OC Oerlikon Corporation AG Pfaeffikon
SIX:OERL
Earnings Call Analysis
Q4-2023 Analysis
OC Oerlikon Corporation AG Pfaeffikon
Oerlikon's 2023 Results Presentation unveiled a pivotal strategy that entails dividing the company into two distinct entities over the next 12 to 36 months. This separation of OPP (Polymer Processing Solutions) from OSS (Surface Solutions) marks a transition away from a conglomerate structure towards a pure-play focus. Emblematic of Oerlikon's journey from five divisions in 2014 to a leaner, more strategically coherent outfit, this move is designed to bolster market positions where leadership is tenable. With a history of divestitures amassing CHF 1.2 billion and reinvestments of CHF 1.1 billion into strategically pertinent assets, Oerlikon has been realigning its portfolio towards core capabilities that promise leadership in material science and high-tech applications across various industries.
Despite the potential adversities, the Surface Solutions division experienced a 4% growth in operational EBITDA to CHF 262 million, highlighting the company's resilience amidst challenges such as currency fluctuations and a tough economic backdrop in China. Looking ahead, Oerlikon focuses on future profitability and targets to rebound their EBITDA margin back over 20%, showcasing anticipation of normalized market conditions in key regions like Germany and China.
Polymer Processing Solutions faced headwinds with a decline in operational EBITDA to CHF 170 million and a margin drop to 14.5%, attributable to factors such as postponed orders and foreign exchange impacts. The division isn't immune to market volatility but has proactively taken measures, such as reducing overhead costs, which are expected to more prominently bolster the bottom line in 2024.
Oerlikon's commitment to a double-digit return on capital employed (ROCE) speaks to its pursuit of operational efficiency and effectiveness. Despite a decrease in ROCE due to the downturn in the filament market, the company continues to target sustainable improvements in this key performance indicator.
A significant leap in the net debt-to-EBITDA ratio from 0.9x to 2.6x, a result of strategic acquisitions and market dynamics, reflects Oerlikon's commitment to maintaining a robust balance sheet despite aggressive growth maneuvers. The projected leverage ratio between 2.5x and 3x by year-end 2024 highlights disciplined financial stewardship amidst expansion efforts.
Oerlikon's intention to propose a dividend of CHF 0.20 per share mirrors the company's balanced approach to delivering shareholder value while retaining a firm grasp on financial health. This dividend payout represents 42% of the underlying EPS for 2023 and conforms to the policy of distributing up to 50% of the underlying net result, thus reinforcing investor confidence.
Projected guidance for 2024 indicates a high single-digit percentage decline in organic sales, influenced by the downturn in Polymer Processing Solutions, but softened by expected growth in Surface Solutions. A projected operational EBITDA margin range between 15% to 15.5% further articulates the cautious yet optimistic outlook for the company's performance in the upcoming year.
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Good afternoon, ladies and gentlemen, and welcome to Oerlikon's 2023 Results Presentation. My name is Stefan Gick, Head, Investor Relations. And I have here with me Michael Suess, our Executive Chairman; and Philipp Muller, CFO of Oerlikon. Michael will start the presentation with a strategy update and an overview of 2023. Then Philipp will highlight the financials and outlook. We will take questions in the end. With that, I would like to open our presentation and hand over to Michael. The floor is yours.
Stephan, thank you so much. As well, a warm welcome from my side to everybody who made it today to our annual press conference.
And probably I'll start with the major headline, why we separate OPP from OSS and why we formulate Oerlikon as a pure play on our future strategy within the next 12 to 36 months. And then we will touch why and how and whom. And it's nothing which was falling out of the blue sky, and it's coming as a result of I'm serving [indiscernible] here as Chairman and in the second year as an Executive Chair as a result of a longer organized strategy, which we have executed in the last couple of years or more couple of years because, in 2014, Oerlikon was built by 5 divisions, was still a conglomerate. You remember probably that Metco was, in a way, phasing in a thermal spray base and Advanced Technologies was somehow, in 2014, on the way out.
I took over January 2015. We made a deeper dive on the businesses which we had, the management team we had, and there was 2 conclusions. One conclusion was let's focus on businesses where we have a clear market position, #1, or a really strong #2 with a chance to be #1. And then let's discuss the businesses where we do not have the opportunity for market leadership. And do we consider ourselves still as the best owner or not?
And as you know, between 2014 and 2019, '20, we executed pretty successful, sometimes with a little luck. If I remember the divestment of drives, where we started first with a planned IPO and then we could sell it directly to [ Pima ]. But before that, we carved out our pump business and the result was simply that my predecessors missed the opportunity to buy Edwards when Edwards on the market. And then with our pump business, we had only a chance to be somehow #4, #5 or #6 in the business. And all of you know, if you're in such a position, you typically make money in good times, but you don't make money in bad times. By saying that, with the divestments, we made CHF 1.2 billion proceeds. We reinvested CHF 1.1 billion in a so-called smaller group of somehow 20 assets, which we called String of Pearls where we had to improve or we could improve our technical position and sometimes even close a little market niche. And then 2 major investments, or maybe 3, if you count Couerdor in that. Couerdor is a [indiscernible] competitor on the luxury sector and in glass on the polymer side.
On top of that, we paid additional special dividends of CHF 400 million and the regular dividends, which was CHF [ 350 million ] throughout the period. So the last 5 years, the dividend, I think, was summing up to CHF 1.2 billion as well.
So now we have 2 divisions. And in 2017, we thought about to execute the last step. But in '16, we had a drop in the polymer story, and we had no positive results. And for some markets, we looked for 3 years positive results in a [ routine ] of necessity. So the earliest we could reach out was 2020, which was uncovered. Throughout COVID, we had other things to do to manage the company through that time. But the idea was always there.
And as you remember, on the Capital Market Day in May 22, we had 2 things done. First, by January 22, the OSS division was reporting on P&L regional-wise, and the 2 divisions made the Capital Market Day. There was the introduction by myself and Philipp Muller about the corporate picture, but then there was a clear strategy and a clear market development for the OSS and OPP side. As well, maybe you will understand now why, in July '22, we didn't replace the group CEO and why we have chosen the model of an Executive Chair, because running very independent divisions is a test run in preparation for the next step to come. And in addition, a group CEO wouldn't have had a chance to contribute additional value. By saying that, when we will have executed the whole exercise in the next 12 to 36 months with a grace period of a couple of months to see that everything works well, we will close that exercise of Executive Chair agn and come back to a regular setup. I'm not saying that this setup is not regular, but it's something where at least some of your colleagues always have a problem with the way how to organize power and how to organize governance. We have done that in Oerlikon, I think, in a very proper way with a Lead Director and a governance committee and all the other stuff. But for the time being, for our situation, it's the best model.
People always have asked is there a termination. In years before, I couldn't mention that termination. Now I can give you at least a horizon for terminating this.
So we have 2 attractive assets. And the Polymer Processing Solutions is an asset which has, over the last 10 years, a CAGR on average of 4%. So the message we always delivered, there is an underlying trend for a growing world population with an ongoing demand on [ glasses ] is still valid. And there's an underlying demand and a continuing trend on construction, because you should always consider that the machines we are building is the machines for the yarn where you can build them later on, textile or nontextile applications, on. So you use that yarn as well in the construction field on roads, railways, buildings, and you use the yarns in a different specification for polymer-based glasses.
