Glaston Oyj Abp

OMXH:GLA1V

Earnings Call Transcript 2023-Q1

[Pia Posio, executive]

Welcome to Glaston Corporation Quarter 1 2023 Results Audiocast. My name is Pia Posio. I lead the Investor Relations here at Glaston. And together with me today, I have Anders Dahlblom, our CEO; and CFO, Päivi Lindqvist. And they will share with us shortly highlights for this quarter, market review, financial development details, and then we have a glimpse of an outlook for this year.

You have the opportunity to ask questions during the session. We have reserved time for those towards the end of the hour, and I will be facilitating those later on. Be active, ask questions.

And with that, we are ready to go. Anders, would you please guide us through the highlights of the quarter?

[Anders Dahlblom, executive]

Thank you, Pia, and very much welcome on behalf of myself as well. Let me start with the first quarter highlights for Glaston. The markets continued on a good level despite growing uncertainties. We see some slowness in decision making, especially in the EMEA area and then also in Asia.

The profitability improved in the Heat Treatment business up to 7.8%. This was a great improvement and achievement in the first quarter. Insulating Glass keeping up very well, and Automotive order intake growth was up to 30%.

In general, the orders declined slightly from the Q1 level, but on the other hand, they improved 10% compared to Q4 2022. The top line, we saw a decline of 2%. However, architectural business, both Insulating Glass and Heat Treatment, we saw a small growth, whereas we had a decline in our China business in general and also in the Automotive business totally.

EBITA amounted to EUR 3 million. This is EUR 0.5 million less than we achieved in first quarter 2022. The big reason here is that the Automotive low sales in the first quarter impacted negatively and also our China business in general in both the architectural and automotive. But then, the China ramp up of preprocessing then, there were additional costs relating to the start-up in China there. But the underlying business, especially in the architectural part, has developed very good and been growing and improving.

When it comes to the services, the service business was two-folded. When it comes to our daily service business, that was growing with 9%. And when it comes to the spare part business, we saw a growth also at 6%. But the new upgrades, as we knew already from the lower order intake in the second half last year, this now impacted and effective decline in the upgrade sales during the first quarter.

And final one and a highlight here, we achieved our sustainability targets that we set in our revised strategy in 2021 already in the first 2 years. And now we are ready to continue the challenge here, and we have made a commitment to set near-term science-based emission targets to impact more broadly in the glass processing -- the whole value chain.

Then if we flip through the KPIs on the same topics, as we can see, the order intake was 3.6% down as said, a growth of 10% to fourth quarter previous year. The top line, a small decline. Service -- daily service spares up. Growth in the architectural business, both Insulating Glass and Heat Treatment and then the China business as a whole declining, as well as our Automotive business.

The EBITA, we see -- I went through it in the previous slide, and the EBITA margin amounted to 5.8% versus 6.6% in Q1 2022. The backlog remains good, and we have a great workload going forward for 2023 in all our businesses.

Then I would move forward to our market environment. So the market in the first quarter, the market activity in general continued on a good level. We see some decision-making slowing down, especially in the EMEA region. China has been quiet in the first quarter, but Americas business was actually very active and strong in the first quarter.

The environment we see is that the new residential business has been declining in most of the areas, but commercial business is doing better in many of the areas. The China part has been quiet. There will be a glass exhibition taking place in the beginning of May. And there, we are able to meet with a lot of our customers, and we are looking forward to see activities getting -- starting up again there.

The Americas part was clearly the strongest one in the first quarter. And there, we see decisions being made and big customers are doing decisions in the current environment. But customer supply chain, we see that supply chain management, especially on raw materials and our components, it's improving. The electrical components that were the big challenge in the previous quarters has clearly improved. And the challenge we see with deliveries are still on [indiscernible] components, but the rest has been improving.

If we then move to the Europe or EMEA region, we had a strong order intake growth there, 19%. And both Insulating Glass and Heat Treatment demand was good in this area. The Automotive, which is a smaller business in Europe, continued to be low activities in the projects. And also when we look at the service business, so the service, we saw a slight decrease in EMEA region though March being a stronger month.

