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

Ladies and gentlemen, welcome to the Oerlikon Conference Call and Live Webcast. I'm Miruna, the Chorus Call operator. [Operator Instructions] The conference is being recorded. [Operator Instructions] The conference must not be recorded for publication or broadcast. At this time, it's my pleasure to hand over to Stephan Gick, Head of Investor Relations. Please go ahead, sir.

Good afternoon, ladies and gentlemen, and welcome to Oerlikon's investor call on the signing of the agreement to divest Barmag. With me on the call are Markus Richter, CFO of Oerlikon. Markus will start the call with a presentation providing an update on the transaction rationale and our new pure-play perspectives. We will then follow up with Q&A. Please note that the call will purely focus on the transaction and its impact on our business. Our I-desk will support you concerning questions on today's published Q1 trading update. With that, I would like to open our presentation and hand over to Markus. The floor is yours.

Thank you, Stephan. Good afternoon, everyone, and welcome to our investor call where I will provide you an update on our pure-play strategy execution. As announced in the beginning of last year, we are about to finalize our portfolio transformation. If we go back to 2014, Oerlikon was an industrial conglomerate with 5 unrelated divisions. So far, we have focused the portfolio to 2 divisions. We received CHF 1.2 billion proceeds, which we partly returned to shareholders and partly reinvested into growth and resilience. In Surface Solutions, for instance, we entered new industries, including aviation, semiconductors and energy, we diversified technologies, and we moved closer to our customers. Today, the remaining 2 divisions are attractive market leaders in sweet spots with cutting-edge technology. They have, however, different end markets, geographies, customers, business models and cycles. We are, therefore, announcing today the unlocking of the pure-play potential of these 2 assets. Let me show you different positioning of both divisions in more details on the next slide. As you see on the left side, we have a high-tech Surface Solutions and Coatings business. It is highly diversified, both technically and regionally with a broad customer base of more than 30,000 customers. The top 10 customers account for just 7% of sales. The business has many different end markets with different application possibilities. Leveraging our innovation into these broad-based end markets is driving the division's growth. On the right side, we highlight Barmag, our Man-made Fiber business. The clear focus of the portfolio is on systems and components for the production of man-made fibers, largely a project business. The regional focus is clearly on Asia. The number of customers is concentrated. The top 20 customers account for the majority of sales. The division has an attractive cash generation over the cycle with selective growth opportunities. Summing up, the 2 businesses have different characteristics, hardly any synergies and no market overlaps. Today's announced transaction will therefore increase both divisions agility and unlock value for shareholders. Let me provide you with an overview of the transaction. As announced this morning, we signed an agreement to divest Barmag to retail, consistent with the 12- to 36-month separation plan time frame as announced in February 2024. The deal is expected to close in the fourth quarter of 2025, subject to receipt of regulatory approvals and other customary closing conditions. Both Eicker and Barmag have a long history of innovation, leadership and expertise in planned engineering for the global textile industry and APAC end markets. The combination will enable positive future development for Barmag by allowing the business to purely focus its strategy and capital allocation on its respective end markets and geographies. The transaction values Barmag at an enterprise value of CHF 850 million. Additionally, there will be an earn-out element of up to CHF 100 million subject to the EBITDA evolution of Barmag over 2025 to 2028. This represents an attractive through-the-cycle EV EBITDA multiple of approximately 6.5, excluding the earnout and slightly more than 7x altogether. We expect to receive an upfront equity purchase price of approximately CHF 700 million at the time of closing. We will use the proceeds primarily for repayment of our CHF 475 million term loan as well as for general corporate purposes and potential distribution to shareholders. With that, let's take a look at the value creation of this transaction on the next slide. By separating the 2 businesses and continuing rightsizing our overhead functions, Surface Solutions will become more agile, dynamic and independent. This will set free management capacity, supporting efficient operations in the current challenging geopolitical environment. We have a very solid plan in place to rightsize the corporate cost to the smaller company setup and ensure future cost efficiency with expected annual savings of CHF 13 million. Besides SG&A cost measures, we already initiated merging our group overhead functions with those of Surface Solutions last autumn. We target to eliminate all overhead costs, which are currently borne by Barmag. In parallel, we are profiling a distinct brand. We are positioning ourselves clearly to our customers and investors as the pure-play Surface Solutions market and technology leader. Last but not least, the Surface Solutions market is highly fragmented. We see plenty of organic and inorganic growth opportunities in terms of applications, end markets and geographies. Following the separation, our focus will be purely concentrated on these opportunities. Summing up, we are working on various levers to unlock shareholder value. We are highlighting the attractive positioning and strong USP of the pure-play Oerlikon on the next slide. Oerlikon is a market and innovation leader in cutting-edge surface technologies such as PVD and thermal spray. The application of these technologies represents an attractive niche market where application know-how of interdisciplinary sciences is required. Oerlikon is at the technology forefront for almost a century and has built up a long-standing customer relationship alongside a strong brand. Our strong credibility is supported through our integrated product and technology offering. The company benefits from a highly scalable global footprint, enabling leveraging of shared technologies and AI for low marginal cost. In the last decade, we have diversified our end markets and positioned us closer to our more than 30,000 customers. This makes us in today's challenging economic environment, more resilient and positions us well to benefit from a potential market recovery in the midterm. Another sweet spot characteristic is our value proposition for our customers, delivering technology with a high impact at a relatively small cost. Summing up, Oerlikon has a strong positioning, serving as a fundament for profitable future growth, as shown on the next page. Oerlikon is an enabler for efficiency, performance and sustainability. This drives demand and growth for our solutions in the midterm. We are capitalizing on the increasing demand for Surface Solutions by driving geographic expansion. We have introduced a new regional organization in 2022. This supports us in accelerating our expansion into Americas and APAC where we are underrepresented compared to Europe, which is our home turf. In parallel, we are leveraging technology leadership into new areas such as battery shielding and we are strengthening our offering in existing workers. Unlike 2014, we are today present in industries like aviation, semiconductors and energy. All of them have attractive growth potential in the midterm. Summing up, all ingredients are in place for profitable 4% to 6% sales growth in the midterm. In the short term, we are exposed to soft end markets and PMIs. We therefore conclude our presentation with an update on our 2025 guidance. Following the signing of the agreement to divest Barmag, Barmag will be reported as discontinued operations. In the profit and loss statement, the results from Barmag will therefore be shown as a single line item result from discontinued activities, including retrospective adjustments for comparison periods. This has an impact on our 2025 guidance provided in February, which included Barmag. You find our February guidance on the left side of the slide, and we align it to the pure-play scope on the right side. We continue to expect flat to low-single-digit percentage sales growth despite soft end markets, particularly in luxury. While we previously expected 18.5% to 19% operational EBITDA margins for Oerlikon Surface Solutions, our guidance for Oerlikon is approximately 18.5%. This reflects the corporate costs, which were borne by Barmag so far. We are executing on a clear plan to eliminate this corporate cost overhang going forward and expect to lower the overhead costs by CHF 13 million. As with regards to the current geopolitical environment, we are recognizing increased macroeconomic uncertainties arising from potentially prolonged trade conflicts. Oerlikon is closely monitoring the situation, maintaining a strong focus on pricing and cost efficiency. With that, let me open up for Q&A on the transaction.