The markets for this industry is typically in direct Asia. 75% of the division today making revenue in China. India is another big market for them. Turkey is a market, and Turkey is not Asia, but at least it's Eastern market. So there are some markets.
The business model is to have 2 handful of customers, maybe 3 handful customers, big projects, and serving them.
The market environment is driven by a dual-pol with another big player in Japan and some small, very small, not very important competitors on a regional base. The creation of a distinct investment opportunity for investors, especially out of that region, to invest in OPP and not to invest in OSS or to invest in OSS, which we'll touch just in a second and not to invest in OPP was one of the reasons why we said we have to separate that now. It was always in our mind, but there was the opportunity, not always the best.
And you will raise the question and maybe I can try to answer it upfront. Is it the right timing? There's never a right timing or there is always the right timing. There's always some crisis out there in the world. There's always something to come. We consider the period now as a preparation to be in the downturn of OPP business prepared in a proper way when we see the markets in a good shape or in a way to come back, that we can use then the opportunity of further developed business to separate. Separation itself, we'll be choosing later on which way there can be, from the whole portfolio, from partially selling, fully sell, partially spinning or [ splating ] to full spin and split these opportunities, we are exercising on them. We're investigating what is the optimal solution for that move. And optimal solution means optimal solution for all stakeholders. That means, as well, what's about the future of the asset? What's about the future for investors to be invested today? And in future, what's about the shareholder value we can create so there will be an optimum, not a maximum in one direction, but an optimum for all directions.
So saying that, let's touch the other division, which is the core of Oerlikon and which will stay the core of Oerlikon as the capability on material science, material know-how, different ways to cut materials in ceramics with diamond coatings with PVD, CVD, thermal spray up to the level of 3D printing. It's a much more agile market environment because it's not only the textile industry. It's much more industries, which we'll see in a second as well. We will focus further on.
We will not lose time in the management to cover 2 businesses which have really nothing to do each other. It was for a period of time to do so. And the reason why we did it was that we did the best out of the situation. And we curate as well here a distinct investment opportunity for investors mainly sitting in Europe, U.S., but as well in some areas in Asia. It's high-tech applications. It's in sensitive industries like in space, like an aero, like in health care, like in semiconductor business, like in defense, so a completely different business situation.
And where we're coming from and where we are you see here. In 2013, and a lot of you may remember that or not, Oerlikon Surface Solutions was mainly 75% tooling plus automotive and then very small to other businesses, which was a little bit in energy and a little bit in aviation. We diversified that. That took some effort, but we diversified that toolbox. First, we enlarged the toolbox from PVD [ while ] CVD, diamond coatings and thermal spray, including additive manufacturing, a much wider toolbox in more industries.
And this is exactly the other part of the strategy we have, which is pretty simple, being #1 in that what we're doing and find enough applications around the technologies you're capable for to use these technologies in other applications. So we rolled the technology, which was developed for cutting tools or nodes, into other industries. We adopted their technologies. You will see later on a slide how that works and how much different applications year-over-year we are finding and doing. And you see as well that, even sales-wise, over the last 10 years, Europe, Asia Pacific and North America, which, by the way, are the regions which are carrying the P&L as well since January '22. So we have the toolbox still central, but the P&L responsibility already regional following our markets.
And there is, meanwhile, 161 production coating centers in 36 countries with more than 30,000 customers. That sounds complex, and it is complex. And to manage that complexity is not the easiest one, but we're one of the rare companies who are capable for doing that. We have more than 500 coaters globally operating. We have a huge amount of datas on customers, applications. We're preparing for a better utilization of that data. So that's why we have a Digihub. That's why we're working in [ BRIC ] on a virtual coating center, which will be the, let's say, the pacemaker for -- or the road maker for a wider application in a way that you have virtual factories where you know, in the different sites, exactly what the other sites already have done. So, it's a much better exchange of data. This is a huge strength where we haven't played in the past. So we've been in a lot of countries. We're working with a lot of different industries, but we haven't yet played this power. And it will still take a little while to play it fully, but we are embarking on that road, and we're embarking successfully on that road.
So, another example only as a side step and I will stay with my time, maybe you have never really realized or people haven't realized that, since 2016, we do material development based on AI and big data. This competitor, which we bought in California, which we have utilized the last 7, 8 years much more for material developments is nothing else than having different algorithms and working on these algorithms with the datas available, which we have, to develop new materials. And instead of working on -- years on a new alloy, we can make new alloys within 3, 4, 5 months and even touch about if this alloy would really fulfill the requirements, if it's a good solution, what will be the cost of that or other ways, maybe even better ways, to adopt an existing alloy instead of using a full fully new-design one. Why is that the case? Because very often, you have industries, especially in air and space, which are very conservative, and these industries don't want to change too often the materials. So you have to prove then that there's a really radical step in that, and then they're open to enter this.
So with the [ broader ] technology, we still have -- I name it Dynamic App because Europe is still far ahead of APAC and Americas. Americas, we had, and Philipp will reiterate to that, last year, only 13% growth, I think the years before even more. The Americas for us is the growth area, Asia Pacific as well. Europe is growing, not as fast as the other 2. So the target for the company -- and it shows you as well the opportunities of the business is to close up to Europe. So Europe is [ still on the ] move, so it will take a while to get fully in, but the clear focus is to grow the Asia Pacific region and Americas on the same level in Europe.
By saying that, we see Oerlikon with the activities in the core of Surface Solutions as a clear #1 market leader. There's no one globally even getting close to us. We have an integrated high-tech offering with very global and diverse end markets. And by the way, to these end markets, if I take this picture, a couple of years in future, you will have some more pies within this donut because we are actually entering the semiconductor business with the new coating technologies with 3D parts for the semiconductor manufacturing because you have a lot of life-limited parts in the manufacturing chain.
We are opening up materials for the hydrogen production. If there is a big hydrogen industry, we will be one of the material suppliers for the stacks, for coating the stacks for these hydrogens. We're developing solutions for terminal-insulated shields for electromobility, which I will touch a little later in a little bit more details. So there is a lot ongoing in our innovation pipeline.
By the way, on the polymer side as well, there is a full innovation pipeline which we will utilize when the market's coming back. That doesn't make any sense to show that now and to wake up competition. So taking that, with the sales upside with our sales, with our M&A operational upside, we show the profitable growth.
And by the way, you may say '23 was a difficult year. Yes, it was.Bbut to achieve, especially in OSS, the results that you grow by 7%, if I would eliminate FX, we would have grown in Surface Solutions by 16% globally. We have -- only in the last 3 years, we lost CHF 400 million top line only because of currency. And CHF 400 million is a 16% or 17% EBITDA level. You know what an absolute EBITDA and an EBIT means. It is simply not there because we changed it back to that.
