Glaston Oyj Abp (GLA1V) Earnings Call Transcript & Summary

Very welcome, everybody, to Glaston Q4 and Full Year Presentation. Here today, as presenters as we have CFO, Päivi Lindqvist; and myself, CEO, Anders Dahlblom. [Operator Instructions] The content of today: I will share the Q4 highlights then followed by the market review; then CFO, Päivi Lindqvist, will take you through the financial development and also go through the taxonomy, how that impacts our life; and then I will close with a 2022 outlook before we go to quick Q&A. So that's the agenda for today. And I wanted to start with this, this is a great thing. We are celebrating International Year of Glass in 2022. And this is the first time ever that the General Assembly of United Nations has designated a year for glass. And glass is interesting. It has been -- glass asset history from more than 5,000 years. And it's part of most of the things that we see and do every day. And glass is also one of the most sustainable materials. Glass does not degrade, and it's a recyclable material and it's part of many future technologies. I mentioned like solar energy, part of energy-efficient buildings and the glass fibers are part in wind turbines and so forth. And it's a pleasure for us really to state and see that this International Year of Glass wants to celebrate the fascinating material and the passion for glass. Let's then move to the Q4 highlights for Glaston. Q4 was a good quarter for us. And the order intake, we saw an increase of 13% compared to the Q4 2020. All our segments improved between 13% and 14%, so pretty stable growth. And the full year order intake increased by as much as 41%. Our net sales improved 37%, and we saw good growth in all the segments, Service being slightly slower in the fourth quarter, but all of -- all in all, the full year sales that improved 7%, we saw a 15% improvement in our sales business -- Service business. The EBITA amounted to EUR 3.5 million compared to EUR 2.1 million quarter and year before. And profitability, EBITA as a percentage of net sales, improved from 5.4% to 6.6%. Also, our order backlog improved significantly, up 48%, amounting to EUR 94.8 million. The pro-forma 2019 order backlog was EUR 79.5 million, so we are up also close to 20% from that number. The Board of Directors proposes a capital repayment of EUR 0.03 per share, which is 50% of our comparable earnings per share. Let me then talk a little bit about the architectural market in Q4 and full year. In general, the strong development that we have seen in the earlier quarters continued in Q4. In the Heat Treatment business, that continued strongly and the biggest growth came from both Tempering Lines and our Lamination business. We also saw a good business and growth in the upgrades for the Heat Treatment business. The Insulating Glass business continued very positively, especially our Thermoplastic Spacers, TPS, and other fire-resistant glass and [indiscernible] improved well during the quarter. Service level continued positively, but not -- but at a slightly lower growth than we saw in the earlier quarters, mainly driven by the supply chain disruptions and also partly due to the automotive business, Service being slightly lower in the last quarter. If we then look at the EMEA, the activity remained very strong in Q4. Orders improved 25% to the previous year quarter and full year up by more than 40%. And this came from mainly the Heat Treatment and the Insulating Glass business. We also saw still some subsidiary programs from the government. Obviously, that impacted positive to decisions to investments. And the Heat Treatment upgrades were on a very positive note as well. Then the Americas part. Americas, we saw a slight decline compared to the previous quarter, but -- sorry, but up 29% for the full year. The biggest segment that has contributed well is the Residential Construction that continues on a high note. And both our TPS in the Insulating Glass continued positively as well at our Heat Treatment. And the Service business was slightly weaker in the fourth quarter, especially in the Americas. Partly also the labor shortage has had some impact on a certain activities during that quarter. Then Asia Pacific. Asia Pacific order intake grew as much as 80%. So very strong growth there and more than 50% on a full year basis. And for us, China has been a good success in '21, especially in '21 and also Q4, and that has contributed to the big numbers in there. And especially the Insulating Glass business, has had dramatical growth in China. And also our Automation Solutions has been very much appreciated there. Generally, the macro changed somewhat during Q4, continuing into this year, but we did not see any significant effect from that in the fourth quarter. On the contrary, we saw continued strong growth in our China order intake. In the rest of APAC, we saw small increases but still on a rather modest level. Then switching to the automotive market in