Glaston Oyj Abp

OMXH:GLA1V

Earnings Call Transcript 2022-Q1

[Pia Posio, executive]

Welcome to Glaston Corporation Q1 2022 Results Audiocast. In short, the strong performance continued in order intake and profitability. My name is Pia Posio, and I'm hosting this event together with our CEO, Anders Dahlblom; and our CFO, Päivi Lindqvist. And today, we will go through the Q1 highlights, have a look at the market, review deeper into financial development and share the outlook for 2022. [Operator Instructions]

Without further ado, Anders, why don't you share us through the highlights?

[Anders Dahlblom, executive]

Thank you, Pia, and welcome on behalf of myself as well. My name is Anders Dahlblom, I'm the CFO -- CEO of Glaston.

So looking into the first quarter highlights. We have a strong order intake. Order intake grew 25%, and the main growth came from our insulating glass business and also the Automotive & Display business. Service business grew close to 10%. The net sales also improved, 29% growth compared to Q1 2021. And the main growth in the net sales came from the heat treatment business and then also the automotive. And service business grew 10%. The margin improved, and our EBITA amounted to EUR 3.5 million compared to EUR 2.1 million in the quarter 2021. And also, the margin improvement was notable, improving from 5.1% in Q1 2021 to 6.6% in the first quarter of 2022.

The order backlog is strong, amounting to EUR 98.1 million. This is an increase of 44% from the quarter 1 in 2021, and it's an increase of 3.5% from the year-end order backlog situation. The Annual General Meeting held on 12th of April resolved that a capital repayment of EUR 0.03 per share will be distributed.

Then I would like to share the thoughts around the architectural market in the first quarter. From a general perspective, the strong development that we have seen in the quarters, it went through the whole 2021 and continued. We saw especially strong growth in the Americas region, though we can see some cautious customer behavior that is becoming visible. And market uncertainty is somewhat increasing and the main situation coming from the geopolitical situation.

Supply chain disruptions continues as well and could even escalate further. We have good connections on this. As you can see in the cash flow later on today, we have increased the raw material stocks, and this will continue to be our focus to manage well through the 2022 as well. We saw growth in all the business areas and also service business, positive growth there of 10%, which is positive.

Regarding Russia, we have taken a decision that we will exit the Russian business, and we will not do any direct or indirect business in Russia. We are also in the process of closing down our small sales legal entity there, and Russia magnitude for us is not too notable. In 2021, the sales in Russia was less than 1% of our total sales.

The situation in China has been somewhat challenging. We see the COVID situation escalating there, also leading into lockdown actions. And this is somewhat challenging for both the commercial and operational perspective.

Then let me talk more about the Europe -- EMEA market. The EMEA market for new orders was rather flattish in the first quarter. The activity remains good. And especially, the residential segment is continuing very strongly. Main growth we saw in the new business from the insulating glass business, and heat treatment was rather flattish compared to the previous year. Also, service activity, we can see increasing in Europe, which is a sign of customers easing up and working with their equipment.

Americas was, in the first quarter, the significant strongest area, where we saw a growth of new orders almost doubling compared to the first quarter in 2021. And especially, good orders we received -- we saw in the heat treatment business. And the residential business is clearly the one that is booming there. And the commercial, still recovering. And in our insulating glass business, we have been more strong and focusing on the commercial business, while such big growth was not seen in the insulating glass as we saw in the heat treatment business yet. On the upgrading part, we saw also a continuous improvement. So this gives a very strong confidence in the U.S. business for 2022.

Then looking into the Asia Pacific. That has been somewhat twofolded. In China, the COVID lockdown obviously impacted somewhat. And when it comes to new orders, we saw a slight decrease there. The rest of the APAC was quite a lot varying: in some areas, lowish activities; in other areas, really good activities. As a result of new business, we saw a significant growth there, so that we can be satisfied with that outcome.

Then I would like to move to the automotive part. And in the automotive, we saw a strong order intake growth, more than doubling in the first quarter compared to the first quarter the previous year. And for us, it was a stable start in our business. Though the automotive production has faced increasing difficulties, one is due to the supply chain shortages, but also the geopolitical situation has caused especially European OEMs to stop even production. And also, in the U.S., we see challenges to continue full operations. So this obviously has also an impact for us, and that's also a reason why the service business has not been the strongest in the automotive in the first quarter for us.

The general market sentiment continues very positively here. And as I said, we saw growth -- order intake growing substantially. And new orders are mainly related to strong growth in both China and in the Americas, where the activity seems to be the strongest also going forward for us.

Then I would like to talk a bit more about our segments. And the heat treatment segment, the order intake was slightly down 1.7% compared to the quarter 1 2021. But in the sales, we see a substantial growth, 63% up. And this is a strong evidence that we have made a step change in the heat treatment business since the pandemic year. As said, North America, strong growth. We had a good -- a big deal amounting to EUR 4 million there. And clearly, the strongest growth in Q1 was there in the heat treatment and Americas.

