Glaston Oyj Abp

OMXH:GLA1V

Earnings Call Transcript 2020-Q4

[Pia Posio]

Welcome to Glaston Corporation's Q4 and Full Year 2020 Results Conference. My name is Pia Posio, and I started last week as a Head of Marketing Communications and Investor Relations here at Glaston. We broadcast this event from the studio with only limited amount of people in order to respect the ongoing COVID-19 safety guidelines. And we host this event in English. And I kindly ask you to also share your questions in English, if only possible, and you can start asking questions already during the presentation that we are going to present to you soon. With me, I have here Anders Dahlblom, our new CEO, who has started in his position beginning of this year; and Päivi Lindqvist, our CFO. And today, they will share with you CEO introduction, Q4 highlights, our financial development and outlook for 2021. After that, we will go through questions and answers. With further ado (sic) [ without further ado ], Anders, I would kindly ask you to take over and start the presentation. Thank you.

[Anders Dahlblom, President & CEO]

Thank you, Pia. Welcome on my behalf as well to my first quarterly review 2020 full year. I'm very proud and honored to be here today. As Pia said, I started 1st of January, so this is my sixth week or day 40 exactly, and I'm happy to share with you 2020 results on Q4, but especially talking more about future and topics for 2021 to consider. I wanted to share a slight background of myself as a new CEO. I have a 16 years experience from a previous employer, Paroc, from the insulation business. I spent there time in various finance positions and 10 years as the CFO and Deputy CEO. And then last 3 years, I was the Managing Director of Paroc and then Insulation European Managing Director.During this period, it was a very exciting one. We had 6 different owners, of which 4 were private equity, international private equity owners. And the last one, we were a part and we are -- of Owens Corning, a publicly traded U.S. company in the Insulation business. I spent a lot of time with value creation projects, especially on top line growth and operational excellence. And in the past 3 years, we did a lot of integration work, which is very topical for Glaston as well after the acquisition of Bystronic and Glaston. I'm very inspired to be here, and I see ahead of us that the work has started to create profitable growth and to realize the full potential of Glaston. We have another change also. We are happy to share with you that we have a new Chairman, named Veli-Matti Reinikkala, who also joined officially as the Chairman 1st of January. Veli-Matti has 22 years of global business experience with ABB. He has held various senior positions lived in Finland, Switzerland, China and the U.S. and in his latest position, he was part of ABB management group team in Switzerland. He also holds position as the Deputy Chairman of Fortum and also he is proposed to become the chairman in the next AGM meeting for Fortum. He also is member of the Board in UPM-Kymmene Oyj, and he used to be the Chairman of Cramo, a Finnish publicly traded company. So we are very happy to have such experienced international industry person, Veli-Matti Reinikkala, with us as the Chairman of the Board. Another change regarding our reporting is we will have new segments, launched on 1st of January 2021. The change we have here is the automotive and display technology that's used to be named automation and emerging technology. And the reason why we have this change is that we are moving our emerging technologies as part of our technology development and R&D. And externally, we are going to report out our core free business areas, which are Glaston Heat Treatment Technologies, Glaston Insulation Technologies and Glaston Automotive and Display Technologies. This does not mean that we would defocus our work on innovation and new ET businesses that we will work more internally on them, and make sure we focus on the ones we want to take further that helps us to grow our business in the core business areas. Let me then share with you the highlights from our fourth quarter. And as you can see, we are very happy to report that our orders received were up 6% compared to the previous quarter 4 in 2019. We had low order intakes in Q2, Q3, and this is also a result of our net sales full year ended 17% below the previous year and 19% below previous year