Gurit Holding AG (GURN) Earnings Call Transcript & Summary

Ladies and gentlemen, welcome to the Gurit Full Year 2021 Results Conference Webcast. I'm Costantinos, the Chorus Call operator. [Operator Instructions] The conference is being recorded. The presentation will be immediately followed by a Q&A session, where questions can be proposed via ongoing conference call. As an analyst or journalist, you can receive the necessary dial-in details by registering at [email protected]. [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, Gurit Group. Please go ahead, sir.

Thank you very much, and a very good morning from my side as well, and welcome to Gurit's Financial Year '21 Results Media and Analyst Conference. I'm here in our office in Zürich together with my colleague, Philippe Wirth, CFO of the Gurit Group. Let me get started with our presentation and a brief look at the agenda. We will start with the business and financial update for the year 2021, followed by a market and business outlook of '22, and then we will conclude with the Q&A session. Let's start with a look back to last year. We finished the year with a revenue of CHF 468 million and an adjusted operating profit margin of 7%, which was well within the latest forecasted guidance. Revenue has been decreased year-on-year by 19.8%, driven by a globally reduced demand for wind blades and by a decreasing demand in price of Balsa compared to a very strong previous year. Our operating profit was impacted by restructuring and impairment charges primarily to rightsize our global Balsa business, and closing and relocating a kitting facility from the U.S. to Mexico. In addition, we were faced with raw material and logistics cost inflations and significant operational ramp-up costs for our new PET extruder facilities. In particular, the Chinese wind market declined after a very strong 2020, but also business with Western wind OEM was much weaker in the second half of the year. Due to our strong and balanced wind customer portfolio, Gurit is basically supplying to each Western and major Chinese turbine and blade manufacturer. We were similarly impacted by both the reductions of Western and Chinese customers. Nevertheless, we consider our global customer base and the proximity to both China and Western customers as a competitive edge. Our lightweighting business grew substantially year-on-year. The marine and industrial markets have performed strongly and saw double-digit growth rates. We see an increasingly strong demand for our recyclable PET, especially from industry segments like construction and transportation. The aerospace business faced a sharp decline compared to pre COVID-19 levels, but it is very encouraging to see that since second half of last year, sales heads in a positive direction with global aircraft OEMs increasing their build rates. In regard to our footprint expansions, we can report good progress. You can see on the upper side of the chart pictures from our new wind sites in Chennai converting a piece of land within 12 months in an industrial facility in facing very difficult environment due to COVID restrictions. Currently, we have our manufacturing experts on site supporting the local team to ramp up the PET extrusion lines. The pictures on the lower part show impressions from our Mexican kitting and PET facilities. We continue supporting the site with our operational excellence teams to improve the operations and strengthen the local team. Besides all the challenges last year, we managed to conclude on some major commercial agreements with our customers in all our business segments. I would like to highlight 2 of them. End of last year, we concluded with a major Western wind blade manufacturer to take over their in-house mold and tooling business that comes with a 5-year supply agreement and Gurit taking over part of their manufacturing facility in China. This will strengthen our position as the global market leader for wind blade molds. Secondly, we successfully won new business awards for recyclable PET in construction and transportation applications by customers in Europe and North America. We consider those as very important entry steps in strongly growing market segments, which demand environmental friendly and high-performing composite materials. Innovation and technology leadership are core corporate values at Gurit. We continue to invest in new product innovations. We are proud that end of last year, 4 of our product innovations have been named finalists of the prestigious JEC Innovation Awards. The winners will be announced during JEC, the world's largest composites exhibition, which will be held early May in Paris. Let me also emphasize the progress Gurit has made in achieving our long-term ESG goals. Last year, we have established a fully operational sustainability organization and operationalized our ESG targets in dedicated work streams. We made major improvements in the health and safety of our employees. We switched to 100% renewable electricity in our plants and facilities, and all this has been recognized by improved ESG ratings. But we will not stop here. As announced on January 31, the Board of Directors proposes to the Annual General Meeting of Shareholders the introduction of a single registered share structure and the share split of current bearer shares. That underlines our commitment towards achieving best-in-class corporate governance and consequently is another element to continuously improve our ESG performance. I will now hand over to my colleague, Philippe Wirth, to give us a detailed view on the financials of last year.