From the insulating glass perspective, we saw an order intake increase of 31%. This was mainly driven by strong growth in the EMEA part. Net sales growth was 1%. There are 2 reasons why the net sales growth was not bigger than 1%, even we have a good backlog, one being the lockdown in China, that had an impact on our capability to get out machineries to the customers and also the customer readiness. And also, in Europe, due to the supply chain disruptions, there were some challenges for customer readiness to take over their deliveries. The TPS technology continued to be strong and successful and very much appreciated by our customers.

Then the Automotive & display business order intake, very strong, more than doubled, 125%, growth in net sales of 56%. Big deals received in U.S., Lippert Component, announced earlier this year. And also, the upgrades are increasing there. And also, the interest for the customers, we see that upgrades are in the interest to meet business requirements for our customers. The display business is still rather modest, even that is an area that we are focusing on strategically.

All in all, from a strategy perspective, this is a year of execution, and we are focusing on our strategical agenda. And there will be costs occurring upfront before seeing the effect on the top line. And also, the R&D focus continues according to our strategy.

With these words, I would like to hand over to our CFO, Päivi Lindqvist, talking through the financials for the first quarter.

[Päivi Lindqvist, executive]

Thank you, Anders, and good morning, everybody. And I think we could start with the order intake in the first quarter. So Anders, if you would take the next slide, please.

I think if we look at the first quarter, we have to really say that this is surprisingly similar to the fourth quarter. And of course, that is very good news because usually, seasonality means that the first quarter is somewhat weaker than the fourth quarter. But if we look at the headline numbers, surprisingly, many of them are very similar to the fourth quarter of last year, and that is so also for the order intake. So EUR 59 million of order intake in the first quarter, a 25% growth compared to the same quarter last year and very much driven by the Americas region that like Anders already explained, the market in Americas has been -- especially in North America, has been very strong. And we pretty much doubled the order intake in that region.

And then if we look at from the product area perspective, we can see very strong growth in IG at high levels continuing. And then in automotive, also a strong growth, of course, from a clearly lower level. In Heat Treatment Technologies, we see some decline in the machines area in the order intake. If we look at the services, there, we recorded 8% growth in order intake in the quarter. So progress there as well.

Then if we move forward to net sales, close to 30% growth in net sales to EUR 52 million, also very close to the fourth quarter number here and continued progress recovering from the impacts of the COVID that we still saw at the beginning of last year. So of course, the comparison was somewhat impacted by the history. And here, if we then again look at the product areas, heat treatment, machine side, the technologies, more than doubled its net sales and was actually even a little bit higher than the insulating glass, which has been the growth driver historically, where we saw the small decline for the reasons that Anders explained, China and components impacting our deliveries and some of our customers.

And in automotive machines, we then as well saw a big increase, reflecting the stronger order intake in the second half of last year. In services, net sales increased 10%. Of course, this is a business that seldom has any huge kind of ups and downs. So 10% growth is a nice growth for the business, and this was even somewhat impacted by the component situations.

If we take a look at the regions and how they performed, EMEA is and continues to be clearly the strongest region in net sales. This happened. We had EUR 28 million of net sales in the region and 24% growth. We also recorded strong growth in the smaller regions, Americas and APAC. APAC grew in the first quarter, and China experienced growth still in this quarter, even though order intake in the first quarter went down. China net sales was roughly 15% of the group net sales in the first quarter.

And after net sales, it's then good to move to the profitability. Nice progress there as well. EUR 3.5 million of EBITA -- comparable EBITA, increased from 2.1% (sic) [ EUR 2.1 million ] in the first quarter of last year, 68% growth, 6.6% margin improvement as well. And of course, volume is a big explanation here. If we look at the margin progress when compared to first quarter of last year, we can say that the group level gross margins were stable, meaning that we were able to compensate for the mix impact with increase in gross margins in the different businesses. Mix impact is negative because our machines business clearly grew stronger than the services. Both were growing, but the machines business has had so kind of big growth in the order intake that it is kind of natural that the net sales increase is at higher levels.

And then the volume impact, all in all, is then more than compensating for the fixed cost increase that we've experienced in the business as well. And the fixed costs are increasing because the business volumes are growing so strongly, recovering from this kind of COVID-impacted levels when we took big declines in the fixed cost levels and also because of the strategic initiatives. We are investing in the strategy, execution, R&D and other capabilities.

So that was about profitability at the group level, and then we can move to the different segments. So if we take heat treatment first, where we see this slight decline in the order intake mainly and currently in the machines area. Comparison figure was also kind of very healthy, so not too much to worry about. And like discussed, net sales with a strong increase, reflecting earlier increase in order intake and very strong progress in both the absolute EBITA and also the EBITA margins.