in the fourth quarter. When looking at the 6% improvement in Q4 we can see variations in the different businesses, so the Heat Treatment business improved from very low numbers in Q3 and Q4 to 10% decrease in the fourth quarter. And the insulation glass business improved. So we were 24% above Q4 in 2019. So a very great achievement in the insulation glass business. Also, the automotive business that was down pretty heavily in Q1 and Q2 -- started Q2 and Q3 improved 14% in the fourth quarter compared to the previous 2019 Q4. We also saw differences in the regions. I will come back to that on the next slide. But on the profitability, even though order intake was down 17% year-on-year, and net sales was down 17% year-on-year, we managed to do a lot on the profitability side, on the cost side. We achieved EUR 12 million cost savings. And out of that, EUR 4.5 million relates to synergies. And all in all, we reported that our synergy targets originally from the acquisition of Bystronic and merging of Gladstone was EUR 6 million -- EUR 4 million. And out of that, we exceeded and achieved EUR 6 million. EUR 4.5 million of this EUR 6 million are included in the EUR 12 million cost takeouts for 2020. So the great achievement on the cost part contributed to the fact that our EBITDA margin in Q4 was 5.3 percentage which is the same level as we achieved in 2019 in the fourth quarter. The full year EBITDA margin was 4.9% compared to 5.9% in the previous years. Let me then talk about the market a little bit more in detail. So the strong thing, and what we are very happy about, is that the architectural market, mainly residential construction and commercial construction, improved in the last quarter. The strongest performance we have seen throughout the year in Europe or EMEA business, where we had an order intake that was down 7% year-on-year. And it was up 4% in the fourth quarter. The strongest demand we saw in the DACH area, and residential construction has been growing, especially in the second half of the year. But the commercial industry has been -- the commercial construction has been the one that has been more challenging. North America was the region where we saw the biggest decrease in order intake as much as 34% year-on-year, 2020 versus 2019. But we are very happy to see that in the fourth quarter, the order intake increased dramatically, and we were up to 14% increase compared to quarter 4 to 2019. Also in North America, we saw the residential activity construction has been growing in 2020, but the commercial activities have been on a declining pattern. Then the APAC, Asia region, Asia has been the strongest part there has been the China for us. And the order intake for the full year decreased 12%. And Q4, we were down 1% compared to the quarter 4 in 2019. The restrictions in Asia has continued to have some negative impact on our machinery equipment activities, but we saw a strong development in the service business. Also the service business throughout all our regions improved clearly in the fourth quarter. Let me then talk about the automotive market, and automotive market for us has been the one where we saw the biggest challenges and the biggest decreases in the 2020. And a big factor here is the automotive market is global, and the biggest market for us is the Asia and China, and also U.S. and Europe being a smaller part of the automotive market. The activity in capacity production of vehicles amounted to close to 74 million globally, and that is a decrease of 35%. So that clearly has had a big impact on the activities and especially on investment activities for machineries for automotive. The order intake for us was down 32% for the full year. But here as well, we have seen a change that automotive capacity is now increasing in Q4, we saw the increase. And actually, the expectations for the full year '21 is that the production units would increase by 15% this year. And that we can see in our Q4 order intake that did 14% improvement here. We also saw increases in order intakes, which were more related to recreational vehicles and appliances, which is a little bit different from the traditional ones in the automotive and also the service business in this industry, we saw a clear change of improvement, and we were almost back on levels that we saw prior to the pandemic. Next, I'm happy to hand over to Päivi Lindqvist, our CFO, to talk more about the financial development.

