Glaston Oyj Abp (GLA1V) Earnings Call Transcript & Summary

Welcome to Glaston Corporation's half -- first half financial results webcast. Today, we will share some insight about solid progress in the second quarter despite the challenging environment that we all are aware of. My name is Pia Posio, and I will be hosting this session and sharing your questions towards the end of the hour. You can share questions throughout the session. We have reserved some time for those in the end. I have together with me our CEO, Anders Dahlblom; and CFO, Päivi Lindqvist. And they will go through the highlights, and financial development, and then we have a look at the outlook for 2022. But without further ado, I would like to give the floor to Anders to start with the highlights, and I'll look forward to getting your questions.

Thank you, Pia, and welcome on behalf of myself to Glaston second quarter review. Let me start with the highlights for Q2. So a solid performance despite the challenging environment. And we have pretty positive figures to report out today. Starting with the order intake. So we have a slight decline in the order intake, 13% down compared to Q2 2021. However, this, we find a reasonable level looking into the 4-year average from 2018, the average is slightly below 50 per quarter, and we are clearly above that with EUR 56.2 million. If we look at them per region, the EMEA region is clearly down. And there is one note that is worth noting there. We had a big deal that materialized in Q2 '21 amounted to EUR 9 million, and this is one reason of a challenging comparison figure. In the APAC region, despite the challenging China environment, we have a flat new order development, and then the growth comes from Americas, 17% up new orders in Americas region. What we have in the pipeline looking into the third quarter, we see a pretty strong continuation with new orders. So we are pretty happy with the current situation there. Then if we look at the more operative performance, starting from the top line, good growth, 24%, it comes through the business areas and service. We have a 30% growth in the heat treatment business, 31% in the automotive and -- business. And then in the insulating glass a 16% increase. And then a very strong growth in the service, 20% up, which is something we have not seen for many quarters. So very good top line growth. Then looking into the profitability. So comparable EBITA improved quite notable, up from EUR 2.4 million to EUR 3.5 million. And also the margin improved from 5.5% up to 6.6% for second quarter this year. The biggest improvement we see in the heat treatment business when it comes to profitability improvement, both absolute terms and margin-wise. Then also looking into the backlog. The backlog is on a pretty good level, north of EUR 100 million. It's a 21% increase from Q2 last year. And then it's 8% increase from the first quarter this year. One highlight is also an announcement that we came out with in the mid of June, and that's execution according to our strategy. And that we are planning and preparing for automotive glass preprocessing equipment to our factory in China in Tianjin. I will come back to that later today. Then also one thing to note is the Russian operations. Russian operations are discontinued. All our employment contracts have been terminated, and also, we don't have any legal entity in Russia anymore. And then the capital repayment was done EUR 0.03 per share in April. Let me then move into the architectural market, and some highlights for the second quarter. Overall, the market activities has continued on a good level. We clearly see some changes in the environment, and it's a more challenging environment. But however, the activity has remained good. And this also gives us comfort that in the near future, we expect a good consolidation throughout the year. Some may be worth mentioning a positive one is really the Americas business. The Americas region has been the strongest in terms of new business and growth and activity, and then also the fact that the service business improved 20%. That's a clear change compared to what we have seen since the pandemic time. Then on the challenging part, it's the China working environment. We have had the lockdowns there, logistical and supply chain challenges, also governmental shutdowns. Our factory was shut -- fully shut down for 2 days. And these facts in China, they had some negative impact on our results. We lost some EUR 2.5 million in terms of net sales, and also roughly EUR 0.5 million negative profitability due to the challenging environment in China in the second quarter. And then globally, the supply chain disruptions continued. However, our feeling is, we have been able to survive and operate pretty well in the challenging environment. This will continue, but it's something that has been -- become already a continuous challenge in our business. If we then look at the regions, some highlights. So the EMEA, we saw the new orders came down there, a big reason there a big order of EUR 9 million as the comparison and the outlook for the near term looks pretty strong there. The service business increased in EMEA region and the strongest performance for new business we saw in the insulating glass. Heat treatment remains slightly lower, but still on a reasonable level. Then looking into the Americas business. I've said Americas is clearly the strongest currently area. And especially in the heat treatment business, we have gained a lot of new business there. So that has been a clear strength. Also, the IG business picked up from previous quarter, not at the same pace as the heat treatment, but clearly in the right direction. And then the service business has been very strong there, and our upgrade business has especially performed super good in Americas. Then to Asia, I would say that 0 flat development in the challenging environment in China and also APAC is a pretty reasonable outcome. I think we see that the markets are -- have remained subdued, but opening up for traveling clearly gives us comfort an indication that we will be seeing also new businesses, both in rest of APAC and then in China in the second half of this year. And I think a big thing here is really the traveling has become possible within certain conditions, and that is opening up for also the service business, but also relationship buildings for new business. Then if we talk about the automotive highlights for Q2, automotive