OC Oerlikon Corporation AG (OERL.SW) Earnings Call Transcript & Summary

Good morning, ladies and gentlemen, and welcome to the Oerlikon Q2 2025 Results Conference Call and Live Webcast. I am Yusuf, the Chorus Call operator. [Operator Instructions] This conference is being recorded. The conference must not be recorded for publication or broadcast. At this time, it's my pleasure to hand over to Aymeric Jamin, Head of Investor Relations. Please go ahead.

Good morning, ladies and gentlemen, and welcome to Oerlikon's First Half Year Results Call. My name is Aymeric Jamin, Head of Investor Relations. I have here with me Michael Suess, our Executive Chairman; and Markus Richter, CFO of Oerlikon. Michael will start the presentation with a strategy update. Markus will then highlight our financial outlook. We will end with a Q&A. With that, I would like to open our presentation and hand over to Michael. Michael, the floor is yours.

Thank you, Aymeric. Hello, everyone, and welcome to our half year 2025 presentation. Before Markus takes us through the financial details, I'd like to start with some reflections on our strategic journey and keep it short only to remind you where we're coming from the past 10 years. We have fundamentally reshaped Oerlikon from a conglomerate into a focus, which was always requested high-performing pure play company where we are on the, while we are in this transition, we have created a diversification in our marketplaces within the Surface Solutions as a leader in advanced technologies. And on the other hand, Barmag is on a good way to be divested as we have signed in May. All the procedures in between are on track. So, from our side, there is no doubt that this divestment will work out in time and in quality. And if you talk about in quality, you remember the transaction value was CHF 850 million with an additional earn-out potential of up to CHF 100 million. What's even important is that we have parallel to that, a very strong reduction in our pensions liabilities. Sometimes maybe that's not really perceived in a proper way. But I have to strengthen that because that was a massively deload of pensions liabilities of our company. What we have done on top of that, we optimized further our portfolio, which unfortunately ended up in an impairment of CHF 46 million. We will go to details in the Q&A if there are some, but 1 or 2 of them are battery development in Europe, green hydrogen development in Europe, where we simply have stopped certain R&D activities and some other stuff in addition. The structural cost measures are implemented or further on track, and we will see benefits second half year and further on benefit in '26. So cost structural improvements are on a regular base. So, we do that consistently, not as a one wave, but as a consistent further development, the performance quality within the company. As I said that, I simply will further confirm that the transformation is on track, is on track to be an agile and efficient organization, and we have a distinct brand and a distinct investment case for you and very open to all the Q&As you will have to us. Markus, would you like to take over from my side and go through the financials?

