Glaston Oyj Abp

OMXH:GLA1V

Earnings Call Transcript 2021-Q3

[Anders Dahlblom, President & CEO]

Welcome to Glaston Q3 Result presentation. Here today, we have CFO, Päivi Lindqvist; and myself, CEO, Anders Dahlblom, as presenters. Our Communications Manager, Agneta Selroos, will read through the questions after the presentation. Looking first on the content of results presentation, we will start with the Q3 2021 highlights. Then after a CEO review by myself; and then our CFO, Päivi Lindqvist, will talk about the financial development. And then I will take the outlook for 2021 and also the strategical points for '21 to '25. So that will be the content of today. So very welcome once more. And to start with, I would like to share Q3 highlights. And first of all, I'm very happy about the third quarter and to be able to share an order intake increase of 36% versus 2020, third quarter, and it's on a similar level as the pro forma for 2019 levels. The increase was heavy in the Heat Treatment, more than doubled. And in the Automotive business, it's close to doubled. And in IG, we had a small decrease of 10%, and the Service business increased 14% as well in order intake. The net sales increased 29%, and the biggest increase we saw in the Heat Treatment business of 75% increase. Also, the IG business increased 10% as well as the service, 3.5% up. And then our Automotive business remained flat in terms of net sales. We saw a big improvement in the EBITA, especially the margin improved from 3.6 percentage to 6.9 percentage and amounted to EUR 3.2 million versus a EUR 1.3 million in the similar quarter 2020. This is clearly a significant improvement. Very happy to spend that. And one big impact for this is our Heat Treatment, strong performance and this is partly a result of our restructuring in that business and also partly due to the integration effects kicking in. The order backlog improved significantly, up 80%, amounting to EUR 86.1 million versus EUR 47.8 million in the end of September previous year, and it's an increase in all the business units. If you want to compare this to 2019 pre-COVID ones, we are still up close to 10%. Then I would like to share some thoughts about insights in the architectural market. And to start with the order intake, we saw the biggest increase in the Americas business. Order intake improved 47% there compared to the previous year. In EMEA, we saw an improvement of 36% and in the APAC region, an improvement of 21%. General thoughts here is really the strong development we have seen in the first half year. I will say that continued well in third quarter. The Heat Treatment continued very positively, and the demand growth was both for the tempering lines and our lamination lines. The Insulating Glass continued also positively, and we saw good demand for our new products there.Service market recovery continued. We still see some effects from the restrictions that are affecting our spare parts and field service business. And then a general statement on the supply chain disruptions, these we have seen and even as a growing concern. There are a couple of comments on the areas on the EMEA, the activity very good, both on Heat Treatment and insulator glass. And we see also that some subsidy programs in certain countries like the U.K. have really boosted the business. Also, the upgrade business, especially in the Heat Treatment, was strong in the European region. Americas also recovery continued. We saw also the residential business is the one that is keeping a strong commercial, not as strong. So really, residential driven growth. [ Block ] trade business continued well there. However, not as strong as we saw in the Q2, but still on a very good level. The APAC region, we have seen good development, especially for our IG, Insulating Glass. So good growth there. Obviously, the situation in China, currently, we see some slowdown. We saw in the end of September, remains to be seen how the impact will continue in the fourth quarter. The APAC has been rather low, but there also, we see clear sign of improving activities. Then if we continue with the Automotive market, Automotive market, first, the order intake improved. It doubled -- close to double in the third quarter. Automotive production, they are -- it is facing and has faced difficulties mainly due to the supply chain shortages. However, there are some positive signs. The Automotive end market looks better. There are increasing interest in new machines that we have noted clearly. And also, the display market is showing increasing level of activities. In our own business, China is the area where we have seen the most active market with projects, the same there of North America. We have also seen rather strong development. And the EMEA area has remained pretty slow during the third quarter. And the service business here has been rather stable, and we have seen actually positive upgrade business in the third quarter. Then moving to the segment. So the Heat Treatment business has been a very positive uplift in the third quarter. As I said, order intake up 140%. The net sales growth was 72%. And really, this is a result of good work and restructuring activities that have taken place earlier this year. The North America continued well, as said, driven by the strong residential market. EMEA activities also have been on a good level here. And some countries in the U.K., especially has been strong, partly due to the subsidies that has been in place there. The APAC region in Heat Treatment has stayed low-ish, but we see some increasing activity size there. The upgrading business in Heat Treatment is very good, but as said not as strong as the second quarter. Capacity utilization in this business is currently at a very good level. Then the Insulating Glass, there we saw an order intake decline of 10%, but the order backlog is actually strong, very strong at the moment. We also saw net sales growth, 10% up. And the EMEA business continued strongly, the same for North America. And I would say also the APAC business is strong in the Insulating Glass. We have seen strong demand for our new innovations, new products, both in Europe and North America and as well in China. Here, in the Insulating Glass, the production capacity is actually very close to full capacity at the moment. And here, we are looking into how to increase our ways of doing more in one go. The Automotive business, the order intake was up close to 100%, so close to double. After a slow Q1, both second quarter and the third quarter has clearly been picking up, and we see activity somewhat volatile. But -- and automotive producers, they continue to face supply shortages. But I think the positive thing here is we have seen new orders, especially in China, but also in North America. And we also had a record high upgrade order in this business in the third quarter. And also, our capacity is running at a reasonable level. So here, things are under a good bet as well. Then I would hand over to Päivi Lindqvist for the financial part.

