dormakaba Holding AG (DOKA) Earnings Call Transcript & Summary

Ladies and gentlemen, welcome to the Half Year Results 2022/23 dormakaba Holding AG Conference Call and Live Webcast. I am Alice, the Chorus Call operator. [Operator Instructions] The conference is being recorded. [Operator Instructions] The conference must not be recorded for publication or broadcast. I would like to remind you that the conference call does include forward-looking statements, which are subject to risks and uncertainties. Listeners and readers are therefore strongly inquired to refer to the disclaimer, which is part of today's media release. At this time, it's my pleasure to hand over to Jim Heng-Lee, CEO. Please go ahead.

Thank you, operator. Good afternoon, ladies and gentlemen. It is my pleasure to welcome you to our webcast and dormakaba's half year results for 2022/2023. With me today is our new CFO, Christina Johansson, welcome. This is a quick preview of today's agenda. First, we will give you an overview of our results. I will then next provide you some insights into our current operating environment, and I will update you on where we stand with the implementations of Shape4Growth strategy. I will then go into more details about how we perform at group level and in our regions. Next, Christina will lead you through details of our financial performance. Lastly, we will talk about the outlook for the current financial year. Then you will have the opportunity to ask questions. Let me summarize our performance in the first half of this financial year '22/'23. We posted strong organic sales growth, mainly driven by pricing. There was strong growth in Region America and Key Wall Solution as well as good growth in Asia Pacific and Europe and Africa. Our adjusted EBITDA decreased due to currency exchange rate effects and higher energy, material and labor costs. Our adjusted EBITDA margin stands at 13.0% in line with our expectations. We saw positive growth effects, offset by a negative product mix, an increase in functional costs due to investments in profitable growth initiative and slower volume growth due to reduction in customers' inventories. It's pleasing to note that net cash from operating activities more than doubled to CHF 104 million. Our net profit decreased due to a lower EBITDA contribution and higher financial expenses. Let me give you some insight on our current market environment. We continue to be one of the international market leaders in an attractive industry. By 2050, 2/3 of the world's population will be living in cities and smart cities, I mean, dormakaba will be a main player in setting standards for smart, sustainable solutions across building lifecycles. However, our industry, like many others, is currently operating in a challenging and yet fluid macroeconomic environment; affected by geopolitical instability, this could impact global economic growth. Inflation, rising interest rates, higher material and labor costs and the decline in economic activity could have a negative impact on our profitability. And there's still some risk of construction delay due to COVID-related restrictions. Specifically, the destocking of customer inventories had an impact on our performance. To our relief, we are also seeing that supply chain shortages are somewhat easing. So where do we stand in transforming dormakaba into an organization that delivers sustainable, profitable growth? As I said last fall, we continue to focus on accelerating our profitable growth through sequential improvements. Shape4Growth is about focus, it's about customer centricity, it's about efficiency. Overall, we are on track. Here are some examples. Our new operating model aims to reduce the company complexity and increase efficiency. Part of its implementation is a global reduction of 300 full-time equivalents, of which almost 200 were already realized by the end of December. We have also reduced complexity in our America sales organization while investing in building up specification writers and specification getters. We see a significant increase in specification output and are confident that these will translate into sales in due course. We see progressing -- we see progress in transforming our America business, which is the key for the success of our strategy. Our strategic focus on our core business was confirmed. Our core product together outperformed the group average in organic growth by 200 basis points. We will be focusing on our new technology development efforts on digitally connected platform solutions. And in response to a challenging business environment, we have launched a cost efficiency program across the entire dormakaba organization. Increasing connectivity lays the foundation for driving additional customer benefits from experience to productivity to sustainability. We aim and we want to disrupt this industry with smart integrated digital offerings, adding value across the building life cycle. I am convinced that we are the company to deliver this integrated future. Shape4Growth includes a clear vision for our future offering group around 5 principles. Developments will be supporting our connectivity strategy. Our new solutions will be embedded into EntriWorX ecosystem. We then enable integration as a core element of our broad strategy. New product design will start with a clear value proposition, supporting our service strategy. And