Glaston Oyj Abp (GLA1V) Earnings Call Transcript & Summary

Welcome to Glaston Corporation's first half and quarter 2 2024 results webcast. Today, we are going to discuss how profitability was supported by the service business, yet markets are still challenging. My name is Pia Posio, and I lead our Communication, Marketing and Investor Relations team here at Glaston. And together with me, I have Antti Kaunonen, our Interim CEO; and Päivi Lindqvist, our CFO, who will be covering the presentation where we discuss the quarter 2 highlights, market review, financial development and also revisit the outlook for this year. And after we are done with the official presentation, it is our pleasure to introduce our new CEO, Toni Laaksonen to you. He will be starting next Monday, and we took the opportunity to welcome him and present to you today. But with this, Antti, floor is yours still for this quarter. And while we listen you are welcome to share your questions and we have time reserved for those in the end. Antti, please.

Okay. Thanks a lot, Pia, and this is now my third time here. And I hate to say it, I have to use pretty much the same message that I have used earlier. So the challenge what we have all the time is with the market. That doesn't come as a big surprise to anybody. So the big challenge is all the time to get the orders. But at the same time, we have been able to keep the margins, and this is important, and I'm extremely proud about how we have done it. The most contribution is coming from the services. So we have been able to grow the services in this kind of market situation when we have challenges with the orders. Like said, so I will go now to the quarter 2. And very much the key points what I want always to start my presentation is about the safety. This year, in the first 6 months, we have 2 accidents, only 2. And both of them have taken place in the customer side. And when it takes to the customer side, we don't have so much control what we have in our own operations. Unfortunately, I have to tell you that in July, we had 1 and that was in our side. And of course, we make all the learnings, what we can do to be able to correct the situation. I have talked already about the market environment, so that's not a big surprise. Order intake was down really to 6%. But on the other hand, so compared to the quarter 1, we increased the order intake. So that's extremely positive thing. And then if I think about the net sales down 10%, it's, of course, Päivi will go through this in detail. But EBITA, we were able to keep, so we were able to keep the margins. So proud of that part, too. If I think about the market environment, no surprises. I really want to emphasize the services. So we were able to grow the services in all the regions. From the orders point of view, so we came back with the EMEA and Americas compared to the APAC. But the big challenge is the slow market. Then this is not about quarter 2, but because of the changes in markets, so we made this kind of big change. So we will move -- transfer all preprocessing production from Switzerland to China. And this will have a big effect on our operations, 1 location less and we have now to consult -- the consultation process with employee representatives going on, and it will -- completed by early September. And it's something important that we are not exiting the business. We will stay in the business. Sustainability is -- going forward, we want to have that as a competitive advantage to us. And if I think about the target sharing, sustainability is extremely important for us. And we will go to the Scope 1 and 2, but over to the Scope 3, and that's the most difficult part because then we talk about the customer and customer uses of our products. Sustainability extremely important as a competitive advantage in the future. And that was very short part that I had. And then I would really like to go to the financial development and Päivi, the floor is yours.