[Päivi Lindqvist, Chief Financial Officer]

Thank you, Anders, and I'm really happy to show you a little bit more detail our financial development in the full year of 2020 and also the fourth quarter. And if we start as usual with the order intake, and Anders mentioned already a few of these numbers. But let's look in more detail. So the full year order intake, was EUR 153 million, roughly, which is the 17% decline compared to in 2019. And if we look at the quarterly pattern during the year, of course, the pandemic had a really big impact on this. The first quarter was the kind of normal quarter of the year when things were still kind of as expected. And then the pandemic started to impact our order intake in the second quarter, which to some extent, also continued in the third quarter, but then in the final quarter, we saw a clear recovery. And actually, the EUR 52 million that we got new orders in the quarter was 6% higher actually, than the fourth quarter of 2019. So a big, very deep drop in the second quarter then coming back in the third quarter, and then actually in the fourth quarter already higher than '19 level. Then if we look at the order intake by product area, we can see quite big differences. Our Insulating Glass Technologies, so the equipment side, experienced 9% growth in the full year, whereas then the other equipment areas, both Heat Treatment and then Automotive Technologies, had big negative percentages, 30% in Heat Treatment and 40% in Automotive Technologies. And also a little bit contrary to many other downturns, the services business had quite big decline in the full year of last year. And this, of course, was happening mainly in the second and third quarter when the pandemic and all the restrictions and our customers kind of capacity restrictions had an impact on both the spare parts sales and even more on the service work. Then if next, we take the net sales numbers. And here, we have quite similar development. When we look at the full year numbers, EUR 170 million net sales for the year, which was 70% lower than 2019. And the quarterly pattern a little bit different. The first quarter is still quite normal. Second quarter, rather high, but already 16% decline. Third quarter, which was then reflecting the lower order intake in the second quarter then had over 30% decline, and then the decline continued in the fourth quarter, also reflecting the lower order intake in the preceding quarters. And similarly, by product area, IG, machines, technology, 17% growth. The other technologies with rather big declines and then also services declining. Then if we look at the regional development and how our net sales by region developed, first of all, EMEA was our strongest region, and it actually was able to grow during this exceptional year with 5% growth. And last year represented over half of our net sales. And this is quite a lot driven by the Insulating Glass business, which is very strong in EMEA area and also is having a bigger share in the EMEA area than the other of our segments. North America, around 1/4 of our net sales and a 37% decline. It was the region with the biggest decline and this is quite a lot reflecting the very strong reaction that, especially our U.S. customers had on the pandemic. So the order intake within North America declined actually the most during the year. And then APAC, 29% growth. China is nicely recovering from the pandemic but the other kind of areas within APAC, the development has been more -- a little bit more modest. And then finally, if we look at the profitability and EBITA, which is our main profitability measure, which we focus a lot also internally. We ended the year at EUR 7.7 million, which obviously reflecting the lower volume, lower net sales, declined quite a lot from 2019. But we were very well able to compensate a big part of this volume decline by reducing the fixed cost and the relative margin, EBITA margin, did not decline that much but was around 4.5%. Lower than 2019, but considering the circumstances, quite a good achievement. Also fourth quarter kind of margin-wise was the strongest quarter of the year, even though revenue was not the highest. This is reflecting quite a lot also the product mix and the fact that the services business started to recover strongly in the fourth quarter, and then that is bringing relatively more profits in. And then I would like to go through quickly the segments. And to start with the Heat Treatment and there, as discussed, rather low order intake, second and third quarter. But then a strong recovery in the fourth quarter. So the percentages -- decline percentage is clearly lower. This did have an impact, obviously, on the net sales, which is coming delayed from the order intake, but well compensated by the cost savings. So this is especially the area where we see a lot of positive impact from the cost savings. And then this means that the EBITA margins were quite close to '19 levels in 2020. And here we, of course, have to note that because of this lower order intake in the earlier quarters, then the order backlog that we ended up with -- at the end of the year is 16% lower than '19. Insulating Glass is the next one. So this segment is really clearly the strong performer among the Glaston segments. We did experience growth, both full year and in fourth quarter. Order intake, 4% growth for the full year, and the last quarter actually was the strongest of all these and was the strongest during the Glaston kind of ownership. So the segment was able to quarter-on-quarter during the year improve the orders. Net sales increased obviously as well as the order intake has been strong for a longer period, and profitability improved as well. In the fourth quarter, the profitability was a little bit taken down by more like internal cost allocation reasons. There, we have to also remember that when we transitioned to IFRS accounting for this business, there are certain projects where we had delayed revenue recognition. And for that reason, the 2020 first 2 quarters have high revenue numbers. And this then, of course, for next year, means that the comparison is rather challenging. And then finally, Automotive and Emerging Technologies segment, where we saw in the fourth quarter a clear recovery in the order intake. It has been low partly due to structural reasons, no, not only the pandemic, but also some structural reasons for a while, but then a 14% increase in the final quarter. Obviously, net sales have been impacted by the slow order intake. And then the big decline in volume has also resulted in the EBITA turning to a loss in the year compared to a profit in 2019. And there also, we have made quite big capacity adjustments by using short-term work in, especially at a factory in Switzerland. Then finally, about the balance sheet. There, we saw in the final quarter, good working capital performance. And this then resulted in positive operating cash flow of EUR 3.5 million for the quarter, which then meant that our net debt declined in the fourth quarter to about EUR 33 million and returned actually to the level that we had at the end of 2019. Gearing was 49%, a bit higher than the year before. But considering the fact that the order intake was clearly lower than the previous year, this is kind of good achievement and working capital performance really has contributed to this. This is then the kind of financials in a little bit more detail, and now I would like to ask Anders to come back with the outlook.