last but not least, new development will articulate a clear value proposition, supporting our sustainability strategy. Our global product roadmap has been redrawn to reflect these 5 major principles. We will present this first results at the coming key industry trade fest, namely ISC West about '23. In an increasingly populous and digitized world, access and security are no longer simple mechanical processes. But an integrated part of the urban infrastructure and a key to smart people flow management. dormakaba is an international leader in smart and sustainable access solutions. We are a partner of choice for customers managing complex products around the group. As an example, to illustrate this, our offering has convinced Kempinski International to select us as the official global supplier for all hotels owned or managed by this famous brand. We are proud. Our contribution will include individual product, complete solutions and a range of services from planning to installation to ongoing operations are all designed to support our customers' reputation for excellence. As you know, sustainability is part of our strategic positioning and helps to differentiate us from our competition. We made significant progresses. The world's largest and most trusted provider of corporate sustainability ratings, EcoVadis, recently awarded us its Gold Medal. Last November, we achieved brand status in the ESG rating of ISS. And at the end of 2022, CDP raised our ranking from B to A-. And Europe's largest associations of wholesalers and distributors in the construction hardware and fitting industry named us as -- named dormakaba as the Best Sustainability Program in 2022. I will shift here to look at the groups and regional performances. On a group level, we achieved year-on-year sales growth of 5.2%. Organic sales increased by 8%, 6.5% was driven by price realizations and 1.5% by volume. Adjusted EBITDA decreased by 4.6% and to CHF 184.6 million. The adjusted EBITDA margin was at 13%. Price realizations and efficiency improvement in this half year could not offset a negative product mix and slower volume growth due to destocking of customers' inventory. We also saw increased costs due to investment in future profitable growth. Items affecting comparability came to CHF 14.0 million and are mainly related to reorganizations and restructuring costs. Into regional performance come Region America. I'm happy to report that almost all markets and all product classes in the region contributed to increased sales. There was double-digits growth in service access control solution and access automation solutions. Organic sales growth was 8.2%, driven by higher sales prices, steady U.S. commercial construction activity, robust growth, a multifamily housing demand and a positive performance in Latin America. The adjusted EBITDA margin decreased by 70 basis points to 17.6%, which was mainly due to an unfavorable product mix. Moreover, price increases could not compensate for elevated cost inflations. In the Americas, we are currently developing entry works planning 360 as a new platform for specification writing and project coordinations, providing real-time coordinations of electronic and mechanical access solution will increase end-to-end productivities and alignments for designers, manufacturers, contractors and channel partners. Turning to region, Asia Pacific. We experienced some challenges due to COVID-19 restrictions in China, which is one of our core markets in APAC. But yet we still generated organic sales growth of 5.1%, driven by higher sales prices and volume gains in both sales and services. This growth was supported by all markets. We performed particularly well in Australia, as an example. We also saw positive contributions by global core products, including door closers and entrance systems. Our adjusted EBITDA margin increased by 160 basis points and was well supported by price development, cost management and efficiency improvements. Region Europe and Africa, almost all our markets within Europe experienced solid sales increases. Germany, in particular, delivered double-digit growth due to strong project activity and price realizations. This led to a total sales growth of 7.1%. However, a negative currency effect of 7.0% led to an overall sales figure unchanged from last year. The adjusted EBITDA margin for Europe and Africa stands at 18.8%. It was affected by inflation, continued investment in operational improvement and lower sales for access door hardware products, especially door closers. In Key Wall Solutions, overall organic sales growth climbed to a combined 14.3% year-on-year. Key systems saw 6.8% organic sales growth, with all the geographies contributing. On the other hand, movable walls, we are pleased to see the organic growth of 25.3% in movable walls. The business clearly continued to convert part of its COVID-related project backlog into sales. We also saw benefits from market share gains and increased market presence. The adjusted EBITDA margin increased by 470 basis point to 17.4%. This increase was largely driven by improved product profitability. In movable wall business unit, higher sales prices and volume further compensated for cost inflationary impact. With that, I close my part of my presentation. I will now hand it over to Christina, who will give you more insights on our financial performance. Christina?