production, continued facing difficulties due to the component shortages. So no big changes there. But I think in general, the market sentiment is pretty okay. And especially when we look at China. So China continues on a good level. Not many decisions for new machines have been done during the second quarter, but I think there is -- we have a pretty strong feeling expectation that there is going to be good opportunities for us in the mid-future there. Americas also continued a pretty stable, reasonable level. It has been mainly outside of traditional markets, so recreational vehicles and heavy vehicles. That market has been strong. And then Europe remained on a low level. So no big changes there. And Europe is the smallest region when it comes to our potential marketing in the automotive business. Service increased somewhat and there our -- including our upgrade solutions have gained positive outcome. Then looking at this from a business area perspective, heat treatment, the biggest increase, both top line and profitability, 30% up net sales, really good profitability improvement, big drivers behind that, good volumes, strong development in the U.S. and then also strong execution in line with our strategy. So these have been being the main drivers for the good profitability there. Also the uptrend market, it's very good in heat treatment. It has been growing pretty rapidly of many quarters in a row. And EMEA has been modest in terms of new business, but we see good opportunities there. So we are pretty confident that the near future looks positive. Then looking at the insulating glass business. So net sales up 16%. Here, the EMEA region remained the strongest in terms of new business. Americas orders were there, improving recovery from previous quarters. Then we have a new solution and move to arriser. That's a new automated glass arriser product launched last year. But I think now in this quarter, we have seen a lot of good feedback from customers, and that has been a door opener for new projects. So one positive note on new developments. Then the upgrade business, it's a smaller business in the insulating glass than in heat treatment, but we see that growing constantly, and there we see there is a potential for us to build bigger market for that. Profitability improved despite the challenges in China. And as I said, roughly EUR 0.5 million impact on the profitability, it's mainly affecting the insulating glass business. Then we have the automotive and display business. Net sales were -- grew significantly, 31% profitability-wise, not too big improvement mainly due to mixes and lower profit projects materializing in the first half expectations for the future slightly better. Then the display market, it's a market that has been pretty low for us. We have made some statistical investments and have strengthened the team there, a lot of good discussions ongoing. And I think that is a route that will bring us business in the midterm future as well. Then I would like to talk through strategical investment. So this is in line with our revised strategy that was launched in August last year. So growing China. China market has been challenging. What comes to the automotive part, it's -- we see this being a very interesting opportunity for us. Over 50% of the market potential for us in the automotive technology is really in China. And that's the place where we see the growth coming in the future. And by doing this investment so that we will establish preprocessing production in China. We will strengthen our commercial competitiveness significantly. We will also be closer to the market. We will be able to utilize the local supply and also the cost level in general, has some benefit. So I would say 2 reasons here is the commercial competitiveness close to the market, and then the cost efficiency. So we will have a meaningful cost efficiency with this setup once we are up and running there. The investment for this is EUR 1.4 million, and we expect to have the first deliveries produced there towards the latter part of H1 2023. So this will be an interesting new setup for us. We also have some production we'll continue in Switzerland, and we also do some automotive production in Finland. This will continue mainly with the target for markets outside China. Then I would talk about sustainability. Sustainability was also in our revised strategy, a focus area. We have systematically worked with different sustainable solutions. We said in our strategy targets 2 KPIs regarding sustainability, one regarding safety, the other one regarding Scope 1 and Scope 2 CO2 emission reductions. So we want to [ half ] our own CO2 emissions from 2020 to 2025. And the safety, we want to make sure that the safety comes first, and we target 0 lost time accident frequency. Let me start with the safety parts of -- safety is something we have built very systematically since we launched the strategy. We had our first group-wide safety week in May this year, a very interesting one. All our locations participating where we promote safety in different visible matters and also our KPI lost time injury frequency is now on a rolling basis end of June, 5.3%. We started with pretty high numbers in '19. Good work. And I think we want still to improve targeting a 0 lost time. This year, 4x -- 4 lost time accidents have occurred first half. Then if you talk about the sustainability part. So last year, we were able to reduce some 12% to 13% our CO2 emissions. Now we have made actions in the beginning of January. So moving into renewable energy in Finland and also Germany. This will have a very big impact. We have also made investment decisions to improve energy efficiencies in our Switzerland plant. And we will also there start with a solar panel for our own use. So beginning of -- towards the end of this year, we will very likely be able to report significant reductions in our own CO2 emissions. Then one very big thing regarding sustainability is the Scope 3. This is, for sure, the big beef in our impact, what can we, as cluster impact on this equation. So this is a big work that we have been working already a long time, and we want to set a target strategically for Scope 3 as soon as we are ready with all the information ready for that. Then also our new financing agreement that you will hear from Päivi. Later today, we also have there links to sustainability targets. With those words, I would then hand over to Päivi on the financial parts. Päivi, welcome.

