Glaston Oyj Abp (GLA1V) Earnings Call Transcript & Summary

Welcome to Glaston Corporation Quarter 4 and Full Year 2022 Results Broadcast. My name is Pia Posio, I lead our Communications, Marketing and Investor Relations at Glaston. And today, I have with me our CEO, Anders Dahlblom; and CFO, Päivi Lindqvist. And we will be hearing about strong profits and cash flow in the final quarter. And in addition to that, we will have a glimpse into highlights and key figures, strategy and sustainability development, our financial development. And finally, we conclude with the outlook for 2023. You can share your questions throughout the session. We have reserved time for those in the end after the outlook. But without further ado, Anders, would you guide us through the highlights and key figures and then into the strategy.

Thank you, Pia, and welcome on behalf of myself as well. So I would -- happily to share our Q4 highlights for 2022. And it was a very good performance in the quarter. The profit was good and a very strong cash flow as well. And if we look at the Q4 numbers as such, our top line net sales growth was 14%, amounting to EUR 59.8 million and our service had a super strong growth of 20% in the fourth quarter. And then our result EBITA was high amounting to EUR 4.2 million, and that was a growth of 21% compared to the fourth quarter in year 2021. As well, our EBITA percentage improved from 6.6% in Q4 '21 to 7% into Q4 2022. The only softer number compared to previous year where the new orders, new orders amounted to EUR 51.7 million, which was a decline of 12.5% compared to Q4 2021. Other highlights, the strategy execution, I'm very happy to see what we have been able to do what comes to our strategy execution that has clearly become part of our day-to-day work. Also, the sustainability progress, we had a 57% decrease in our own CO2 emissions from the year 2020, super good performance and just the beginning of our sustainability journey. Also, a good thing we have is the taxonomy related aligned top line. So we have 43%, which is a significant part of our business that are taxonomy aligned. Also on the capital return, we are proposing EUR 0.04 per share, which is an increase from EUR 0.03 the year before. So all in all, a strong profit and good cash flow and really a good quarter 4 for us. If we then look at the figures from the full year perspective, so I'm very happy about the full year as well. I think this was clearly an evidence of strategy in action with a lot of great successes. If we look at the new orders, the order intake, an increase of 70% that's a significant number. At the same time, the top line improved 17%. The service business, close to 15% and our EBITA improved 23% and also the margin improved from 6.1% to 6.4%. Looking into 2023, our order backlog amounted to EUR 138.3 million. This is a significant improvement of 46% from the year before. So we have a very good starting point when we entered into the year 2023, which is a good position to be in. Then I would like to share some views of the market environment in the fourth quarter and as a general activity in our business continued on a good level in the fourth quarter. Despite the building activities being somewhat suppressed in Europe, we can see new buildings decreasing also in the U.S. with these activities somewhat coming down. At the same time, the renovation building, which is for a relevant business from a sustainability perspective, is clearly improving that is a good posit for us. We also see some decision-making that takes slightly longer time than we have seen previously, especially in the EMEA area. China was a big challenge in the fourth quarter. I will come back to details on that. At the same time, Americas was our strongest region and still remains our strongest region, good activities, good achievements there, good growth. Then from the supply chain perspective, supply chain situation continued pretty much under similar level, as we have seen throughout 2020. Many raw materials easing up, also price easing up. But at the same time electrical and automation and electronic components, they are still rather challenging to manage. If we then look at the EMEA, new orders decreased by 21% but the full year increased with 16%. So a good growth in EMEA for the full year. Insulating Glass, the strongest region was EMEA throughout the full year, but -- and also in the fourth quarter. And the Heat Treatment demand continued well. We saw growth in the fourth quarter in the Heat Treatment business. And Automotive, which is a small business in Europe has been on a very low level also during Q4. The positive thing with the service business, we saw good growth in the service business in the fourth quarter. The activities for upgrade orders was slightly lower in the fourth quarter still. Then if we look at the Americas, Americas was the strongest as I said, super good growth. Q4 new orders increased by 32%, a strong number. Full year improvement in the new orders in Americas but the same number actually 32% as well. If we look at the businesses there, the biggest growth we saw in Americas was with the Heat Treatment business -- actually super strong growth in all the quarters also in Q4. The Automotive market there remains pretty good, especially product for recreational vehicles and heavy vehicles. We're on a good level in Q4. Also the service business there, we saw strong growth, and the upgrade projects improved somewhat from the third quarter still being on a rather low-ish level. Then moving into Asia. So APAC, as said, China. China was difficult in the fourth quarter. New orders in China clearly decreased. Full year also China new business came down with north of 20%. Still, we see for the IG business for high-end demand in China remains actually strong. It was strong in the fourth quarter. The Heat Treatment business for new business was pretty soft but then the automotive activities were on a very good level throughout the fourth quarter. In the rest of the APAC region, the new