Thank you, Jim-Heng. Ladies and gentlemen, from my side, also a very warm welcome to our half year analyst conference. My name is Christina Johansson, and I joined dormakaba as CFO on December 1st last year. I'm very much looking forward to meet all of you soon in person. Today, I will guide you through our financial figures for the first half of the '22/'23 business year. The first slide is a reminder of what we changed in our operating model in the second half of '21/'22, which is important for the understanding of our segment reporting. Because of the new operating model, we restated the previous year for the segment reporting. I would like to remind you of the steps we took so that you can better understand why the segment numbers now look a bit different. What you see on this slide is the starting point of our old operating model with a 4 access solutions segment, Key & Wall Solutions is not affected by the changes. In the first step, we made some organizational changes, such as merging AS DACH and AS EMEA into the region, Europe and Africa. In a second step, we moved the new global functions out of each legal entity. These functions include marketing and products, product development and global operations. Moreover, we split the corresponding legal entities into sales and plant organizations to form global operations. This was a crucial step in implementing the new operating model. In the third step, we reallocated the operations and marketing and products, global functions back into the 3 regions based on value creation and the full value chain concept. This now gives the full picture for regional development. Product and development remains a standalone segment. That should also give you a clearer picture of our R&D investments for the future. All of this has been done in order to provide clear responsibility and transparency for our company steering, clear customer orientation and customer centricity and strengthened focus on performance and value creation. For full transparency, we have again disclosed the transition from the old operating model to the new operating model for the first half of the '21/'22 financial year in the notes to the financial statements. In addition, we have also simplified the principles for internal audit cost allocation as of July 1, 2022. In alignment with the principles of the Shape4Growth strategy, previously, charges to the segments were based on consumer services within the service catalog. The new structure reflects IT cost by user as a share of the total costs. The change structure increases the transparency of segment performance and functional cost based on the full IT cost per employee. To reflect this change in the internal accounting policy, functional cost in the consolidated income statement as well as the financial performance of the individual segments in the segment reporting have been restated. We have disclosed the correspondence of these costs in the chapter that restates prior year financial information. Let me then run through the key figures. Overall, our net sales totaled CHF 1.4 billion, with sales growth of 5.2%. We reported a very strong organic sales growth of 8% for the dormakaba group. Further, we had an adjusted EBITDA of CHF 184.6 million, which is 4.6% below the previous year. Our adjusted EBITDA margin decreased by 130 basis points to 13%. And this due to volume shortfall in access hardware solutions, a negative currency exchange effect and also a negative product mix outcome as well as investments in growth initiatives related to the Shape4Growth strategy and here, especially in sales and marketing and PT. Net profit stood at CHF 84.9 million. Return on capital employed was affected by the increased level of net working capital and a lower profit margin and ended at 23.3%, which is 250 basis points below the previous year first half. Then coming on to the sales development. The top line was driven by organic growth of 8%, of which 1.5% was volume growth and 6.5% attributable to increased pricing. M&A added a further 0.1% to net sales. Currency translation effects were negative, reducing the sales figure by 2.5%. All regions contributed to organic growth, supported by strong pricing measures. Volume grew by 2% in the region, Europe and Africa as well as Asia Pacific and 1% in Americas as well as in Key & Wall Solutions. Moving to the adjusted EBITDA. The picture is slightly different. The adjusted EBITDA, as I said, declined by 4.6%. There was a negative currency translation effect of CHF 4.5 million. There was further a positive margin squeeze effect of 2% due to higher sales volumes and increased sales prices. However, this effect was more than offset by a negative product mix effect from lower Safe Lock sales and higher functional costs, mainly due to strategic investments in growth initiatives such as an FTE buildup in specification. Additional factors included inventory revaluation and lower margin contribution from production plant due to lower volume for access door hardware. In particular, door closers contributed less as customers destocked inventories in response to increasing supply chain constraints. These factors impacted margin, especially in the region, Europe and Africa. In Region Americas, the adjusted EBITDA margin declined as well. Key & Wall Solutions and the region, Asia Pacific, however, increased their operating margin. Asia Pacific also did so despite the challenging situation in China from Covid-related lockdowns. M&A activities improved the adjusted EBITDA margin, mainly due to the Mesker divestment last year. Benefits of other acquisitions in '21/'22 were offset by the divestment of the interior glass business in the same year. I will now proceed to the condensed income statement. The gross margin for the reporting period was 39.4%, below the previous year's level of 40%. This is due to inflationary pressure on materials and engineered components as well as increased labor costs. The gross margin was further affected by lower capacity utilization in our production sites for door hardware products, primarily due to destocking of inventory along the whole supply chain, which resulted in lower sales and some inventory impairment. Sales, marketing and general administration costs rose to CHF 364 million. This increase was primarily because of investments in growth initiatives. The net financial result for the first half of the financial year amounted to minus CHF 17.7 million. This is attributable to higher net debt from net working capital, dividend payouts and slightly higher interest rates. The income tax decreased slightly. The tax rate increased to 26% due to onetime benefits last year. The items affecting comparability were at CHF 14 million on EBITDA level. They consisted of reorganization and restructuring expenses, CHF 6.6 million, of which are attributed to ERP harmonization and IT infrastructure optimization. Now a couple of remarks on the cash flow statement. Cash flow from operations increased to CHF 137.6 million due to a sequential improvement in the net working capital. Net cash from operating activities stood at CHF 103.9 million. This represents an improved operating cash flow margin of 7.3%. Inflationary pressure was partially offset by stock reduction programs, resulting in an inventory buildup of CHF 28.4 million compared to CHF 71.7 million in the previous year. Despite organic sales growth of 8%, our trade receivables only increased by CHF 2.7 million. Net debt increased by CHF 28.4 million to CHF 736.7 million, mainly driven by inventory buildup and dividend payments for the financial year '21/'22. As you will see in the notes to the financial statements, we also have a change in the mix of the financial debt. In October 2022, a new CHF 275 million, 3.75% corporate bond, which is during 2027, has been secured on the Swiss debt capital market. This was to refinance the CHF 300 million bridge to bond credit facility with a major Swiss bank. The financial debt profile now shows again a balanced short and midterm maturity profile. Overall, financial leverage was 2x. The company fully complies with the covenant of the syndicated credit facility. With this, I thank you for your attention, and I would like to hand back to Jim-Heng. Thank you very much.