So there, we've had, of course, the strong volume growth, good margin improvement in both machines and services, so a negative mix impact there as well. Services share declining, but the margin and volume impact compensating for this and the fixed cost increase. So 6.8% margin compared to 2.3% in the first quarter of last year. And also, a nice progress compared to the last quarter of '21.

Then if we move forward insulating glass, which has been kind of a strong profit contributor for a longer period. Especially European demand for IG lines continues very strong, and we see this in the order intake of EUR 25 million and over 30% order intake growth for the segment, including both machines and services. Net sales, flattish, like discussed, slight decline in the machine side, but nice growth in services here. And despite this flattish net sales, we have improvement in absolute EBITA and also the margin. So margin improving, close to 9% from 8.3% in the first quarter of last year. And here, compared to the other segments, we have positive mix impact because services has grown stronger and also improving margins, which then kind of more than compensating for the fixed cost increase in this segment.

And then as the last one, we can move to the Automotive & Display, where we have a good level of orders. And despite the different disturbances in the automotive markets and the interest in investing in machines is high, on the other hand, services growth in this area was more modest than in the others. Because of these disturbances, of course, in this segment, we recorded a very big order in the first quarter that was also announced as a separate release, impacting this over EUR 10 million of order intake and over 100% growth compared to the low levels that we had in the first quarter of '21.

Net sales recovering strongly as well and, like I said, reflecting the stronger order intake in the second half. EBITA and margin, on the other hand, close to breakeven levels, positive but close to breakeven levels. And the margins in this business are quite volatile. And they are very dependent on what kind of projects we have in the revenue recognition for the quarter. And this quarter, the regional mix of the projects was weaker than in some other quarters we've had in the history. And that is then impacting the gross margin. And at the same time also, fixed costs increase because we are especially now preparing for this increasing kind of production in the second half when this big order from the earlier of this year is becoming closer to delivery. And this is then explaining the breakeven results here.

So that was the segments. And then to finalize the presentation, as usual, I have here the quarterly operating cash flow and the balance sheet key figures. We had strongly negative operating cash flow in the first quarter, and there are several reasons for this. First is seasonality. Typically, the first quarter is negative. In some years, there might be some kind of timing issues related to this. But usually, the first quarter is a negative operating cash flow quarter. And it is because we have usually a lot of deliveries at the end of the year. And then all the components' subcontractor invoices are then paid for those deliveries in the first quarter. And that's one reason for this.

And another reason is that we have increased inventories, partly because business volume is growing strongly. But then also, a big impact there is the kind of component situation and the fact that we are preparing for kind of ensuring timely customer deliveries and then also preparing for some kind of anticipated price increases. So it has made sense to do kind of more than usual, clearly more than easy usual stocking of components in this situation. But still, the gearing is -- continues to be at kind of reasonable levels, increased to 36% in the first quarter from 27% at the end of last year.

But with this, I would like to end my part of the presentation, and then I hand over back to Anders to discuss the outlook for this year.

[Anders Dahlblom, executive]

Thank you, Päivi. And let's then move to our final part before the Q&A, which is the outlook for 2022.

And I think let's start with the positive parts here. One of the positive thing is the order backlog is very good, EUR 98.1 million, up 44% from previous Q1 and up 3.5% from year-end. So this one is a good start for the 2022. '22 is a year of execution, and we have the strategy that was launched in August '21 that we have fully in execution now.

I think there are, on the risk and uncertainty parts, a couple of things I wanted to list up. One is the economical development and the general effects due to the geopolitical situation. Those we need to monitor carefully, the supply chain disruptions and disturbances, also including the inflationary part. That's one part on the risk side here. And then we have in China, especially the COVID and the lockdown situation, how long and how much that will impact on various things there. So these are parts that are -- we have to consider from the risk perspective.

But as said, I think the strategy part, it's going well. We have done and also succeeded in many things we are doing there, though worth mentioning that the cost that we'll incur from our strategical actions, they will occur prior to the effect that we can see in the top line there. That's something we want to list here when looking at the strong Q1. So what we are saying is despite a strong Q1, we would keep the '22 outlook unchanged from what we said in February when launching the full year '21 results. So unchanged outlook for '22.

So that would be the official presentation part from today. And with that, we are ready to move over to questions.

[Pia Posio, executive]

Yes. Thank you, both Anders and Päivi. Let's start with margins. So can you give some more color on your strong margins and group-wide stable gross margin despite the component shortages and inflation? And should we expect a similar strength going further this year, especially noting that the fixed cost increased to prepare for high volumes in the second half?

[Anders Dahlblom, executive]

Yes. I mean, I can start with that. So I think it's a twofolded thing. So one part is the operational excellence, and this is something that is part of our strategy and our cornerstone. So this is something we are making progress, and that is good to see.

