening industrial activity in 2023. Clearly, when looking at the broader macroeconomic picture, there are concerns about growth. Given this, we are preparing decisive actions to make sure we stay as agile as possible and protect our margins. Now let's move on to Page 4 with the financials for our Surface Solutions division. Orders were CHF 346 million, up 9% FX adjusted. Sales increased 13% in local currency to CHF 347 million. We saw a somewhat weaker demand in general industries and tooling. This was more than offset by the easing of supply chain shortages in automotive and the continued recovery of aviation in Q3. Operational EBITDA in the third quarter was stable at CHF 59 million. EBITDA margin was 16.8%. The business saw a negative impact from FX and some impact from higher input costs, specifically energy. As previously explained, we have largely hedged our energy costs, particularly where we have bigger operations. There have been some disproportionate effects from smaller countries where we don't have hedging or where our hedging counterparties have filed for insolvency. We continue to follow a systematic approach to passing on input cost inflation, and we have been very successful to date with this approach. Given the weakening overall demand environment, we expect that the discussions with our customers will get more challenging and pricing adjustments might take more time to execute. Accordingly we also accelerated our efforts to streamline our organization and portfolio. We expect to take another set of decisive action for the fourth quarter. Depending on the execution of these actions, we expect to incur certain one-off charges in Q4. Next on Polymer Processing Solutions. Orders in Polymer Processing Solutions were CHF 418 million. Q3 reflects the third highest order intake on record. Orders were down year-over-year due to the strong comparable of the record quarterly order intake 1 year ago. Orders in the first 9 months are up 15% in local currencies to CHF 1.3 billion. Sales of CHF 395 million, were up over 12% at constant FX. Both filament and non-filament delivered growth. With year-to-date sales of CHF 1.2 billion, we are well on track to meet or even to slightly exceed our full year expectation. Operational EBITDA increased over 17% to CHF 65 million. Margins were up 160 basis points to 16.4%, supported by operating leverage and cost efficiency. We continue to have a strong order book for 2023. As our customers are weighing the timing of their investment decisions, we are preparing the organization proactively and will take decisive actions here as well. Next, let me give you an update on our strategy execution. As highlighted at our recent Capital Markets Day, we are focusing our strategic priorities on growth, diversification, profitability and sustainability. The continued focus on executing our strategy has positioned Oerlikon well for profitable and sustainable growth. Our third quarter sales exceeded 2019 levels by 19% when adjusting for FX and M&A. This is at the top end of our 4% to 6% annual growth guidance. The market sweet spots where we are focused are attractive and provide structural growth. The customer need for sustainability and efficiency is driving growth in Surface Solutions. Polymer Processing Solutions demand is driven by rising GDP and limited alternative resources for textiles. The division has executed well on the market extension into the non-filament space. Additionally, the current environment presents some very interesting M&A opportunities, which we are actively evaluating. EBITDA and margins are well above pre-pandemic levels. This reflects the improved cost base, continued cost discipline and resulting operating leverage. Oerlikon's enhanced capital allocation framework is already yielding benefits in profitability and capital efficiency. ROCE has been improving on a quarterly basis towards our medium-term target. Last but not least, we are driving sustainability progress. Customers are increasingly incorporating sustainability considerations into their purchasing decisions. Oerlikon's sustainable innovation framework is enhancing the next generation of products and services. Customer and investor ratings are starting to reflect the underlying sustainability credentials of Oerlikon. ISS ESG significantly improved our rating from D plus to C, putting Oerlikon near the top of industrial machinery businesses. Summing up, we have made strong progress and our strategy execution is on track. With that, let me conclude on the next slide. Our strong financial performance year-to-date provides a clear proof point that our strategy execution is paying off. We are committed to 4% to 6% of profitable sales growth over the midterm. The environment in which we operate has deteriorated significantly since the summer. Manufacturing PMIs show contraction in China and Europe and have declined substantially in North America. In Polymer Processing Solutions, some of our Chinese customers are starting to reshuffle their investments and have started to postpone orders until they have more visibility. We are increasingly cautious on the future developments and are considering various scenarios to manage a potential downturn. While we will continue to work on our pricing structures with our customers to pass on input cost inflation, we will also adjust our cost structure and organization where we see fit. As explained earlier, we will take decisive actions, which may result in certain one-off charges in Q4. We are trying to be very proactive in preparing for various economic scenarios, but we remain very confident in our company's ability to outgrow and execute well in our respective markets. For the full year 2022, we now expect to slightly exceed our previous group sales guidance of CHF 2.9 billion. This is driven by strong execution in Polymer Processing Solutions. We expect EBITDA margin to be between 17% and 17.5%. Year-to-date, we delivered margins of 17.1%. As described earlier, we are seeing a negative impact from FX as well as certain transitory impacts from rising input costs in Surface Solutions, which are only partially compensated by operating leverage and cost discipline. In closing, I'd like to thank the Global Oerlikon team for their strong performance and execution in a demanding operating environment during the quarter. With that, let me open it up for Q&A.