[Anders Dahlblom, President & CEO]

Thank you, Päivi. So now it's then time to switch gears from 2020 and talk about 2021. And I wanted to share with you a couple of first feelings about the Glaston for me being the sixth week in the company, and then a little bit around what we are focusing on now in 2021 before going over to the guidelines for 2021. And if I first talk about Glaston as a company, so first of all, I think -- I believe Glaston is a great company. Glaston is a front-runner in a strong technology, and we are a technology leader. There is a lot of skilled people in the company. We have been able to do good cost-cutting and adjusting to a changing environment, which is a very strong measurement of good agility. We have now as a global service business after the acquisition, which gives us muscles to build that further in a different manner than prior to that. And our quality and brand is very strong and perceived by customers. And what I have also noted by talking to key customers, we have a very strong reputation and good cooperation with our customers. Then the last thing maybe here is really one about the Glaston and the potential here is the sustainability aspect. We know that sustainability is high on the agenda globally, and approximately 40% of the energy consumption comes from buildings. And really glass and windows and the whole glass equipment, so there is a big potential in -- for us, how we can impact the renovation and new buildings to be part of the sustainability and decreased CO2 and energy costs. So I think there is a great potential for us there. And if I then look at the key priorities for 2021, obviously, we kick off the strategy the second week of January, and that will be our main focus now through the first half year. And just some elements on the strategy, so ultimately, we are here -- we want to create value. So value creation will be strongly on the agenda. And then another thing is really on -- we are a global company, so we are going through now a more detailed work on where to play and understanding the customer experience. So we really want to make sure we understand where we want to play and what is the customer experience and how do we make sure we will win with the customers in the future. Then also, obviously, profitable growth is part of that one and our value propositions towards the customers in different regions. And I think especially Asia will have a weight on its own there. Then I'm talking about realizing the full potential of the integration. So obviously, I mentioned, we achieved EUR 6 million of cost savings from the integration. That's one part of the integration. I think now we are into the second part of the integration, which is really understanding and starting to work with the commercial potential as being a different company, having a global service business. So we really work more on that. And then also, it's clear that on the ways of working, by harmonizing our ways of working, talking about operational excellence in various areas, we see also that we have potential there to grip as part of realizing the potential of the company. So what comes to the strategy, so we are obviously now doing a big work there and more details. And I hope to be able to share with you something more in connection with the Q1 reporting and end of February on the strategy work and ways forward. Then as the third element, so leadership and execution, that is obviously a very important one of making sure that the strategy becomes part of our day-to-day work and our operational targets and that we have one aligned Glaston team that really believes and have the clear targets and responsibilities of where to go and where to run. And that is obviously also baked in as part of our strategy work that we will focus on in the first half of this year. So then moving to our outlook for the year. As you saw, we saw a strong recovery in the fourth quarter, and we see our big drivers are residential construction, commercial construction activities and automotive activities. And then obviously, investment decisions by our customers. That have been partly on hold in Q2 and Q3 2020, and we see that there has been a different willingness and decision makings on the investments in Q4. We are very happy to see that the trend continues. And the signals for the first quarter are, in that sense, positive. So we see it Q3, Q4 trend continuing to '21. We have also, therefore, made a proposal to pay out a dividend of EUR 0.02 per share because we see the positive momentum in the business, and we feel that is something that works out for the company. And based on this, there are guidelines for 2021, is that we will -- we estimate that sales will increase from '21 -- 2020 level. And at the same time, we also expect that EBITDA will increase up from the EUR 7.7 million achieved in 2020. So that was the recap of 2020 and Q4 and some insights on my first reflections and 2021 guidelines. I think we are thereby ready to move over to questions and answers. Thank you.

[Pia Posio]

Thank you, Anders. Thank you, Päivi. We have plenty of time. Please do -- chat is available for sharing your questions in writing this time. And while you think your good questions. I already have some here that we can start with. As the competition in China is more about the price than technology, how do you plan to resolve this market for your advantage?

