Glaston Oyj Abp (GLA1V) Earnings Call Transcript & Summary

Welcome to Glaston Corporation Q3 2022 Financial Results Audiocast. My name is Pia Posio. I will be hosting this session together with the colleagues of mine. You can share questions already during the session, and I will be taking those when we have time reserved for questions and answers towards the end of the session. Highlight of the Q3 was the record-high order intake, and you will hear more about that with the highlights that will be presented by our CEO, Anders Dahlblom. Following that, our CFO, Päivi Lindqvist, will guide us through the financial development, and we will close the session with the outlook towards the end of this year. With this, I would like to invite Anders to go through the highlights for this quarter. Please, Anders.

Thank you, Pia, and welcome to Glaston Q3 presentation. Let me start with the Q3 2022 highlights. And the first highlight is our order intake. We are super proud about order intake increasing by 90%. This is an all-time record quarter intake in 1 quarter. In the quarter, we had one big project of around EUR 30 million that contributed to this. But despite this good, big project, the order intake would have increased north of 30%. We also saw some highlights in one of our strategical areas in solar in Asia. If you look at the order intake on a business area, insulating glass improved 185%. And heat treatment business improved orders by 30%, and automotive was close to flat with a small minus of 4%. The net sales improved -- grew 3%. This is somewhat shy given our strong order book and order intake. If we divide it into the business areas, the insulating glass growth was 14.3% and Automotive & Display grew most by 32.8%. And in heat treatment, we had a decline of 14.8%. The service business, overall globally, grew 8%. If we take these to different levels, the spare part business improved 12%, and the daily service work improved as much as 23% with a very strong improvement in the Asia, APAC region. The upgrade sales were somewhat lower than previous quarters, while total service growth was 8%. I will come back to this later on, on our business area level to explain the top line development more in detail. Given the shy growth on the top line, the EBITDA also was affected by that. So the outcome was a EUR 2.5 million EBITDA compared to EUR 3.2 million previous years in third quarter and thus also the margins somewhat decreased from 6.9% to 5.1%. The backlog increased significantly from EUR 86.1 million to EUR 142.3 million. And if you compare the increase from Q2 this year, it increased from EUR 106 million. Then let me run through some of the highlights in the orders that are important, that strategically wins for us. The first one is the big order of EUR 31 million in Europe. This is a customer who have been our customer in Heat Treatment business who also now wanting to expand and let us in the offerings of the IG business. And this is a great strategical achievement given also our multi-areas that are new product development that is included here, and this is a clear proof that our strategy with cross-border deals and focusing on new development and innovations are paying off. Secondly, in automotive, we were able to achieve orders, which are important for us from the reason that we are in the process of moving or starting up Automotive & Display production in China mid of next year. And now we have got orders already that we are planning to produce as the first ones in China next year. Then the third one is a strategical focus area for us, which is solar. And we received the first deal in solar, which is in Asia, a deal that was close to EUR 5 million, which is strategically very important for us. Those were the highlights, and thereby, I would jump to the architectural market in the third quarter. In a general note, overall market activity remained at a good level. The continuous challenges being the supply chain and inflation and also the pressure on especially energy prices that are affecting our customers' operations significantly. If we then go to the EMEA, being the strongest part, Europe, here. The strongest order intake was in Europe of 157%, a significant improvement. And the bigger success we saw in the insulating glass business, but also the heat treatment business performed well in terms of new business in Europe. The service business coming to our spare part and daily service business developed very positively. Thus, our upgrade business, especially for the heat treatment and automotive has been slow in the third quarter, but at the same time, building up an upgrade business in the insulating glass business, that has improved very well. If we then look at the Americas business, in the Americas, we have a strong year-to-date growth in order intake. The third quarter was slightly down by 13%, but we see strong expectations for the fourth quarter in the U.S. as well. The strong demand continues for the heat treatment business, where we have seen very good growth throughout the whole year. The insulating business has been slightly lower than previous year. We see good potential there, and we are strengthening our focus and portfolio to be able to take more gains in U.S. going forward. The same note on the service business here, spare part business developing very well. Daily business was very strong, even stronger than in Europe. And here, again, the upgrade business has been, at least in the past 