Thank you. Thank you, Christina. I will make a few remarks on what lies ahead before we come to the Q&A sessions. But first, let me point out some changes to our Board of Directors. As you know, the Board announced an accelerated staggered renewal in 2022 last year. As part of this process, Riet Cadonau will step down as Chair and member of the Board as of 30th April this year. I want to thank Riet Cadonau, also in the name of the Board and my colleagues on the Executive Committee for his valuable contributions to the developments of dormakaba and his tireless commitment over so many years, and I wish him the best of luck and every success in his future. Svein Richard Brandtzaeg will take over as Chairman on 1st May 2023 and Thomas Aebischer will assume the role as Vice Chair of the Board. Before we take your questions, I would like to share with you how we see the current business environment as well as the outlook for the second half of '22/'23 financial year. The global macroeconomic and geopolitical situation is categorized by limited visibilities and uncertainty. Our customers in the commercial property and construction industry remain exposed to the twin pressures of price inflation on one hand and higher interest rate increase -- higher interest rate on the other as well as supply chain disruptions. Under these circumstances, dormakaba expects a sequential improvement to a slightly higher adjusted EBITDA margin for the full financial year and continued organic growth above our midterm target range of 3% to 5%. Independent from macroeconomic conditions, we are strongly committed to improve gross margins and profitability, and we will therefore continue to focus on implementing our Shape4Growth, strategic initiatives and taking targeted measures to reduce the cost base of our entire organization. With that, I close our presentation for the first half of the 2022/2023 financial year. And Christina and myself, will be taking your questions. And before that, can I ask operator to give instructions on how to ask questions remotely. Alice, please?

[Operator Instructions] Our first question comes from the line of Patrick Rafaisz with UBS.

I have 2 or 3 questions, please. The first one is just on the EBITDA margin in the Region Americas. And I understand what you said about things like hiring specification teams, maybe some slow passing on of inflationary pressures with pricing, but I was still surprised to see the margin drop here, especially with Mesker Door's now out of the mix. Can you maybe explain a bit more what happened? What was the main driver here of the cost? And how much do you expect to maybe recover near to midterm here? That's the first question.