We don't draw the conclusion, okay, then let's move out. No, we face the challenge because we see a lot of other positive arguments why we
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a summary, you will see that, with the order intake and the sales, we will have, even on the sales side in '24, probably a lower number than we had in 2023. So, '24 will not be an easy year again, but it will be a year where we can and will show that we can turn profitability of our businesses and growth of our businesses further on in a positive direction.
To have the CHF 16.5 million and CHF 8.7 million EBITDA and operational EBIT margin was, in my eyes, a very good result. And on top of that, to lead in innovation, to drive sustainability and to strengthen resilience -- and to strengthen resilience, I think what's clear when you look on this donut again, instead of depending on one industry, which is tooling, we have now 6 industries, probably future 7, 8 industries, where we work with our applications, where we work with our technologies in.
We face all the challenges, you know, the geopolitical tensions, the very slow recovery in China, inflation, which leads by other reasons to cautious consumer spendings. The FX headwinds I have already mentioned, and the rising interest rates. Nevertheless, we were waiting on industrial production, our Surface Solutions, and we're waiting on customers' profitability in polymer processing.
The market outlook is more flattish. There is -- aviation looks positive, especially when you hear about Airbus and some developments there. When we see some of our developments, which we're actually testing in the U.S., which is high entropy oxides, which could lift engine turbine intake by 50, 60 degrees, which will have a much better erosion -- not corrosion, but really erosion behavior, which will help in a lot of applications, especially on the military side when you're operating in a sandy environment, but as well for commercial and a lot of other stuff.
When we say we lead in innovation, then we have next-generation coatings. We have the battery shielding, which I mentioned, which is out of a carbon coating, which we use for friction systems and return that technology in heat shields for batteries, which gives you a -- that's a requirement of the auto industry, of electromobility. When you get the 5-minute period to evacuate a car in case it's burning, to get your people out, to get your kid out, to get your own parents out if you have them in.
And our technologies are very, very promising. I have signed a big contract with one of the premium manufacturers already last year.
We look forward. There is more to come, not only in Europe but as well in Asia Pacific and in the U.S.
We have the next generation of [ liner ] technology, as I mentioned already. And these are only some examples.
What else drives sustainability? We are on track with our ESG targets. Our ESG rating, according to MSCI AAA, we belong to the top 15% globally in the industry -- to the most sustainable companies. Close to 80% of our R&D spending already goes in sustainable products, and we have strengthened our resilience significantly with the examples I've mentioned to you.
So here, only a snapshot. And don't be shocked [indiscernible] because of his engineering background, he really wants to bore us now. It's not the case. I only show you some examples in all different areas. And they're not moving in tooling. They're moving in tooling, in aviation, in semiconductor, in luxury accessories, different innovations which we have in the PVC (sic) [ PVD ] and CVD. PVC (sic) [ PVD ] stands for physical vapor device (sic) [ deposition ]. CVD stands for chemical vaporizing depositing.
We have applications in the thermal spray hemisphere, where we work as well. aviation, automotive, energy, so it's not linked with one industry. And whenever it has proven its capabilities in one industry, we still can roll it out into other application of other industries.
So the appetite, for example, in aero -- in tread engines -- and I was running 5 years MTU when we brought it public as a COO. There was no PVD coating in tread engines at that time. There was some spray. Now there's more and more appetite to get PVD coated parts in the engine because that's improving the lifetime and the durability of the engine and the performance. So if you take electroplating for -- galvanic electroplating for luxury goods, the first which disturbs you are all the scratches you're having. PVD coating doesn't have that. If you buy a bag for several thousand years, you don't want to have after 1 year the scratches in either because you buy the bag as one and you want to keep for 10 years or you're one of these luxury customers who are selling that bag after 1 year on a second market and buying the next one. Scratches is always disturbing. But to cover the demand of that industry was necessary to be part of the industry because there have been several attempts in the past when we worked with Swarovski and with [ Arada ] and others. For them, we've always been an industrial player. Now we are a luxury player. Now we developed with Hermes, with Gucci, with Louis Vuitton for their demands because they take us serious. But we had to buy the sales channel. We had to buy the companies working in that. Otherwise, you cannot rule out your technologies in these industries. They don't take you serious because they don't take you as part of the group. All that happened.
And the last one I mentioned already, the same as we have really great, new solutions on additive manufacturing for the semiconductor industry, for RF antennaes, which are not only for satellites, you have RF antennas in almost any kind of computers, and they all need cooling plates. And the cooling plates are a difficult piece of aluminum today manufactured and then welded together. And in 3D printing, you can optimize them dramatically -- only to give you some examples about what we have done in the past and what we will do in the future. It's a real tech company where the technology drives our success and drives our growth.
This is only the BALINET ALCRONA when we launched in 2004. The ALCRONA PRO in 2010 was a 20% better performance. Now the BALINET ACRONA [ EVO ], which we launched in '24, will again improve by 30% the performance of the tools getting coated by that. And this is huge because this gives you much more lifetime or higher durability when you operate them tougher, but it's improving significantly your cost base.
Touching sustainability, within the last 19 seconds of my time, means that, with 2 applications, the lifetime extension we do on metals and the efficiency increase, which our coatings providing on turbines, we are saving, into the first application, 20% -- 28% of the carbon emissions of whole Switzerland for 1 year within our customer base. And we're saving 88% within the aerospace space of Switzerland with our Aero customers. So only these 2 applications are saving more carbon emissions in the applications which we are delivering than Switzerland is emitting. I need to give you a good reference about how sustainable that applications are what we're doing. Besides that, internally, is [ Code1, 2 and 3 ] is under good coverage. And we stick to our goals, and we will fulfill them.
So conclusion, by '23, before I hand over, 2 attractive position divisions. The midterm growth drivers are intact. The synergies are limited. And by simple that reason, we will separate within the next 12 to 36 months. And don't ask, is it tomorrow? No, it's not. We have still to prepare some stuff. We have, within the last couple of years, observed our environment very well to choose the right solution and then to execute the right solution. Will it be 36 months? I don't know. But within that frame, it will happen.
By that, thanks from my side. Later on, hopefully, a lot of questions. Now I hand over to Philipp Muller. Philipp, it's yours.
[Foreign Language] Thank you, Michael. As usual, I will start with group results and then provide more details on our strategic priorities at the divisions. And as usual, at this time of the year, I will finish with the outlook for 2024.
At the group level, orders were CHF 2.5 billion, down 13% in constant currencies, driven by Polymer Processing Solutions. In Surface Solutions, orders were up 4% organically.
We highlight the quite dramatic movements in foreign exchange here on this slide, driven by the strengthening of the Swiss franc. Just since the beginning of 2020, this has negatively impacted orders and revenue to the tune of about 15%. We don't have a huge cost base in Swiss franc, but as a Swiss headquartered company, we do incur some of our ongoing expenses in Swiss francs. And so, naturally, this development has also put significant pressure on margins since 2020.
2023 sales were CHF 2.7 billion, a decrease of 1.5% at constant exchange rates. This includes a 4.5% contribution from our acquisition of Riri. While Polymer Processing Solutions was impacted by the very slow filament market, Surface Solutions achieved 7% organic sales growth.
