Gurit Holding AG (GURN) Earnings Call Transcript & Summary

Ladies and gentlemen, welcome to the Gurit Full Year Results 2020 Conference Call and Live Webcast. I am Moira, the Chorus Call operator. [Operator Instructions] And the conference is being recorded. [Operator Instructions] The conference must not be recorded for publication or broadcast. At this time, it's my pleasure to hand over to Mr. Mitja Schulz, CEO of Gurit Group. Please go ahead.

Thank you very much, and good morning. Let me welcome you to our 2020 results and media analyst conference. I'm joined by my colleague, Philippe Wirth, Gurit Group's CFO. Introductionary statement. This presentation may include forward-looking statements that reflect the intentions, beliefs or current expectations and projections of Gurit Holding about the future results of operations, financial conditions, liquidity, performance and similar circumstances. Such statements are made on the basis of assumptions and expectations which may prove to be erroneous, although Gurit Holding believes them to be reasonable at this time. We have structured the presentation as follows. We will start with a brief introduction, followed by the business update. Philippe will afterwards present the financial results before I will elaborate more on market and strategy. After summarizing, we will end the presentation and continue with the Q&A section. Gurit is a leading supplier of products and solutions for the wind energy, marine, industrial and aviation industry. About 80% of our sales is generated in the Wind Energy segment, where we offer a holistic portfolio of composite materials, tools and kitting services for wind blades. In the other industry segments, aero, marine and industrial, we offer primarily lightweighting materials and structural engineering. We are strongly positioned, usually one of the top suppliers in the market segments we supply to. Let's continue with the business update and start with how Gurit managed through the global COVID-19 crisis. Our cross-industry setup certainly helped us to navigate through the pandemic. While the marine and the aviation industry had been hit severely, global wind markets were strong most of last year. We faced several operational challenges and still experienced bottlenecks with transportation and shipments. Throughout the crisis, the Gurit team kept a strong focus on supporting the business and our customers. We successfully commissioned new sites and installed new extruder lines, partially fully remotely. Because of a strong focus on cost management, we accelerated the restructuring of the Aero business. Despite all challenges, Gurit achieved an 8.9% sales increase last year. So let's continue with a view on the top financial KPIs. As already indicated, Gurit achieved a net sales growth of 8.9%, generating sales of CHF 576.7 million. We grew our operating profit by 4.2% to CHF 64.1 million, yielding an operative profit margin of 11.1%. Allow me a brief personal comment. I want to thank the more than 3,000 Gurit employees for their dedication and effort in a challenging last year. And although I have the honor to present our 2020 results today, I want to thank my predecessor, Rudolf Hadorn, who was leading Gurit as the CEO last year, for achieving these great results together with the Gurit team. Now let's look a little bit more in detail at the different business segments. In Composite Materials, we achieved a sales increase of 16.1% to CHF 276.2 million. This growth was primarily driven by a strong wind business. We saw a spike in demand for Balsa wood, increasing Balsa costs and prices were boosting revenues. As indicated, the sales in the marine business was impacted negatively by COVID-19. Key business steps in 2020 have been the implementation of market focus, customer-centric organizations for both wind as well as marine and industrials. We see an accelerated substitution of PVC and Balsa core materials by higher-performing, recyclable PET, and consequently, expanded our PET capacities globally while securing longer-term PET supply agreements with major wind customers. One of our key competitive advantages is our fully integrated PET value chain from developing and building our own extruders to [Technical Difficulty]

Ladies and gentlemen, please hold the line. The connection with the moderator has been lost. The conference will continue shortly.