2 months, somewhat slower than previous months. Then moving to APAC. China architectural market is currently rather slow. It has been slow for already a couple of quarters, and this is continuing. Despite that, we saw reasonable success for our high-end IG machines. The rest of APAC was somewhat slow, but the big success for us here was the solar business. This is a great area for solar. And here, we had the success of a deal of close to EUR 5 million that will be now or soon going into production. When it comes to the service business growth, the strongest growth was seen in APAC region. So we had a service growth that was above 20%. And this is clearly a sign that the restrictions that are being tougher in APAC are opening up, and we are now able to continue and grow our service business also in APAC. I think in general, focus is in this architectural area of the energy efficiency, renewable energy. Climate focus elements are clear there. So these are all good drivers and solutions for our products going forward. Let me then talk some words about the automotive market. Automotive market, our order intake was 4% down. But -- and the quarter started somewhat slow, but it picked up quite clearly towards the end of the quarter. And we see an expectation also to continue well into Q4. When it comes to our customer -- customers' customer, the automotive producers, they are still faced with some challenges with the supply chain shortages. And this is visible and also has some effect on postponement of some deals. The service business is continuing well, and it's steadily improving and growing. There are long delivery times for control systems, and this has had some impact also on upgrade potential for -- with some postponements in there. If you look at the automotive on a regional basis, so EMEA, which is the smallest automotive market globally has been still somewhat slow. We see some improvements. They are visible there. But as said, that this is the smallest area for us, when it comes to the market potential. If you look at Americas, Americas continues pretty well and especially in the recreational and the heavy vehicles, there was a continuous growth in Americas. And then the APAC business, APAC's being the biggest potential when it comes to automotive market. Market continued positively. And also, the success for us in projects that we are planning to produce locally. In 2023, it has been proved that our strategy to establish our local footprint for automotive business there is the right thing to do. Then I would like to switch gears to the business areas and look at the business -- area segments and let me start with the heat treatment business. So the heat treatment business, we saw a growth in orders of 30%. This has been a steady good growth throughout the year, continuing in Q3. The net sales is worth opening up a bit, and Päivi will go more into details here. The net sales is declining by 14.8%. And there are two main reasons in here. One being that we have strategical investments that are ongoing and much focused on Q3, and this has consumed some of our available capacity temporarily and thus, the top line and as machines going out has been lower than previous quarters. Also, some impact we see from the components, there is especially electrical and automation components that continue to be challenging in terms of availability and price. Thus, we see other materials actually easing up, when it comes to the availability. We also have seen focus on more automation, and we also launched the product here, which comes out with new features. And we have been able to do deals in this area, which has been a great success for our R&D development here. Then the insulating glass business, here, we had a very strong order intake, growth of 185%, biggest growth ever. The top line growth was 14.3%. This is not reflecting our real potential here. We have here some supply chain electrical components and automation that have delayed some full deliveries, which, therefore, are seen as less top line than the potential. Also, the China business has the biggest impact on insulating glass. China business, as said, is continuing on a rather challenging level. And here, getting out the products to the customer, installed, with this situation has been also somewhat challenging and the full potential of the top line there has not been materialized. Also, some investment contributing to strategical initiatives are frontloaded before we see the full potential growing into the top line, and that is one other point here. The upgrade business, though, is an area that is growing well in insulating glass, and we see a further potential to continue this route, as we have seen in our other BAs. So this is a positive note that is continuing and visible. Then going to the Automotive & Display business. So order intake being rather flat with a small decline of 4%. It's picking up, and we actually expect a continuous now positive note going into the fourth quarter. When it comes to the operations here, we saw the biggest growth, and top line is 32.8%. So this is a significant growth in the business here. And we also have a good project mix and service has been continuously growing through in the automotive business. and thereby, we saw a strong EBITDA margin of up to 9% in the third quarter. So that's briefly about the markets and the business areas. And with those words, I would like to hand over to the financials to Päivi Lindqvist.