Then looking at the Americas. Order intake in Americas amounted to EUR 22.6 million. This was a decline of 10%. But however, I would point out that this was a very strong amount, the EUR 22.6 million, as it is 40% of our total new orders in the first quarter knowing that last year, Americas business was 30% of the whole business. So this was from that perspective, a very strong region.

Also in the Automotive business, we saw a great new business. So clear growth in the Automotive business in U.S. Insulating Glass with a small decline, and Heat Treatment demand continued strongly, still drove a small decrease compared to previous year.

The service business was very strong in Americas. The daily business and service growth was 30%. And on the spare part business, it was up to 15%. The upgraded business, new orders have been recovering and still negative compared to previous year.

Then the APAC region was, in terms of new business, slow. And knowing the China being a quiet market in the architectural part, this obviously impacted the new orders negatively. Also in the rest of the APAC region, many of the projects have, from a decision-making point of view, moved forward a bit.

The Automotive business in APAC and especially China continues on a strong basis. So it's growing. And also the service business, we saw there growing in the whole APAC region, where the daily service business actually doubled, and the growth of the spare part business was north of 20%.

Let me then take you through our key strategic message. In the beginning of the year, we reviewed our strategy and got clear confidence that we are on the right track. The big picture remains the same. No major changes were made to our must-win project and our cornerstone initiatives. Some new opportunities were identified. And we are getting organized to boost and accelerate strategy in those areas. We also have made a decision to focus on certain activities that have been de-prioritized in the first 2 years of the strategy execution.

One big milestone for us is the ramp-up of our automotive and preprocessing business in China. The operative work there goes on well and started in the first quarter. The positive thing is we have projects that we are working with them. The challenge for us in the first quarter is the localization of the supply chain there. So due to having to export, import components to China, the first quarter was hit in terms of profitability. And we have an extra cost of roughly EUR 400,000 due to this in the automotive China ramp-up. This will continue still partly in the second quarter, but we expect that in the second half of the year to be on a better profitability there.

The solar business continues in Asia, the first solar lines that we sold in 2022 are now being produced in China, and deliveries have started. But there, our customer side has been postponed by a couple of months, while we see a small gap in top line still in the first quarter, but this is to come in the coming quarters then.

So with this word, I want to give a message that the strategy execution is ongoing very well. A lot of good progress ongoing for the future to come.

With those words, I will hand over for more detailed financials to our CFO, Päivi Lindqvist.

[Päivi Lindqvist, executive]

Thank you, Anders. My pleasure. And as usual, let's start with order intake. So in the first quarter, close to EUR 57 million order intake, slightly down from previous year. Still in a historical comparison, a reasonable level of order intake for a quarter, especially for the first quarter, which quite often has been a weaker quarter in terms of new orders.

If we look at the product area, distribution of the new order intake, we can see that actually our smallest business, Automotive & Display Technologies, had growth differently from the other product areas and 31%, strong growth, of course supported by this one big EUR 8 million order. But actually, there was growth in all regions in this business.

If we look at Heat Treatment Technologies, there was 14% decline compared to previous year. And this is mainly coming from the Americas region, which had a record high order intake in the comparison period and was then in the first quarter this year more on the normal levels.

In IG, Insulating Glass Technologies, 11% decline. And this is purely coming from APAC where both China went clearly down and the other kind of APAC as well. And IG Technologies is -- has been traditionally our biggest business in China. So in euro terms as well, the impact here was visible.

And then finally, if we look at the services as a whole, a slight decline there as well. For spares and field service, the year started a bit slow. And then we also have a decline compared to the previous year in upgrade order intake, which continues to recover. The lowest quarter was third quarter last year, and fourth quarter last year was a recovery. And the recovery continued, so higher order intake than in the last quarter of last year, but still somewhat below previous year first quarter.

Then if we move to the net sales development, EUR 51 million of net sales, slightly down as well. And this is mainly driven by the automotive and technologies, the automotive machines being low due to second half last year low order intake and as well the upgrades net sales again due to lower order intake in the second half of last year, impacting then, of course, then the whole services growth.