business for machines was rather flattish, but the service level and the service activities actually increased quite significantly. Let me then move further to our strategy part here. I wanted to share a couple of words on the strategy execution. Since I personally -- am very pleased with the '22 achievements. It's very clear that the growth of 70% in new orders and top line growth will not come without investments, and we have made a lot of good investment when comes to strategical future. And as we can see also, the capital expenditures for that has increased from 3.8% of net sales to 4.3% of our net sales. And we are improving and investing into new products. We saw a good solar deal that we enter into a EUR 5 million deal in 2022. And we have a lot of things ongoing when it comes to more automated solutions for our products in both the Heat Treatment, in Automotive and also in our IG business. So investing on the technologies there. Also on service, we have products that we are investing into new things that will help us to increase the Service business more than the market increase. We also did great cross-sellings, one big deal in Europe of north of EUR 30 million was achieved in 2022. This is a great evidence that our strategy is working. We are able to enter into deals that we were not able to do with the old of us. So the bigger -- [ the new of us ] is clearly -- strategy is working in our favor. One big thing for the automotive business is that we are moving or entering into standard preprocessing equipment production in our Chinese factory in Tianjin. This has been a successful project so far and now we are actually up and running there with assembling, producing standard equipments in the automotive business also in China in 2023. So this is really strategically a big difference for us, and we expect good outcomes continuing there. If we then look at achievements that we have for previous year compared to our strategy that we launched in 2021, this is good evidence that we have a lot of green arrows and great achievement. And if we look at the first, our financial targets, we have 3 financial targets, which is the top line growth, where we clearly want to exceed the addressable equipment market growth and in the past 2 years, we have, on average grown 12%. So this is clearly an evidence that we are on the right track. We are making progress with our strategy. If we look at the profitability, our EBITA, our target is to exceed a 10% EBITA. We have made progress from the starting point of 4.6% margin, reaching continuous improvement up to now 6.4%. So that's a good improvement still a great bit to reach the strategy, but we are very much on the planned level here. Also, the third one, which is the return on capital employed. Our target was said to be at a level of 16%. And here, we have made a great success of exceeding 10%. One big achievement that contributes to that on top of the top line growth and EBITA is our working capital. We have made actually very good improvement in the working capital and that helps also the return on the capital employed. So very good development and exactly we are on the right track achieving the strategy. And then if we look at our nonfinancial targets that we have strategically set up, which are 4 of them. So the Net Promoter Score, we want to make sure that we do great and our customer experience is good and super and the first time we were able now to measure this globally, we are -- have a figure which is north of 50 -- so 53, this is a good achievement for us. We want to continue. We want to gain more experience globally to understand that this is really continuously, and this is something that we can live up to also in the future projects. Then we have our safety part, lost time accidents amounted to 6. We have our LTIFR number of 3.9 obviously, the target to have 0 lost time accidents. This culture is continuing and I would say, culture-wise, we have done a lot. We have seen good development in actually all our main locations. So this is a journey that will continue going forward. And then the first time, we measured also our employee engagement rate. We will not -- we targeted a level to be above 75 and the first outcome was a number of 70. I think this is on a level that is classified as good. And also, we received good -- a lot of initiatives that we want to take with us now going forward to develop the engagement and increase the level to above 75. Then the final one is our emissions, our CO2 emissions in our own operations. We had made a target to decrease them by 50% by 2025 and this is something where I'm super happy that this target we were able to achieve already now in the year 2022. And this obviously takes us to the fact that we -- it's only the beginning of our journey, we will now work with -- working on setting new emission targets, which will cover the upstream and the downstream value chain. So it means that we will update our targets regarding Scope 1 and 2. But the big one there is the Scope 3, where we will work and set targets during this year. Some highlights from the sustainability journey, we have been doing actually a lot there strategically an important item for us, one of them being the safety. This is something we work continuously and heavily with Glaston's first emission reduction target was achieved. As said, we have been reducing our -- improving our energy efficiency in our own operations. This came mainly from the Finnish operations and the German operations, 2022. And we also will continue to invest in own renewable electricity. We will see here we have close to 400 solar panels installed in our factory in Switzerland. This is a great way to reduce our own CO2s and also said about engagement index that we are working with our engaged people who want and will execute our strategy. So all in all, before wishing Päivi Lindqvist on the stage here, I want to thank everybody for good Q4 and a great achievement for the whole 2022. Thereby, I will hand over to Päivi on the financials.