Thank you, Antti, and hello, everybody, from me as well, and let's move forward and start with the order intake. Like Antti mentioned, order intake improved from the first quarter, which was very much on the low side and now reached over EUR 50 million with 6% decline compared to the year before. This is very much coming from the Insulating Glass Technologies this time. So there was quite a change compared to what we had in the first quarter when Insulating Glass Technologies had a strong order intake, whereas then the Tempering and Laminating Technologies had a kind of very low figure. And now Tempering and Laminating Technologies were able to grow in the second quarter, which is a very nice development from that perspective. Services also grew nicely in the quarter for orders as well. And like Antti mentioned, the regional split was quite different and more typical for us in the second quarter where EMEA and Americas' share increased a lot compared to the first quarter. And then on the other hand, the China share decreased. If we look at the product areas and here the first half, figures. Tempering and Laminating Technologies have still 26% decline in the orders, and this is reflecting the very weak level in the first quarter. Insulating Glass Technologies also has a decline of 16%. And after the strong first quarter, then on the other hand, the second quarter was clearly weaker. Mobility, Display & Solar Technologies, also with negative development. There, we have difference in China and then the regions outside China. So in China, the preprocessing technology orders increased, but on global level, they declined. And especially now in the first quarter, there was a big decline in the preprocessing orders outside China, then -- explaining this first half figure mainly. And then services for the first half in 5% growth and the second quarter kind of growth improved clearly from the first quarter and then kind of supported this growth level. Then if we move forward to net sales. Net sales were very minor way short of EUR 50 million with a 10% decline compared to a year ago, and all of this decline is coming from the Architectural Technologies. The Mobility, Display & Solar Technologies were growing as well as services, but both product areas of Architectural Technologies, Tempering and Laminating as well as then Insulating Glass had a negative net sales development in the second quarter. Tempering and Laminating Technologies with over 30% decline, reflecting the weak order intake that happened in the earlier quarters. And now, like I said already, the orders for the second quarter were growing compared to a year ago. Then on the other hand, the Insulating Glass Technologies, we had a negative development in the second quarter, had a very strong growth in the first quarter. And for the first half, which I think is, in a way, better to look at that figure because most of these changes are now due to timing of acceptances. So the first half is with 8% growth. Mobility, Display & Solar Technologies, 52% up. So strong growth there, both in preprocessing and the heat treatment area. Some slowdown, though, and that is because of the orders have been lower outside of China. Services net sales in the first half, positive 4%. So a clear catch-up now during the second quarter. Then if we look at the regional net sales split, these are our first half figures here. We have 60% growth in net sales in the APAC region. And there, we have had strong order intake in China in previous quarters, supporting this growth and China's share of net sales now increased to 15% from 6% in the first half of '23. EMEA and Americas had a 10%, 11% declines and decreased their share to some extent. Then moving forward to profitability. So despite this 10% net sales decline, the EBITA -- comparable EBITA was at the same level, almost at the same level as we had a year ago in the second quarter and the margin -- EBITA margin improved to 6.6%. The reasons for this positive profitability development: Good growth in the services business, good development, in total, in our machines gross margins. And then, of course, the EBITA margin is also supported by the big or high services share, which was improving clearly from the year-ago levels. Then if we move forward to the segments, and let's start with the big one, Architecture. And here, really, we have nice profitability development despite of lower net sales. Orders came down by 8%, and this is kind of purely coming from this Insulating Glass orders in the second quarter. Net sales decline was 15%, close to EUR 37 million. And this also is explained by the machines. Like I said, machines went down by 22%. On the other hand, then services had some growth in the quarter. And in Architecture, the services share was 37%, which is a very high level for this business. And in the second quarter of last year, the share was 30%. So quite a big kind of uptick in the services share. Of course, that is quite a lot driven by the decline in the machines net sales. And then EBITA, kind of I would say, a little down considering the decline in the net sales, and this was very much supported by the machine margins and then the EBITA margin up to 8.4% from 7.6% in the comparison period. And here, of course, the services share having quite a big role. Then if we move forward to Mobility, Display & Solar segment. Here, we have some improvement in the profitability, but still, of course, not at all at satisfactory level. Orders were up based on services, where we had 8% services growth. So orders up 2%, close to EUR 9 million. Net sales, EUR 13 million with a 12% increase. This is coming both from machines and services, especially in services, very strong growth in net sales. Comparable EBITA, like I said, modest EUR 0.2 million, whereas the comparison period was even more closer to 0. So small change in percentage wise, of course, big figures, but the margin -- EBITA margin improved to 1.6% from 0.2% in the comparison period. Volume development is mainly the reason. Last year, we had after the first transfer of the standard preprocessing equipment production from Switzerland to China, that then created certain margin issues. Now we are for those products in China at target margin levels. But then there were certain offsetting impacts the volume in Switzerland being very low. And then in addition, there were certain kind of new products kind of -- the first deliveries for certain new products that had some impact on this margin. Now, of course, we have announced the plan to move then further production from Switzerland to China, then -- that then would improve the profitability going forward in this business. All right. That was Mobility, Display & Solar. And then to end with cash flow and gearing. Cash flow in the second quarter was negative. There is a capital increase -- working capital increase that is mainly driven by the lower advance payments, which is then mainly driven by the change in the new order intake. The new orders, yes, they went up from the previous quarter, but not enough really to support the cash flow development. And then if you look at gearing, obviously, the capital return that was paid in the second quarter is impacting that as well as our cash balances and then cash balances also then impacted by the debt repayment that we have in the second quarter. So this was my part. And now I invite Antti back to discuss the outlook.

Thanks, Päivi. The message is very clear. So we have the challenges with the market. So the markets are soft, and this is no surprise to anybody in this business. So if I think about our outlook for 2024, so now we are giving forth the comparable EBITA to exact numbers. So estimated to amount EUR 14.5 million to EUR 16 million. So if I compare that to the 2023, so then we had EUR 14.9 million. Then very clear messages about the net sales. So we expect that to be at the same level as in 2023. So we have come a little bit down because of the existing market situation. So this is how we see the market, and then we see how the things are going forward. And I really want to emphasize that in this kind of market situation, I feel that we have done very well. We have been able to keep the margins. We have been able to grow the services. And then very important is just if I compare to orders from quarter 1 to quarter 2, so that has improved. And what has also improved is just the distribution -- in which geographical areas, we are getting the order. So now it's much more, let's say, what it used to be. So that concluded now the outlook part. And we are ready to -- for the questions, and I hope that there will be many questions coming, so looking forward.