[Päivi Lindqvist, Chief Financial Officer]

Thank you, Anders, and hello to everybody there listening to this online presentation. And let's start with the order intake. In the third quarter, which typically is seasonally lower order intake quarter because of the holiday season. We reached now this year, EUR 45 million order intake, which is very close actually to the level that we had in 2019. And then, of course, naturally now clearly higher, 36% higher than we reached in 2020, which was still impacted by COVID. And then if we look at the 9 months orders by product area, we can see that all of our businesses are growing strongly in order intake this year compared to last year. And they are either kind of double digit -- double or triple-digit growth for all areas. And in absolute terms, especially Heat Treatment has had strong order intake growth this year or 100% growth. IG with strong growth as well. Automotive display technologies, 251% growth, still rather low numbers, of course, are not that high in absolute terms. And very nice to see also services with close to 30% growth in the 9 months and over EUR 50 million order intake in this period. Then if we move to net sales in the third quarter, 29% growth in net sales to EUR 46 million roughly. And there we now see that the -- in previous quarters, recovering order intake is having an impact on net sales. And we've, after kind of a 4 consecutive declining quarters year-on-year, then now have a growing net sales in the quarter. If we look at the 9 months, again, by product area, we can see differences. Heat Treatment is having 5% growth. Services, 20% growth. And we do, of course, see now with some lagging impact than this order intake growth, having the impact on net sales as well. And then we have IG and Automotive & Display Technologies, which have negative growth figures in 9 months. And this is explained by some technical IFRS reasons in the first half, I will get into those a little bit later in the presentation. So it is operationally a little bit different story than what we see in the reported numbers. And then if we take a regional perspective, we can see from the different regions that Americas now for the 9 months, recorded 12% growth and is then kind of recovering from the pandemic, clearly. We also have a 5% growth in APAC. This we cannot say is really a kind of pandemic recovery, but this is rather than China driven, that the order intake in the first half of this year was very strong in China, and that is also visible in the net sales of -- during this year. And then we have EMEA, which is our biggest region, with still 10% declining net sales and there we have the same technical IFRS-related reason as mainly kind of explaining this development. And then if we move from net sales to profitability, like Anders mentioned, very strong, both absolute and relative profit and the EBITA margin of 6.9% is actually the highest margin that we've recorded for a quarter for all the figures that we have combined with, plus the previous old Glaston and the Bystronic glass. Also for the pro forma, so starting from 2018. And there are several reasons for this. One is seasonality, that the third quarter typically is the highest margin quarter, and it is because the fixed costs are lower in third quarter during the holiday season. So personnel costs are adjusted downwards for the holidays. That's one reason. Then, of course, the volume is clearly another reason. And if we take a segment perspective, we can see that this is very much driven by Heat Treatment, which then is actually then bringing me to the next part of the presentation, which is the segment numbers. And we start with Heat Treatment. And I've been saying now that this is really a quarter of comeback for Heat Treatment. The orders have been recovering already earlier, but now we see a very kind of a big impact of that then also in the P&L side. I think we'll start with orders. So good order intake for the third quarter, like I said earlier. Also, order intake-wise than the third quarter is typically somewhat lower than the other quarters, 141% decrease. Well, obviously, the comparison period is weak and was weak due to the pandemic.And then if we look at the net sales, EUR 21 million and 72% higher. So this is what I mentioned that the strong order