Thank you, Anders. And my pleasure to go through the numbers in a little bit more detail. And let's start with the order intake. So like said, this is really that comes, in a way, a positive highlight of the quarter. Over EUR 86 million of new orders received and 90% higher than the year before, and this is beating our earlier quarterly order intake record of EUR 64.5 million in Q2 '21 with a pretty wide margin. And of course, one big reason for this record-high order intake is that one single individual order of about EUR 31 million. But even if we would exclude that, the order intake growth was very healthy for the quarter. So the market has stayed positive. If we take a look at the different product areas and 9 months received order, we can also there see that our insulated glass technologies business is dominating the growth year-to-date with 66% growth in new orders. And of course, in the latest quarter, the growth in this business was extremely strong. Then if we move to Heat Treatment Technologies where we've recorded 9% growth in 9 months with a clear pickup in the third quarter where we had a 55% growth in new orders. And the smallest of our machine businesses, Automotive & Display Technologies has 28% growth in 9 months. And there, we saw some decline compared to the year before in Q3. This business has been a little bit volatile when it comes to new orders. And because it is also quite small, some kind of individual deals and where they actually then take place has quite a big impact on the growth figures. And then finally, of course, and definitely not the least, the services business, which is having 7% growth in orders in 9 months, Q3 was flat. And there, this slowdown in order intake in heat treatment and automotive upgrades is kind of dragging down the kind of positive development in some other areas of this business, like the spare parts and field service. And then if we move to net sales, so like said, the net sales growth clearly slowed down from the previous quarters. I will come to the business-specific reasoning a little bit later. One reason, of course, is the fact that the comparison period starts to be a little bit stronger already for Q3, whereas then for the earlier quarters, the comparisons were still quite a bit impacted by the COVID time and the fact that we had, had less order intake, especially in 2020, then impacting the net sales in '21. By product area and again, kind of commenting first the 9 months figures, we have 8% growth in insulated glass technologies. And there, the net sales growth picked up to 14% in Q3. Considering the very strong order intake in this area, the growth could have been quite a bit higher as well. And this is also the business where we have the most impact from the situation in China. Then if we look at Heat Treatment Technologies, 27% growth in 9 months, so a very strong growth area. But like I mentioned, Q3, in the machines area had quite a bit of a decline, over 20%. And I'll come to those reasons later. Automotive & Display, small business growing strongly, and also in Q3, we experienced nice growth in that area. And then service business, 9 months growth of 12% and then Q3 growth of 8%, kind of partly explained by the upgrades net sales not meeting the very high comparison figure within heat treatment. All right. So I think we can move on to the regional view of our net sales development. EMEA is clearly our biggest region and has actually increased its share to 54% in the 9 months and has definitely been the growth driver for our business this year. Both 9 months and Q3 regional net sales growth was 24%. Then we have Americas region with 3% growth. And in the first 6 months, Americas region had a very nice growth, but then in Q3, there was a decline. And this is mainly dependent on the fact that there was clearly less U.S. projects in revenue recognition in Q3. The order intake in the first half, especially, has been very strong from the Americas region. So this is kind of -- from a regional perspective, mainly a timing issue and the fact that there just happen to be less of those U.S. projects approaching delivery when most of the revenue recognition is taking place. And then APAC region, with 26% growth for 9 months, Q3, clearly slower growth of 11%. And this is coming from China. China share of our net sales in 9 months was 16% and declined 11% in Q3. The net sales from region China was flat compared to a year ago. So there, we have to separate a little bit what is happening in the business locally, where we saw a decline in net sales compared to Q3 last year. And then on the other hand, then there is some growth from deliveries that are happening from our European factories to China and the outcome for the whole region was flat development for Q3. But clearly, we can see that in China, especially for the local business, we see customers kind of not ready to receive machines and that was the reason why quite a bit of the revenue that we were expecting for the quarter actually is then moving to Q4. And then moving on to profitability and EBITA, EBITA margin, which both declined in Q3 compared to year before. And this is mainly volume-driven. As explained earlier, the net growth -- net sales growth slowed down quite a bit. And then if we compare the cost base with what we had a year ago, we are clearly at the higher level. Margins -- gross margins developed well. There is kind of no negative impact coming from gross margins, but the profitability is kind of suffering from the fact that the costs are higher and the revenue growth could not compensate for this cost increase. We have increased kind of resources. We are executing the strategy, and we especially see now marketing and traveling type of costs returning to kind of more normal levels. And we also had this main industry event, Glasstec, in the third quarter, increasing fixed costs. But we'll get to this segment-level kind of profit and growth drivers a little bit later on. I'm actually kind of move to heat treatment next already. So within heat treatment, market continued strong. Nice order intake growth of over 30% for the business. So that is definitely the good news within our heat treatment business. Net sales, as been mentioned, down about 15%. And reason is, I would say, a threefold. Component situation is definitely one thing kind of delaying revenue recognition. Then there is also a specific comparison issue within heat treatment that the quarters in this year are quite different from what they were last year. Last year, we had exceptionally good net sales and also margin for Q3, whereas that kind of peak happened in the second quarter this year. So earlier, the previous quarter for heat treatment was extremely good, and the same kind of extremely good quarter was in Q3 last year. And finally, the third reason is that the kind of capacity constraint coming from the kind of R&D project and the fact that kind of building R&D machine within the production is taking some capacity out from customer projects. So mainly kind of revenue-driven, profitability declined. And of course, here also, we do see some of this fixed cost increase, especially in marketing, travel and external services. On the other hand, the positive drivers, positive impact for profitability development was on the margin side and also from the fact that, that mix was better services with a higher share and some positive impact from other operating income as well. Then if we move to insulating glass. So this is, of course, the area where we have extremely good order intake development really kind of excellent level and order back starting to be kind of dramatically higher than year before. And like said, this one individual deal boosting the orders further in addition to strong general development. Net sales increased for the whole segment, 14% and component shortages, lockdowns having an impact. So without this, the growth had been clearly higher and profitability and margins softened. Here, we see some margin pressure from the fact that the supply chain issues, component shortages are kind of creating inefficiency and putting some pressure on cost, not dramatically but some impact, yes. More importantly, I think the development is based on the fact that the operation is geared for higher net sales levels. And we have increased personnel and external services in order to cope with the increased order backlog. And then when the revenue was a little bit softer, then this is hitting profitability. And then in addition, increase in some kind of other fixed costs, like marketing. And then the final segment, Automotive & Display, which -- where we see very delightful development compared to year ago, especially on the P&L side. If we look at the order intake, we had low machine orders. Like, I said earlier, this seem to vary quite a bit from 1 quarter to another. Services order intake grew slightly. So that was kind of softening the impact. Our net sales increased 33% and -- based on growth in the earlier quarters in machines order intake. And also, the services net sales had a very, very nice growth of 17% in the quarter. The EBITA improvement, profitability improvement is mainly coming from volume growth and also the fact that in the machines area, the gross margin is higher due to kind of better geographical mix or higher margin projects in the revenue recognition. And this is now changing from the first half where we've had more kind of challenging profitability situation. And there, the geographical mix was not that good. All right. And then moving on to the kind of cash flow and net debt. I think we can end this financial part with a positive highlight. So very good working capital development in the quarter, positive operating cash flow and then this also led to lower net debt and thus gearing coming down to 27% at the same level that we actually had at the end of last year and end of year is usually the lowest point of the year. So nice development for cash and balance sheet. This ends my part. So Pia, I guess, we are ready for questions. Let's have a look at the outlook first…