Looking at the product areas, nice growth in Heat Treatment Technologies 7%, flat development in Insulating Glass Technologies purely coming from China. So the kind of European production had a nice growth in the quarter. And then we have Automotive Technologies that -- Automotive & Display Technologies that I already mentioned. The percentage decline is 46% there, and the euro amount is very low in this quarter.

The capacity utilization in the Switzerland factory was low, and the new China-produced machines in the first quarter contributed little. So that will then come later on. And services, like I said, slow start in fields and spares and then the upgrade impact having some kind of impact there.

And then if we move to the regional side, we have now quite different regional development. Americas region had in the quarter very strong growth, 45%. This is a result of those kind of big orders that we received in Heat Treatment early last year, and we see this now in the numbers as well. EMEA continued to be clearly the biggest one now, a little bit less than 50% of the total net sales decline of 11%.

I -- this is despite very strong orders last year, but it is more like a timing issue that there was more big projects in revenue recognition in the Americas region, especially in the Heat Treatment, like I said. And then we have APAC, which is declining its share and 33% decline in net sales for the quarter. China share of the total group net sales reduced from 15% to 6%. So that development has been now quite dramatic. And that is, of course, because this whole architectural sector in China has been in downturn for quite a long time already.

Then if we go forward to profitability, the EBITA -- comparable EBITA for the quarter was EUR 3 million, 14% decline, and the margin declined quite a bit as well to 5.8%. Our Heat Treatment and IT businesses, the architectural side was performing with solid profits, whereas then the loss that was in Automotive & Display segment is the main driver for this decline in profitability.

I will go next to more details into these segments so that we can see that what were the drivers for this segment profits. So if we take the Heat Treatment segment first, in order intake some decline, market activity continued, good level. There is the uncertainty which is kind of making the customers a little bit hesitant and some kind of orders were moving forward.

The pipeline continues to be good. And like I said, previous year was very strong in this business. So the comparison is also quite challenging. Net sales were at same level, flattish. Machine's net sales went up. Like I explained earlier, services for these segments were down 13%. And here, we really see the impact of the upgrades. Net sales declining. Heat Treatment is the segment where these upgrades play the biggest role as it is quite sizable business with long traditions.

But then I think if we look at this business, the really good news is on the profitability side, which improved strongly, the EBITA margin from 6.8% to 7.8%. And this is very much driven by strong improvement in machine's gross margin. And that was -- kind of compensated fully the weaker mix. Services share, obviously, went down because of the upgrades and also fixed cost increased as the kind of business is in the growth mode.

Then also one thing to note here is that we were expecting earlier that the new solar line deliveries would kind of generate quite a bit of net sales at lower margin because they are new products in this quarter, but a big part of that has been moved to later quarters. So that kind of a burden on the profitability. Relative profitability also moved a bit forward.

Then if we go next to Insulating Glass, which continues to perform at kind of quite nice profitability levels. But if we go to the orders first, here as well, minus 8% in order intake. Yes, decision is taking a bit more time impacting, especially in China in this business and as well slower start of the year in services.

Net sales increased slightly. China has big impact on why the net sales is not growing at a higher pace. The net sales in China in this business went down close to 60% in this quarter compared to the previous year.

And if we take the machines and services, machines net sales were flat. Again, here, China, of course, having a big impact. And then services net sales was up, and this is then where we contrary to Heat Treatment business have a growth in -- a very strong growth in upgrades business. It is scaling up now here, and that was supporting the services net sales.

EBITA and EBITA margin were somewhat down here, and it is coming from kind of lower margins in machines and in services as well. In services, it is driven by a mixed shift, this increasing upgrade business has lower margin and then that, of course, impacts the kind of relative profitability.

And then finally, Automotive & Display, where we were struggling in the first quarter in terms of kind of net sales and profitability. But on the other hand, the order intake was growing strongly. And there, we saw a strong growth in orders, both in machines and services. So kind of -- and like I said earlier, also in all regions.

But the net sales down 19%, and the low order intake in the second half being the main reason there. Comparable EBITA, negative, several reasons for this. The low machine net sales, obviously, is a big driver. And then, like said also by Anders that we have these first deliveries from the Tianjin factory, which are at low margin and then fixed costs increased as well. The ramp-up in China and low capacity utilization in Switzerland increased the fixed costs.