Thank you. At this point, both Antti and Päivi, yes, we do have some questions here and quite many of those. So let's get cracking. Following up the outlook, what -- how would you describe the current machine sales funnel to where it was 3 or 6 months ago? And how much is there just postponing and how much cancellations?

I hate to repeat the same messages all the time. So if I look at the sales funnel, what we have in the sales force, it's very strong. And then important point is really such that we don't have cancellations, meaning now that the project would be canceled. What really happens is just that they will be postponed, postponed, postponed. So we have this wait-and-see kind of game going on now with the orders, and we have a lot of focus on getting the orders, I have to say, that's one of the top priorities, what we have.

Antti, I would also like to remind everybody or inform that we have this kind of famous glasstec trade show in the final quarter of this year, actually quite late October. And in earlier years that quite often has impacted especially the timing of orders that they tend then to be in that more when we have the event. And historically, in some quarter -- some years as well, it's impacted also the total order intake. So great expectations for glasstec, nice to see that.

This is a great place to put some pressure on our sales force. I love it.

Let's stay at the markets. What makes you confident that the demand turnaround would still start in '24? And what kind of early indicators you see? And does it already show in the tendering activities related to requests from the customers?

I guess partly that was already answered. So if you think about this glasstec taking place in Germany. So traditionally in our business, which is still a surprise to me, the trade shows have a big meaning. And usually, in the trade show, so a lot of these different kind of deals are then signed and coming through and looking at the sales funnel again, so that's the best way to look at the market. So that's giving me the confidence to say that 2024, it will be better than the 2024 start from the orders point of view.

And when we look from business areas perspectives, let's start from the heat treatment sphere. Can you discuss both the weakness and -- sorry. Let's start from the IG side. Can you discuss both the weakness of Insulating and strength of Tempering and Laminating orders in Q2? Do you expect similar order volatility to continue that we've seen in the past quarters?

If I think about our business. So what is very important is just that orders tend to come to one business, and then they come in the next business the next quarter or next month. So there's a lot of changes in just how they happen. If I think about the IG, so yes, IG was -- is a challenge from that point of view that our IG orders were low. But at the same time, I have to say that for the mega trends, I'm a strong believer that this is the business that we have to really put and also invest in the future. And I'm strongly believing that we are able to get much more of these IG orders. Then about the heat treatment. So there, we have much more competition and also competition from different countries, also from Asia. That's more challenging activity from that point of view that what we have in the IG side. And then just now if I look at the heat treatment, so I'm also confident that we are getting more orders what we have received earlier, a totally different kind of competitive situation with these 2 segments.

And I would say this kind of volatility in the quarterly figures is quite natural because we are, in a way -- yes, and one individual order and its timing can have quite a big impact on then the quarter outcome.

If we stay with IG, how large a share of IG business stems from China? And how would you describe the opportunities and threats?

Less than -- I want to get business from China because, of course, the architectural market, especially in China, is very, let's say, challenging, if I may use that word for the markets. And if I think about that market, so it will take still a while that there will be a huge increase in the orders coming from that market. But if I think -- even if it was not asked, so then the mobility market is extremely strong in China. So that compensates for those, growth expectations, what we have.

Yes, it's without saying any exact figures. The biggest region for Insulating Glass is definitely Europe or EMEA, after which comes Americas and then only after that is China.

Correct.

We actually do have a question related to the mobility market opportunities. So if you want to follow up on what you already just said at the regional differences, and how do we see the potential on that market?

If you think about now the activity, what we are doing in Switzerland, so transferring the production, please understand that we talk about the production then it really shows already what is happening in the market. Investments into Americas -- new investments into the machinery in Americas and then in Europe, Middle East, Africa are very, very low, if nonexistent. There is overcapacity in this market segment, but where the music is playing is, of course, Asia Pacific and especially, of course, China. So the growth is going to take place in China. And that's also one of the reasons that we have -- we want to be close to the customers. So that we also do the transfer of the production from Switzerland to China.

At the same time, we also mentioned in the release that we expect quite a bit of volatility, especially when we look at different quarters and how the orders in this business from China are expected to come in. It's quite dependent on a few bigger customers. And of course, they don't necessarily order every quarter, and that then brings certain volatility to the quarterly figures.