The other part is the pricing management, and that's something that we put a lot of focus on also. So we are able to balance between the component and the inflationary prices and that effect being also moved forward. So we share the pain with the customers here. So I think these are the 2 reasons why we have managed pretty well on this part.

[Pia Posio, executive]

So if we continue with the components, so in the past, you referred to your local component sourcing being a working model amid the shortages. Has this model continued to work? And has the Russia-Ukraine war changed this dynamic?

[Anders Dahlblom, executive]

Yes. I would say this is something that has continued to work. And I would also say this is maybe partly answered in the previous question, one reason why we have also made and managed pretty well through the challenging situations through '21 and continuing into 2022.

So from the Russia and Ukraine situation, no notable changes here. There are materials that our suppliers are -- part of them have been previously sourced from the said countries. But so far, we have not seen any implications that would be worth mentioning from that.

[Päivi Lindqvist, executive]

Yes. Of course, we -- like we say in the report, this is one of the bigger risk items for this year because we don't yet know how the things will evolve. We did see, especially on the raw material pricing, metal pricing, big spikes. Some of it has a little bit come down. But I think what we can say is that at least the situation is not getting any easier, but we can anticipate that this is something that we need to continue to work very hard in the future as well.

[Pia Posio, executive]

Yes. And moving on to COVID scenarios. You stated that Chinese lockdowns postponed some deliveries and created operational difficulties. Can you elaborate what Glaston currently expects to happen in China in terms of lockdowns? And in what point would your negative scenario actualize?

[Anders Dahlblom, executive]

Well, I think I'm not the best person to talk about the lockdown situation in China. I think what we have seen in our operations, when things started to escalate, there were days where we had difficulties to get our people on the factory floor. So there has been 4 to 5 days of the first quarter where we have not been able to produce with a normal speed. But I think that part we have seen now hopefully overcoming, and there are more structural ways in getting used to this now. So that part, we hope that is going to continue pretty well there.

I think when it comes to the customer part, it's really also reflected in the ways of lockdown and how much will that impact on communication, on distribution, on every flow going between. So very difficult to say. But as Päivi said, 15% of our sales amount is from China in the first quarter. Profitability-wise, it's significantly less than that amount. So I don't think we are expecting any notable changes for '22 due to this.

[Päivi Lindqvist, executive]

But of course, the worst case, I think, is that also, the Tianjin area where our factory is would be in a longer lockdown, which would prevent us from producing at the moment. The impacts are coming more from our customers who are then in lockdown and can't receive the machines and the fact that the logistics is very much kind of in difficulties in the whole country.

[Pia Posio, executive]

Yes. Moving -- actually, let's continue on the customer side. So you know that in the report, the IT production running at full capacity. Have the lead times overall lengthened here? And are you able to match the customer demand? Or have you lost any potential orders here due to ongoing delivery difficulties?

[Anders Dahlblom, executive]

Well, I think the lead times have increased during '21 because of the strong order intake growth. Our part of the strategy is to make sure we match our supply and demand part. So that's something we are -- is part of our operative day-to-day work and part of the strategy.

It's clear that in certain cases, the lead times are higher than the customer would like them to be. But this is pretty much what you see in the industry as well. So I wouldn't say we have any more difficulties on this part than any other competitors have. So everybody is in the same business and in the same boat there.

[Päivi Lindqvist, executive]

And we are, of course, taking actions to increase the capacity as well on a continuous basis. It's not something that can be done overnight, but there are measures to that direction as well.

[Pia Posio, executive]

And then moving to guidance, full year guidance. You noted that you're keeping the full year guidance unchanged despite the strong Q1. So current uncertainties are still keeping you prudent here. But overall, Q1 has clearly been a more positive surprise than you expected at the time of issuing the guidance. So sentiments, Anders, would you like to start?

[Anders Dahlblom, executive]

Well, I think I would repeat pretty much what I said here. Yes, we had a good Q1, and we are happy about the performance in Q1. And I've been just highlighting that uncertainty that comes from the geopolitical situation, that potential implication in the supply chain and then also, as was mentioned, the China part. So I think there are, from a risk perspective, slightly higher uncertainties than we saw when coming out with the full year report, though we have a stronger Q1. So I mean, it's a very good start. And this is what we feel at the moment, has been the balanced outlook with the performance versus the uncertainty.

[Pia Posio, executive]

Thank you. Seems like we have covered all the questions so far. So we are ready to conclude this session. At this point, I want to warmly thank all of the participants and our speakers here. And we are looking forward to seeing you again with the results in August. So 4th of August, it's time to have a look at the half year reports. Thank you, and have a wonderful springtime.

[Anders Dahlblom, executive]

Thank you.

[Päivi Lindqvist, executive]

Bye-bye.