Operational EBITDA was CHF 444 million and EBITDA margin of 16.5%. Profitability was impacted by operating leverage, higher input costs, the mix that we incurred in the year and certainly the strength in Swiss franc.
During the year, we continued to focus on pricing and the cost out measures we previously described. And so this led to a solid margin increase in Surface Solutions in the second half of the year and certainly counteracted the negative operating leverage in Polymer Processing Solutions towards the end of 2023.
As previously discussed, we took certain actions in the fourth quarter of last year to improve and further improve the resilience of our business. Specifically, we decided to discontinue some activities where we don't see enough future potential. These actions were mostly related to early-stage technologies with very limited revenues. We incurred certain one-off charges related to these items, which are mostly noncash. In addition, we took a significant step in further improving Surface Solutions margins by consolidating 5 factories in Germany.
With that, let me provide you with an update on our continued actions to drive profitability. You've seen this slide before in this chart. Our focus on strengthening our company's profitability is unchanged. In addition to growing specifically Surface Solutions now organically, we've put a focus on working with the right structural cost base and optimizing the portfolio of products and technologies.
As you see at the top of the slide, we have reduced overhead expenses by 24% since 2019. And this chart includes the effect of the 3 acquisitions that we've made during that time. Additionally, we took the proactive cost actions ahead of fulfillment downturn, which we announced at the end of last year, and we're currently optimizing the footprint of more coating centers in Germany.
As we've previously stated, part of our strategy is to continuously renew and review new technologies and assess their viability in the market. In the fourth quarter, we determined that our Teknoweb and automation businesses in polymer processing solutions will not achieve the commercial success we had anticipated, and so we decided to discontinue them. They do not no longer fit into the overall capital allocation framework that we have for the overall company, but also for the strengthened individual divisions in the future.
In parallel, as you know, we realigned our additive manufacturing business. We're improving the scalability of the business by transferring the European production components into the United States. North America is certainly the largest additive market in the world and much more mature in terms of transition to [ seamless ] production and overall innovation.
So, I would say these actions were quite significant in the fourth quarter, as you've noticed. They're certainly meant to continue to optimize and strengthen the resilience of the company. We will continue to review and optimize our portfolio going forward, but certainly at a much smaller scale than what we did in 4Q. And the 4Q actions are certainly also in light of the future structure of the company, a leaner setup, more nimble and more resilient.
Further on the page, what you see is initiatives that are aimed to improve our product portfolio and include the elimination of Surface Solutions materials and equipment numbers, which were subscale and dilutive. You can see here, we have reduced the number of material codes by 43% since 2020. And this is really without losing any revenue, so significant simplification that will contribute to better margins and more focus in the future.
And as you know, our R&D, one of the key strategies for us is to introduce ongoing new R&D developments, and we have an even stronger focus on the commercialization of those technologies. We will continue to price upcoming innovation at a significant higher gross margin and at a premium towards the existing portfolio.
Overall, we have future proof of the company, and we will continue to do that, and each of the divisions individually, not only with the measures taken in 2023, but also with the measures taken before that. These measures, while significant in Q4, will help us to sustainably improve profitability and capital returns going forward.
With that, I will go through some more details on the Surface Solutions division. 2023 orders improved 4% organically to CHF 1.51 billion. In terms of sales, we achieved 7% organic growth in 2023 and 7.6% in Q4. In light of a challenging industrial production environment, this is a very strong result. It includes robust 13% growth in the Americas, which benefited from our new geographical organization, as well as the recovery in the aviation markets.
I would like to remind you here that we generated 6% organic growth in 2021, 10% in 2022, and now 7% in 2023. So, when we talk about the Surface Solutions business and really the future of the company being set up for substantial organic growth in the future, I think there are some good proof points there.
Operational EBITDA in 2023 improved 4% to CHF 262 million. The EBITDA margin was impacted by the strength in Swiss franc, higher input costs, and mix. And when we talk about mix here, it primarily relates to a lower share and short-cycle service revenue as well as a difficult economic environment in China. The latter specifically has an impact on margins since, as you know, we sell a very high-margin product portfolio in China.
As we've explained, also during the last year, the pricing and cost actions we took phased in throughout the year, and this was our expectation all along. So the cost actions and the continued pricing actions supported margins in the second half of the year. And this is showing positive effect. So, as a result, margins were up around 150 basis points in the second half versus the first half of the year. As I said earlier, we took a decisive action in Q4 by realigning our additive manufacturing business. This led to a one-off charge in Q4, but will structurally improve profitability and our ability to commercialize this technology.
Going forward, the cost and pricing actions we are taking, operating leverage and portfolio optimization, and some normalization in key end markets such as Germany and China will allow us to bring the Surface Solutions margin back to our midterm ambition of over 20%.
Next, I'll go through Polymer Processing Solutions. Orders were CHF 943 million, and sales were CHF 1.17 billion in 2023. Both were mainly impacted by order postponements in filament and negative foreign exchange. To a lesser degree, we saw nonfilament activities being affected by softer PMIs and, in the second half of the year, fewer car launches. We believe that's very transitory in nature.
Operational EBITDA decreased to CHF 170 million. The margin of 14.5% was certainly impacted by lower volumes, foreign exchange, and really, at this point in the market, a limited ability to pass through higher input costs in terms of pricing to customers.
As announced last year, we have taken proactive measures to protect our margins in 2024. And we've actioned these headcount reductions in production and overhead functions. Really, the phasing in of those benefits started to support our 11.2% operational EBITDA margin in the last quarter. And we expect those cost actions to become even more visible in 2024 as they will counteract lower sales volumes.
I think important to note here is that we're, for all intents and purposes, complete with all those cost actions that we have announced to you at the end of last year. We've executed them. And so we feel very good about the cost basis for the next 12 to 24 months.
As flagged also during our Q3 results here too, we executed on this capital allocation framework in Q4 and discontinued the Teknoweb business. We sold our automation franchise. These 2 actions led to one-off charges in Q4, are really also seen in light of the portfolio actions, which we described. They will both structurally improve the profitability going forward, and both of those businesses had a very minor revenue contribution in 2023. And the reason why we discontinued them is because we really didn't see the commercial liability in the market.
With that, let me move on to cash flows. 2023 cash flows from operating activities were CHF 199 million. As we had communicated, net working capital was a use of CHF 76 million in 2023, primarily driven by the reduction in customer advance payments and accounts payable in our Polymer Processing business. Important to note is that, compared to 18 months ago, customer advances have reduced by over 60% to CHF 205 million.
And you see here in the chart on the bottom left, we're now pretty close to the trough levels of the last filament downturn, which we had in 2016. And so, as such, we expect limited further cash outflows from this dynamic going forward. I think that's very important when you think about future cash flows for the company. Altogether, when you add it all up, this led to an operating free cash flow of CHF 60 million.
Next, I'll touch on return on capital employed. ROCE was 7.7% when we look at the organic operational performance of the company and at 2.7% reported. That's a decrease compared to last year, which is really related to the filament downturn, which transitorily impacts -- negatively impacts EBITDA and the lower customer advance payments. We continue to target certainly in the current form, but also in the future form of the company, double-digit ROCE, sustainably double-digit ROCE. And the recovery of -- the market recovery in filament will help us with that. We will continue to contain costs in a leaner setup for the overall company, and we will continue to execute in a disciplined manner on our capital allocation strategy.