[Anders Dahlblom, President & CEO]

Yes. So I think Asia is a region that we want to work with, and it's going to be part of our strategy, and we see that the local players, they play with prices and different lower technologies. And obviously, we want to make sure we understand where we want to play, what are our segments where we should play. And also, we want to work on our value proposition. So it really corresponds to the customer expectations. And at the same time, we need to work with our technology as well, so we have something that works right for the Asian customer and Asian demand. But I think we have a great opportunity, being a technology leader in this industry, adjusting ourselves to more understanding the regional aspect is something that we will work on, and we feel that there is a great opportunity for us.

[Pia Posio]

Thank you. And we continue -- this was Daniel Lepistö from Danske asking, and we continue with his question. How would you describe your current technological position against competitors in both Heat Treatment and Insulation Glass segments?

[Anders Dahlblom, President & CEO]

Well, as I said, we are a technology leader. I think we have a great advantage there. And our key question and key answer that we have is that we make sure we apply the relevant ones in the relevant regions compared to the customer expectations and the customer needs. I think when we compare ourselves to competition, I feel we are very strong in there. Obviously, new innovations is going to be a continuous focus. We want to make sure we can have and find new solutions, new innovative solutions that solve our customers problems or needs. And that is a continuous thing that we will continue to work on.

[Pia Posio]

Thank you. And then Erkki Vesola, thank you for your question, and it goes like this. In Heat Treatment, how much was there an order rebound from Q2 and Q3? And what makes you believe the high run rate will continue in 2021?

[Päivi Lindqvist, Chief Financial Officer]

Should I try to answer this question. And it's, in a way, impossible to answer exactly. I think it is clear that second quarter and third quarter order intake in Heat Treatment were so low that it kind of created certain pent-up. The customers were on freezing the projects and waiting for a little bit better time of uncertainty to clear up a little bit or something like that. So part of it is that, yes. But then on the other hand, based on the market that how do we see it and the pipeline and all that, at least it looks like that it's not only that. So I think it's both.

[Anders Dahlblom, President & CEO]

I think -- I mean, what we see, we are a market leader in the Heat Treatment business, where we have approximately 40% market share. So we see a lot of what is going on in the various regions. And I think what we see also now as to starting in January, so it continues with a positive pattern. So we expect that we will see figures upwards in Heat Treatment as well this year.

[Pia Posio]

Thank you. And then we have a follow-up question. You talked about EUR 12 million COVID-linked savings in 2020. How much of that will return in 2021? And how much can be turned permanent?

[Anders Dahlblom, President & CEO]

Maybe if I start the question and then, Päivi, you continue. I think we have analyzed that out of the savings that we have made, partly were integration and partly where operational savings are up to EUR 12 million, and then partly because of the environment with lower activities in both traveling and some other activities. So we said that roughly 40% of the savings are sustainable for the longer term. And the rest will come partly back depending on activities. But Päivi, please.

[Päivi Lindqvist, Chief Financial Officer]

Yes. It's -- this is the estimation really what we have about that. And what is then the thing that is -- or the costs that are coming back, it's mainly related to, obviously, the fact that our factories start to get back on kind of closer to kind of full capacity. And it means then that we cannot have the temporary layoffs or short time work to the same extent. And then also this kind of traveling and marketing exhibition type of costs, we do expect that those will start to gradually increase when things are getting normalized.

[Pia Posio]

Thank you. Then something, I think this goes to Anders. So you started in the beginning of the year. So what are your first impressions about the organization? And then on the other hand, coming from similar but not similar industries, so what is your first insights related to the, for instance, environmental requirements in construction that opportunities and possibilities they provide to Glaston?

[Anders Dahlblom, President & CEO]