Yes, sure. Thank you, Michael. Good morning, everyone, and welcome to the H1 2025 results presentation also from my side. In H1, we continued to execute on our strategic priorities to drive efficiency and innovation. We achieved stable orders in a very difficult economic environment as Western industrial production continued to be subdued. In parallel, we noted increased cautiousness among some of our customers driven by ongoing trade tensions and geopolitical uncertainties. And finally, the significant appreciation of the Swiss franc against all major currencies during the period had a negative impact on our financial results. I will start with an overview of our first 6 months, followed by an update on our end markets, including the results and will conclude with our outlook. At Oerlikon, orders were stable year-over-year at constant FX to CHF 826 million with a book-to-bill ratio over 1. This is a really strong achievement and the confirmation that our strategy to diversify away from automotive and tooling slowly benefits our company. Group sales decreased 3% at constant FX to CHF 786 million. This was driven by lower activity in our service business in the context of downturn in automotive, luxury and the general industries. Operational EBITDA margin was 16.7% in H1, down year-over-year in the context of difficult end markets, negative mix effect and FX. We are focusing on managing costs extremely diligently and continue further with our structural cost-out actions to support the margin. These actions across areas offering limited growth potential aim to gain agility and efficiency and expect positive effects in the second half of 2025. Moreover, as part of our pure play transformation, we optimized our portfolio towards structurally higher profitability. This resulted in the impairment of some R&D projects and assets at our Nitriding and Eldim businesses. Despite the current challenging environment, Oerlikon continues to drive innovation and successfully launched a new PVD equipment platform in [InSpeera] as well as a new thermal spray equipment Surface 2 and new CVD coating, BALDIA VARIA. With that, let me provide you an update on our end markets. Oerlikon is operating across the Tooling, Automotive, Luxury, Aviation, General Industries end markets. Particularly the General Ind. & Tooling show a close correlation to industrial production. In the first half of the year, the PMIs in the euro area remained in contraction, while U.S. and China stayed around neutral levels. In addition, the ongoing trade tensions led some of our customers to adopt a wait-and-see approach. And in the first half, our service business was down 5%. This activity is usually early cyclical and have particularly in the General Ind. & Tooling, a close correlation to industrial production. As such, we were impacted by contracting PMIs in euro area and close to neutral levels in China and U.S. In Automotive, global light vehicle production saw a slight increase in the first half of the year. However, regional disparities persisted with North America and Europe recording declines. Industry agencies forecasts have been recently revised downward but remain roughly stable for the full year. In EU, uncertainties generated by changing industrial policies create a challenging environment for our customers and delay investment decisions. In Flow Control, our performance is closely related to car model launches. The recent slowing momentum in the automotive production and the trade tensions are weighing on the reacceleration of car launch projects affecting particularly the U.S. We continue to drive innovations to make future mobility more efficient and sustainable, be it in the vehicle body or in the battery, hybrid or combustion powertrain technology. In Luxury, the market momentum remains relatively low for the time being with customers acting in a wait-and-see mode. This is primarily related to the weakness in the Chinese end market, inflation and some geopolitical uncertainties, which are dragging on spending power of the middle class. Midterm growth drivers for the Luxury segment remain well intact. With product quality, value for money and trend for more sustainable products, Oerlikon with its unique offering is well positioned when the markets pick back up again. In Aviation, we saw 6% passenger growth year-to-date with industry agencies expecting 8% growth in 2025. Rising flying hours are driving MRO activity and demand for our solutions. We see plane manufacturers reinvesting and upgrading old equipment. Our products are supporting them to develop more efficient and more sustainable aircraft engine technology. The trend had been confirmed at the Paris Air Show in June 2025. Overall sentiment from the key players is positive and all remain confident in the growth trajectory for the next years. Summing up, we see a continued subdued industrial environment. While PMIs remained in contraction in Europe and close to neutral level in the U.S. and China, trade tensions prompted some customers to adopt a wait-and-see approach. The positive trend observed in Aviation is confirmed. With that, let's where we are, discuss where we are with the financials. Orders in the first half of 2025 were stable organically year-over-year at CHF 826 million and sales slightly down FX adjusted at CHF 786 million. In light of a challenging industrial production and trade tensions environment, this is a very strong performance with continued market share gain over the period. Our diversification strategy across end market and geographies has been instrumental in this achievement. The first 6 months of 2025 were supported by organic sales growth in Aviation and Energy, compensating for lower organic sales in Automotive, General Industries, Tooling and Luxury. The book-to-bill ratio remained above 1 throughout the first half year, signaling our resilience despite market headwinds. Operational EBITDA in the first 6 months of 2025 amounted to CHF 131 million, down year-over-year. The margin had been impacted by transitory negative effect from mix and FX. Ongoing macroeconomic challenges and trade tensions are temporarily weighing on our service business. Although this business typically delivers higher margins, it is also early cyclical by nature. Oerlikon continued its structural cost-out actions in the first half as part of its pure play journey, which should support margin in the second half and will position us upon market recovery. I will come back on this topic in more detail later in the presentation. As part of the pure play, Oerlikon is updating its ROCE calculation and removed the effects from amortized acquired intangibles from the formula. This change aims to better reflect the core financial performance of the company. Our operational ROCE was impacted by the lower EBITDA in the first half. Through our strategic initiatives, we are committed to improving our return on capital employed, aiming to restore it to a level that reflects our long-term value creation goals. With that, next slide on Barmag. Barmag is presented as discounted operations, discontinued operations following the signature of a definitive agreement for its divestiture to Rieter. In H1 2025, orders in Polymer Processing Solutions improved sequentially at CHF 367 million. This represents an 18% increase compared to H2 2024. It is down year-over-year due to different seasonality in line with Barmag expectations. Filament orders were up 20% sequentially and came in line with the expected seasonality pattern. We see continued signs of momentum in small and midsized filament orders. When it comes to non-filament, we continued to see low order momentum in the first half of 2025, driven by weak PMIs. Polymer Processing Solutions sales for the first 6 months were CHF 352 million, up 9% year-over-year at constant FX. Operational EBITDA increased to CHF 29 million. This represents a margin of 8.2%; the transitory lower margin is due to the customers' price concessions granted in 2024 to maintain order volume. We expect recovering pricing levels and innovation to support margins beyond 2025. Furthermore, Barmag is about to implement ongoing manufacturing footprint optimizations. This will benefit Barmag Manmade Fibers profitability beyond 2025. With that, let's move on to our outlook on the next slide, please. When we presented our full year results back in February, we anticipated 2025 to remain a challenging year. That view was based on a careful assessment of the macroeconomic landscape and early signals of volatility across our markets. Since then, the environment has become even more complex. Tariff tensions and geopolitical uncertainties impacted a certain number of our end markets. Our diversification effectively helped mitigate the impact. In the face of these headwinds and the subsequent soft start into the year, we update our full year guidance. We now expect organic group sales in 2025 to be stable or to decrease by a low single-digit percentage at constant FX. In terms of EBITDA, we foresee a group margin between 17.5% to 17% for the full year, whereas the lower end of the margin range would be expected in the event of further escalation in geopolitical tensions. Moreover, our ongoing cost efficiency initiatives are expected to provide structural support to margins with tangible benefits already anticipated in the second half. Let's now recap for the first half of the year on the next slide. As we reach the midpoint of 2025, we remain focused on navigating a complex environment with resilience, discipline while continuing to execute our pure play strategy. Tariff burden has erupted, adding pressure to already fragile market dynamics and pushing some of our customers to wait-and-see mode. Geopolitical tensions have not only persisted, they are intensified, creating further uncertainty for businesses. In Europe, evolving industrial policies, while aimed at long-term competitiveness have introduced short-term unpredictability. In the face of these headwinds, we remain focused on what we can control. We are executing our strategy with discipline, maintaining financial resilience. We are accelerating our structural cost-out measures to enhance agility and efficiency with effects expected to support margins in the second half of 2025. At the same time, we continue to drive innovation, not only to stay ahead of the curve, but to unlock new growth opportunities in emerging technologies and markets. And finally, we are firmly on track with our pure play transformation, including the corporate cost adjustment, reinforcing our commitment to long-term value creation. Thank you very much. And with that, let's open up for Q&A, I would say.