Thanks, Mitja. Let me start with the P&L and here with a quick summary on sales. Materials sales declined by 21.1%, driven mainly by reduced demand in Balsa in all regions, but in particular, in China. In other materials, the decline coming from the wind business has been offset by a strong double-digit growth in our marine and industrial business. Kitting with minus 17.8% and manufacturing solutions with minus 28.3% declined as a result of lower demand for wind blades. Manufacturing Solutions experienced a sharp decline in the second half, whereas the first half still benefited from finalization of Western projects. Aero is slowly recovering from decline due to the pandemic. The last 9 months of 2021 were above the same period of the prior year. And as a remainder, decline of 5.3% is coming from the first quarter, which was pre-pandemic in 2020. So in total, this led to a decline of minus 19.8% and at constant exchange rates. When we go further down the P&L, gross profit margin is 2.7 percentage points below prior year. This decrease includes a 1 percent point reduction due to a onetime hit for Balsa inventory adjustments and the remaining reduction of minus 1.7 percentage points is mainly due to increased raw material and freight costs. EBITDA is CHF 35.9 million below prior year. This includes a onetime Balsa inventory write-off of CHF 4.9 million and a CHF 9.5 million reduction due to increased raw material prices. The remaining decrease includes reduced sales volume and ramp-up costs for our new production sites in Mexico and India. Next, we reached an operating profit of CHF 23.4 million or 5% of sales. This includes expenses of CHF 9.6 million to adjust the Balsa footprint and consolidate the kitting operation for America in Mexico. Excluding these items, which we consider as onetime, the adjusted operating profit was CHF 33 million or 7% of sales, which is CHF 31.6 million below the prior year. On the next slide, I would like to summarize the key drivers for this reduction. So here, we are looking at the key variances in operating profit compared to prior year. Compared to prior year, we lost CHF 11.4 million due to reduced sales. Next, we have a CHF 9.5 million negative impact on operating profits due to raw material price increases. As always, we expect to pass on these increases to customers with a time lag, either through contractual obligations or renegotiations. As a last item, we lost CHF 10.7 million of profit for ramping up Mexico and India as well as for other extraordinary costs to deal with the volatile supply chain in 2021. With this, we ended the year at CHF 33 million adjusted operating profit or 7% of sales. If we look at the income statement below operating profit, you will note an actual tax rate for 2021 of 56.2%. Since this is an exceptional high number, I would like to make a few comments on that. Our expected tax rate, which is adding up the theoretical local tax expenses is 25.3%. In addition, many countries withhold taxes when we pay off dividends or charge group costs. In our case, China, we held CHF 2.1 million in 2021. Next, we have certain tax expenses where we will have no future taxable earnings to offset against. In '21, this was the impairment of our Indonesia Balsa plant or we have tax losses in areas where a recovery is uncertain in the near future. As an example, our ramp-up sites in Mexico and India. These not recognized tax losses added up to CHF 4.3 million. These are some of the -- these are the main drivers for our high tax rate. And going forward, we expect the tax back in the normal range. Okay. Now let's move to cash flow. In 2021, we experienced an increase in trade net working capital as a percentage of sales compared to prior year. This is caused mainly by a reduction of business in our China operations with favorable prepayment terms, particularly in manufacturing solutions. We also experienced some inefficiencies in our inventory levels to ramp up production in Mexico and India and to overcome supply chain disruptions across the world. I do believe the 2020 number was exceptionally low. The 22% is more what we are aiming for. Capital expenditures amounted to CHF 23.8 million, of which close to 80% is related to capacity increase and dedicated to core material, particularly PET and kitting footprint expansions in India. The CapEx is slightly lower than communicated earlier due to the timing of the investments in India and some reprioritization given the cash flow levels. For 2022, we expect CapEx in the range of up to CHF 20 million. Free cash flow, which equals net cash from operations of the capital expenditures, amounted to minus CHF 2.5 million. Compared to the previous year, we faced a lower EBITDA on one side, while we did not significantly adjust our planned expansion CapEx on the other. This led to this negative free cash flow in the year 2021. To conclude on the financials, a couple of comments on the December balance sheet. Net debt increased by CHF 18.4 million as a result of our cash flow performance. Our borrowings at the end of the year were CHF 67.3 million, about the same as last year. CHF 66 million were drawn on the credit facilities with a commitment of CHF 120 million. The equity ratio remains solid at 51.3%, and our gross debt-to-EBITDA ratio increased to 1.6x. Our return on net assets dipped in 2021 to 3.1%. This includes the Balsa and kitting restructuring as well as the high tax rate, as explained earlier. If we adjust for that, return on net assets is 7.7%, which is below prior year mainly due to ramp-up and other extraordinary supply chain efficiency losses. In summary, we look back at the very challenging year in which we, despite many economic uncertainties, heavily invested into our capacity to supply the wind market. I would like to conclude with some comments on our share structure. As you have read in the January media release, the Board of Directors proposes the adoption of the One Share, One Vote principle by introducing a single registered structure. Current significant registered shareholders have indicated their agreement to waive their voting rights privileges in favor of a new single share structure without compensation. The voting rights of current registered shareholders together would change from 36.4% to 10.3% after the introduction of the single registered share. To facilitate trading, the Board of Directors will also propose a 1:10 share split. This affects 420,000 Gurit bearer shares with a nominal value of CHF 50. Upon the approval of the AGM, the share split of the bearer shares would become affected at the same time as the implementation of the single share structure. Gurit share capital would remain the same, but newly consists of close to 4.7 million registered shares with a nominal value of CHF 5 each, of which all would be listed on the Swiss Stock Exchange. So this is it from my side, and I hand over back to Mitja.

