Gurit Holding AG (GURN) Earnings Call Transcript & Summary

Ladies and gentlemen, welcome to the Gurit Full Year 2023 Results Live Webcast. I am [ Moira ], the Chorus Call operator. [Operator Instructions] At this moment, I am pleased to hand over to Mr. Mitja Schulz, CEO of the Gurit Group. Please go ahead, sir.

Thank you very much, and good morning from my side as well. I welcome you to the presentation of our financial year 2023 results. I'm here in Gurit's corporate office in Zurich, together with my colleague Philippe Wirth, our CFO. Philippe Royer, Gurit's Chairman of the Board is also with us today. Let's start and have a look at today's agenda. I will start the presentation by providing you a business update, highlighting the key events and achievements of last year. Philippe will provide details on the financials before I spent a bit more time explaining our view on the markets and our full year outlook. Following the presentation we have scheduled the Q&A session. Let's continue with the highlights of last year. We ended the year with a revenue of CHF 460 million which represents an FX adjusted gross of 2.7%. We improved our adjusted operating profit margin to 4.5% coming from 2.3% in 2022. Our diligent focus on net working capital drove our free cash flow to CHF 27.2 million, which is another significant improvement compared to the year before. Consequently, we were able to substantially reduce our net debt to below CHF 60 million, significantly deleveraging our balance sheet. I want to thank the more than 2,500 Gurit employees worldwide for their daily efforts, their strong commitments towards our company and their desire to support our customers globally. Let's have a closer look at last year's business activities. Wind customers have been cautiously investing again and winning new orders for future projects, both onshore and offshore. Western OEMs have taken actions to improve their financial performance with several returning to profitability during the year. We saw a slight recovery in the Western world and higher activities in China. The Chinese market established overcapacities for wind turbines and in the supply chain. Consequently, we adopted our strategy to be more selective on Chinese projects, prioritizing profitability before volume. We see the trend of PET is dominating core material and wind blades to continue and are happy with the fact that we are able to increase our PET market share, leveraging our global PET extrusion and core kitting footprint. As announced, we successfully concluded on multiyear agreements with key customers guaranteeing us the major share of their supply in the coming 3 to 4 years. This is highly relevant considering the recent positive news of major wind customers planning to increase their production output in the coming years based on strong order intakes reported. Our new sites in India and Mexico are fully operational. We successfully achieved a profitable year 1 in Chennai, a strong effort by the local team. The plant in Mexico improved operationally and shows a strong order outlook for the year. The Structural Profiles business now fully integrated in Gurit's organization is still loss-making and was impacted by lower offshore business in Denmark and the delayed ramp-up of our lead customer in India. For 2024, the focus is to turn around the business. This will include further structural cost reductions and the full utilization of the synergies of the Gurit Group, for example, by bundling procurement activities. Our Marine and Industrial business had another good year and continued with profitable growth. We were able to win the first significant orders with major European boat builders. We also successfully won business for recycled PET panel for multiple industrial applications in the U.S. Recycled PET foam is both gaining shares in existing markets, while growing in new applications in recognition as a superior material option, driven by energy efficiency considerations of customers. We see the field of energy-efficient composites, as we call it, as a new growth potential for Gurit, and I will elaborate more on it in the later part of the presentation. Concluding the business update, I will now move to our sustainability performance from last year. Highlighting our ESG performance. We progressed well with the implementation of our sustainability strategy. We are operating multiple ESG-related work streams across the company and progress according to our goals and expectations. It is encouraging to see that the dedicated work of our teams has been recognized with continuously improving rating results. We received a gold rating from EcoVadis and we have been awarded with the A rating by MSCI. For the first time, we awarded internal projects with the Gurit Sustainability Award, recognizing the successful work of our teams to reduce energy consumption, improve waste reductions and to increase our social engagement in the community Gurit plants are located. To summarize, we are on track with the execution of our ESG strategy. Lastly, I want to use the opportunity to highlight changes in our executive management team. I'm welcoming Karen Glauser as new Head of Group, HR. Karen joined Gurit in February and is succeeding Hannes Haueis who left Gurit end of last year. And as announced 2 weeks ago, Javier Perez will join Gurit on May 1 as new CFO, and Philippe Wirth will leave Gurit end of this month. We thank Philippe Wirth and Hannes Haueis for their supporting -- for their support and strong commitment during their time with Gurit. Philippe, it was a pleasure having you as a [ wingman ] on my side, and I wish you all the best in your new role. With this, I conclude the business update and for the last time, hand over to Philippe Wirth and full year financials.