[Operator Instructions] Our first question comes from Vogel Sebastian, UBS.

I've got 3 questions. I'll ask them one by one. The first one is on the indicated cost outs that you have mentioned for Surface Solutions. Is that also causing some extra costs in the second half? Or is it just a saving benefit that you expect there? That would be my first question.

So according to that, we expect savings for the second half of the year. We are on track with the execution. Potential additional costs in terms of, for example, severance packages will be part of a restructuring and will be normalized for the operational business.

Got it. Second question is on the trading volume or trading backdrop, so to say. Can you share a little bit your thoughts on order and sales momentum by the end of the second quarter and the beginning of the third quarter in your key end markets, i.e., general industry, automotive, luxury, and what you have seen there?

Is it to Marcus or is it to me?

To both of you.

Okay. Markus, do you want to start, or should I do?

Go ahead.

Okay. So first, before I answer that question, maybe one additional comment. All these tariff discussions, which we see and maybe you have, from sure you have realized that this EU-U.S. trade agreement is not a fully trade agreement yet because it's not formalized. It's the idea about this 15%. Switzerland actually is struggling with the 39%. So now we have 2 layers. The one layer is what does that impact us directly with our regional setup and organization, I think we can handle that in a proper way despite the fact that, for sure, exports to the U.S. directly out of Switzerland, we will seek to ask for exemptions, because in most cases, we are mission-critical. What is much more difficult to judge on is the indirect effect. So how does this tariff discussion is impacting the U.S. consumer behavior? How is it impacting the U.S. trade overall and how it is impacting the export capabilities of our customers in Europe. And still, we have 50% of our revenue in Europe, 25% of our revenue in U.S. and Americas and 25% of our revenue in Asia. So, to predict what the second half of this year and maybe first quarter next year is a little bit difficult. But what we see is that we had, let's say, a weak second half of '24, a weaker '25, and we see some stabilization. So anyway, to go for a 17% guidance, second half will have to be better than the first half, and part of that is the saving, but the other part of that is to stabilize our top line. Has that answered your question?

And a follow-up in that regard, more regarding dedicatedly for general industry, automotive and luxury was the demand that you have seen by, let's say, June, July, was that stronger than the average that you were showing for the first half? Or was it weaker?

