Gurit Holding AG (GURN) Earnings Call Transcript & Summary

Ladies and gentlemen, welcome to the Gurit Half Year Results 2021 Conference Call and Live Webcast. I am Sandra, the Chorus Call operator. I would like to remind you that all participants will be in listen-only mode and the conference is being recorded. The presentation will be followed by a private Q&A session for registered analysts and journalists. You can register at investor@gurit.com. [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 Group. Please go ahead.

Thank you very much. I welcome you to Gurit's half year results media and analyst conference. I'm in Zurich, together with my colleague, Philippe Wirth, CFO of Gurit. We will discuss our half year financials today, which are in line with our guidance update from end of June. What is important for us today is to give you an understanding; first, how we adapted ourselves to the market situation and what measures we implemented. Second, how we expect Gurit's business mid-term development and to explain what is on our strategic horizon. So let's have a brief look at the agenda of today's presentation. I will start with providing you with a business update, followed by Philippe who will elaborate on the financials. I will summarize and give an outlook on the remaining year before we close this presentation. Afterwards, we switch to our Q&A session. So let's get started with a view on the highlights of the first half of '21. Gurit achieved revenue of about CHF 259 million, which represents a decline of 8.5% compared to first half of 2020. That is not fully comparable since the first half of 2020 still had a strong first quarter in Aerospace before the industry collapsed as a result of COVID. Gurit sales were impacted by a strong decline of the Chinese wind market, which came as a result of major rebuilds in 2020 before the feed-in tariffs expired at the end of the year. The global demand for Balsa also declined because of the reduced China activities and Western OEM gradually changing new blade designs from Balsa to PET. While we are convinced that the market decline in China is a temporary event, we see the transition away from Balsa and new blade designs as permanent. Consequently, we are continuing the execution of our PET growth strategy and accelerated the necessary actions to right-size our Balsa footprint. Besides the rather challenging market environment in wind, the Marine and Industrial business developed very positively and grew more than 20% year-over-year. Gurit's operating profit margin for the period is 7.2% and impacted by restructuring and impairment costs for the Balsa business as well as the consolidation of our Kitting business in Mexico. The worldwide shortage of raw materials as well as an exponential increase in the cost of shipping has resulted in cost increases for the full range of Gurit products. These increases can be partially pushed to customers through contractual or individual agreements but temporarily impact our profitability. We are on track with our global footprint expansions. We launched our new PET and Kitting plant in Mexico and finished our 2 new locations in India as we speak. We are very happy that our strong efforts in developing and implementing our sustainability strategy are being recognized with an improved ESG rating. Lastly, we concluded on the Gurit 2025 strategy. Besides defining our strategic initiatives in the fields of product development, key markets and global footprint, we are strongly emphasizing 3 main focus topics; sustainability, customer focus and innovation culture. To give you a better understanding, we prepared more details on the business highlights in the next few slides. As structure follows strategy, we consequently adapt our organization to reflect Gurit 2025. First, we strengthened our wind setup by merging the Wind Materials and Kitting organizations newly forming the business unit Wind Systems. Andreas Kipker, who was leading our Kitting business is in charge of this organization. Additionally, we implemented a Global Key Account Management to support our customers with dedication and regional proximity. To drive our future product development and strengthen the innovation culture within Gurit, we have appointed Ernst Lutz as Chief Technology Officer. Ernst was leading our Wind Materials business and held multiple CTO roles for major global technology companies before. We are happy to announce that we are progressing well on achieving our long-term ESG goals. Keeping our people safe has the highest priority for Gurit. Through our Global Health & Safety First campaign, we managed to reduce accidents by almost 40% over the last 2 years. The implementation of our sustainability strategy is advancing. We improved our ESG performance by more than 20%. One key initiative this year is reaching climate neutrality for Scope 1 and 2 emissions. Among many other things, we are committed to use 100% of renewable energy in our plants. On the picture on the lower right, you can see the roof of our Tianjin, China facility being fully equipped with solar panels. Let me give you a more detailed status on our global footprint. Although facing multiple challenges in the expansion of our PET and Kitting activities in Mexico and India, like travel restrictions, remote training and on-boarding of factory workers, COVID-related delays in