[Operator Instructions] Our first question comes from the line of Sebastian Kuenne with RBC Capital Markets.
My first question is regarding the decisive actions that you mentioned several times in the call. It appears or it feels like that you expect revenues to come down quite significantly next year because you seem to feel the need that you have to cut capacities in Q4. I would like you to maybe comment on this a little bit. And then can you tell us a little bit about the scale of these adjustments for the 2 divisions? That will be my first set of questions.
Yes. Thank you, Sebastian. I would say, I'd probably start with the overall set of actions that we continue to take. I think we will continue to work on our pricing with our customers. I think that we've been very successful in this year-to-date, and I think we're going to continue to do that. You heard in my comments that I think it's going to be incrementally more challenging in those discussions as the end markets are getting weaker, but that continues to be a core tenet of our strategy. Then we'll work on all the aspects of sourcing, structural costs, the portfolio really where we need to optimize it, and I think that's the next set of actions that are going to be -- that we had communicated. We're working on that anyway, and I think we'll just do that even at a higher speed. And then when it comes to capacity, I think we're really looking at in Polymer Processing Solutions, we continue to have a solid backlog for the next year. But some of the lead times are just -- are long. And I don't think we're looking at adjusting capacity for the front end of next year. But as we have a longer-term view on even the outer years and so on and as we're working on the different scenarios. Our focus is really on acting very swiftly, putting plans in place and so on as early as we can and really plan for the downside and then if things turn out to be a little bit better than that's good.
Yes. And maybe a follow-up, if I may. You probably have quite a large number of temporary workers already in OPP in the polymer business. If you cut those that would not incur costs, but the fact that you say you will incur cost means you also cut into permanent staff then in the division?
Look, I mean I would say, Sebastian, we're obviously still finalizing plans and everything that we need to do, depending really on the final scenarios, I think we're going to land also on what are we doing. My comment was really a global comment, and we really look at a total set of actions. So we're looking at some of the portfolio components, maybe discontinuing certainly technology programs that we had certain business development activities, shrinking that, shrinking our structural cost footprint where and if needed, looking at the capacity to, maybe a little bit too early to tell. But there's a range of scenarios, and I would expect that there's some restructuring charges to come in the fourth quarter as well.
The next question comes from the line of Tommaso Operto with Credit Suisse.
My question was mainly on the product mix that you mentioned. Automotive now has held up a little bit better or you're expecting it to hold up better than the general industries and tooling. However, last quarter, you mentioned that automotive should actually also be a relatively high-margin business and helped the product mix. So I was wondering if you could give us a little bit more color on margin evolution for Surface Solutions and what the effect from the product mix really is going to be.
Yes. Thanks for the question, Tommaso. I think auto was actually exactly as we expected. So auto, we saw an easing of the supply chain shortages at our customers, and so for us a pickup in activity in auto. But overall, our service business, and that also includes general industries and so on, was softer than we expected, and that's really the mix effect that we're describing. On top of that, we saw certain headwinds from the energy cost than from foreign exchange. So that's really the story of the third quarter. I think the mixes will continue to normalize. It will depend a little bit on the overall activity. But I see some of those in the third quarter more as transitory effects. And then -- but it continues to be true that services is higher margin than materials and equipment. And so that's really the effect that we saw in the third quarter, even slightly more pronounced than in the first half of the year.