As far as I have seen it, but maybe, Markus, you may correct me. Luxury is flat, not really increasing, not really declining. The only thing what we see is there is in our favor, an ongoing process, which was strategy to enter this market to walk away from electrical wiring and to work closer to PVD. So that percentage is on a good track. We have some really new innovations shown them, but they're working actually on how and in which way they want to place them in the market on the luxury side. On automotive, the picture is much more diverse. As you have seen that the automotive, especially the premier car manufacturers have shown massive reduction of their income situation. This is not changing any new models launched, but maybe that's changing the behavior to launch additional models. This could have an impact. Actually, I do see more fighters for flat and not for further decline. In outer order intake, I have not seen a decline yet.

Got it. And one very last follow-up. Generally, in terms of mix, can you provide us with sort of a rough ballpark of the business mix regarding to equipment versus powder versus services and where you're standing at the moment, if possible?

That's a little difficult, but I can share 2 things probably. 80% of our revenues actually have headwind and 20% have tailwinds. So that's the Aerospace part where we are in, that's running well. There are more orders, especially on the equipment side. Any equipment which we sell is further tracking than our service part. Service on the equipment side is in a pretty good ratio. We don't disclose that because that would go too deep into the reporting structures. And the Service business overall. So, most of our business, as you know, PVD is services. In Equipment, a decent part of that is services. where there's not a real service business that's in the materials business, that's direct sell. But to split that in percentages, I'm not in a position to do that now.

The next question comes from Billon Louis, Alpha Value.

Could you provide more insight on your exposure to the U.S. market? You have previously highlighted that the U.S. was a key growth driver. However, the U.S. sales are currently down year-on-year. Could you help us better understand the dynamics in the U.S. market? And do you expect potential tariff shift to have a positive impact on your U.S. growth? And are you seeing any of your clients, relocating operation or establishing manufacturing sites in the U.S.?

Let's start with the last part. A lot of our clients have U.S. sites, and it's for the moment, not visible for us that they shift massive production towards that site. So, one of our bigger clients, the Volkswagen Group, they have not the biggest exposure into the U.S. Audi has none, Porsche has none. If they plan to do something that would not work short term, that works mid to long term. Overall, our exposure in the U.S. is a good one. But as I said, it's 25% of our business is U.S. market directly. What is important for us is that a lot of our European customers who are exporting to the U.S. may have an impact, may have a positive or negative impact on the tariff situation. And that's why we are a little careful and cautious because that makes the whole world for us very very difficult to judge on because very often, we coat stuff, which is in a Tier 2 or Tier 1 situation, enters then a car or a product, and we do not know finally, is this product moving towards the U.S. and tackled by tariffs? Or is that moving to India or China and not tackled by tariffs? Or does it stay within the European Union. The predictability of markets within the last 3 months dropped a lot because we had seen, but I don't tell you anything new, and I don't want to hide behind geopolitics. But it's a matter of fact that the Israel situation is completely unclear. The Iran situation is unclear. Nobody talks about Taiwan anymore. Russia and China have just recently launched a common exercise with the Navy. We have a tariff discussion, which goes radically up and down. So now India is announced to get higher tariffs from the U.S. The European deal, as I said, in my eyes, is not really fixed because it's a handshake between the European Commission head and U.S. President, but there is not a real deal structure behind. And last but not least, we have to face this 39% threat on the Swiss industry. And here again, we can handle that somehow by our international network and our direct activities. It will have an impact, but it's an impact which we get probably under control. What we cannot handle is and what we can, it's difficult to foresee is that how this tariff situation is impacting our clients situation and overall behavior of customers to buy the equipment where we are getting our coatings on.

Yes. And Michael, thank you. And if I may add to that. So, if we consider the FX headwind and USD depreciation, we are actually flat year-over-year for the U.S. or for the Americas. So here, we have shown some resilience. And going forward, we see some upside in the energy, oil and gas, if the promised drilling activity is coming back. Here, we see a bit of a delay of the uptake of that. But don't forget, we have the world-leading technology with our new matrix material, a drill head that has set world records in terms of depth and growing through hard rock. So, if the drilling activities for generating new oil sources will come, this will be a great upside for us. On the tariff side, don't forget, and I want to mention this, I'm sure you're aware, but the service business is typically very local. We have a location in the U.S. and 100 miles around it or 150 kilometers around it is where you have the customers, except for materials and equipment business as we discussed earlier. But I feel we are flat in a very weak environment, which shows our resilience and shows that our customers really appreciate us as part of their partner in there and how valuable we are to their supply chain.