Thank you, Philippe. Now let's look forward. We have prepared our view on the development of the markets and our business outlook for this year. Beginning with wind and the look at Wood Mack's latest market update. The global level of wind turbine installations is supposed to remain in the current levels for the next few years before offshore wind accelerates in the second half of the decade. Regionally, we expect China to be on 50-plus gigawatt levels already this year, meaning a year-on-year growth compared to last year. In North America, we expect a year-on-year decline to below 10 gigawatts levels as a result of the expiration of the PCD subsidy schemes and no conclusion yet on the continuation or even expansion of the program. Translating this for Gurit, we expect our Western wind customers to remain challenged in the current market environment. We see volume forecast on and below '21 levels. In China, we experienced a strong level of activities. Customer demand is increasing, but price levels and commercial conditions are very challenging. We are well positioned in the Chinese market and see opportunities, but we will carefully decide and select those which will contribute to a profitable growth. Overall, for '22, we anticipate the wind market to remain volatile and hard to predict. In our lightweighting market segment, all indicators are on growth. You can see that we embedded some third-party market data on expected composite CAGRs, both in Marine and Aerospace, which show solid growth trajectories. In Marine and Industrial, we see, as already mentioned, a strong demand for more sustainable product solutions and therefore, experienced a strong pull for recyclable PET. We continue to strengthen our business units set up globally and anticipate to grow faster than the market. Aerospace is growing again, coming from very low levels. The growth is primarily driven by a forecasted increase in single-aisle airplanes, so narrowbodies. Gurit plans to follow the anticipated double-digit grwoth -- market growth rate. Translating our view on the markets and business environment, the priority of 2022 will be on operational execution. On the left side of the chart, we have mapped the area with a major operational focus. Strengthening our China setup, ramping up the facility in India and Mexico, price and cash management, supply chain management and the Balsa restart. Let me give you some examples more in detail. In China, we had to experience 2 years of remote management due to COVID travel restrictions. Consequently, we decided to strengthen and empower our local teams to improve our time to market, the availability of local product designs and customer relationships. We anticipate that raw material prices, energy costs and freight rates continue to be volatile and sort of unpredictable for the remainder of the year. To further mitigate supply chain-related impacts, we have strengthened our global procurement team and manage our global spend through direct and indirect category management teams. In a difficult year '21 for Balsa, we have successfully restructured our global setup. We have streamlined the organization and empowered our team in Ecuador to drive the business, and we now see first positive market signals. In December, last year at our Capital Markets Day, I introduced our One Winning Gurit strategy to you. This year, we will continue to execute this strategy in line with meeting our strategic expectations. We have started multiple work streams and programs focusing on technology and innovation, the transformation from a component to a system supplier to the wind industry, driving business growth outside of wind and meeting our long-term ESG sustainability ambitions. Also, we expect to see further consolidations in our industry. We see this as a chance to both expand and focus Gurit's future scope and therefore, closely monitor the markets for potential M&A opportunities. Now let me summarize the presentation. Gurit is strategically on track. We will see challenging wind market environments, partially offset with a strong growth trajectory in Marine and Industrial. We are, as you have seen, firming up our strong ESG commitments. And in summary, '22 will be all about execution. Our outlook for the year, uncertainties in the wind market and obviously, recent year political developments and potentially continued disruptions of global supply chains influence our full year '22 guidance. Gurit expects a revenue of around CHF 440 million to CHF 480 million and an operating profit margin between 5.5% and 8.0%. That concludes the presentation. Thank you so much for joining us today. Please stay on the line if you wish to attend the Q&A session, and I will now hand over to the operator.