Thanks, Mitja. Let me start with the P&L and here with a summary on sales. In wind materials, which includes composite material, kitting and structural profiles, grew 1.9% year-on-year against a very difficult comparison in the second half, as you can see in the bar chart to the left. The decrease in the second half of CHF 44 million includes CHF 16 million of negative currency and CHF 19 million of lower sales to India in structural profiles, where in 2022 we included a onetime order to build up safety stocks at one of our customers. The remaining decrease in wind materials in the second half is mainly due to China, where we -- where the competitive environment had either an impact on pricing or we selectively opted out on orders. In Manufacturing Solutions, sales was more or less in line with the previous year, but with a more than CHF 30 million shift of sales from Chinese to Western customers. Marine and Industrial continued with solid sales growth of 7.1% at constant exchange rate. Overall, for the group, this results in a 2.7% growth for the continued business at constant exchange rate with an approximately CHF 35 million shift of sales from Chinese to Western customers. When we look further down the P&L, operating results benefit from the Western wind market with increased demand for our core material and the pickup of orders for molds. Gross profit margin is 3.4 percentage points or CHF 10.5 million above prior year. The increase is mainly coming from an improved product mix in manufacturing solutions with more Western sales, which accounts for an increase of CHF 8.2 million. Lower raw material and freight costs, including sales price changes at CHF 6.9 million profit compared to last year. So overall, our profit is increasing because Western blade manufacturers have bought molds again and with a lot of effort in our sourcing strategy, the trend of increasing material and freight costs combined with a time lag until we can adjust sales prices has reversed. These positive impacts, however, are partly offset by a reduction of structural profile profitability. EBITDA for the year amounts to CHF 34.6 million, including restructuring expenses of CHF 0.9 million mainly related to Structural Profiles. This compares to CHF 39.8 million last year, which included a gain of CHF 18.3 million from our sale of the Aero business. Excluding this gain on sale, EBITDA improved CHF 13 million. Adjusted operating profit excludes the gain of the Aero divestment in 2022. Restructuring and impairment charges, it amounts to CHF 20.6 million in 2023 compared to CHF 11.2 million last year. The next slide summarizes the key drivers for this reduction. So last year, we had an adjusted operating profit of CHF 11.2 million. Compared to prior year, we gained CHF 8.2 million due to a favorable product mix, mainly of our Manufacturing Solutions business. In addition, we benefited CHF 6.9 million from higher sales and lower raw material prices after big emphasis has been put on our sourcing strategy in the last year. On the negative side, we incurred a decreased profit of CHF 5.9 million due to the acquisition of Structural Profiles last year. We are in the process to restructure the cost basis of this business and expect this number will change its [ sign ] as the business becomes breakeven in 2024. Okay, now let's move to cash flow. For those of you that follow us regularly may remember how in 2022 I was talking about the challenges we had with net working capital caused by, on average, longer payment terms requested by our customers in the wind business and inefficiencies in our inventory levels due to supply chain disruptions with long lead times, much more volatile demand and the ramp-up of the production in India. To counter these trends, we have put several initiatives and measures in place with the target to bring the net working capital back to approximately 22% of sales. As you can see on the left chart, this work is bearing fruit, and we were able to reduce net working capital below the targeted level on average over the last 12 months. In the second half of 2023, we were even able to reduce this further compared to June 2023. As a result, we were able to release on average CHF 23 million trade net working capital into cash. Capital expenditures amounted to CHF 11.3 million in the year. CHF 7.7 million or approximately 70% of it is related to capacity increase mostly to our footprint expansion in India. For 2024, we expect CapEx [ again ] between CHF 10 million and CHF 15 million. Free cash flow, which equals to net cash from operation of the capital expenditures, amounted to CHF 27.2 million. Compared to the previous year, we benefited from higher EBITDA, excluding the gain on Aero, improved working capital management and lower CapEx. So to conclude on the financials, a couple of comments on the December balance sheet. Net debt decreased by CHF 24.1 million to CHF 59.9 million since December, which is the result of the before discussed free cash flow. The equity ratio is 28.3%. This is slightly below December '22. Equity has been reduced by additional goodwill from the buyout of the remaining 40% Fiberline shares, and we continued to experience strong currency headwinds, which lowered our equity. The gross debt-to-EBITDA ratio reduced to 2.1x with underlying 2 opposing effects. On the one side, we were able to reduce borrowings by CHF 38.8 million since December 2022. This reduction in borrowings is an even more impressive CHF 63.9 million if you look back to June 2022, where we started with a rigorous working capital program and implementing state-of-the-art cash management processes across the globe. On the other side, the gain of the sale of the Aero business from last year of CHF 18.3 million is not anymore included in the EBITDA. So we expect this ratio to further reduce by the end of 2024 towards 1.5x. Our return on net assets is positive again, coming from a significant improved legacy business. So financial summary. Modest sales growth in the year with a legacy business whose margins are back to normal levels. A rigorous net working capital program helped to improve free cash flow significantly. Together with improved cash management processes, we were able to lower borrowings substantially. Unfortunately, the Structural Profile business did not develop as initially expected, [ it is ] modest, the overall very positive picture, but we are addressing the issue. With this, I hand back to Mitja.