Yes. So let me first start with the organization. I think, I mean, as we have seen, we have some changes in organization. We have a new leader in the Heat Treatment, and we have [ BS ], a new person here. And we also announced an HR recruitment here earlier this year. So we have done some changes there. And I think now we have the team in place for the strategy set up here. And as I mentioned there in the strategy part, so one big challenge and work that we are focusing on is really to become One Glaston after the acquisition based on the Glaston. And I think what I see there is really the positive and the benefit is that to have One Glaston team with shared targets, having the strategy in place, clear responsibilities, then it's about leadership. So we will also focus a lot on leadership. That is something actually that I learned in the past 3 years as being part of a U.S. publicly traded company. We worked a lot about leadership and impact and really how to make sure you work and achieve a growth above market, achieving value creation project target. So I think that is one part really to crystallize the strategy then work with leadership and make sure we take the leadership into execution and execute that. I think then the third one, if I remember correctly, was about the previous work and Glaston and the industry point of view, and what is a little bit funny is that the Insulation business that I worked for, we had very similar drivers. We were more -- the demand on residential construction than being on Glaston here, we have a big -- we have more commercial as well there. But we had residential as the main driver. And obviously, automotive is something where we have not been and then the service business is something we didn't have in the same magnitude as we have here. But if I think about and look about the megatrends about sustainability and really the impact that you can have on glass and insulation on decreasing the energy consumption and CO2, which is highly on the agenda many places. I mean doubling the renovation work to make sure we reduce energy cost. That is really highly on the political agenda also. So I think that aspect is very similar. We are selling machines not to the end customer that are really using it cost center -- or industrial companies, in many cases, who then. So I think the thing here for us is really understanding the customers' customer and the end users and the whole chain. But I see a lot of similarities compared to the previous business I worked with.

[Pia Posio]

Then moving on to Emerging Technologies, if you will. What's the situation of Heliotrope in terms of product development and financing sustainability? And what should we be expecting in 2021?

[Anders Dahlblom, President & CEO]

So maybe on the Emerging Technologies, as I said, so that's something we are in a segment moving back into the technology and R&D. So it will mean we are not going to report out a lot of Emerging Technology work until we really have something concrete that becomes part of our businesses. But Heliotrope, which is one, it remains to be one very interesting solution for us. And the latest on Heliotrope is that they just received some short-term financing, and they are currently looking for a second finance round for a more long-term solution there. But it remains to be a very interesting solution for our future business. Sorry, was there a continuation of...

[Pia Posio]

What should we be expecting in 2021?

[Anders Dahlblom, President & CEO]

From the...

[Pia Posio]

From the Heliotrope, if there is any, but I think you covered that...

[Anders Dahlblom, President & CEO]

Yes. I think, I mean -- let me put it this way. So obviously, the next phase of Heliotrope is to commercialize the solution and the product. And at this point of time, we don't have an accurate enough timing to talk for that. So it's something that is going to be -- remain to be seen how quickly we will come there or get there.

[Pia Posio]

Right. Then moving on to Heat Treatment. Your 40% market share in Heat Treatment machinery, is it in monetary or unit terms? And how that has developed in 2020?

[Anders Dahlblom, President & CEO]

I think if we look at the Heat Treatment, it's the flat tempering, which is the biggest part of our Heat Treatment, then we are also in the laminating business where we have a lower market share. But the flat tempering, where we have roughly 40% globally, the market share has been pretty stable if we look at the years and currently where we are. I think the biggest -- so in EMEA, we have a strong play, and we are doing well and the same goes with the Americas. I would say that the biggest challenge for us is Asia, as mentioned earlier, that a big focus on the strategy will be Asia, where we see local players playing with different technology and lower quality, which also goes to the price and they've talked with lower price. So for us, that is a challenge to understand where do we want to play in which segments? And also, what is our value proposition and technology and solutions there. So obviously, innovative solutions for us will be important to make sure we succeed well in Asia going forward. If we look at the market development, in a way, Asia market has grown maybe the most lately. And that means that since our share in Asia is not as strong as in Europe and in America, from that perspective, maybe we can say there is a small impact on that total.

[Päivi Lindqvist, Chief Financial Officer]

And the answer to the question whether it is unit or monetary market share, it is monetary market share that there is a lot of players in the market who are selling lower-cost equipment and big numbers of those. So it's kind of euro-based measuring that we do.

[Pia Posio]

Thank you. I don't have any more questions visible at this time. So it seems like, let's -- if we move on to closing our session. If you can -- yes. So here, we can see the schedule for our financial reports in 2021. And I would like to warmly thank Anders and Päivi for this session and, of course, the audience for your attention and your questions. And with this, I thank for your time with us, and we are looking forward to seeing you in April. Thank you.

[Päivi Lindqvist, Chief Financial Officer]

Thank you.

[Anders Dahlblom, President & CEO]

Thank you.