Okay. Good. Talking about COVID-19 crisis and the successful crisis management. I would continue here, yes? The Kitting business grew strongly by 25.4% and reached a net sale of CHF 225.6 million. Gurit secured long-term supply agreements with major customers and increased the kitting capacities with new locations in Mexico, China and India, which will be opened later this year. As the global leader in core kitting, we focus on innovations and modular designs. Combining both PET extrusion and core kitting in 1 location offers a competitive advantage for Gurit going forward. Finally, a view on Tooling. The business for wind blade molds follows a different cycle, and it's usually ahead of turbine blade manufacturing. Gurit achieved a net sale of CHF 98.7 million, which represents a decrease of 1.7%. Gurit kept a strong position as global market leader for wind blade molds and improved the market share with domestic customers in China. We invest in advanced technologies like process automation, sensor integration and Industry 4.0 technology. On the picture below, you can see our team in Taicang, China, standing in front of a more than 100-meter long wind blade mold, clearly an impressive view and the longest mold which had been manufactured by our team so far. But more to come. With this view on the market segments, I'm concluding the part of the business review and hand over to my colleague, Philippe Wirth.

Thanks, Mitja. Good morning, everybody. Let me start with a quick summary on sales from what you have just heard from Mitja. Material sales grew 16.2% in the year, driven by strong wind energy demand. Kitting grew 25.4% with strong growth in China and Europe. Sales in the second half were in line with prior year, with strong growth in Europe, offset by declines in the region what we call rest of the world, that includes, for example, Turkey. Tooling declined slightly by 1.7% with growing sales in the Chinese market. Aero was down 39.3% due to the sharp decline of the whole industry. In total, this leads to an 8.9% growth in constant exchange rates in our continued operation. In 2019, we have bought a PET recycling operation in the second half of the year. And when we exclude this, our sales grew organically 8.6%. Going further down the P&L. Gross profit margin is 0.7 percent -- percentage points below prior year. The main driver here were our Tooling and Aero business. In Tooling, we continued to see fewer sales of high content mold systems in the sales mix as we are gaining back market share in China. In Aero, the reduction in gross profit margin is mainly due to the fact that we were not able to reduce fixed cost as fast as the sales volume contracted. Here, we have pulled forward the closure of our Zullwil plant into this year to react to this reduction, and we run significant short-work programs to mitigate the financial impact on the business. EBITDA is slightly below prior year, mainly due to the margin reduction in Tooling, as explained before, and lower sales in Aero due to COVID-19. This was offset by strong results in Materials and Kitting. When we look at operating profit, I'd like to mention that it includes onetime restructuring and impairment charges in our Aero business of CHF 0.9 million in 2020 and CHF 2 million in 2019. If we adjust for this restructuring, our operating profit is CHF 1.5 million above prior year. And on the next slide, I want to highlight the main reasons for this increase. As mentioned before, the operating profit includes onetime restructuring and impairment charges in our Aero business, and this results in a net increase of CHF 1.1 million in profit year-on-year. Next, we have a positive impact on operating profit from increased sales prices due to increased material prices. The main impact comes from Balsa. In Balsa, we saw an accelerated increase of raw material prices in the second half of last year 2019. Last year, in 2019, we were not able to pass this increase on, and we were only able to pass this increase on with a time lag. Hence, you see a positive number here when you compare to last year. On the flip side, we see continued pressure on sales price in the Chinese Tooling business. The net effect, CHF 5.4 million on operating profit you see here. Due to exchange rate changes, we have lost CHF 3.5 million of operating profit compared to prior year. This is mainly due to the strengthening of the Swiss franc against all currencies in the year. Overall, I would like to conclude that we are very happy with the solid operating performance for the year 2020, which was clearly at the high end of our expectations. Okay. Now let's move on to the area of cash flow. First, you will note a reduction in working capital in 2020 for the second year in a row. The working capital movements are somewhat volatile, particularly in the area of trade accounts receivables around the cut-off dates of financial reporting. Due to this reason, we look at the development of net trade working capital more on an average basis on a longer time scale. You see this on the left graph on this slide. We continue to see improvements of our trade net working capital requirements, and 2020 looks very good. This is mainly because of Tooling with better payment terms with Chinese customers compared to the rest of the world and the discontinuation of the Automotive business. However, in general, we experienced continued pressure to increase payment terms, which may hurt us going forward. Capital expenditure, or CapEx, amounted to CHF 26.7 million. 