[Operator Instructions] The first question is from the line of Mayer Markus with Baader-Helvea.

I have several questions, if I may. I think I will ask them one by one. The first one is basically on the potential ramp-up costs -- on the ramp-up costs you had on 2021, and if you expect further ramp-up costs in 2022 and what would be the delta from these ramp-up costs year-over-year?

Thank you for the question. I think what we -- the site that we ramped up the most, so to speak, in 2021 was Mexico. We started in India, and India will continue into '22. We have seen that with some ripple effects from various reasons, mainly due to COVID, this might -- or this was extended and took a little bit longer than what we expected. But at the moment, it is difficult to say how much less or how much low will be 2022. So we expect it kind of in a similar range for the India ramp-up and for all the supply chain issues that we may find.

Okay. So -- and can you quantify the ramp-up costs you had in 2021? When you say, you also expect this to happen then in 2022 was it a low single-digit million amount or...

Well, in total, for the 2 sites, plus the mold inefficiencies, it was CHF 10.4 million.

Okay. Then my second question would be on your exposure to Russia and Ukraine. I guess it's not much. But anyway, it would be good to know it, if you could help us here.

Yes, sure. Well, we kind of anticipated that question, as you can imagine. Our direct exposure to Russia and Ukraine is super limited. It's in a very limited, below 1% of sales impact. So a zero point small number percent of sales is basically the business we do directly with Russia and Ukraine. So there's basically almost no exposure on our side.

Okay. And then another question. You said also M&A could be an option then going forward, in particular -- and also in the Aerospace, I guess. Can you quantify what would be a theoretical M&A firepower of Gurit?

Well, I'm not sure if it makes sense to speculate around firepower. But the question is, of course, relevant. And when you -- I don't know if you had a chance to be at our Capital Markets Day, where we try to elaborate a little bit on the strategic rationales behind M&A activities. And there are certainly areas where we would feel that it strategically can make a lot of sense for Gurit to further strengthen our position. And I think in summary, you can summarize basically 3 areas where we felt it is worth to consider certain activities. One is certainly in the area of wind. We have a very diversified portfolio already. But there are probably 2, 3 technology trends right now in the wind blade manufacturing process, which could make a lot of sense to be part of Gurit's value chain as well to kind of conclude Gurit as a one-stop shop for blade manufacturing suppliers. So that is certainly an area where we are keeping our eyes open. And then I think I strengthened quite a bit in my presentation the huge opportunities we see in the Marine and Industrial segments. And here, there are multiple opportunities to either strengthen our own global footprint and reach or to vertically integrate. And lastly, I also think it is absolutely important to always consider your current product portfolio and are you best in class to grow and to basically reflect strategically from a portfolio management perspective, your current activities, and this is also what we are doing. But in these 3 areas, we are moving right now.