And if I still may continue because this is extremely important for us now. So don't forget service. If you think about the mobility market, if you think about the big production units, service is extremely important. So we are supporting our customers that they are able to keep their production sites running all the time. And from that point of view, even if we move the production now to China -- sorry, we plan to move it to China, it really means that we will even strengthen the service operations, what we have in EMEA and then in Americas. And we will take care of our customers, absolutely. So this is no exit, absolutely no exit.

Let's stay with services on the broader perspective. Services share of sales and also absolute services sales seems to be historically a pick-up, especially in the Q3. Do you expect similar seasonality this year? As well as was there timing-related differences now seen in the more pronounced Q2 figures?

Well, if I think about now service, so we have to divide it. So first, we have, of course, the spare parts. So the spare parts typically is fairly stable business. If I think about the services at the customer side, it's also fairly stable. Then we have also this upgrade business and upgrade business is then more complex. So somebody could even say that then we talk about the project business. And from that point of view, so these rebuilds and upgrades. So that's causing also some fluctuations all the time to our numbers. But the base load is really coming from the spare parts and then from the technicians serving the customers.

Yes. And to add, I think it's good to understand that the services share is actually driven more by the machines volume development because it is a bigger part. And now if the machines net sales is coming down strongly, like we had now in the second quarter, it, of course, impacts then the services share positively because services tends to be a lot more stable and not growing that strongly, but then on the other hand, also not declining in the same way as machines.

A couple of more concrete questions, and then we could spend some time with this news we shared this week related to the mobility production. But how likely are the one-off items we saw in Q2 to continue in the coming quarters?

Well, in the coming quarters, of course, we have now this planned production transfer and which has been quite sizable one-offs. And some of them are expected to take place already this year, especially the asset write-offs and then also quite a big chunk of the other -- the cash one-offs are expected already this year. So that means that there will be quite a lot of one-offs this year. Those kind of activities that drove the one-offs in the second quarter will not grow to the same extent.

Päivi, I think you partially covered the next 2 questions, but still I want to repeat them. Can you specify how much of the EUR 6 million personnel and asset write-off related costs are to be expected to the second half?

Yes. So out of the noncash items, everything is expected this year and then out of the cash one-offs, up to 40%.

And then was there any expenses related to this production transfer already in the Q2 figures? If...

No.

Okay. If no, what are the quarterly adjustments related to?

There are a couple of things that drove this time. One is a kind of a very broad -- I see the outsourcing change, so we changed the outsourcing partner over there. And then another one is quite a big legal case we have, where we have a kind of a patent dispute in the U.S. with one of our competitors. So that -- in a way, the competitor has infringed our patent. So let's make it clear that it is in this direction.

Thank you. Good clarification. We are protecting our assets.

We are protecting our assets, yes.

Indeed. CapEx levels year-to-date are still well below '23. Do you expect clear acceleration with investments in the second half?

Some acceleration, yes. The -- I would say that the capitalized R&D projects that we had, for example, last year, there were many projects in a very active phase. And now this year, we have not started new projects to the same extent, and that is the reason why it is quite low. So I would expect some acceleration, but not to the levels we've had historically or last year.

Taxes. Why were the group taxes close to 0 in Q2? And what's the full '24 outlook regarding group tax rate?

Well, if I start with the full year tax rate, I think roughly 30% is a good estimation. Now in the 6 months, we were 28%. So not too far from that. It -- the deviations usually relate to some items that are not tax deductible or are tax-free. And there quite often is some quarterly deviations. And then it is only at the year end when every kind of tax calculation is done in detail, and then we see the final outcome.

Related to MDS still, with the current operating setup, how big revenue is needed in MDS for the business to start reporting decent EBITA margin?

More.

Yes, I would not like to give any exact figure about this. Of course, with this decision that was made this year to really start the planning of this transfer that is very critical for the profitability improvement. And of course, in the end, the target should be the same as we have for the group EBITA target, which is 10%.

Yes, let's not forget the strategic goals that we have, and actions related to those are close to our hearts. One final thing still within the MDS sphere, combining something you've already discussed, it related -- you mentioned that you will keep sales and services close to customers. So could you define a little bit what does it mean in practice and why this kind of decision to start planning?

And of course, this is transferred and -- related to the transfer of the production. So we are really focusing now first on the production, what we are transferring. If I think about the sales and service so coming back to the fact that we have huge installed base in Americas and in EMEA, we have to take care of the base. I see a lot of opportunities to grow the services further. And I see in the future also a lot of opportunities for the upgrades. New machines, not in very near future, maybe some but very, very little. So from that point of view, so it really means that we have the existing capabilities, what we have, and at the same time, we are strengthening -- so the -- service operations. So if I think about the transfer, so we will transfer also people from the so-called capital side to the service side as a part of this activity, what we plan to do in Switzerland. I'm a strong believer in services.