Patrick, let me try to understand your question better is around America. You wanted to better understand the margin development in America and what is the expectations. In America, I'm of the strong opinion that we must get the basic right. The basic to me is where we got to get customer centricity, stickiness to our customers, even in the basics of trying to make sure that we deliver what was ordered on time, every time. I repeated that emphasis last fall. And if I remember correctly, it was also the first time March 2, 2022. Without that basic right, I think Americas opportunity will never realized. The truth is that the margin in America had sequentially improved. We have increased our margins by almost 1 basis point to what 1 percentage closely to what we are now. And clearly, we see that continued investment in specifications. We'll continue to improve our order pipeline and create a demand situations. And we have also done numerous things, as an example, in getting our sales team closer to the market in making sure that we are reducing the complexity of our organizations. There remains work to be done, Patrick. And my view is that we are on the right path, and we will continue to sequentially improve in these regards. Your second question, Patrick?

Okay. Yes. And then staying with margins, but now more on the midterm, right? So I mean it's clear what you've guided for this fiscal year, a bit better than the 13.0%, which we saw in H1. So let's make it, I don't know, 13.5% for H2. But the bridge then to your midterm target is, in fact, very steep, right? And it looks like a very back-end loaded performance, if you were to achieve that. Can you maybe explain where your confidence is coming from what the main building blocks are for you now to head to that range?

Let me, Patrick, first of all, put this into context. When Shape4Growth was announced back in November 2021 it was a different world than what it is right now. The world has changed quite a lot since then, and we are no longer operating dormakaba is no longer operating in a normal market conditions environment. We are committed to sequential improvement, and we did achieve our guidance for the first half of this financial year at 13.0%. We intend to enter the range of 16% to 18% adjusted EBITDA in the course of 2025/'26. We confirm the organic growth and the ROCE, ROCE as well. This is where we stand right now, Patrick.

Okay. Okay. I get it. And then the last question is I'm sorry, it's still on margins, right? And now looking at the mix for the remainder of the fiscal year. And it seems that in various segments, the mix was a problem, right, with door hardware, closers and the destocking of customers. Is that already reversing or stabilizing or how do you expect that the mix development for the rest of the year maybe into the first half of the next fiscal year?

Patrick, I took comfort from our first half performance in terms of being able to have price contributions to 6.5%. It confirms dormakaba's status as a market leader in the industry, and this is an attractive industry to be in. The first half outcome was a relentless effort to fight against inflation. In the process of fighting inflation, we encountered destocking activities due to our customer repositioning their inventory position. And we ended up in a situation where we are. Going forward, we have to continue to evaluate our position, and we are currently evaluating a position in views of different markets, different volume elasticity to price movement as well as our competitive strength in the different product classes. Sufficient to say, we have to drive sufficiently enough high-margin traditional bread and butter businesses of dormakaba, and these fall into the door closer range. And effort is already underway. The tailwind that we have from pricing that will drive growth will be increasingly challenging, but we continue to believe that with the unique offerings of dormakaba focusing on verticalization and solution offering, we are able to continue to command a premium in most of our geographies across our markets.

The next question comes from the line of Maidi Rizk with Jefferies.

Christina, welcome to the board. I have a few questions, and I'll take them one at a time. So firstly, Jim, I just wouldn't talk about this destock and I'm a bit surprised by it because your peers have seen it in the residential side, not on the nonresidential side, which you are mostly geared to. Can you first just help us quantify destocking and tell us whether it happened amongst your distribution customers or its OEM customers? Any color on selling versus sell-out? And where do you see overall distributed inventories at this stage? I'll start there.

Rick, it's a mixed picture here. I mean, let me try to walk you through our major markets. In Europe, that's where we experienced quite a bit of destocking in the first half of this year. In Germany, we see that the destocking is going on, and it is happening. However, we are not seeing a decline in the order situations. In Austria, destocking in the process of door hardware is happening. And clearly, we are also closely monitoring the situations in the other major markets, United Kingdom, Netherlands, France and Spain. The impact of destocking in these markets are rather pronounced. We can see that orders are now returning, but somewhat at a lower pace. We are primarily active Rizk, as you know, in the commercial and not so much in the residential market. However, we have as well a channel that's selling in the residential market through the OEM manufacturers. And that's where we are also seeing a slight destocking effect and also a reduced level. So all in all, the cost of inventory is the motivations for the destocking. And it is also interesting to note that our customers have greater confidence in dormakaba's supply chain capabilities that they feel that the safety stock we had enough. So therefore, this is also triggering the destocking at year-end. And the external market uncertainty, especially in the residential is also affecting the OEM channel, the new manufacturer channels that we are serving. So that is, in a nutshell, the entire situation, we do not see quite a lot of that happening in Asia Pacific and America is a mixed bag between what you see between the smaller market in Europe and also in Germany.