intake in the previous quarters is now very visible in the net sales development. And then EBITA EUR 1.8 million in the third quarter, whereas the comparison period was very low so over 8% EBITA margin. Now this year, third quarter, the comparison period, 1.3%. So a little bit of a breakeven. And the reasons for this profitability improvement volume, obviously, and not only in new machines business, but also in the services business. And in the first half, there was exceptionally high order intake in upgrades. And now we see that in net sales. And then the upgrade sales are a higher-margin and where the share of that is higher than usual, then it boosts the relative profitability. And then another reason is the holiday season here that the fixed costs are somewhat lower than they would be without the holidays. And then next segment, as usual, is Insulating Glass. And there, the market continued to perform well. And -- but due to some kind of timings of some orders, we fell slightly short for the comparison period. And 2020 was a little bit different for Insulating Glass than it was, for example, for Heat Treatment. In 2020, for the full year, we had growth in this business. And there was the -- after the shock from the pandemic in the second quarter, there was a very strong recovery in the third quarter. And for that reason, the comparison figure is totally [ decent in ] this business. And then if we look at net sales, EUR 19 million, roughly 10% growth. And if you have been following the quarterly figures earlier this year, where we've seen a strong kind of operational performance from IG. But on the other hand, then the net sales have been declining, and now we are seeing a positive development. This is exactly from the reason that we are -- we do now have a clean comparison, but we don't even have anymore have those old projects that -- where we had the revenue recognition for the full project. And that impacted the comparison of the first half. Now it is clean and now we more can clearly see the operational performance of the business. And then EBITA, EUR 1.4 million, 7.4%. This is an improvement from the second quarter and quite a lot in line with the comparison period. We see seasonality -- positive seasonality impact here as well. And also a little bit of negative mix impact as a big part of this growth is now taking place with the new machines business. And then the final segment, Automotive & Display. Over there, market continues to be active. Order intake growth is very good, close to 100% in euros, order intake, EUR 7.5 million. This is a little bit lower than in the second quarter. And it seems to kind of vary a little bit. We, of course, are still at so low levels that individual projects and their timing had a quite impact on the final figure. Net sales is the same level as in the comparison period as the volumes are low, it is here also very dependent on how the projects that are in the backlog are progressing. And we could see in this business, also some impact from the kind of component shortages with some delays in the net sales. EBITA in the third quarter was breakeven, just like it was in the comparison period. In the second quarter of this year, we had a very high margin. And now we think -- but what is the reason that the third quarter went back to this breakeven level. We do have somewhat lower machines volumes and margins now in the third quarter, but still a high share of services, which continue to support the profitability. And then finally, a look at the cash flow and balance sheet. And in the second quarter of '21, we had this record high order intake and already then, we could see that, that impacted working capital positively and cash flow positively. And we're indicating that this is something that will be and gradually eaten up when those projects in the backlog then are progressing. And this is then happened in the third quarter. So the cash -- operating cash flow that was coming from the profitable business then was eaten up by the working capital increase, pretty much as expected and EUR 0.5 million negative operating cash flow then was the end result with then a slight increasing impact on our net gearing to 34% the end of third quarter. This was my part, and then I would like to hand over back to Anders for the outlook.