Q4. Automotive market order intake was up north of 13% in the fourth quarter and full year as much as more than 50%. The first quarter last year was slowish, but then increasing in the further quarters and especially investment activities, they were quite good in the fourth quarter. The component shortage obviously is affecting the automotive business throughout the whole year and that continues. But the general sentiment is positive. China remains the most active market, and North America as well contributed actively in the fourth quarter. Service business was somewhat impacted negatively by the supply chain shortages. But in general, a good year for the Automotive. Then moving to our segment, so Heat Treatment, Insulating Glass and Automotive & Display. The Heat Treatment business improved order intake 13.5% in fourth quarter, full year close to 50%. The most significant orders that we received were tempering lines, but also the focus that we strategically have on lamination continues on a positive note. In the Heat Treatment, we have very positive upgrade business and mainly biggest orders we saw in the U.S.A., in Spain and in Germany. For the Heat Treatment business, the APAC region and China remained somewhat challenging, lowish, but we have a clear strategic focus to improve there. From a capacity perspective, the capacity level is on a very healthy level at the current state. When we think about new developments in the Heat Treatment business, we are working with automation solutions that you will see coming up on the market this year, also different equipment that measures the quality and improves the quality and then also the focus on China will continue into this year. Then the Insulating Glass business, order intake was up 13% in Q4, full year close to 30%. Both EMEA, North America and China performed very well in the fourth quarter. And the rest of the APAC region was slightly modest compared to the other areas. The capacity situation is actually very strong there, and we have now been increasing our capacity to be able to produce more in 2022 than in 2021. Here, our solutions, the TPS, has contributed to very strong order intake in '21. And also in China, we have seen due to the said solutions very good deals closed. Then the Automotive & Display. Order intake up 13.5% in Q4 and the net sales improved close to 50%. The first quarter was slowish but then we saw positive development in the second quarter and the third quarter, and it culminated positively in the Q4. Clearly, customers are looking for investments to be able to meet the future requirements. And a very positive note for us is that we were able to turn the 2020 negative profit in Automotive to a good positive level in 2021. Here as well, we have many new developments in the pipeline and also part of them are focusing on improving the Service business going forward. Then I wanted to share our strategical targets and how we have been performed to -- against our strategical targets that we launched in August 2021. And the first one, we have the financial targets, 3 of them, and we also have our nonfinancial targets. And if we start with the financial targets, the net sales, we have a target to clearly exceed the market growth. And we were able to capture 7% growth, after that Service business grew 15%. So I would say the Service growth is a very strong one, given the low order intake when we enter into 2021, so we had a negative top line in the first half, but all the growth came in, in the second half. The EBITA improved, and we are on the right track. I think we can see impacts from the synergies. We can see we are on the right track with the strategy. And we have been able to deal with the difficult supply component situation as well with the high inflation on materials. And as a summary of the aforementioned, the return on capital employed also improved. And also we had a negative working capital that has been positive. Then looking into the nonfinancial targets. The first one, we have the Net Promoter Score, that's something that we have not measured in a harmonized way through the new Glaston, that's something we will do and start in the first half of 2022. So we will thereafter disclose the numbers we have there. The positive notice on the safety, we were able to reduce the lost time accident significantly, and the LTIFR improved from 10.8 in 2020 to 3.3 in 2021, which equals 5 lost time accidents. Then the sustainability part. The sustainability part on the Scope 1 and 2 we improved by 13%. So the emissions decreased from 2,777 tons of CO2 to 2,608 tons of CO2. And the last one, the employee engagement. This is also a measurement that we have renewed in this year. So we will disclose the results from that during 2022. All in all, I'm very satisfied and happy to be able to state that we are very much in line with our strategical targets. With those words, I will ask our CFO, Päivi Lindqvist, to continue with the financial developments. Päivi?