Thank you, Anders, and very happy to be here today and go through the numbers for the fourth quarter and the full year of '22. And as usual, let's start with the order intake. Like I said, the fourth quarter orders were slightly soft, 13% lower than the year before. This was after the record high third quarter. So probably one reason for kind of a slightly kind of declining orders in the final quarter. Then if we look at the full year number and the growth, the 17%, of course, in this rather kind of uncertain environment is a good achievement for the order intake and very well in line and even a bit higher than we were expecting for the year as a whole when we started it. If we look at the product areas, we can see that our Heat Treatment and Insulating Glass technologies, the machine side, they were growing strongly. Insulating Glass even at over 40% in '22. In the Automotive and Display Technologies, we did see some decline. The market over there seems to be quite volatile still, and there's a lot of customers quite hesitant to make the final decisions. And then if we look at the service, we achieved 7% growth in orders in service. This is taken down somewhat by the quite low order intake that we had in upgrades in the second half of last year. The upgrades order intake improved slightly in the fourth quarter, but still it was clearly lower than the year before. If we look at the other service areas, spare parts and field service, there we have very good growth numbers over 10%. So that is then supporting the growth in the services area. Then if we move to net sales, as you can see in the chart, we had a bit soft third quarter, mainly because of the component issues and now we were able to catch up very nicely in the final quarter and approach EUR 60 million in net sales, which is clearly highest quarter if we look at this kind of time since the Bystronic acquisition in the spring of 2019 and 14% growth for the final quarter. For the full year, net sales reached EUR 213.5 million, 17% growth. By product area, in net sales, all our machine areas were growing actually the highest automotive and display technologies, which then had kind of orders in the backlog, which were kind of successfully delivered and projects progressed during the year. In Heat Treatment technologies, we also had 16% growth and in Insulating Glass Technologies, 9% growth last year. Services, for the full year had 7 -- sorry, 14% growth and this also was slightly kind of impacted by -- already by the lower upgrades order intake that the upgrade net sales for last year was almost flat. So most of the growth actually came from spare parts and field service. If we look at the regions and how they have been performed last year. All of them contributed strongly to the growth. EMEA is clearly our biggest region with 53% share of net sales last year and 17% growth. Americas has had a somewhat lower growth 10% last year and a bit less than 30%. But Americas at the moment and especially now in the fourth quarter was clearly growing kind of at faster pace than EMEA. So it has kind of taken a little bit of the role of the growth driver as well as APAC. Also there, we had quite strong growth in full year and also in the last quarter. Now if we look at the share of China, the China's share of total net sales last year was 12%, and it was a bit higher than the previous year even though the order intake in China declined last year, but there were quite a lot of deliveries from Europe to China and those progressed well and contributed to net sales. Then moving to profitability. Like I said, a very strong profit in the final quarter, EUR 4.2 million and 21% higher than previous year. And the first time now we reached 7% level in the EBITA margin. For the full year, EUR 13.6 million of EBITA and 6.4% margin somewhat up from the previous year's level. And what then contributed to this kind of strong profit in the final quarter, volume, of course, is one explanation clearly, but then also the services growth was strong. Services share of net sales increased and also the margin in services increased. There's also a positive mix impact within services as the upgrades net sales kind of did not contribute that much to the growth, but rather the higher margin spare parts than actually increased its share. So that is one reason for the good margin in the quarter. Then moving on to our reporting segments. Heat treatment is clearly the segment where we saw very nice progress, both in volumes and margins during the year. In the fourth quarter, orders increased 8%. Net sales recovered back to this kind of a more normalized level after the weak third quarter. It was kind of a bit lower than the year before, but a clear recovery from the third quarter. And then also here, we see very well this impact of the high share of spares and field service that then kind of boosted the share of services and also the margin within services. In the full year, we had healthy demand, healthy growth in orders throughout the year with 7% increase. In profitability, we also saw a clear progress. And there, we have again, volume and then margin improvement actually both in the machines and services that have enabled this profitability pickup for the full year from 4.5% to 6.1% in EBITA margin. Now we have to hear note that now especially in Heat Treatment, this upgrade business is quite sizable part of the business. And as that order intake has been lower in the second half of last year, it will have some impact now in the first half as those orders are not contributing to net sales that much. Then moving on to Insulating Glass. I think this has been a business that usually kind of surprises very positively at the end of the year, and this happened again. If we look at the orders, those were then, on the other hand, a little bit lower than kind of previous year. And in third quarter, there was record high kind of orders and one exceptionally big order now in final quarter of last year, the order intake went down 23% and this is mainly in EMEA, where we saw some kind of softness and also some timing issues with the order intake. On the P&L side, very excellent, very good project execution at the end of the year and a lot of kind of received acceptances and successful project deliveries, which then meant that net sales increased. And also the profitability was above 10% margin level as it was also kind of last year in the final quarter. In the full year, on the other hand, the orders here are very good, 33% increase. Net sales 10% higher margin. EBITA margin a little bit below the previous year because the fixed cost didn't compensate for the kind of additional gross margin that we got from the volume. And then our last segment, Automotive and Display. Here, we saw, like I said, weak order intake, especially now only in the machine areas. So customers hesitant making decisions, those taking time. On the other hand, services had extremely good performance and over a 50% increase. So service is kind of performing well in this area as well. Then if we look at net sales, we have quite opposite situation, extremely high net sales growth in machines, almost 90% and service is also very high percentage kind of net sales increased 30%. Profitability was lower, and this is quite a lot because of mix. With these high machines net sales growth, it means that the share of machines, the lower-margin business is increasing, and that impacts the margin quite a lot. And there also, we have some regional impact of having more lower-margin Asian projects in the mix. In the final year, orders slightly behind previous year, very high machines growth, also service is performing well. And for the same reason as in the final quarter, the mix impact driving down the profitability slightly in the full year. Okay. Let's move forward very good operating cash flow in the quarter, EUR 8.7 million. This is, of course, quite a bit coming from the strong profit, but also working capital performance was good customer payments coming in for the deliveries and from the acceptances and also inventories going down because of the big amount of deliveries and acceptances. Then if we look at gearing, now we ended up below 20% -- at 19%, and this is now also the lowest level that we've had since the kind of big acquisition was made in 2019 when we obviously had a big increase in the debt levels. And that brings me to the capital return. So the Board is proposing EUR 0.04 capital return, which is over 50% payout, but kind of consistent increase now for the third year since 2020. And then finally, my bit on the sustainability topics. One little bit kind of explain more about the taxonomy, which is the kind of the EU's classification system for kind of identifying green businesses that are supporting EU's climate change and other environmental targets. And we have kind of identified two different businesses within Glaston who are enabling climate change mitigation according to the taxonomy and which are also meeting this technical screening criteria that now first time for '22 have to be applied so that you can say that your businesses are taxonomy aligned. So there is certain kind of quite strict technical criteria that have to be met. And for Glaston, there are two businesses that meet this criteria. And the first one is Insulating Glass technologies and Related Services, which then is a technology that enables energy saving in buildings. And the second one is different types of glass processing technologies that are meant for processing glass for photovoltaic modules, which then obviously is enabling the production of renewable electricity. And these two businesses last year had a share of 43% of the total. And I think this is probably the kind of end of my part in the presentation, and then we can move forward to Anders.