[Anders Dahlblom, President & CEO]

Thank you, Päivi. Let's then move to the outlook for 2021. So 2020, our net sales totaled EUR 170.1 million, and our comparable EBITA was EUR 7.7 million. Our guidance remains unchanged from the previous quarter. So we believe that our top line will grow from 2020 level, which means obviously that the growth we saw in Q3 that we will also have continued growth in Q4.The EBITA, we estimate to increase to a range between EUR 10.5 million to EUR 12.5 million. Then I would like to take a short recap on our strategy that we came out and launched in August. And looking into this one pager here, we can see in the center of everything here, we have our purpose. That's why we exist. And the purpose is for us, we want to be building a better tomorrow through safer, smarter and more energy-efficient glass solutions. So that's why we exist. Then we have other megatrends to the left, where we have energy efficiency, smart design, safety, Asia becoming a bigger part and taking bigger share of the global economy, automation being less dependent on people and quality improvement. These megatrends are supporting our business going forward. There we can see houses, trains and vehicles. So these are the residential ones of the houses. And these are really areas where our product or -- by products that are produced with our machines will end up eventually. On the right-hand side, we have the core technologies that is Heat Treatment, Insulating Glass and Automotive & Display. And these are really the technologies where we want to grow and we target growth. Then below the core, the technologies we have, our cornerstones. We have defined 5 cornerstone projects, and these are really the foundation and frame to enable success. So these are group-wide projects that will help our must-wins in our business areas to grow and succeed. And as we can see, the key cornerstones are innovation with customers. So really bringing the customer voice closer to our innovation funnel and R&D people. Here, we have made some organizational changes for that. Then the leading digitalization transformation, this is a cornerstone lifted up on the group level. And then empower Glastonians to thrive, important one from a leadership perspective. And then the sustainability is and sourcing and manufacturing on part of our global group-wide cornerstones. And then -- so everything is really built on people and the way we work together. And that's where we see our values. And looking at the vision, everything we see here are really elements to reach our vision. So I'm really convinced we have a good strategy of elements in place for each innovation. Then moving to the following one, the financial targets. So our ambition by 2025, we divided them into 2 targets, one part being the financial targets, the other part being the nonfinancial targets. And here on this page, we can see the financial targets. And the first one here is about growth. And we have concluded that the addressable equipment market is expected to grow north of 5% annually. And our targets, we have set that we clearly want to exceed that growth. Then from the EBITA margin perspective, we have increased the previous strategy number that was 8%, setting a target that we want to reach a double digit, north of 10% EBITA margin. And then a summary of the top line growth and the EBITA margin, also the return on capital has been lifted from the former 14% to a target of 16% return on capital employed. Then switching to the nonfinancial targets. And here, I just wanted to remind that these nonfinancial targets are targets that we first time have included as part of our strategy. And these targets, one is measuring the customer experience. So we really want to make sure we focus on customer focus and experience. And we will measure this through net promoting score by saying that we want to exceed 40% in all our regions where we are active. Tenant safety is a strategical focus area. Tenant safety is unconditional. We want to make sure our people can get to work and home from work in a safe manner. And we also want to make sure we behave in a safe way in everything we do. And here, the KPI for this one is that we are targeting a 0 lost time accident request. Then employee engagement, we have set a target to be at a rate above 75 out of 100. And this is really about people and leadership. So -- and the engagement. It's really important that our people are engaged and knows the strategy are able to bring the strategy to the day-to-day life. And this way, we will execute the strategy well in the coming years. Then the sustainability part, we have still a target to reduce our CO2 emissions by 50% from the starting point of 2020, where our emissions were 2,777 tons of CO2. So to conclude here, this strategy is based on strategical business area, specific must-win initiatives and also followed by -- combined with group by cornerstone initiatives that will enable our business area initiatives here. And then leadership part is one -- the third part, which covers everything and everybody of us, and that's the way for us to ensure that we also are able to execute this and have engaged people. That's the strategy in a nutshell. And by saying that, we are then ready to move to the Q&A session. So if I can ask Agneta to jump in here and see whether we have some questions.

[Agneta Selroos, Communications Director]

Thank you, Päivi and Anders. Yes, we have a couple of questions. The first one is, are the Heat Treatment restructuring and the seeming profitability improvement in the segment permanent or temporary by nature?

[Anders Dahlblom, President & CEO]

Yes, thanks for the question. I would say the following. We have made a lot of changes in the Heat Treatment towards the better, and I think we can see a result of that, and we are on the right track. Then we have -- if we look at the strategical target here. So we have a target to be at a double-digit EBITA number, and we are on that track. So I would say what we have done is in one way sustainable. Then also, there might be differences in the quarterly EBITA. So that will be something to consider also going forward, not just looking at one quarter in terms of the productivity margins.

[Päivi Lindqvist, Chief Financial Officer]

Like I said, that, of course, for the third quarter, there is a seasonality impact that is good to take into account.

[Agneta Selroos, Communications Director]

Then moving to the next question. Do you see the Q4 order intake showing similar seasonality than in the past by being clearly stronger than, for example, the Q3, generally?

[Päivi Lindqvist, Chief Financial Officer]

Well, it is right that the typical seasonality is so that the fourth quarter is [ bolstered ], even the strongest quarter. And at the same time, I would like to say that in the past 2 years, we've learned that these typical seasonality quarters do not necessarily apply. And we've already commented that this year, the second quarter is most likely the strongest quarter because it was extremely, extremely high. And we haven't given guidance for the fourth quarter order intake. I would only then say here that, like we say in our outlook that we expect the markets to perform well also in the final quarter of this year.

[Agneta Selroos, Communications Director]

Thank you. And at this point, we have no further questions.

[Anders Dahlblom, President & CEO]

Thank you. So then by that, we are ready with the Q3 presentation. And just for a reminder, as for the fourth quarter and the full year presentation, we will be back in early February 2022. So I hope to see you again then. Thanks a lot.