Thank you, Antti. Thank you, Päivi. Seems we have no more questions related to first half and quarter 2. At this point, our official results webcast content is covered. Thank you for very good questions and your attention. Antti, you closed with services, and we know the other thing close to your heart is safety.

That's correct.

Yes. I want to thank you for the time you've been our interim CEO. It's been a pleasure working with you, and I trust I talk on behalf of many of our colleagues.

Thank you for the kind words. And let me say that I really want to thank for the real trust and support that I have received. I will continue in the Board of the Glaston and it will be very great pleasure to continue to do that. But at the same time, also, I have to say that I'm extremely proud about Toni, who is now joining us, and Toni will take and keep the focus on safety, services and costs. Do you promise to do that, Toni, so please?

Yes, definitely. Thank you.

It's a pleasure to have you here, and to take care of Glaston.

Thank you, Antti. It's a big pleasure to join the company, and thanks for having me over here, so...

Welcome.

Thank you, Pia.

Yes. Toni, exciting time, in many ways. You start on Monday officially as the new CEO -- President and CEO of Glaston Corporation. But already now, it would be good to understand a little bit about your background, so who you are, where you are coming from? So...

All right. Thanks. Yes. Like mentioned, my name is Toni Laaksonen and joining the company on Monday, and living here in Helsinki at the moment, but I have had a lot of international experience in the past, for instance, living in the U.S.A. some years ago and then just recently I spent years '22 and '23 in the United Kingdom, working for Metso and came back to Finland now last year. And from the professional background point of view, I have been working for several industrial companies and also service companies. So namely like companies like ABB, Posti, Outotec and Metso. So a lot of experience from there and different type of roles, product management leadership, sales management, profit and loss management in different type of operations and environments. So a lot of background in different environments and especially background from the services. And I must say that the services business is close to my heart, and it has been a joy of watching Antti leading the service side and developing the platform further, so there is a good opportunity to grow it further. Recently I worked for the Metso Aggregates segment, and I was leading a business line, having operations in 4 main countries. So we had service and operations locations in the U.S.A., in Canada, in the U.K. and also in India. The business line had some 1,000 employees, and it was a nice experience from my point of view because it was almost like a company within a company. So I had like full profit and loss responsibility over the business, including all the functions like finance, HR, operations, supply chain and so on. So from there, I have a lot of experience from leading a company comparable to Glaston and now really looking forward to meeting the Glaston team and getting started.

Picking up something you mentioned, service is close to your heart. But as a leader, is there some topics that are important to you that we can look forward to you in the coming times?

Yes. Yes, definitely. I would mention maybe 3 topics in this respect. So first of all, starting from people. People really make the business happen. And I think about the people topic in a wider sense. So of course, our own organization is extremely important. I want to get to know -- with the team, meet the team, learn from them and start developing the business together with them. But then, of course, all the other stakeholders are very much close to me. So for instance, starting from the customers, together with them, we can develop the business further, find new opportunities, make innovation happen and so on. Then we have the shareholders, suppliers and other partners. So really excited to meet different people from these different organizations and to learn from them and to learn from these different cultures. So people definitely the #1 priority. Then secondly, as mentioned, services, very close to my heart. So like I said, Antti and the Glaston team, they have been doing excellent work during the past 9 months when Antti has been leading the company to develop further the service platform and the service business. I definitely want to continue that work. I see a lot of opportunities over there, and there are several projects ongoing, which will help us to gain even more service business and to help our customers to operate efficiently their machines. And then the third topic, continuous improvement. So this is very evident that in today's world, the market is developing, and it's developing fast. And if we want to keep up with that development, we definitely need to continuously improve our business and be better on a daily basis. And this is also the same in sports, normally the athletes, they want to get better every day to compete and to be competitive against their competitors. So this is also something that we need to do, and I believe that we have a good opportunity to make it happen, and I will focus on that together with the organization.

Thank you, Toni. So people, services, continuous improvement. With this, we look forward and are excited to welcome you on board on Monday.

Thanks a lot.

Thank you, Toni. And Toni, you will actually meet in this occasion having a financial report presentation for first 9 months of '24, and we will be discussing those results on October 30. This concludes our session today. And when we share the presentations, you can find some end market indicators to support your thinking about what is happening in the market. We follow these and are excited to share those as well with you. Thank you for the attention. Thank you for your time. We look forward to seeing you again.