And then if we go to the final slide, and this is the cash flow for the quarter. Operating cash flow minus EUR 0.5 million. For the first quarter, this is a good level. Typically, we have quite sizable increase in working capital in the first quarter as we have a high amount of deliveries at the end of the year, and kind of payables related to those deliveries are typically paid in the first quarter. Net gearing increased from the year-end to 23% but is clearly below the first quarter of last year when it was 36%. So this, I think, is all from me, and now I'm handing over back to Anders.

[Anders Dahlblom, executive]

Then the outlook for this year. So the starting point, the good backlog is there, meaning we have good workload throughout the 2023 as a whole year. I think we can say that the first quarter, as we said in the connection with reporting of 2022, we were expecting first quarter to be lower than the average quarters going forward. So in the big picture, this is materializing according to our expectations.

And the other thing on the strategy execution is positive. We have many ongoing good projects, product development initiatives that are going according to plan, which will help us going forward in the business. The maybe challenging part, which is slightly more challenging than we expected, has been the ramp-up of automotive in China. I think this has, from operational perspective, worked out very well. So the quality we expect to be good, and that will work out. But localizing the supply chain and get the financial benefits has been slightly more challenging and time consuming than we were expecting. So that is one part.

And then China, in general, as we expected, has been very slow in the first quarter. And we are now very much excited to see this year with own eyes in China in early May and hope that China activities will now increase. But with these words, so we remain -- our Glaston outlook remains unchanged. So we expect that our net sales and comparable EBITA will improve in '23 from the levels that we reported for 2022.

That's all for us before we move over to the Q&A part. Thanks a lot.

[Pia Posio, executive]

Thank you, Päivi. Thank you, Anders. Questions. Let's start with order intake. Can you discuss any seasonality effects for your order intake?

[Päivi Lindqvist, executive]

Well, I little bit kind of mentioned this already that if we look at the typical seasonality for our business, for order intake usually the last quarter is the best one and the first quarter is the weakest one. Of course, now we have seen years when this hasn't applied. So there has been quite different quarters as well.

And now we also see that this first quarter is now stronger than the fourth quarter of last year. In last year, we had extremely strong or extremely good third quarter, and then it went down in the fourth quarter. So it's -- it varies year-by-year, but the usual, I would say, seasonality is like I said at the beginning.

[Pia Posio, executive]

And then continuing slightly on the topic, how comfortable you are with returning to EBITA cross later in the year? And should we expect a shift to positive Q2 already or in second half seasonality?

[Anders Dahlblom, executive]

I think as we said with the whole outlook, so it remains unchanged. So that means we are confident that we will meet growth in both top line and EBITA. We, as said already, we know that our ramp-up in China with the preprocessing is slightly more challenging than we were expecting, which means that there will also be some effect in the second quarter before we get into the targeted profitability in China. So that's something that will impact, that we are expecting top line growth in the second quarter.

[Päivi Lindqvist, executive]

It's in a way, the full year, our view of the full year has not changed. This is, I think, the important thing. And like Anders said, there is certain pressures in the second quarter, which we also say now in the guidance related to these other projects and to some extent, also the solar deliveries moving forward from the first quarter as having been some impact there.

[Pia Posio, executive]

Thank you. Moving to capital expenditure during Q1, some EUR 1.7 million. Are you expecting further acceleration to CapEx in the coming quarters? Or is this just a reasonable quarterly run rate to expect for the rest of the year?

[Päivi Lindqvist, executive]

Well, we have said in connection with the strategy that we will increase CapEx, and then this is now happening. So I would -- and of course, this is a little bit dependent now on the kind of a prioritization of R&D projects and how much progress we can achieve month over month. But the CapEx amount, we do expect to continue to increase.

[Anders Dahlblom, executive]

And one important point why we want to do this is that our strategy is to clearly grow -- exceed the market growth. And we believe that the way to do it is -- a big portion behind that is that we have focused on new initiatives, new products and new concepts. And that we will continue to do because we believe it will pay off in the future.