With that, I'll quickly touch on the balance sheet on the next slide. Our net debt-to-EBITDA ratio was at 2.6x compared to 0.9x a year ago. This mainly includes the impact of the Riri acquisition and the filament downturn, which has a negative impact on EBITDA and net working capital.
As a company, we really remain fully committed to maintaining a strong balance sheet. We will continue to focus on cost management, net working capital and cash. And I would say, ceteris paribus, we expect a leverage ratio between 2.5x and 3x by year-end 2024. Obviously, that doesn't include yet potential actions that are going to happen.
Important to note is that, at the end of 2023, we had access to CHF 1.1 billion of cash. This was also supported by our placement of 2 series of senior unsecured bonds in the second quarter of last year.
We have one debt maturity of CHF 150 million coming due in 2024. And we will decide at a later point in time whether to refinance or not. This will certainly depend on interest rate environment and market conditions and so on.
In terms of the dividend, we will propose CHF 0.20 per share, which reflects 42% of our underlying EPS in 2023. It's in line with our dividend policy of paying up to 50% of the group's underlying net result and reflects both our commitment to pay an attractive dividend to shareholders but also our focus to maintain a strong balance sheet.
With that, I'll briefly touch on the ESG rating improvements, which Michael had already mentioned. We are pleased to see that also external partners and agencies recognize our leadership and sustainability and innovation. This ultimately makes us an attractive employer and investment opportunity.
Particularly in ESG, we have continued positive momentum with several rating upgrades in 2023. In the last 3 years, we've become part of the top 15% of global companies within the industrial space. This was supported by our improved disclosures in our sustainability report and as a reflection of the fact that sustainability is in Oerlikon's DNA, as Michael mentioned. Our solutions improve efficiency and sustainability of our customers significantly.
With that, I'd like to conclude the presentation with our 2024 guidance. We expect group organic sales to decline by a high single-digit percentage at constant FX. This is driven by the downturn in Polymer Processing Solutions and partially offset by the growth we expect in Surface Solutions. Group operational EBITDA margin is expected to be between 15% and 15.5%.
In Surface Solutions, we're expecting low to mid-single-digit organic growth. Compared to 2023, the growth pace in Aviation, we're expecting to slow down somewhat given that global passenger numbers are approaching 2019 levels. And light vehicle production, which increased by about 10% in 2023, is expected to only increase very slightly, maybe about 1% in 2024. Certainly, as leading indicators are bottoming out, we expect to gain more traction in the second half of the year.
On EBITDA margins, we're expecting 17.5% to 18% for the division. Here, again, pricing and cost actions will support us in reaching the high end of this range.
In Polymer Processing Solutions, the lower 2023 order intake will impact 2024 sales, which we expect to be down in the mid-20% range. We communicated on the challenging demand environment already last year, obviously, and have proactively prepared our cost base. And these actions, which I described, are fully on track and will support an approximately 11% EBITDA margin in 2024 despite the significantly lower sales volume.
In terms of outlook for the order recovery in the filament business, I would say it's too early to say anything definitively. What we do is we specifically look at leading indicators and the improved economics of our customers.
The chart at the bottom of the slide highlights the cash margin that our filament customers earn on every ton of product they sell. We've included this chart a couple of times now. Without assuming that history perfectly predicts the future, we look at prior downturns in this industry and look for certain parallels. What you can see on the chart is that our customers saw a negative margin in 2015, which turned again positive in 2016. And given a certain time delay, this resulted in a very challenging 2016 for Oerlikon, which was followed by our order and sales recovery in 2017.
And so when we look at the current downturn, the margin of our filament customers was negative in 2022. It improved again into positive territory in 2023. This provides a positive indication for an order recovery in due course, in our view. Most importantly for us, the underlying filament growth drivers are very well intact. Michael described them. The filament market has been growing with a CAGR of 4% in the last 20 years. We are absolutely confident that this growth will return and continue. We have meaningful innovation in our pipeline to accelerate the market recovery.
With that, I'll hand it over for -- to Stephan for Q&A.
Thank you, Michael and Philipp, for the presentation. Now it's time for Q&A. [Operator Instructions] We will now start with questions in the room. Please first introduce yourself and institute you're representing.
Mike from Baader-Helvea. So my first question is actually on the, let's say, the corridor between your operational profitability and the reported actual number and how you're expecting that to develop for 2024 in terms of restructuring charges. Are there any potential additional charges expected? Or is it going to be relatively clean in 2024?
And then my second question is on the potential portfolio realignment. Are there -- you've mentioned quite a few different options that you're evaluating as it's very early in the process. Are there any options which are off the table? And also, are there any options which would potentially affect the shareholder structure? Could...
Yes, I'll start with the first one. I'm expecting 2024 to be a completely different setup and a much cleaner, if you will, set up of numbers. It's really these actions that we've taken to focus the portfolio are really also to be seen in light of the future structure of the company, leaner, more focused and so on and so forth. So, I don't expect that -- I think we will incur a certain limited amount of separation costs as we go through this process. But really, for all intents and purposes, all substantial portfolio cleanup actions should be done. I think that will be the first one.
And then on the portfolio realignment, really all options are on the table, and we want to maintain that...
It's simply -- it's simply too early to speculate in case of option sell or spin or split or whatever and how would that impact an even shareholder structure. That's all in. There's nothing excluded. And that's why we said 12 to 36 months. People who know me probably will say, he will not wait 36 months. On the other hand, we are not in a hurry to do something within the next 6 or 8 months. We prepare it carefully, and we execute it in the best way for the company. I think we have a track record of doing that.
If you remember how much pressure we got in selling drives and withstand the pressure and we did it in a very professional and good way. And all the divestments we have done, no acquisitions, we have done according to our conditions and not to the conditions someone told us. And it was as well, in the years when we've been sitting on a big amount of cash, people been coming and say, "You have to buy this. You have to buy that." If we would have done it, we would have burned a lot of money because there was highly overrated assets in between. So we do it in the best favor. And so here, that, I mean, is a certain trust necessary to the Board of Directors and to the management team to execute it in a proper way.
For us, important, I want to add that. We are very early always. It was in 2016, we'd been told you've been a little bit late with the communication about the downturn in the market. We took that feedback very serious. We came back in 2022 summer and told you there will be a downturn. Even downturn was a year later, but we told you already look for that. That's the same way we do this now. You can be assured we will execute it. You can be assured we'll execute in an optimized manner for all stakeholders, but there is no way back because it was always clear that the 2 assets are great assets, both market leaders, but they're serving different markets. They're serving different investors. They don't fit perfectly together. And this was how we prepared it now.
Thank you. Alessandro Foletti, Octavian. I have a few questions. Can I ask them one by one? I limit myself to 3. But first, I have a pre question because...
[indiscernible]
[indiscernible] accounts -- 3.1.
Right. That's the smart way to do it.