Thank you, Päivi. So as you could see from the previous slides that we have made great progress in all our businesses, which is super good. And the sustainability part, we have made a lot of work in the past year there, and we see a very good journey for us where we can play an impact and make an impact going forward. And I think if we look at the '23, so this year, the year has started. We see that the markets are somewhat unsecured when we look what we see out there. I think what we see currently -- the starting point is we have a 46% higher order backlog is a very good starting point for us. So we have a lot of agreed deals that we will be producing and assembling this year. That's a very good position. Then if we look at the -- in North America, our Americas, currently, it looks as the strongest region, where we are seeing a good amount of deals being done in the beginning of this year. Also Europe, we actually have good activities ongoing. As I said, the decision-making seems to be somewhat slower in Europe at this time of the year, given all the things ongoing. But we see quite active activities there. So that's a positive thing right now as we speak. Then if we look at the region in APAC and China. As I said on China, China was a super difficult market in the fourth quarter. We are declining our business in the fourth quarter. This year, there are different -- there are changes in the market. The market is opening up for traveling and so forth, which should have a positive impact on the economy. The global economy or the economy in China is forecast to grow this year. We have quite good activities, especially on the high end, we see we have great possibilities to gain deals. So we are forecasting and targeting a growth in China this year as well. So given that, so we have the starting point, a strong order book, which means that we are expecting our top line to grow this year compared to '22, which amounted to EUR 213.5 million and we are also continuing the strategy execution. So 2023 will be another year of strategy and actions with some modification, and we are very much on the right track, as you could see from -- in all our businesses. So we will continue to target continued growth in the business and as well continued profitability improvement. And thereby, we expect both top line and result to improve this year. I think that was the last slide before we then are ready to jump into the questions part. Thank you all.