Thank you, Philippe, and I will continue with a closer look at our markets, obviously followed by an outlook of how we see 2024. We are thrilled by the commitments from global governments during the UN Climate Change Conference, aiming to triple global renewable power capacity by 2030 and double the rate of energy efficiency improvements. We expect those initiatives to impact sales very significantly from 2025 as they started to translate into major turbine orders for our wind customers in recent months. Strategically, that is fully in line with our positioning in the Wind Energy segment. So we will continue to prepare our global manufacturing footprint for the announced growth, but it offers also new opportunities for Gurit. More energy-efficient applications require technologies and materials, enabling customers to reduce energy or fuel consumption of their products. Those are new markets for recyclable PET materials, and I will later explain more on our strategy related to energy-efficient composites. But first, I will share our take on the wind market outlook and referencing to the latest market outlook from [indiscernible]. First of all, we expect Western wind markets to grow substantially from 2025 onwards. This is also substantiated by the most recent announcement from Western Wind customers considering order intakes and project timings of new major wind park projects announced. For '24, we expect some growth in China, while demand for rotor blades of Western customers will slightly decline versus '23, primarily driven by customers still consuming sizable blade inventories. We have seen that most Western turbine OEMs progress well on their financial improvement plans and are positive about the outlook of the next 3 to 4 years. Incentive packages start to translate into growth pipelines, particularly for onshore both in Europe and North America. So looking at the upper chart, which shows the expected amount of new turbine installations for the world without China and for China below in grey, we expect both markets to grow from 2025 onwards. Offshore growth still see some delays linked to high financing costs and uncertain permitting in the U.S. China is expected to experience growth primarily for offshore, while onshore remains stable at 60 to 65 gigawatts. Mid-term growth is projected at a double-digit CAGR. So the industry will need to scale and set up the investments needed to produce the expected gigawatts of new wind turbines. Let's change gears and have a look at the Marine and Industrial market segment. In the short-term, we see medium to large marine projects to maintain their market position, while the market for smaller marine projects is expected to soften slightly. Midterm, the market is expected to grow on mid-single-digit CAGR levels. In the Industrial segment, we are confident that growth will accelerate, driven by the increasing demand for recycled PET foam. As I elaborated already, we see what we call Energy-Efficient Applications business as an additional future strategic growth driver for our company, and our expectations are to double PET sales outside marine in the next few years. To execute those strategic plans, we strengthened our footprint in the U.S. and acquired FX Composites in Dallas, Texas. FX today supplies core materials for -- core material kits for Gurit's Marine and Industrial business, so we basically in-source that operation. It will provide us a more visible hub for our non-wind activities in the U.S. And while we see the U.S. as most promising market for those energy-efficient composites, we are convinced that with establishing a dedicated Gurit footprint, we will underline our commitment as a regional player. The acquisition provides the first milestone in our approach to conquer the U.S. market for energy-efficient composites. Before I'm coming to the conclusion in the outlook, I want to provide more color on our expectations for 2024. You can see in this chart that we expect volume growth with Western customers of about 5% in a market environment that is flat at best in terms of blade production volumes. This growth is a result of Gurit winning market share across the Western wind portfolio. As said already, we managed to secure sizable multiyear contracts and strengthened our market-leading position. We deliberately choose to be more selective with business in China, prioritizing profit before volume. Additionally, we see reduced input material costs, for example, for carbon fiber, which we pass through one-to-one to customers. Both impacts will offset the volume growth. Looking at Marine and Industrial, new business wins for energy-efficient composites and market share gains in marine help us to offset the softening of some of the marine market segments. In summary, we grow both in volumes and market share in a flat market environment, but this growth will be offset by material price reductions and less China business. That brings me to the conclusion of today's presentation. Overall, we navigated well through '23. We saw moderate growth in a non-growing wind market environment impacted by a strong Swiss franc. We improved operating profit and cash flow performance and deleveraged our balance sheet. This is important to prepare the company for strategic growth ahead. We gained market share and secured its future with strong multiple long-term agreements. Our Marine and Industrial business remains on a strong and profitable growth trajectory. We adjusted our strategy and build stronger emphasize to wider addressable markets for energy-efficient composites. We will keep the focus on cash management and operational execution and continue delivering improved financial results. For the full year outlook, we expect the back-end loaded 2024 with net sales between CHF 435 million and CHF 485 million, and an adjusted operating profit margin of 5% to 8%. Beyond '24, we expect an accelerated growth momentum driven by increasing demand of Western wind customers and additional impulse from our energy-efficient market penetration. I will hand over to Philippe Royer for some closing comments.