And just also on Surface Solutions. Going back to the Capital Markets Day, where you talked a little about potentially expanding in the U.S. Is this maybe going to be a victim of your cost cuts in preparation of the expected downturn? Or are you kind of continuing to target this as a growth market?
Yes. We are 100% committed to that growth strategy. I'll tell you, actually, the weakness that we're seeing in terms of the service market is really Europe and China for different reasons. I think in Europe, it's just the overall market environment. In China, it's really driven by the lockdowns and the interruptions of overall production. The U.S. is our best-performing market. And if anything, we'll double down on that growth strategy. We continue to have huge opportunities in the U.S., and we will not cut anything there. I think what we're more talking about is certain growth investments that we've made in the past. We sort of looked at the growth trajectory and depending on how we assess that growth trajectory now and how much it really contributes to revenues and margins in the next 24 months, we might stop certain things. But none of the overarching pillars that we talked about at the Capital Markets Day will be affected by that.
The next question comes from the line of Alessandro Foletti with Octavian.
A couple here. You mentioned it's a bit too early for the restructure to give an indication exactly what you do. So on potential magnitude of charges is also too early to say?
Yes, I think to be specific on that is maybe a little bit early.
Right. And then what I don't understand is the slowdown you're mentioning for sort of calling for polymer. It seems to me it's rather for '24 rather than '23? Or do I understand you wrongly?
Yes, look, no, you're right, Alessandro. What we're seeing is obviously a -- it's a global phenomenon, but it is also very much a China-specific phenomenon. At the end of the day, because of the inflationary pressures, discretionary spend is down. Textile demand globally is down a little bit, but it is specifically and sharply down in China. And so our customers are obviously seeing that it doesn't affect sort of existing projects that we're executing on. We've always said we have a very solid backlog for 2023. But then in the current situation that with the uncertainty that you have in the overall markets, but specifically continue to have in China. I think active new investment decisions are pushed a little bit to the right. We don't actually see any of the larger infrastructure investments that we've worked on with our clients over the past couple of years called into question. I think it's more about the timing of investment decisions, which we would expect to potentially have an impact on 2024, depending on where those shake out.
A couple more on this subject, if I may. I understand the Chinese consumer and the situation locally, and so on, that clearly will have an effect on the local managers of those companies. But they are 60% of the world's capacity, so they should export a lot. Why is there not sort of a compensation with what happens in other markets? Or are they sort of becoming scared that there is that people will not want to order more from China because of all the sort of sanctioning issues going on?
No, I think it's less of the latter effect, Alessandro. I think it is more global markets have slowed down or slightly down, but not as sharply. But demand in China is down very significantly. And demand in China from everything we see is actually down predominantly because of the shop closures and the Zero COVID policy. So I think that remains to be seen. But you're absolutely right. At the end of the day, also for our clients, domestic demand actually makes up a big chunk of overall filament demand. And so it does play a critical bold. And I think the other markets are just not offsetting it at the moment, at least not at the moment.
Right. On the sort of -- I think you called it interior business in the presentation. So I imagine that's the BCF. This is mainly a U.S. business. So why do you sort of call a potential slowdown there as well?
No, I think that business continues to perform well. We're not worried about that. I think the comments were really more focused on the filament business and Chinese demand. So that business, I think everything that we're seeing in the U.S. is actually holding up very well.
Right. And did you make already any scenarios on how the margin will develop if you have a slowdown in the filament business or it's also too early to tell?
Look, I mean, that's exactly the -- what we're laying the focus on. It's probably a little bit too early to sort of pinpoint it. But the reason why we're talking about it is because we're going to be very early on, and I think we're going to be very aggressive to protect our margins. We obviously do not control what some of the overall market environment is doing, but we're going to be laser focused on making sure we continue to deliver strong margins in both divisions. And so I think that's why you hear us talk about some of the actions, some of the preparations we need to take early on.