Thank you, Anders. And let's start to go into the details of the financial development for the second quarter. And as usual, starting with the order intake, like Anders said already, the order intake in the second quarter was on a very healthy level, over EUR 56 million. And compared to the historical kind of average. And also if you look at the period after the COVID kind of impacted quarters. This is on the high side of the average slightly. Then if we look at the different product areas and what the order intake development was in those, in the second quarter, the -- all of the machines areas went down, compared to second quarter '21. All of them also had a very strong comparison in the previous year, especially insulating glass, where we had a very big order from Poland, press glass that was also kind of separately announced. So taking that into consideration, especially the insulating glass order intake in the second quarter was on the strong side. On the other hand, automotive and display machine order intake was quite weak mainly because of the situation in China. But then the highlight, I think, for the quarter is definitely the services order intake. And then for the second quarter, services order intake increased by 14%. So somewhat picking up from the a little bit kind of sluggish growth that we had in the first quarter. Moving on to Net sales. Net sales grew 24%. So now we have 4 consecutive quarters where we've had double-digit growth. So that growth continued and now 3 quarters over EUR 50 million net sales for the group. This was a bit impacted by the component shortage and also the China lockdowns. The China lockdowns impacted the global business in China. That we have as we have our own factory over there, and it was not really about kind of the lockdowns kind of preventing us to continue production in our own facilities, but it was more about the general situation in China, the logistics challenges and also the fact that the customers didn't make project milestone payments, which then prevented us to continue with the projects. So this did have some 2.5 million impact on the net sales. If we look at the product areas, there we can see that all of the machine areas in net sales had a growth quarter, IG in the second quarter, returned to growth. So there we also had a 16% growth in the second quarter. And the heat treatment, high level of net sales, very strong growth and automotive and display also net sales-wise kind of growing, increasing strongly. And here also, the definitely of the second quarter, the highlight is the services where we have 20% net sales growth in the quarter. If we take net sales development regionally, we can see that all of our regions had strong growth in the quarter. EMEA continues to be clearly the biggest region that we have. Both EMEA and Americas grew 25% in the first half. So these are our first half numbers. And also in APAC, we see a strong growth. Actually, that was the strongest growth region for us, which might feel a little bit illogical thinking about how big weight China has in APAC, but this is very much based on the kind of projects that are going to Chinese customers that are now being in production in the European factories. So those projects, of course, in this phase are not impacted by the lockdowns. But the lockdowns had an impact on the local business in China. In the second quarter, the share of China net sales was 14% of the group net sales. So that has somewhat also increased now during this year. And then if we look at profitability, very consistent performance over the past 3 quarters in terms of profitability and now fourth quarter over 6% EBITA margin. Compared to second quarter last year, we see kind of a clear progress, so 6.6% EBITA margin compared to 5.5% in the comparison quarter. Kind of thinking about the drivers of this profitability increase. It is mainly based on volume. And I will go to the more details of the profitability performance and development in the segment reviews. Now starting with the heat treatment. And I think in heat treatment P&L perspective, there is very little things to complain about. So I think the performance overall was very strong. Of course, orders declined slightly, but they are still at a good level and comparison quarter was also strong. And net sales-wise, close to 30% growth in the quarter to EUR 23 million despite all of the supply chain challenges. So there has been a lot of things that need to be reorganized and a lot of extra work happening like in all of our sites during this whole