Thank you at this point. Yes, indeed, questions, and please do share them through the chat function as we go along. Starting with order intake, which level do you see being more representative for the current expectations for '23 year, the year '22 order intake or the year '21 order intake?

Well, as I said in the '23 expectations, we are targeting continued growth. So our target is to grow the business continuously. It's worth remembering that in EMEA, we had a super strong growth and one very big deal in 2022. So that's one thing that will be difficult to beat at least at this point of time. But in the U.S., we are, for sure, targeting growth also in APAC, including China, we are targeting growth and Europe has been on a very high level in 2022. So I don't see big expectations that we will be over running that in '23. But all in all, we are targeting strong numbers.

And then working capital point of view, can you describe in a bit more detail your work on the working capital? What sort of measures you have taken to show such improvement?

Well, of course, we have -- we did have a working capital project in '19 and '20, which then build the base of how we managed working capital. And I think there are a couple of things that are very important for that and I think the main issue is the payment terms for our project business that we manage I would say, very diligently. And that means that in our business, as long as the order intake is growing, the working capital should be performing really well and that we kind of keep our standards in the payment terms. But in addition, of course, we also have to work on the inventories, which has been a little bit challenging in the past couple of years because of the component situation, and we have intentionally increased some of the inventories but we have to keep a very good eye on that, that they are not excessively increasing. And then as well, of course, the accounts receivables and accounts payables where we do follow them very closely, especially the accounts receivables part that is the responsibility of all the business heads and that there isn't any kind of overdue. So if there are reasons for those overdues that we solve them as quickly as possible.

Thank you. Let's move into regions. Have you been able to win market share in Americas? Or has the market growth been stronger in '22?

Well, I would say U.S. was a strong market in '22 and the market grew a lot. However, what we saw, especially in the Heat Treatment business, we have been able to gain market shares. The biggest growth we gained last year came from the Heat Treatment business. So in Heat Treatment business, yes, when it comes to the other businesses, we have not been gaining that much market share.

And then in terms of China, pretty much the same question, how has the market presence expanded in '22 as the strategy entails?

So what we saw in 2022, when it comes to new businesses in China, that decreased. So we decreased -- our new business decreased by more than 20% in 2022. And as I said about China expectations for this year, the market, we expect the market to pick up to start growing after a challenging, especially Q4 was very quiet there, also after opening up for traveling and meetings, et cetera. So we are targeting to grow this year also in China. And of course, the market is quite unsecured, and it's a difficult really number to pick up there. But there are also good elements and reasons why we could see growth this year in China.

Staying in China, despite the question is not directly mentioning that, but we have a question about the key solar lines that we got an order from in September. So could you remind us about the current status of these lines? And have we -- have you already started the deliveries?

So the solar line, I assume we talk about the sort of EUR 5 million deal that we received in the latter part of '22. We started the production of those lines in China in November last year. And currently, we are in full production of all those lines. So we are not yet there. So we are in the middle of the project, and we expect to have the deliveries done somewhat later than mid this year. So it's too early to say. But so far, we are doing well there.