Yes, thank you, Mitja. And I guess the main questions are -- first, is growth coming in the wind industry? And then, is Gurit going to benefit from this growth? So I wanted to stress a few points, and I'm not going to talk about Brussels goals or Washington D.C. goals, but just what we see at our customers and internally. So as partly said by Mitja, first, major Western OEMs have increased their order intake in the last months -- in the last 3, 4 months. Almost all of them to the exception of one, maybe with some quality issues. All Western OEMs have increased their sales guidance. Of course, part of it is coming from increased sales price, but there is a little element of volume in it. We have also some other customers who already guided for '25 who is extremely optimistic and better numbers than '23 million. The numbers of onshore blade lines in North America and Europe is increasing, and we see our customers ramping up, so in store and ramp up those [ lines ]. We also are seeing customers ramping up new factories, for example, in India. Even some new -- completely new offshore facilities have been announced, but this is -- for example, in Poland, this is going to be a bit later [ and ] come onstream in '26. But so on the market side, our customers in all kind of [ measures ] are foreseeing growth. So growth is coming. Now on our side, at Gurit, first we are integrated [ kitters ] with a global footprint. This means, of course, we deliver the core materials like PET foam, and we keep it. We are, as we speak, qualifying for all new blades, onshore and offshore. This means in all our plants, Mexico, India, Europe, we are now qualifying for the new kits that are going to the newly developed blades from our customers. As Mitja said, we have negotiated LTAs with 2 major OEMs. And I want to stress out that those LTAs are not volume based, they are share of wallet based. This means when customer volumes are going up, our volumes are also going to go up with these contracts. With other customers we have yearly contract which we have negotiated with full benefit of the global footprint. Today, approximately 20% of our capacity is available. With the customer forecast we have, we know that in the second half of this year we are going to be more than 90% utilized. I'm talking about capacity. And then we can still make more capacity available by improving customer mix. So as you can hear, Gurit is ready for the [ announced ] growth in the second part of '24 and certainly the growth accelerating in '25. I hand it back to you, Mitja.