year. In heat treatment, we saw a very strong project execution towards the end of the quarter, which then meant that we were able to recognize quite a bit of revenue. We also have kind of a higher-than-normal share of our projects in this business from North America, which are U.S. dollar-based projects. And then that also resulted in some benefits because of the dollar did strengthen quite a bit towards the end of the quarter. Services within heat treatment net sales grew over 30%, which then meant that it was kind of roughly in line and led to kind of neutral mix impact. So that was a little bit different from the earlier quarter. Fixed cost also higher, but the share of net sales declined, which then helped also the profitability. But all in all, EBITA margin improving to 7.9% from 2.9% in the second quarter of '21. And then if we move to insulating glass, this is the segment where we saw most of the component challenges. I think the business did excellent job in kind of tackling those, those problems. And also this China lockdown impact on net sales also happened mainly in this business. Order intake close to EUR 27 million, a 14% decline compared to second quarter '21. Here, we have this kind of big comparison and the big deal impacting the comparison. And taking that out, the performance was good. Net sales was still up 16%, and this is a good performance and improving the growth from the first quarter. But like I said, some kind of challenges and even a little bit bigger than in the other segments were seen here. Compared to last year, profitability improved. So the EBITA margin was 6.6% compared to 5% in '21. This is mainly because of more volume and then slightly positive mix. So services grew over 20%. So there was a kind of a slight increase in the share of the services. But volume growth was able to compensate for the gross margin decline in this business. That we had from kind of a few lower margin projects. And then the final segment, automotive and display, like mentioned now, there was a rather weak order intake, a bit less than EUR 6 million in the quarter and clearly lower than the comparison period. Here, we saw several deals actually moving forward because of the Chinese lockdowns. So this is a business where we clearly saw an impact in order intake from the China lockdowns. Net sales continue to kind of recover in a major way over 30% growth in the net sales. Thanks to the orders that -- higher orders that were received in the earlier quarters. And -- but then the comparable EBITA and the margin declined for automotive and display. Of course, we have to say that this 11% margin in 1 quarter last year was exceptionally high. This business has a lot of volatility in profitability from quarter to another, quite a lot based on what type of projects are in the production or close to delivery because the geographical differences in the margins of the projects are high. And in the comparison period, we had high-margin projects from those regions where we are having higher profitability, whereas then in this quarter, we had more of the lower-margin projects. We started to see some impacts from one kind of big U.S. project already, and that will have even more impact in the second half. And also, if we compare to last year, then fixed costs are higher because the business has been preparing for higher volumes for quite a bit already. So there were the big segments and then finally, a couple of words about the cash flow and the balance sheet. We had positive operating cash flow in the quarter. We were able to recover a part of this working capital increase that took place in the first quarter. In the second quarter, our inventories still increased, but then the advance payments or down payments for orders and second milestone payments for projects; and third milestone payments increased more, and for that reason, the working capital declined. And of course, the good profitability contributed to the cash flow as well. We had 9.5 million of financial cash flow -- negative financial cash flow as we renewed our financing agreement in March, and it was executed first of April. And in connection with that, we repaid EUR 5 million of long-term debt. And then we did also repay one additional loan of EUR 2 million during the quarter. And then we yes, paid the capital return of EUR 2.5 million as well. So there was quite a lot of financial outflow during the quarter. But still gearing declined slightly to 35%. So this was my part, and now I would like to invite Anders to share the outlook for this year.