Okay. Understood. And my last question would be then given the outlook you gave for the wind industry, when -- or is it in your kind of outlook as well, midterm that you regain then this 9% to 11% margin corridor you had in the past?

Short answer, yes. It -- we do have to get our -- we expand our footprint significantly, right? This in '21 and '22. These sites have to be efficient on the normal Gurit levels, right? And then obviously, we have now this continuous pricing pressure from our customers on the one side and from the -- from our suppliers on the other. But yes, I think we want to go back to this corridor. The question is a little bit how fast can we make it happen? As you can see from the current guidance, I think this is more like a '23 time issue.

The next question is from the line of Koenig Daniel with Mirabaud Securities.

Yes, I have a question concerning H1 '22. I was wondering in your guidance -- do you hear me?

Yes. We hear you.

Yes, in your guidance, does this include H1 '22 to be similar to like H1 '21 because H1 '21 was considerably lower than H1 '21. So H1 was higher than H2. And I was wondering if H1 '22 will be similar like because...

You're very hard to understand. I'm sorry for that, but you're very hard to understand.

Hear me now better?

Well, we'll try.

Yes, I had a question if H1 '22 will be similar like H2 '21 in the first half of this year, if it will be similar. That will be my fine question.

Yes. And that's a good question. And as I also said, and I think you also probably listened to the announcements from our big customers in the wind side. We see that H1, the first half of this year is more or less -- I would say, from a demand side in wind, more or less on the level of the second half of last year, looking at the Western customers. Looking into China, as I also iterated, we see a stronger activities in the market and stronger -- I would say, a stronger request for volumes than we probably projected or than we certainly have seen in H2 '21.

Okay. So that means it's net-net slightly better than H2 on a consolidated level. Is that fair assumption?

I guess we will see.

Okay. And then I was wondering what to expect from the former tooling segment this year. I'm kind of like a little bit -- still a little bit worried about the pricing development there. Can you...

Yes. Tooling -- yes, I can certainly shine some light into that as well. But first of all, I think what we see in the tooling business is you could argue as a time delay in the investment decisions made in new molds and then really, the amount of new turbine installations. So that -- tooling is always a little bit -- I would say, always a little bit ahead in terms of seeing what the market will bring, then probably 15, 18 months later in terms of new market -- new turbine installations. What we see is also here in the tooling business, to come back to your question, we see now stronger activities in the Chinese mold market. The Chinese price picture is different than the Western price picture. It's more competitive, but we see stronger activities in China. We see that probably the first half of the year with Western customers is rather cautious in terms of -- or Western customers are rather cautious. I think this is also our takeaway from the call or the investor conference from our customers. There clearly is an uncertainty also on their side in terms of how will the second half of the year and probably early '23 really turned out to be. So I think that also influences on a very short-term investment decisions. So we would see the first half in the manufacturing solutions business for Western customers more conservative than probably a year ago.

Okay. Okay. And then finally, can you spend some thoughts on Balsa, how you see the situation there?

Yes. As I also try to address in my presentation, we see that markets are slightly going up again. Demand is slightly higher than we probably anticipated for the year, and this is primarily driven by the already mentioned stronger activities in China. So we see that for Western customers, our perspective and also the market view has not changed to Western customers are on the verge of designing Balsa out in their -- the majority of their new blade designs and converting it with primarily PET. So that technological trend has not changed. And from our perspective, will also not change over the next couple of years. But again, coming back to the demand and the business, we see that there is a solid business for Balsa, also for Gurit this year. It's, from today's perspective, slightly better than we anticipated it probably a few months ago.

[Operator Instructions] Ladies and gentlemen, there are no further questions registered at this time. I would now like to turn the conference back over to Mr. Schulz for any closing remarks. Thank you.

Yes. Thank you very much. And again, I want to say thank you to everyone who participated in today's call. One last point I want to mention because it was not in our timetable. Gurit is also planning another Capital Markets Day. We will soon also come out with further details on that. So stay tuned. Thank you very much, and talk to you guys soon. Thank you very much. Bye.

Bye.

Ladies and gentlemen, the conference is now over. Thank you very much for your participation. You may now disconnect your lines. Goodbye.