Thank you. Philippe?

And this concludes and ends our presentation. Thank you very much for joining us today. And with this, I'm handing over back to the operator for the Q&A session.

[Operator Instruction] The first question is from Wiechert Konstantin from Baader-Helvea.

Maybe I would start with a couple, if I may. First of all, I think you touched already on the uncertainties in the U.S. offshore sector. But -- however, given the recent rebid for at least 2 of the challenging New York offshore projects, would you say that the Western offshore markets also with regards to the U.K. maybe as well, really getting a bit more back into a consistent demand environment and therefore, some more -- some less uncertainty for the future? And then on your FX Composite acquisition, if you could share some further details on any sales and if you expect any integration costs? And if there's anything already -- or what is included in your guidance here from that acquisition as well? I guess it's a rather small acquisition. But nonetheless, maybe you can shed some light also given the fact that integration costs might be an issue, or was at least for the Structural Profiles in the past. And maybe if I may squeeze in a third question. I've seen that Arkema has successfully tested polymers for core materials that would enable blade recycling. Is that something that you expect to challenge current PET leadership in the future? And maybe you can just elaborate a bit on what your opportunities are in that regard as well?

Sure. Thank you, Konstantin, for your question. Let me probably start with the last one, the Arkema project. But first of all, we are ourselves -- engaged in multiple blade recycling activities and development projects ourselves as well. And we're, of course, also closely following Zebra and the other projects which are out there with our customers. I mean, the major technical challenge obviously is 2-folded, right? One is to have a resin system available which allows you to be fully dissolved and then basically enables the blade to turn back into its original component. And second major challenge, of course, to do this in an industrial process where it is, let's say, to a certain degree commercially viable. The impact on core materials, the projects we are engaged with and what we've also seen in other projects is that after basically the recycling process is done, you will have core materials or carbon fiber or glass fiber, again, available in a way which would you allow to reprocess it. With PET, we are actually having one project where we are now already trying to reuse exactly this recycled PET and check if we, for example, can re-extrude it in our process, basically, fully reintegrate it in our process. So long story short, we are actually not concerned about the recyclability of rotor blades. We think PET is actually a very good product, which can also after the blade recycling be reused and be put again into use in a -- in the cycle. So no worries on our side. Offshore, yes, we've also seen that there were some good news. I mean there were also a couple of not so good news when we see what [ Orsted ] for example, announced. But we -- what we see is just bluntly, but what we see on the customer side is that customers are preparing. We've seen an announcement of a big customer to set up a new plant in Poland. But we also see that the timelines behind are more -- a little bit further out than we probably originally anticipated 1.5 years, 2 years back. So we think real volume growth is probably more in the very late part of the decade and also in the U.S. When we talk to customers in the U.S., there still seem to be certain things not fully clear. Yes, some projects are now making it through the full permission pipeline. But still -- again, I would say, when you compare it to probably 1.5 years 2 years ago, this outlook is a little bit further out than what we originally anticipated in terms of volumes. And related to FX, FX, as I indicated in the presentation, is a company which is today working for us already. So 100% of their sales they do today, it's basically for Gurit. So what we do now is an in-sourcing of this activity. So it will not have an -- top line impact on our numbers. We assume that the integration costs will be very, very limited. So -- and those costs are considered in our outlook and our guidance. So there's from today's perspective nothing uncovered out there what we would see. I hope that answers your question.

There are no more questions from the phone. Gentlemen, would you like to conclude the call?

Absolutely. Thank you very much for participating in today's call and taking the time, and we are looking forward to speaking to all of you next time. Thank you so much, and have a great week.

Ladies and gentlemen, the conference is now over. Thank you very much for your participation and interest in Gurit. You may now disconnect your lines. Have a good day.