No, but this is just a clarification. I'm sure it interests everybody. You said restored Surface Solutions margin above 20%. In the presentation, I see 20% as a midterm target.
20% plus.
So why does this...
20% plus. Yes, yes, yes, it's a good question, but we don't try to be that prescriptive on it. For sure, the ambition is to generate, in that division with that product portfolio, margins of 20% and in addition to that. At the same time, we obviously have to face the reality that, over the past couple of years, there were a number of things that really impacted us adversely.
So, I would say before we start running, we walk. We work ourselves up. But I think we've done a really nice job in the second half of last year to counteract the very, very substantial amount of labor inflation that we felt in the business. We executed on the cost-out actions. We executed our pricing. We're going to continue to do that. We were maybe a little bit later than what we expected. So, I think we're going to march back in that direction and work ourselves back to that level. And then, when we're at 20%, we can argue about is it more or less?
But then on my question on the margin of Surface Solutions. What's the gap between this potential 20% level and what was in the past, which, after Metco, was already a few times. I just checked my numbers again
[Audio Gap]
22%, 23%.
Yes, I think -- and we were obviously already higher
[Audio Gap]
in 2021 and in 2022. And I would say let's just -- we've talked about this a couple of times, what happened in the last 2 years...
[indiscernible]
Not higher than 20%, but higher than in 2023. And what happened in between was obviously a very substantial amount of labor inflation. And it does take us a little bit of time to offset that and really translate into customer pricing and so on. But we've previously said, I think, all the technologies are coming to fruition. I think we've continuously shown that. Again, maybe outside of this very significant inflation, we'd already be a couple of steps further, but we will continue to show that trajectory towards a much higher margin business.
Then if I'm allowed to add here from -- maybe I'm too much engineer. But there is always a mix of what you're doing, and there is a service. There is a material business. There's equipment business. And as I have tried to show you, on Page 5, we have a much more diverse business as we have done maybe in 2016 numbers. You remember when we had 22% of the company. This is a [ midterm ]. I would say we can come back to that. But then we handle the company in a much more complex way because, instead of serving the tooling business, we're serving in 6, probably 8 to 9 different industries, markets, talking their language and working in their environment. But this is exactly the part of the strategy which we're executing. Hopefully, that helps a little bit to understand that this while, the last couple of years, been transition phases.
And I don't want to -- you've seen that we had something behind transition, but I'll give you one example. We had an EB-PVD solution for replacement of hard chrome. We developed that. We've been ready to introduce. European Commission [ never ] banned hard chrome [indiscernible]. So sometimes you have technologies developed which it simply doesn't serve, but you have the cost. And you have others which are overnight developing super, like ALCRONA. ALCRONA PRO was one of them. It was a blockbuster. In 2016, '17, it was 40% of revenue was ALCRONA PRO with a super market leading situation.
What I want to say is the world is not one dimension, and that's what we are executing.
Right. So if I understood you correctly, really, the gap lies more in the product mix and a different mix of [indiscernible].
It's in the mix, sometimes how fast a new product is developing, someone is phasing out. It's a wide range of 5 big families of coatings. Within the families, we have a lot of different applications. Applications are in different industries. In the end, it's a sum of a lot of small parts. It's not so easy always to calculate that, even from an analyst perspective, because sometimes aviation is running better than an application in automotive or the application channel industry, which is high profitable, runs better than something in space -- where you would have believed that it's super profitable. It is probably, but the other one is more.
I don't want to make the world even more complex, but it is. It's not that simple as it sometimes sounds.
I would say some of it is the mix that we talked about. For sure, there's also -- when we talked about consolidating 5 factories in Germany, there's still more of that work to be done.
And then the third component of it is pricing, which I think we have really reestablished in our service business, specifically an ability to price more aggressively, to be more flexible in terms of the pricing and adapt to certain market realities, which I think, for a number of years, we probably didn't have as much.
And so I think, between those 3, better mix, China and Germany going a little bit better than what they do at the moment, these cost actions that we're still taking on the portfolio and then pricing, I feel confident that we're going to get to a much higher margin level.
And the second question on Surface Solutions, did I understand correctly that you plan to have, once polymers is out, sort of a double-digit return on invested capital [indiscernible]?
For sure, that needs to be the intention now. I want to be cautious, obviously, with everything we're saying when it talks -- when we talk about the outlook, when we talk about midterm growth ambitions, when we talk about guidance and so on at the moment. We do this for the combined company. How we will evaluate then balance sheets in the future and so on is still a little bit out. We will do that in due course. But for sure, at the end of the day, every company has to deliver on those returns expectations just from a value creation standpoint.
But would you agree with me that separating is actually -- it will sort of expose the lower margin of Surface Solutions? I mean, without [ EB ], you might have lower return on invested capital, a starting point.
I think it depends on the [ rate ]. For sure, what you have is a dynamic and it's the whole background of what we're talking about here -- is you have a lower capital intensity business in Polymer Processing Solutions, which will -- which needs less capital to grow. And I think you have Surface Solutions, which will require more capital to grow.
But I think, at the end of the day, especially when you look at it from a cash-on-cash standpoint, and you probably -- you exclude the significant amount of intangible assets that sit in Surface Solutions, so from a CF ROI standpoint, also Surface Solutions will be a strong business, grow fast and generate strong margins and strong capital returns.
My last question, if I may, on the Polymer Processing, you made a comparison with 2016, '17, which I agree, that's what happened, and we saw that happening. Also what we saw was that then suddenly there was a big boom of orders, and you could sort of not follow with your capacities really and sort of you then were not really able to profit from this boom in a proper manner.
[indiscernible]
Will you be able to avoid that next time?
I don't know because...
[indiscernible]
Sales were up 57% in 2017. So I don't know that I would say we didn't profit from it. I would just put it in perspective that there's obviously -- behind the reduction of some of the production capacities that we've done last year is also a strategic move where we both shift the supply base and certain manufacturing parts closer to our end customers. And so we're in the process of building that out. We're very aware of that.
There's always this kind of how much do you do yourself? How much do you give to suppliers? We feel like we're going to be able to respond to an upturn just like we did last time. It's not easy, but we're going to be able to respond to it.
Sebastian from UBS. I also have 3 questions. I would ask them one by one, if I may. The first one is on Surface Solutions and with regard to the different end markets over there. And they're related to the exit rates, where the exit rates were materially different to the average that we have seen over the course of the quarter. And then, of course, since we're already in February, is anything what you have seen so far in the year is sort of having a bit of a stronger move in one or the other direction in any of the end markets that you outlined earlier? That would be the first question.
You're saying exit rates in terms of growth or margins or both?
Growth.
You saw the sales, fourth quarter, grew 7.6%. So I think a healthy growth clip and it's really driven by a lot of the things that we're doing as a company and growth initiatives. And then the overall environment is U.S. is good, China is muted and Germany is soft. But I don't know, Michael, if you want to give a little bit more color on the end markets.