Thank you. Päivi. So then let me conclude with our outlook for this year. We have specified the outlook. First, on the positive part, we have a strong growth, 24% of Q2 and a good growth for the first half. We have a order book of EUR 106 million. So that's strong for the near midterm future. Also, we have EUR 7 million EBITA in the pocket from the first half and pretty many positive things. Also, the order intake expectation for the short-term Q2 looks pretty good. On the contrary, we have the challenging part is the supply chain disruption. That's the single biggest challenge we have globally. So far, we have managed pretty well through the tough environment. This will continue, and that's on the risk part. And then we have China. We see China situation will continue challenging. We have done pretty well despite the situation, and we foresee a pretty stable continuation there. Then also, we have the strategical investments that we are doing according to our strategy. Those will have some costs ahead of the expected return. So that remains similar as we have gone through earlier as well. But I think given everything we see today, we are confident that we will improve in net sales, up from EUR 182.7 million last year. And then also, we are pretty confident with the range between 12% to 15%, which is a clear improvement from previous year for the full year outlook of EBITA 2022. So that's all for our part today here. Thanks a lot for listening to us, and we are now ready to move to the next part, which is our Q&A. Sorry I would invite Pia back here. Welcome Pia.

Thank you. Thank you, and thanks for the insights so far. So we have some details and some product point of view. So -- let's start first with the -- with currency impact I was described. Can you estimate the total positive currency impact on the group sales as EBITA level during the quarter?

Yes, can estimate. One thing that I want to say here is that in our case, this currency impact is not so easy to measure because our subsidiaries are operating agency model. But what it means is that our net sales also from example, North America and the U.S. is mainly happening in the factory companies. And it means that we can't do this kind of a like-for-like easy calculation because the impacts out of that are very small. The net sales impact of kind of just calculating the group net sales with last year's currencies is 2 percentage points, so it's not major. We know that the impact is somewhat bigger because then there is the positive currency impact happening at the factories where we are able to kind of increase or even keep the kind of the U.S. dollar prices, whereas our costs are lower, so the margin should be improving because of that. And if we take this into account, then the estimate for the profit impact for the second quarter is about EUR 0.5 million.

So following up on that. So regarding Q2 order numbers, how big an impact did currencies and your own price increases have on order intake?

Maybe I'll let Anders answer the pricing impact question. But I think the same applies here that the orders are taken at the factory companies and we calculate them in euros and calculating them back with last year's currencies would not be correct. We know that the U.S. dollar has strengthened compared to year-on-year, something like 15%, but that is not the kind of correct comparison that when you do the pricing, you do it in dollars, but you think about the margin in euros because your costs are in euros. So it is kind of lot less than that. So I would say that maximum 4%, 5%.

Would you Anders want to elaborate on the...

Yes, I think it's -- I don't actually want to give an accurate number on this. One is that we don't want to disclaim our price increases in absolute terms. I think the message for us is from the raw material component increases, we have been pretty well able to include that in our new offerings and that we are very happy about. Of course, these price increases are visible in the order intake, and it's a single-digit number that we can say. And as we see the net sales impacting 2% from the currencies, so it's not more than that for order intakes either. But it's a broader question. It's not a simple just mathematics. We talk about single-digit number.

And then moving to the preprocessing line investment part. So can you quantify the split between those EUR 1.4 million investment in terms of CapEx as OpEx? And how much of this figure will be used in second half this year?

I would say we don't want to disclose exact numbers of OpEx and CapEx. The total investment is estimated at EUR 1.4 million. And a big portion of this investment will likely take place from a CapEx perspective during 2022.