[Operator Instructions] The first question from the phone comes from Michael Foeth with Vontobel.

Congratulations to the deal. First question would be in terms of the use of the proceeds. Why are you not considering to deleverage the balance sheet further rather than paying out after shareholders or eventually making additional acquisitions or keeping some firepower on the balance sheet? That would be my first question.

First of all, thanks for the congratulations, much appreciated. The proceeds will be definitely used to improve our balance sheet position. We will use the proceeds to pay back a term loan of CHF 475 million, which was used at the time for the Riri acquisition. On top of that, we will have to decide what to do with the remaining part. The midterm for our leverage is certainly to be under 2x, so with that, you can be assured that improving the balance sheet and deleveraging is a top priority. The exact split of the proceeds will come in due course.

Okay. Then my second question would be on just financials. If you could help us what tax rate you're expecting for the stand-alone Oerlikon business and what net working capital intensity that stand-alone business has, if that's already possible to say.

So for the 2A, I would say, we expect right around 27% tax rate for the stand-alone for net working capital, as you suggested, at this rate, it's a little bit too premature to have a good number for that. We'll update once we have more details.

Okay. And then the final question would be if there are any changes to the management structure planned following the announcement of the deal? Or will -- or do you have any plans to change that only after the closing of the deal.

So for the management model will remain intact for the moment. The Barmag is -- if we consider Barmag, it's carved out unit for us, which we hand over to Rieter. For [ Remain Co, ] we are in place in position. No changes are to be expected at the moment. However, if we look at the executive share model right now, has been announced, and I want to reiterate that next generation of management has been onboarded, and we expect that the double or the chair model that we have right now, will be discontinued latest by H1 2027.

[Operator Instructions] The next question from the phone comes from Sebastian Vogel with UBS.