Aerospace is doing well. Automotive is still struggling a little bit. General industry, it depends where they are allocated to. If they are more linked to the supply base to the automotive industry, they're hesitant. There is a rational and an irrational factoring. The irrational factor is that a lot of customers or suppliers take [ CF ] and other players simply don't know how far Europe will go with this e-mobility story because, in 11 years, there should be no ICEs anymore in Europe, which is difficult to imagine because it's 11 years down the road. So how far they are in their transition? Last year, I think there was 91 million cars globally. So by making a long story short, out of them, 5% was electric. The rest was ICEs. So, the transition here will take longer, especially in the global dimension.
Market actually for '24, as I said, where it looks pretty okay, that's air and space. Where it looks average is automotive. The channel industry is a little bit shaky. Health care industry looks not that bad. But it's -- overall, it's more flattish than some real boom upside.
Got it. The second question was directly on there continues -- the auto part. You mentioned that the overall industry is supposed to be growing by around like 1%, or at least that's a soft indication you had on the slide deck there. I assume your ambition on that is sort of to outgrow the market and that 1% would be rather the sort of low end. That's more of a clarification question.
And the second one on EV -- on automotive is the EV exposure there. If you have some sort of -- can you give us a little bit of a ballpark indication what sort of EV exposure you have in your current auto exposure overall, that would be great as well. That's the second question.
Yes, I think, when you think about auto -- and we're probably not going to give individual expectations. But you saw our organic growth guide for Surface Solutions, sort of low to mid-single digits. And that's -- basically the assumption is very, very limited volume growth and our ability to price better. Certainly, that's even harder in the automotive industry, but that's the base assumption.
And then on the electric vehicles, I think we specifically don't give a split between ICE exposure and EVs because, frankly, for us, that is almost impossible to tell because so many components go in there. What we can tell you is not just the battery shielding, but also coating for certain gear components and so on is growing rampantly, just like the overall picture from a very low base, but we have a multitude of solutions there and continue to develop that. And we'll continue to sort of time that together with how fast actually EV adoption proceeds.
Got it. My last question will be on PP. With regard to the sort of trajectory that you have outlined already, does it mean that actually the [ fourth ] quarter order intake should be sort of the low point or the bottom and then, going forward, we see some potentially initially some gradual improvement and then potentially later on some more of an acceleration? Or what is the sort of the cadence you have in mind over the course of the following 12 months or coming 12 months?
Yes, we're very hesitant to forecast the timing of that very specifically, and also cadence. As we always describe, typically, what happens in the market is that, once one customer starts to move and reinvest in Polymer Processing Solutions, all the other customers follow in a very, very timely manner. So, when exactly that switch kind of flips over is very, very difficult to predict. We don't want to predict it because it's probably not helpful to aim for that, and it's very difficult. But when that happens, I expect that there's going to be a similar movement, again, which is partially driven by a need to invest and partially by our introducing new technology, more productive technology, which requires the customers to invest at the same time.
This is [ Ingo ] also from UBS, but the Credit side. Regarding leverage, 2.6x is starting to inch up quite a bit. You're guiding for up to 3x. Can you maybe give some color on the pace of deleveraging after that? Or are you waiting for the big business split-off to be your main cash generator? Or what can we expect there in the near future?
Yes, [ Ingo ], I think you're right that this is higher than, obviously, 0.9x, where we were at the end of 2022, but it's fully expected by us. We obviously -- we knew and had announced that to everybody that the filament market was going to go through this down cycle. We had the opportunity to buy Ririr the beginning of last year, which we know is a very strategic and very important acquisition for us.
And then I would say, as you've seen now, too, with some of the decisions we've made from a capital allocation standpoint, the focus will be on deleveraging the balance sheet in a very swift manner. Market recovery in filament is going to help with that. Potentially some of the transaction structures that we will choose will help with that. And otherwise, it's going to be the organic business that will follow on that. But I think the entire framework is certainly focused on doing that.
But don't forget, there's the cash component and there's -- the much more significant component is really the earnings component and the filament earnings. And I think that normalizing will be the biggest contributing factor.
If I might follow up on that, if you see any more potential M&A opportunities, would you act on those as well, pushing leverage even higher? Or do you think you really will stay here?
I don't think at the moment -- and also, just from a focus standpoint, I think we will be very focused on executing the transaction and potentially a number of transactions that we've described to you. And I think that comes first.
Christian Arnold, Stifel. Coming back to the capital intensity of the 2 businesses, looking at your cement reporting, I see that operating assets, there's a split 2/3, roughly, Surface Solutions, 1/3 Polymer Solutions. Are there major differences in the different asset categories? So thinking about tangible assets, intangible assets, inventories, account receivables, are there major differences about this overall 2/3, 1/3 relationship between the 2 divisions?
Yes, you have to distinguish a little bit and first take out the intangible assets, because it's really a large part of that is related to the Metco acquisition, which was many years ago. And so I think you have to separate that. And then you look at the fundamentals and you say Polymer Processing Solutions, at least the filament business is less CapEx-intensive. It's an equipment business, and it tends to be, by definition, net working capital negative. So, that is a business that requires very, very little capital to act on.
And then Surface Solutions is, historically, we've spent probably 6% of revenues on CapEx, and it has a slightly higher, although not incredibly high, net working capital requirement. So, I would say the differences are there, but it's important for us to kind of take out the intangible assets of it because I think that distorts the view really when you think about it from a CF ROI standpoint.
Great. If there are no further questions in the room, we now move to questions on the phone. Yes, we take this question before we move...
[indiscernible] on the Bond side. My first question will be a follow-up to my colleague here. On the shareholder structure, can you rule out the situation where your main shareholder is not increasing to above 50% in any case of whatever happens with your separation so that we would have a situation like with another Swiss company?
I think you gave your answer by yourself. An investor who would increase to 50% and then risk to get the situation as it was in the other company. We'll not do that. But I'm not representing the [ shelf ]. I'm representing the company. So if you want to ask himself, you should reach out to [indiscernible] or to the truster.
From my perspective, I don't see any risk in that direction. But it's my perspective. I'm not representing them. I'm Chairman and Executive Chair of Oerlikon.
Okay. And then a second question I would have is, again, on the separation plans. Can you say anything on the protective clauses, covenants you have in your terms for the bondholders? I saw that you have a couple of covenants in there regarding reorganization, mergers, and these kind of things. Can you say anything on that?
We're going to go through the details. As you know, not all of those are public or available to the public. So, we're going to go through the details off that. And as we think about the structuring, we're going to work with all of our partners and, of course, our banking partners to think about what a new structure looks like. But first, we need to decide what the transaction structures really are, and then we'll look at what that means for credit facilities and bond agreements and so on and so forth. But I don't expect that -- there are no limitations in there that I would say that hinder us from executing on any of those transactions.
Okay. But following on that, it's fair to assume that part of the debt is moving away as well with the separation?
I think that will fully depend on the transaction structure. I think it's all -- but it's all going to be prorated to whatever the future of the company looks like. Both future divisions or companies or however that structure is will be equipped with a healthy and strong and well capitalized and well financed balance sheet.
Okay. We move now to questions on the phone. Operator, please go ahead.
Our first question from the telephone comes from the line of Sebastian one with RBC.