Thank you, Anders. All right. Good afternoon from me as well. Happy to be here to discuss the financial development in the fourth quarter of '21 and also to recap the full year. And if we start with the order intake and fourth quarter with about EUR 59 million of new orders, a 13% increase compared to the fourth quarter of 2020. I think we can consider a strong achievement. The comparison period already was closer to the normal levels or the levels we had experienced before the pandemic. And now we were able to get orders in double digit -- with double-digit growth compared to that. And if we look at the full year numbers and the different product groups, we can see that all of our technology areas grew strongly. The Heat Treatment orders on the technology side increased by 76%. So very strong recovery during the year. Insulating Glass technologies grew over 30%, and this is on top of strong 2020 figures already, and then Automotive, Display technologies more than doubled order intake in '21. And then we had the Services business with 19% order intake growth in the full year with a certain slowdown in the last quarter based on the component shortages and the -- a little bit increased restrictions on traveling as well as the Automotive kind of Services business volatility. If we move to net sales, fourth quarter was kind of a continued recovery, 37% increase in the net sales compared to previous year and full year, 7% growth. And now we are seeing actually 6 consecutive quarters with increasing net sales. So we are kind of -- we've had now several quarters of net sales kind of recovering from the pandemic-impacted kind of order levels. And again, if we take a look at the product areas for the full year, we have Heat Treatment with 20% growth in the full year and accelerating in the fourth quarter. Insulating Glass experienced strong final quarter of the year, but the full year number was down as well as the Automotive and Display technologies. This is based on the comparison period, which was still impacted by the IFRS transition. And operationally, both of these areas were actually growing. And then we have services with 15% growth for the full year. And like I said already with certain slowdown at the end of the year. If we look at the regional split of our net sales, EMEA, our strongest region, close to flat, small growth of 1%. APAC, the same with 2% growth. For APAC, I think it's good to mention that the subregion within APAC had a very different development last year. APAC outside China was declining, but China was then growing over 40% last year and the share of China exceeded 10% and it was also over 11% of the total group net sales last year. And then the main growth actually came from Americas, which then experienced 24% growth in last year and increased its share to 30%. And then finally, profitability. Full year EBITA margin had a nice progress from 4.6% to 6.1%. And this is, of course, mainly based on the volume increase. Then if we look at the fourth quarter, we had a slight decline in the margin compared to the third quarter. And there, we see a declining share of the higher-margin Services business impacting this that the fourth quarter share of Services was lower than in the third quarter and also lower than in the comparison period in the fourth quarter of 2020. Then in addition, we have to note that the third quarter margin typically is the highest during the year because of seasonality if everything else is almost the same or roughly the same. That's good to note. Then we had also somewhat lower margin in the Heat Treatment business in the fourth quarter that had some impact on the EBITA margin. And actually good to look at the Heat Treatment in more detail than next. So Heat Treatment as a segment, both including the new machines and services business recovered strongly in order intake. Full year order intake at 59% growth and nice development in the fourth quarter as well, considering the strong comparison period. Net sales accelerating to -- for the 8% growth in the fourth quarter. Comparable EBITA improved strongly in the full year, but the fourth quarter was slightly down. And there, again, the reasons were the share of Services business and then also there were a few projects with lower-than-usual margin level. Then if we move to Insulating Glass next. And as a segment, very strong market, very good offering to the high-growth market, which can be seen in the order intake development, 25% order intake growth compared to already strong level in 2020. Net sales impact in the -- or net sales flattish compared to 2020. And this is again kind of having an impact from this IFRS transition that took place already in 2020, but is then impacting the comparison, obviously. But then now in the fourth quarter, we see really the kind of operational growth and how this business was able to execute very strongly in the final quarter. So the final quarter, both in the revenue and also profit perspective were very strong. EBITA margin in the fourth quarter over 10%, supported obviously with the strong volume development. In the full year, 8% EBITA margin, to some extent, impacted by higher costs because of the capacity increases that we have been doing during the year. And then also the fact that this kind of extra revenue from the IFRS transition is kind of an easy profit as it comes without any kind of effort. And then finally, if we move to the Automotive & Display segment, where we can see a major turnaround last year in both in order intake and in the P&L. And the order intake increased 54% in the full year, 14% in the fourth quarter and fourth quarter orders were a good level. Net sales, 4% growth in the full year and this operationally was a lot higher percentage because of this IFRS transition and in the fourth quarter, 48% growth. So nice improvement compared to 2020 in this quarter. And a big improvement in profit and of course, a big contribution also to the group profitability improvement in the full year that in 2020, this business was still loss-making and now we are seeing quite nice level of profit already in this business. And the improvement here is very much dependent on actually now increase in the share of Services that the Services is mainly kind of behind this revenue increase and then also somewhat more beneficial regional mix of the projects last year compared to 2020. Then if we look at the balance sheet, the strong order intake is then having the impact in terms of cash flow that whenever order intake is increasing compared to the previous quarter, we typically see strong operating cash flow and that we had also in the fourth quarter, EUR 5.5 million operating cash flow and then that then also is improving net debt below EUR 20 million net debt at the end of last year and 27% net gearing, which is the lowest we've had for this new Glaston. So that is about the financials. And then I would like to say a couple of words about the EU taxonomy. And just to explain a bit our conclusions here and because this topic is not that straightforward for Glaston, EU taxonomy as probably many know, is European Union's initiative and part of the sustainable finance -- EU sustainable finance programs. And the idea of this is to direct more of private investment money to sustainable targets. And there are certain businesses that are considered taxonomy-eligible. And if then those taxonomy-eligible businesses are meeting certain criteria -- most of these criteria, the most important criteria are technical criteria, then the business can be considered taxonomy-aligned. And we have reviewed Glaston's businesses, and we have gone quite deep in trying to understand that what is our role here because especially our Insulating Glass business is having a clear role in enabling building's energy efficiency. And we have concluded that the Insulating Glass business is a key enabler for energy-efficient windows that are in the taxonomy documentation than considered sustainable as long as the windows meet certain technical criteria. And in reality, you cannot produce that kind of windows without having Insulating Glass lines like what Glaston is providing to the market. So that is the reasoning why we are considering the Insulating Glass business as taxonomy-eligible. So it is enabling activity. And also, we can say already now that it is meeting those technical criteria. In addition, then we have here, a couple of smaller businesses in the solar business in consulting and 1 investment project that we have included in our reporting. But the main part is our Insulating Glass business. And then that means that 44% of our turnover last year was considered taxonomy-eligible. All right. And then I would actually like to welcome Anders to conclude with the outlook.