[Pia Posio, executive]

Thank you. Talking about order intakes and referring to pipeline, you talked about the solid pipeline, but are there many projects that have been there for extended period of time and may never materialize. So how do we see the pipeline?

[Anders Dahlblom, executive]

So the pipeline is good as was said here today. And what we see in the current environment where interests are increasing, so money becomes more expensive for our customers. And activities in the architecture and the markets, building construction market is down in certain areas. So it's clear that this have some impact on customer-thinking behavior.

However, we have the mega driver, the CO2 emissions, the energy efficiency that is impacting this business globally, not only in certain areas. It is there. There is renovation money being directed to initiatives which are in our favor.

We see big customers who say they keep the plan. They want to go. But of course, the decision to postpone a project by a quarter happens more easier today than we saw a year ago. So that effect, yes, we see there.

[Pia Posio, executive]

Upgrades were discussed. Any insight about what has kept the upgrade market so [indiscernible]?

[Anders Dahlblom, executive]

So last year, we saw a decline in the second half in upgrade order intake. And this was, in our mind, result of a lot of new orders. So upgrades were somewhat suffering on the cost of new orders.

Then on top of that, we have internally now reorganized our ways of working when it comes to service and upgrade part, especially in both U.S. and in EMEA. So we believe we now have even stronger ways of approaching and looking for upgrades in this year. And knowing also that the market conditions are slightly more unsecured now, the decision to make an upgrade, we believe, is different than it was in the middle -- end of last year.

[Pia Posio, executive]

Right. Then some regional questions, especially related to China. What are the current expectations of Chinese market activity in respect to current guidance?

[Anders Dahlblom, executive]

So the first quarter was for us very slow. The total amount of sales in Q1 was roughly 6% of our total sales. So this was clearly down compared to previous year where we have seen a double-digit number from the China sales.

Now a good question for us is that we see that the Chinese market in general, if you look at just an economical market there, is somewhat improving. Activities are increasing there. When it comes to properties and markets where we are active, this is something that the China glass processing exhibition hopefully will give us some comfort that markets will be more active. So we expect the Chinese market to improve from the first quarter. That's clearly what we expect.

[Pia Posio, executive]

And is there any room for elaborating the impact overall the Chinese market referring to the entire outlook?

[Anders Dahlblom, executive]

So when we look at the Chinese market, so we have -- we are ramping up our preprocessing production there, which means -- and we see that the preprocessing market currently is actually pretty active, and we have projects ongoing there.

So what we are doing now, we are able to focus more on preprocessing ramping up, that train our people. At the same time, the production of the IG business has been lower, where we hope and expect that we can get -- see an increase for the second half in the IG business and also in Heat Treatment.

[Päivi Lindqvist, executive]

Yes. I would say that if we look at the guidance that we give and the EBITA improving and how we see the year, this kind of China recovery has some impact but not a significant impact because, of course, we are then talking about orders that we expect to receive later in the year, and their kind of impact on this year's net sales is quite limited.

[Pia Posio, executive]

Thank you. Perhaps having a look at the other regions as well, overall, how do you find the prospects of different markets and especially in this case, interest is to North America and the profitability drivers around the world across the markets?

[Anders Dahlblom, executive]

So as said, U.S., America business has been in proportion, the strongest in the first quarter. We expect this to continue in the second quarter. It is clear that the construction and new residential market, it is declining. Currently, commercial business doing better. And the expectation for market growth in construction business is not too strong towards the latter part of the year.

However, we see and we have plans, our customers have plans, especially big customers that we believe will materialize according to expectations. So we believe and see that we can make a strong new business during '23 in U.S.

[Pia Posio, executive]

Components. Any updates on the pricing and availability situation related to components and the impact? And then of -- in addition, slightly covering that one is the question related to salary inflation. How do we manage to adapt those into our pricing and profitability part?

[Anders Dahlblom, executive]

So first, when it comes to the component availability, as said, the situation has been improving in the first quarter pretty much everywhere. The biggest challenge in the end of last year was still on electrical components that -- and there, we see things easening up.