I have 3 areas of questions. One is OPP. You mentioned the last boom in the polymer CapEx cycle 2017/'18. And it does make sense that there should be a recovery at some point. But at the same time, your main competitor has a 25% FX advantage now compared to 3, 4 years ago. So, I was wondering how you prepare the division for the next up cycle in terms of being price competitive? And also what you see currently in -- on the pricing side in the tenders that you do have in Asia? That would be my first question.
So, I will take your first question directly. What we have done is to restructure to reduce with the downside workforce in Germany in [ Ulm ] and in [ Wehrmacht ]. We will transfer that activities into the regions, which will eliminate to a certain extent, any, let's say, exchange disadvantage. On the other hand, we have typically a significant premium because of technology, which we always have, which will play, by the way.
And then last but not least, as in '17, the first couple of projects, [ all those ] were price-sensitive. The good thing is the first projects are coming. There are more to come because that's the behavior, the crowd behavior, as we have seen in 2 cycles, by the way. It was even after 2009, and it was after 2016. Then when the first couple of investors are investing, the rest [ fields ] to be decoupled and to go for productivity, especially that we have a pipeline with significant productivity gains when we roll it out. We will not do that before the market comes back. So, in that combination, reorganizing our cost structure, transferring significant workforce, and I have to say that in that clear way, most of the workforce which we have taken out last year will not be built up there anymore for 2 reasons. We will probably not even find the people. And second, the cost structure there is not capable anymore to do that for the markets where we are in.
R&D is different. Prototyping is different. But all the rest of manufacturing will go more in -- more will go and will be allocated in the regions where we are selling our products. And then in combination with the R&D capability and with the leading technology we have, we're still convinced -- I'm not saying believe -- we're convinced that we will make our margins as we have done in the past.
That leads me directly to the second question. What's your capacity now? If the market was to come back tomorrow, what is your capacity for OPP compared to where we were in 2021, '22? Is it 20% lower? 30% lower?
We have, even in '16, already flexibilized capacity, so I would not answer the question [ in ] a way that we have actually lower capacity. The question is how fast you can adapt and by flexibilization of our supply chain on one hand and our workforce on the other hand? Because we have much more flexible contracts on hand as we had years ago. That was one of the reasons why we could manage the downturn this time in a way that we are not entering the -- or not leaving the profitable level.
So, as you have seen, there was profit in '23 and there will be a profit in '24 as well, not as high as it was in the boom time, but not like in '16 or even in 2009 when the company crashed massively into the minus. So it's about how to manage flexibility and how to create flexibility and how to manage your supply base and new internal resources. How we do that, I wouldn't like to disclose because I don't want to [ wake up others ]. But you can be sure that we can manage the capacity increase if that comes. And then we have a certain, let's say, interaction with our customers. It doesn't come overnight. It comes fast then probably. And then you don't have to choose each and any project because, by the way, there are only 2 players who are capable. It's a real dual-pole. It's not a monopole and it's not a oligopole, but it's a dual-pole. And if you want to get the productivity -- and don't forget, you're investing a couple of hundred million in something, which is CHF 1 billion investment. So the machine park or let's say the machine -- the equipment manufacturer is probably a CHF 2 billion, CHF 2.5 billion market driving only in China a CHF 70 billion industry, but the productivity gains you've gained at the beginning. So, you will always look for that you get the best technology available. That's why we could always cannibalize old technology with new technology from our own, because we always could provide significant productivity gains. And this is exactly the name of the game for the next cycle.
Understood. On OSS, you mentioned the margin target that you have for operating EBITDA. But then again, you have to reduce it by 10% depreciation or CapEx, if you look at the cash side. So you end up with underlying margin, EBIT margin, of 7% to 8%. For #1 player, is this an area where you are happy? I mean, compared to [ Sundrick's ] tooling business, they have a 20% EBIT margin. So, is there a way for you to reduce the capital intensity, equipment intensity of the business to push more into services and to really make a difference and to bring that business maybe to a 15% EBIT margin? I mean, why is that not possible? Why should we not think that 15% EBIT margin is possible in that division? What holds you back? What is structurally different?
Yes. I would take 2 things. The first thing, Sebastian, I would point you to the EBIT margin trajectory of the business since '21. And you can see there that while EBITDA margins shrank by about 120 basis points since '21, which was driven by the labor inflations, EBIT margins were actually up. And that is a reflection of our capital allocation framework and a much stronger focus on CapEx and also other investments. So, I would say it's very clear that the focus on operating more effectively with the capital that we deploy in Surface Solutions is there. That takes a little bit of time to work itself through the system. That's the first part. I think that's the positive part.
And then the second part would be that we just -- based on the diversification that we have and that Michael described in his remarks, we don't only have products of that level of differentiation and margin in our portfolio. We certainly have some parts of our portfolio that are even significantly above the margin ranges that you described, but certain other components that provide volume as well are not at that margin level. So, I think, at a mixed level, maybe 15% is high. But for sure, we expect that we're going to be able to deliver very strong 10%-plus EBIT margins with a differentiated set of products. And from a depreciation standpoint, it just -- it takes a little bit of time to -- for the depreciation to work itself through the system.
And even to be more aggressive, I would not exclude the 15% somewhere. The question is, will we really go for that? Or are we going more probably for a 10%, 11%, 12%, but with a much stronger growth? In the end, for me, margin times volume is which counts, and we will make here as well an optimization. We could have sticked in 2016 only to tooling and massaged tooling up and down, forward, left and right, but we wouldn't have this diversification, which we have done, which gives us more than healthier, a very promising future because we participate in all really good trends in the industry globally. If we would not -- we wouldn't have done that, I would be pretty nervous because then I would have been harvesting the business, which could last another 5 or 10 years, but then it would be over, because if you rely only on tooling, that's too short. That's why we have enlarged that. That's why we have found solutions for the semicon industry when the thermal spray solutions are not good enough for the next generation of semiconductors and you need PVD coatings in the production world or where you need parts, 3D printed, why you cannot get any more with the classical way done. And that's the areas where we are in. And these are some investments you do.
And then, in the end, for us, it's clear, a business like ours has to be double-digit in EBIT, unquestionable. The question is then, is do I limit our growth potential by optimizing margin or do I optimize the product of growth and margin? And for me, the second one and the absolute number is then the one which counts more.
But I would go with Philipp to compare us with a pure tooling company, and this is maybe a little bit our destiny. We don't have a real peer because a company which is operating 500 coaters globally is not existing. And what we haven't done, unfortunately, up to now, but we are working on it, is to utilize the power of data, which we have, and the power of customer base and solutions to optimize even our capital base in a better way. This is the next, let's say, the next couple of years, one of our main focuses, to work on that.
Understood. I have a final brief question. On Page 10, you talk about the outlook and the end market development. Just to get a bit of clarity, the flat development for filament demand, is this revenue or demand that you show with the arrow, just for me to...
Well, first of all, this is a comment on the market. And second of all, that would be more an indication for orders because we've obviously given you the sales guide on the last page of the presentation.
So, flat underlying order for filament. Okay, understood.
Great. Thank you, everybody. This concludes today's presentation. You are now more than welcome to join us for coffee and tea upstairs. Thank you for your attention today, and goodbye.