Ah, perfect.

But then we are there. But my mentioning questions, please use the chat function to share those. So we have time to discuss in a minute. Anders, please.

So outlook for '22, we have specified outlook from the range of being EUR 12 million to EUR 50 million. We have narrowed it to SEK 12 million to SEK 40 million. And we also expect the net sales to increase from the 2021 level. I think just a couple of words on the outlook here. So obviously, the Q3, we were slightly short on the top line when it comes to getting up machineries out. And I think we could say we have roughly a EUR 3 million to EUR 4 million impact of the electrical components in terms of the top line. Hence, we have the shortfall for Q3. We don't expect a significant upside why we would give the upper range up to EUR 15 million as we had in the previous outlook. Still, the market looks very good. We have a good outlook for the new businesses for the fourth quarter, and we are also expecting to come with a better quarter than Q3 and Q4. That is the expectations. So the situation as such is somewhat of a temporary, especially the decline in top line, the heat treatment in Q3, which we expect to be different in the next one. So outlook is specified EUR 12 million to EUR 14 million. That's the range that we expect to come out. Thank you.

Yes. Thank you. And now we have the opportunity to move into questions.

And let's start with the capacity discussion that was here. How long do you see the capacity and the other issues suppressing the revenue generation, especially in HT and IG?

Yes. I think this comes back to the component situation, and what we see currently is the electrical and automation components being the ones where the situation looks to continue. When it comes to the availability, when it comes to other raw materials, other components, we see an improvement there. So we get -- availability starts to be improved significantly, which obviously, will ease up a bit. But still, this is a challenge that is going forward. Also, we are learning to go internally better and better, and that way, we believe to be able to deliver more on a quarterly basis.

Thank you. On a group level then, how much of the deliveries and sales that postponed from Q3 and Q4 and onwards due to component shortage and COVID restrictions?

Well, I think what we see in general, so the -- due to the component shortages, we see that the potential we would otherwise have is a EUR 3 million to EUR 4 million shortage on the top line. So that is what we can see through -- due to the component challenges.

And I would say that in addition, a couple of million from this COVID restrictions in China.

Partially already there, but any rough estimate on how much postponed revenue that was during the quarter that could have been otherwise recognized in absence of component shortage, and on the other hand, the customers not being able to receive the products?

Well, I think this is pretty much the same question. At least I understand it now, quite as the same question as the earlier. So if we put those together, I think we are above EUR 5 million of the impact of both components and then also the COVID restrictions in China.

Related to costs and inflation, so how much has there been cost inflation? And what do you expect for the future?