[indiscernible] component has been now the most challenging one still, so we cannot say that the challenge is totally behind us, but it's easing up. At the same time, currently, we are in discussions with the annual contracts on the components and the raw materials. And it's clear that suppliers are trying to put in some price increases because they also see the salary inflation going on.

So that's part -- but that's part of a normal annual discussion. So we don't know exactly where we will come out there on prices, but we see some prices have been declining -- are declining, but we also see some components where prices are being pushed up.

When it comes then to salary part, so this is something where we have made plans, expectations. We're building up the plan for '23. It's clear that the salary inflation will be higher than previous year, but this is part of the inflation or ways of working. And we have trust that we can take this into our end result -- end prices with our customers, both in new projects and in the service business. So we are taking this into consideration continuously.

[Pia Posio, executive]

Then moving to businesses and starting with Automotive & Display. The margin pressure should continue in Q2 as well. Should we expect similar, worse or gradual improvement for margins for Q2 versus Q1? And then really a question related to Q1, especially in this, you mentioned for Automotive & Display the preprocessing ramp-up in China. And what is the expectation there moving forward?

[Anders Dahlblom, executive]

So the ramp-up in China automotive or our preprocessing, so this affected the first quarter that we calculated around 400,000 extra compared to what the target level should be when we are up and running there. And this should improve in the second quarter and we will give more numbers.

I think here, our challenge is that being -- we should have been reacting more swiftly with getting this supply chain localized. And that's somewhere where we saw challenges to get there with the combined reaching the target quality, and that's why it takes a bit of time. But Päivi, maybe you can give some...

[Päivi Lindqvist, executive]

Yes, not really kind of any exact numbers. But of course, the plan is that with each delivery, we improve the margin. And that is now quite dependent on this supply chain topic, like I said.

And then, of course, in addition, the amount of net sales we have or the amount of current deliveries we have in each quarter, the amount will increase. But on the other hand, we are working on the supply chain. So the margin levels should gradually start to improve. So don't want to get any -- I don't want to give any exact numbers, but of course, the plan is still to improve for the coming quarters.

[Pia Posio, executive]

Thank you. And then through solar moving to Heat Treatment, you mentioned the customer delivery delay in the solar case in China. Can you elaborate the impact of it?

[Anders Dahlblom, executive]

Well, this is a couple of million top line that was moved from the first quarter to latter quarters. So Q2 should be in line with what we expected originally, but then we would have some higher coming up in the third quarter and even a small part to the fourth quarter. This is not something I will be worried about. It's a timing point more.

[Päivi Lindqvist, executive]

Yes, it's a question of the customer not having their site ready. So it's a new production site for the customer, which is little bit delayed from their plans.

[Pia Posio, executive]

Thank you. And I'm continuing that one, so can you elaborate a little bit still the reasons behind the Heat Treatment's profitability increase?

[Anders Dahlblom, executive]

Yes, in Heat Treatment, we have done during the strategy period a lot of changes, which have been one, to boost the business and grow the business, which we have achieved well. Our strategical must-win has been optimized for cost and efficiency and also quality-related costs. And there, we have managed very well.

We can see that we have green lights on all action points there and also the achievements. This combined with also a good order of U.S. mix in the customer with pricing good has resulted in the improved margins. So good change in the ways we operate that achievement.

[Pia Posio, executive]

Thank you. It seems like those were the questions that we have received during this session. I have answered to one of the questions that we've had offline, and that has to do with the industry development overall.

And we are happy to share also to this audience as an important stakeholder group that yes, the industry development is still looking very solid. There are new innovations coming up, both on the process development and the technology development.

And the -- since the '90s, the Glass Performance Day has been the platform for actually sharing that information across the industry. And also, yes, to confirm that the GPD is happening this year, and then there are over 120 presentations on the recent developments in the glass industry. So industry is innovating and moving forward towards the future with improvements across the border.

And with that, that concludes this results session. The next one is in the beginning of August. And we look forward to seeing and hearing from you again at that point of time. Thank you for this, for staying and tuning in. And thank you, Anders. Thank you, Päivi.

[Anders Dahlblom, executive]

Thank you.

[Päivi Lindqvist, executive]

Thank you very much.

[Pia Posio, executive]

And this will conclude our session. Thank you.