80% of the CapEx is related to capacity increases and dedicated to core material, particularly PET and Kitting footprint expansion in China and Mexico. Capital expenditures for next year 2021 is again expected to be around CHF 30 million, mainly for the setup of our India expansion. As a result, free cash flow, which equals net cash flow from operation of the capital expenditures, amounted to CHF 45.8 million for the year compared to CHF 42.8 million (sic) [ CHF 42.1 million ] last year. This is an increase of CHF 3.7 million or 9% compared to prior year, which allows us to propose an increase of dividends and further significantly reduce our debts. To conclude the financials, a couple of comments on the December balance sheet. Net debt decreased by CHF 33 million from prior year to CHF 19.9 million this year. Our equity ratio improved compared to the prior year by 5.5 percentage points to 45.7%. The strengthening of the Swiss franc also had a significant impact on our balance sheet as it reduced equity by CHF 10.6 million compared to the prior year and reduced our equity ratio by 1.4 percentage points. Our gross debt -- our gross debt-to-EBITDA ratio was at 0.9x, an improvement of 0.5x compared to prior year because we were able to pay back CHF 31 million of loans in 2020. And as a final comment, our return on net asset has improved 3.8 percentage points compared to prior year. And this improvement is mainly due to our divestment of the Automotive business. So in summary, we report a very solid financial year 2020 given the challenging economic environment. And our balance sheet builds a strong basis to continue on our growth plan. And with this, I hand over to Mitja for the strategy and market update.

Thank you, Philippe. Let's start with a high-level perspective and a look at the global energy market. Several think-tanks and institutions have developed scenarios and published studies on the potential penetration of renewable energy. What is visualized on the left of this chart is a tremendous growth outlook for renewable energy, increasing both its share of power generation from 25% to 86% in 2050 as well as multiplying the absolute output of renewable energy. For wind energy, this means a huge growth from about 500 gigawatts to more than 6,000 gigawatts of installed capacity till 2050. Depending on the transformation energy scenario, an additional yearly wind capacity between 100 and 200 gigawatts would be needed, which basically means doubling or even tripling of what had been installed on average during the last couple of years. These encouraging outlooks are being supported when considering recent announcements on different zero-emission targets. China targets 2060. Japan, Korea and Canada, all 2050. President Biden signals that clean energy and environmental protection will have a much stronger focus in U.S. politics. And the EU Green Deal quantifies goals for increasing offshore wind to more than 300 gigawatts by 2050. Overall, a very positive long-term perspective. So let's look a bit closer what happens in wind midterm. Last year, we saw an installation rush in China, driven by the expiry of subsidiaries for onshore wind, the so-called feed-in tariffs. Figures of up to 72 gigawatts of grid-connected turbines had been published in China. A closer look reveals that up to 25 gigawatts had been produced before 2020, so the net new turbine capacity in China can be estimated on a level of 45 to 55 gigawatts, driving global new capacity above 80 gigawatts last year. Consequently, 2021 will be on a lower level as a result of the prebuilds in China. We anticipate a fast rebound on 80-plus gigawatt levels as early as next year, driven by the execution speed of the net-zero plans, as indicated before. Both a binding statement towards energy transition in the U.S. as well as the publication of China's 14th 5-year plan and the anticipated commitment on the massive expansion of renewable energy in China will strongly influence the growth trajectory for wind in the coming years. Now let's continue with a qualitative evaluation of the wind market trends and Gurit's strategic positioning. Technologically, we see rotors of wind turbines getting larger. Offshore diameters of up to 250 meters will become reality, onshore up to 200 meters. While split-play technology might help to mitigate the transportation problems, these long blades weigh above 60 tonnes each, which causes design and manufacturing-related challenges itself. The end-of-life management and recyclability of wind blades has become a fundamental issue. Thousands of rotor blades will be out of service soon, and no sustainable solution is available yet. Gurit is getting engaged in customer discussions to address the end-of-life issue proactively. For new blade