And may I add to what Markus was saying, and I don't want to overwhelm you with all these words and phrases. But when we talk about oil and gas industry, we have as well to differentiate between upstream, midstream and downstream. We have seen a good oil and gas industry in midstream, downstream, but there was no upstream. Upstream was half that. If there is now these activities of higher drilling, that would be in our favor because that's where we are engaged in the oil and gas sector. So, it's always important which part of the sector is moving actually, and this is, I think on one hand, it's on the other hand, it shows the resilience of the company because 80% of our markets are really in headwind. Despite that, we're still in a very high profitability level. And if then for the half year, and I stated that very often, a business like Oerlikon is very difficult to judge on a quarter base or half year base. When we do some impairments now, then we correct within the pure play story, we correct some developments, which have not either taken place or which have really materialized like in Nitriding, where the market volumes are consistently falling and not developing proper. And there we had to act on. But this is a correction, which is not talking anything about the operational strength of the company. It's not talking about the innovation pipeline, which we have. The only what we need is a little, little boost from the back in one of the other markets because 20% aerospace is 20% is good, and we will increase our market share there, but it's going over time. All the other industries, even semiconductor first half year was pretty weak. This is a market where we're building actually a position for us. But still that market, even that market is not a strong market.

The next question comes from Michael Foeth, Vontobel

Actually, 2, if you could make some comments on whether your midterm EBITDA margin target of 20% to 22% is still valid at this point? And sort of maybe on the back of your cost savings and streamlining, what the timeline to get there would be? That would be my first question.

So, Markus, I would like to start because; yes, it's intact, and it's massively depending on how our market environment is working. In that market environment where we are in, we are more in the 17% or 18% as we are working actually. But if some of these markets, and they will, by the way, we have not 80% of our markets is, I would say, most of industry because we're covering general industry, automotive industry, luxury, semiconductor industry, tooling, cutting tools, forming tools. This is a huge portion of industry. If some of that industry is joining, there is a very high opportunity to get on this 20% and further on in a given market environment, so if you ask me on time line, if the market environment next year is the same than this year, we are more in that area where we are actually, maybe a little bit higher because our savings are working and savings doesn't mean that we cut off something nonsense. We are simply additional drive our performance within the structures, procedures in that very pure organization, which we are now a little bit released of all this stuff, which was more too much corporate heavy. So, by the time line, it depends massively on the markets and depends massively on how the international community is thinking about Open Trade.

And maybe if I may add to that. And currently, we're looking into the possibility of having a Capital Markets Day next year. And with that, because it's really transformative mode for us right now, we can give you much better and much more concrete updates on that. So... Okay.

Okay. And I guess my second question probably gets the same answer. you redefine the way you calculate ROCE. And the question would be you still, it's still pretty pretty low and not in value-generating territory now. The question would then be what timeline you have in order to get value generative, but you will probably answer that at the same time, I guess, or if you want to make any comments on it now.

Sorry, that's the wrong answer. ROCE is something where we simply see that we have done significant investments and activities in the past. By the way, within our depreciation, there is a significant portion out of a very old deal that was the old Metco deal, which is phasing out over the next couple of years, but it was in '21, '22, still significant. There are some other activities where we're working, where we have invested, where we do not need to invest all the time. As for example, we had no on carbon coater and diamond coaters, which we developed, and we are now on a very good to introduce them into the market. So, there was things to be done where the ROCE was not in favor of that, as you mentioned. I'm not happy about a 4% or 5% ROCE, and there is a clear task to get that on a level, as you said, that we are capital accretive and not capital dilutive. And the timeline about that, it's in a shorter period over, let's say, over the next 2 years and not over the next 5 years. Market situation, it can be a year, it can be 2, it can be 1.5. Definitely, with the pipeline we have, and this is, and that should sound really encouraging for you with the innovation pipeline we have day by day, we take market share in a flat or even shrinking market environment, we take market shares from our competitors. So, the technology position of Oerlikon is a super strong one. The only what we need is a little bit more market to grow to strengthen that.

Right. And, but also, you're correct, you get the same answer, a more formulated view on that also as part of a potential CMD in 2026.