And may I address the sort of the elephant in the room, which is, in my opinion, the additive business. If you are going towards sort of a very negative scenario, is there not an opportunity to get rid of it?
No. I think Alessandro, with regards to the additive business, we -- our view is pretty much unchanged. I think we see actually in the current year, we see some very strong growth in that business. We're executing better. We, for sure, have flexibility to allocate more or less resources there just from -- depending on the trajectory we're seeing. But I don't think we're sort of at a scenario where we're seeing we need to -- we need to take any dramatic actions. I think what we're describing in terms of the portfolio is more sort of on the smaller technology bets that we've made, things we're really not seeing the traction. I think I go back to, again, the additive business from a bottom line standpoint and how we talked about it is performing exactly in line with what we communicated at the beginning of the year, actually exactly in line. And top line and order intake are actually quite strong for the current year. So we remain committed to that.
May I ask you a final one on the flow business, so the INglass. Do you think that it -- I mean there are 2 scenarios. Automotive production is increasing a lot. And hence, this business should have a big, big tailwind. Or maybe because of the consumer spending going down, that business may not accelerate. Do you think that -- so the automotive car production does not accelerate as you expect. So do you think that then the flow-control business might have a trouble? Or do you see potential for still growing?
Yes. I'll probably start with the fact that INglass so far, has outperformed our expectations significantly. So versus how we under growth the business that time of purchase INglass is performing significantly stronger, both top and bottom line. So we're very, very happy with the acquisition, with the execution of the team and so on and so forth. I will remind you that the driver for the INglass auto-related business is actually much more the proliferation of models and variations of that, both on the exterior and on the interior side. So the great benefit we're drawing there is really as automakers continue to overhaul their portfolio both on the ICE side, at least from an interior and exterior standpoint as well as on the EV side. More models, more iteration of models means a very good business for us. And then I'll tell you, we're doubling down on our growth strategy in nonautomotive. We feel very good about the progress we're making there. We're making some significance in investments, both in terms of CapEx and in terms of operating expenses. And we're looking forward to really generating exponential growth in the nonautomotive business. There's big parallel, our technology advantage and our flexibility translates straight into that space, and we're opening those market channels. So we feel very good about where INglass is going. And again, the correlation is much less new auto production. It's really more of the proliferation of auto models and then the non-auto growth, which we feel good about.
The next question comes from the line of Sebastian Vogel with UBS.
I know third quarter is every time a bit difficult to compare within the quarter. However, I just want to know if it's possible, if you look at the exit demand, it was at somehow somewhat materially different in your end markets compared to sort of the average growth that you have seen in the third quarter? That would be my first question.
No. I would say, September, and I think I can also tell you, October demand patterns have been relatively stable and consistent. So no major changes as we transition into the back end of the year.
And then actually, also answer my second question and then I'm pretty much through anyway.
Thank you, Sebastian.
The next question comes from the line of Torsten Sauter with Kepler Cheuvreux.
I would have a question with respect to the cash flows in the years to come. Considering the level of advanced payments on orders in the filament business, should I expect a cash drain as and when the order book declines? And if so, can you talk us through the mechanics, please?
Yes. Thank you, Torsten, for the question. I think you're absolutely right. Depending on the scenarios and the outcomes, I think there will be -- there can be a temporary draw on net working capital driven by the depletion of customer advances. Now you obviously always have to see working capital as a total. The customer advances that we're collecting tend to be somewhere between 15% and 25% of the contract volume. And subsequent to that, we will obviously buy inventory, accumulate labor hours in inventory and so on and so forth as we execute on the projects. So I think there's going to be a drag on networking apple. But at the same time, depending on the scenario, obviously, but at the same time, I think we're going to see decreasing inventories as well in the release of net working capital from that standpoint. So I think there will be an impact in '22. There might also be a slight impact in '23. But I think overall, we're obviously managing the company with a very strong cash flow generation potential, and we'll continue to do that in the future.
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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