designs, we can contribute with our strong PET capabilities as well as working on next-generation of organic core materials together with our customers. We developed our automation and digitalization road map, as illustrated here, combining different solutions in the fields of Industry 4.0, automation, robotized systems and blade manufacturing monitoring solutions. We have started to commercialize these products and achieved first sales already last year. We think automated and digital tooling products will offer a significant business opportunity for Gurit. Continuing the evaluation of market trends, we see a further consolidation of the onshore blade manufacturing footprint in best cost countries. Offshore projects are often tied to local content requirements. And in the wind service business, we see rising demand for wind blade repairs. Gurit will strengthen the offering for wind blade repair kits with our designated product portfolio to participate from the rising service demands. We understand that both customer proximity and competitive footprint will be essential, so we continue with our strategic investments in our footprint. In China, we invested in tooling automation, added PET extrusion capacity as well as kitting capacity. In India, we are building, as we speak, 2 new locations, strategically located to the wind hubs in the northern and the southern part of the country. We will combine tooling, core materials and kitting under one roof. In Mexico, we are trying to maximize footprint synergies by combining our colocation strategy with customer proximity. As you can see on the picture, we are literally neighbors to the wind blade manufacturer as well as the turbine OEM. We think that these dedicated wind industrial parks are best practices for new greenfield investments, for example, for new offshore wind clusters to be developed. As another relevant market trend, we see our customers trying to reduce their supply chain complexity by focusing on less, more capable suppliers. Integrating key suppliers early in the development process is another objective. Gurit has already started with the transition from a component supplier to become a solution provider for our customers. Besides our strong commitment to customer support and proximity, we are strengthening our engineering capacities and getting earlier engaged in new development projects for new wind blades. Outside of the wind industry, we see multiple industries gradually increasing the demand for composite materials. Gurit is serving these markets today with a dedicated product portfolio, as you can see on the slide. We anticipate a significant growth opportunity for recyclable PET materials, especially for marine applications and building solutions, double-digit figures which can be expected in the next years. We are convinced that our newly established setup with a separate customer-facing organization helps us to focus and execute on these business opportunities. Our company vision statement is clear, with passion for a sustainable future. We have developed a holistic sustainability strategy consisting of 5 pillars: the safety of our employees, environmental protection and emission reduction, social responsibility, good governance and economic performance. To implement the strategy, we have set up a sustainability organization orchestrating the different workstreams group-wide and creating a transparent reporting of our ESG performance. We have just finished the latest version of our sustainability report, a good read, illustrating multiple examples of the great work which had been done by our teams. As a signal of our strong commitment towards sustainability, we announced today that we become climate neutral this year. In the first step, we focus on reducing our own emissions and will use 100% of renewable energy in all our locations worldwide. We will compensate for emissions that cannot be directly impacted by investing in a wind energy project in India. More details about this can be found in the sustainability report. Let me summarize. After an excellent and financially strong year 2020, Gurit is well positioned with a solid product portfolio and a robust balance sheet. Besides a temporary reduced wind market outlook in China and the normalization of Balsa prices, both impacting our sales short term, our confidence in the midterm growth outlook has not changed. We will continue to expand our manufacturing footprint, grow our technological leadership position and our transition to become a system supplier to the wind industry. Furthermore, we see a positive market recovery in the Marine business and new growth opportunities in different industrial segments. The Aerospace has stabilized at a low level, and we expect a gradual longer-term recovery. Our guidance for this year reflects the sales in the range of CHF 530 million to CHF 580 million and an operating profit margin between 9% and 11%. Before now ending with the presentation, let me briefly highlight that we are planning a Capital Markets Day most likely in the last week of August here in Zurich. Thank you very much for your attention, and have a good day.