Thank you, Päivi. Then a couple of words of 2022 outlook. So first of all, our order backlog is very strong, I said already, 48% up compared to the year-end of 2020. So by that, we have a very good starting point, especially for looking into the first half of 2022. Also, last year, we worked a lot with strategy, making sure we have a strategy that we really understand what we want to achieve, and this is the year of execution. So really trying to make sure we execute the strategy systematically and well combined with the current market situation. So I feel we have a good starting point for moving into 2022. Obviously, the challenges for '22 are the supply chain and the challenges with components and also the inflation that is pretty high. So that puts us in a situation where we need to focus on execution and also making sure prices move into the -- to the right direction. But having said that, at this point of time, we are guiding still a net sales and comparable EBITA will improve in 2022 from the levels of 2021. And group net sales total EUR 182.7 million last year and the comparable EBITA, EUR 11.1 million. So that's the guideline for now. And I think by that, we are ready to move into any questions if there are. Thanks a lot.

Yes. We have some questions here. The first one from Daniel Lepistö, Danske Bank. Can you give some more color on the Chinese market demand? Do you see the higher demand there sustainable? And have you been successful adjusting your offering there to better match the local demand?

Yes. Thank you. So I think, firstly, the Chinese for us last year was a great success. And I would say, especially in the Insulating Glass, we have managed to close good deals, especially with our TPS solutions there. The market, as such, what we have seen in the last couple of months and what we can see into 2022, I think the market as such is slightly to decrease somewhat during 2022. As I also said earlier, for the Heat Treatment business that was not a big success for us, but we strategically have a lot of initiatives where we are targeting to address those, so we can find the growth pattern also for the Heat Treatment. And so far, we are growing with the Insulating Glass there.

Then we have a couple of questions about the supply chain. The first one, how do you see the supply chain disruptions in 2022? And then another one: can you describe the measures you have taken to ensure the availability of the components and mitigate the negative cost effect in rising prices?

Well, the supply chain situation, I think we started to see the effect from that around March-April in 2021, and that has continued since. So I would say, first of all, in 1 way, I hope we, at this point of time, already have learned how to cope with the situation, so both with the shortages and both with the price inflation. Based on what all we know today, it seems to continue. And our feeling is that it will at least continue through the first half of 2022. We will see will it take -- continue in the second half as well, that remains to be seen. But I think measurements that we have taken, it puts our people more stretched to work, to really make sure we have solutions, not relying only on 1 supplier, looking at alternatives all over. And I think for us, what has benefited us somewhat in this situation is that we have not had too many global suppliers. So we have more been relying on local suppliers or in close by to where we have had the need for the components. That has turned out to be a positive way for us so far.

Then we have another question. What's the outlook, how much equipment driven will the 2022 growth be compared to 2021, thereby weakening the mix?

Well, if we think about what we say in our strategy, so we said that we want to clearly exceed the equipment market growth. And it means that in order to be able to improve also the service business, we have first to grow with the equipment market to some extent. So likely the equipment market or equipment business is likely growing slightly more than the service business this year.

Yes, I would say the same that now when we see these strong growth figures in the equipment order intake, it is clear that it is very difficult to grow in services at the same pace and then that would somewhat weaken the mix. And this is something that we all already kind of considered in the strategy because we see that there is so much growth opportunities for the equipment, and Services is a little bit different business. It is kind of a -- it comes a bit later, and it is a little bit more stable, whereas then the Equipment business is more volatile, and there we can then see this big percentage is up and down easily.

But I think still based on that, so strategically, the Service business growth for us is very important, and it's one of our clear initiatives to make sure we have a sustainable growth pattern there. But due to the situation where we are so likely the equipment market will grow faster this year.

And then the next one: how do you see the progress of the strategy execution?

Well, that's a good question. And as I said, this is the year of execution. So I think we have -- on a higher level, we have 15, what we call, must wins in our business areas. And then we have 5 cornerstones that are grouped by the projects. And I think, I mean, we have been doing a lot already in the first half. We are continuing. And really this year is the year of executions, and I feel we are doing good progress in almost all our areas where we are. Obviously, there are big challenges and they are not easy, but the action points there are moving forward in a pretty good pace.

And at this point, the last question: can you remind us of the key regulatory initiatives and their current timelines that could be driving IG demand in the future, referring to EU's Fit for 55 and the Chinese 5-year climate plan?

Well, I think all these climate plans, they have already been ongoing for many years, and it's a continuous process. And many countries, they are acting on these bigger guidelines in a certain tempo. So I would say there has been already things that have progressed due to that, but there are still many things to come in the coming years. So we are on the road of those actions that will come.

And at this point, no further questions.

Thank you.