permitting and temporary construction shutdowns, we managed to launch our new facility in Mexico. To fully leverage the cost benefits of this facility, we decided to close our Allentown Kitting plant in the United States and relocated the activities to Mexico. In India, construction of the North plant in Ahmedabad is finished. The south plant in Chennai is expected to be finished in Q4. As I already mentioned, we right-sized our Balsa operations in Ecuador and exited the joint venture for Balsa wood production in Indonesia. Considering the long-term growth perspective of our wind business, we are in the final evaluation stage to further increase our PET extrusion capacities. Additionally, we are evaluating a new manufacturing facility closely located to customer's focusing on offshore wind. That brings me to a more detailed look on the wind market. After the strong wind market in 2020, experts expect a transition period until the markets continue to grow strongly again, supported by major offshore capacity expansions globally and a strong domestic China market. Mid-term, the global wind installations will level around 85 gigawatts till the growth resumes in '24. Just as a side remark, 85 gigawatts is significantly above the industry average pre-2020, which was around 54 gigawatts. The long-term outlook remains unchanged with a strong growth trajectory, driven by increased demand for renewable energy and commitments from governments to reach carbon neutrality targets. Offshore wind will be a major driver for growth. So let's have a more detailed look. There are 3 main offshore growth areas; Europe's North and Atlantic Coast, the Chinese Sea and the U.S. Atlantic Coast. Installations will quadruple over the next 5 years from 6 to 24 gigawatts per year. Due to turbine dimensions with rotor diameters far above 200 meters, technological capabilities and regional proximity will be key for suppliers to participate from that growth. Gurit is very well positioned to support our customers on that offshore growth trajectory. We are the global leader for large wind blade moulds and blade manufacturing systems. We have strong in-house capabilities covering, core materials, kitting, wind adhesives and structural engineering, and we are globally present in all major wind markets. Finally, a look at our Lightweighting markets. The Marine business exceeds our expectations, as I already said. Markets are on and above pre-COVID levels. We experienced a strong demand of our recyclable PET for industrial applications in the fields of construction and transportation, where conventional materials are gradually substituted by more sustainable solutions. The Industrial segment offers new growth potentials through replacement of existing technologies with advanced composites. For example, replacing steel with carbon for certain agricultural applications. To express our strong commitment, we are strengthening the organization and global setup by dedicating more resources and capacity to the growing Marine and Industrial segment. The Aerospace business has stabilized at a low level. Gradual longer-term recovery is expected. The first recovery phase has started and trends are heading in a positive direction with global OEMs restarting production on various aircraft programs and consumer air travel is increasing as pandemic restrictions lift around the world. As a result, aerospace sales increased 6% compared to the second half of 2020. With this, I'm concluding the business update section and hand over to Philippe Wirth.

Thanks, Mitja. So let me start with a summary on sales. Composite Materials achieved net sales of CHF 118.2 million for the first half of 2021. This represents a decrease of 12.9% at constant exchange rates compared to the first half of 2020. The decrease is mainly due to lower wind demand in China and globally reduced volumes and pricing in Balsa. Marine and Industrial markets are back to pre-pandemic levels. As Mitja summarized earlier, we believe the slowdown in China is temporary. The trend to replace Balsa and other core materials by PET is permanent and we are adjusting the Balsa operations accordingly. Kitting recorded net sales of CHF 95.2 million for the first half of 2021. This is a decrease of 13.7% at constant exchange rates compared to the first half of the prior year. In line with Composite Materials, net sales were negatively impacted by the temporary slowdown in China as well as lower material pricing. Tooling saw an increase in the first half of 2021 by 19.6% at constant exchange rates compared to the first half of 2020 to CHF 55.4 million. The strong growth is mainly due to the timing of orders of Western wind turbine OEMs and plate manufacturers in the first quarter of this year. We currently see a weakening of the tooling market in general and in particularly in China for the second half of this year. Aerospace net sales in the first half of 2021 amounted to CHF 14.2 million. This is a decline of 23.7%. While the business unit faced a sharp decline compared to the prior year's pre-COVID-19 levels in the first quarter, sales have stabilized at low levels and we are actually seeing a year-on-year improvement in the second quarter this year. In total, this leads to a decrease of 8.5% for the continued operation at constant exchange rates to CHF 258.6 million. The operating profit for the first half of 2021 was CHF 18.6 million, which is 7.2% of sales. Last year, we reported an operating profit of CHF 31.3 million. The reduction year-on-year was caused by higher material costs of CHF 3.9 million; by onetime expenses of CHF 7.4 million to adjust our Balsa and Kitting footprint as discussed earlier by Mitja; other reductions of CHF 1.4 million include the reduction in sales, obviously, but are also caused by the start-up costs for our new production facilities in Mexico and India. These negative impacts were partially offset by positive mix effects, and particularly due to the higher share of tooling sales in the reported period. When we look at the rest of the P&L, obviously, profits are impacted by the reduction of sales, but also by some special expenses to adjust the Balsa footprint and consolidate the Kitting operation for America in Mexico. These I consider as more onetime in their nature. So I want to walk you through some of the key takeaways when you look at our numbers. Sales, we discussed before. Gross profit margin at 19.6% is 1.5 percentage points below prior year. We are losing 1.5 percentage points due to higher material prices and 1.5 percentage points again for inventory adjustments for our Indonesian Balsa business. This was partially offset by positive mix effects due to a mix shift towards our tooling business. EBITDA in the first half of 2021 was CHF 27.2 million or 10.5% of sales. Adjusted for the restructuring items, the margin was 12.6%. The operating profit in the first half of 2021 was CHF 18.6 million or 7.2% of sales. Adjusted for restructuring and impairment, the operating profit margin was 10.1%. Continuing further down the P&L, you will note an exceptionally high tax rate. This is caused by net losses in operations where we do not expect that we can recover this in the future. Hence, we cannot record a tax asset. In this reporting period, this is mainly the restructuring and impairment losses in our Indonesian Balsa business. Bottom line, we finished the first half of 2021 with earnings per share of CHF 25.61. Turning now to cash flow. We experienced a slight increase in our net working capital to sales ratio to 21.1%. This is caused mainly by a reduced amount of prepayments in our tooling business and some late payments of our customers. I believe the 2020 number was exceptionally low. A 21% to 22%, as we show now, is more than normal. CapEx in the first half amounted to CHF 13.8 million. To be noted is that only CHF 2 million of this number was replacement CapEx. The rest was used to expand our production capacity, mainly in PET extrusion in Mexico and India. As Mitja elaborated earlier, Mexico is finished, we're ramping up the production to full capacity as we speak. And in India, we are on good track to start production beginning of next year as planned. For the full year 2021, we expect a CapEx number of something just shy of CHF 30 million, mainly for the finalization of our Indian PET expansion. Free cash flow amounted to CHF 4.3 million for the reporting period. The reduction compared to prior year is due to a lower EBITDA and to a slightly higher cash outflow for CapEx. To conclude on the financials, let's look at some key performance indexes of our balance sheet. Net debt has been reduced by CHF 19.2 million compared to the same time last year and now amounts to EUR32.3 million. The equity ratio improved further to 47.4% and our gross debt-to-equity ratio is 1.1x at the end of June. The one measure that is important to us and that is slightly off in the first half year is our return on net assets, which is only 7.2% in the period. This low number is explained by our start-up businesses in Mexico and India, where we have the assets fully or partially in place, but do not produce at full capacity yet. This number will jump back to normal level once these sites are fully up and running. With this, I hand over back to Mitja.

Thank you, Philippe. Let me conclude today's presentation. First, Gurit is strategically on track. Our Strategy '25 defines the priorities and directions for the next years. Second, we expect a transition period in wind till the strong growth kicks in again. We have initiated the necessary measures in regards of footprint, product mix and organizational structure. Third, marine markets recovering on pre-COVID levels and industrial segments offer new growth potential for composites. And fourth, we make progress on achieving our long-term ESG goals. As a full year outlook for '21, we expect a revenue of around CHF 500 million and an operating profit margin of around 8%, including restructuring charges. Adjusted for these onetime charges, operating profit continues to be expected in the range of 9% to 11%. Additionally, I want to announce that we joined Wind Europe, the leading association for wind energy in Europe. This underlines our engagement and strong commitment as a partner and solution provider to the wind industry. Let me close with highlighting our Capital Markets Day, which is scheduled for August 31 as a physical event here in Zurich. During this event, we will introduce the Strategy 2025 and present our ideas on innovation and future technology trends. I'm looking forward to seeing you there. With that, I'm closing the meeting. Thank you very much for your attention. We will now move to the Q&A session with registered participants.