The second one is it's just really a follow-up on what you've mentioned before. You said we're operating in a different world versus when Shape4Growth was announced. So in this environment of slower growth in, does it really make sense to still commit to the same Shape4Growth investments that you sort of initially targeted? And while I'm at here, can you just give us a sense for how much savings you achieved in H1? And how much Shape4Growth investments have been deployed in the period?

I will leave the second part of the question to Christina. I'll first try to put a picture around how we see the Shape4Growth investment. What Shape4Growth has committed was around customer centricity. Leadership in the core, investment in core countries, marketing, hands all product developments that are channeling to these leading geographies. And this is an important part of our strategies. In this regards, we continue to invest in specifications in America that we are now seeing, clearly, after the reorganizations of our spec team, we are seeing clearly that we are generating more output to the tune of 60%, and that we will continue to drive. And equally, it's true that I explained to you earlier on about dormakaba being an established a connected integrated solutions in EntriWorX as an example, it is a planning crew that will allow us to create pull-through demand at the upstream level. And this is one project that we have invested quite substantially in Europe and in America, and we will continue to do that in order to bring it to fruition. However, on the other hand, we have also generated FTE, full-time equivalent reductions to the tune of 200 that we have committed 300, and the saving has now come through in the first half of this year. So we have to be selective in order to strongly project dormakaba unique competitive advantage and unique selling argument in order to bring their customer centricity to the forefront.

Sorry, I think...

Go ahead, Christina.

I think when we relate to that the market conditions have changed since November '21, I think it's visible in regard of the volume growth that we have achieved in the first half, the expectations were higher than we would have higher volume growth. And we also then expected that we would need to invest to support this growth, which you also clearly see in regard of sales and marketing and R&D costs that have increased if you compare with the year before in the same period. But on the other hand, we have taken action at the later end of the first half year to be more I would say, a stricter cost management in regard of people, but also areas like travel expenses and professional fees. So we see that we have achieved at the later end of the second half more savings. And we have also, of course, been working extremely hard on the procurement side to be able to compensate through procurement savings, also the increase in costs. So it has been a combination, but the intention was obviously to create more volume growth than what we saw in the first half, and we wanted to get ready for that. I think we need to slow down a bit and definitely now in the second half, be more cautious when it comes to our cost structure and make sure that we, in the second half, are having a good trade-off between getting ready for the future, but also performing in the short-term perspective.

Christina, can you quantify the savings? I think you had procurement savings of 1% to 2% of CHF 1.2 billion and CHF 30 million of SG&A or the operating model. How much of that was achieved in H1?

I can only say that we are in line with our expectations when it comes to procurement savings, not mentioning a short-term number here. But procurement is contributing to compensate some of the inflation costs that we are seeing, especially on the labor cost side because, of course, labor is the largest cost factor for dormakaba, and we have all around the world, of course, seen that the labor costs have increased more than we expected, and especially in U.S., which has been the biggest challenge in the first half.

The next question comes from the line of Martin Flueckiger with Kepler Cheuvreux.

Martin Flueckiger from Kepler Cheuvreux here. I've got several questions, and I'll take one at a time. Could we first go back to the topic of pricing and the 200 basis point squeeze that was mentioned earlier on. And what your targets are specifically for the full financial year '22/'23? That will be my first question.

I can start off on that question then Jim-Heng add if there is anything. I think we have done a terrific job in regard of trying to make up for the cost increase, especially in energy, labor and material to get this pricing up all through the dormakaba Group. So we actually manage that very well. But then on the top of that, in the gross margin, we had some negative effects that then forced us to lower the gross margin versus last year; things like inventory impairments, factory utilization, the mix. So in total, we then lost in the margin for gross margin. When I look at the cost increase versus the pricing, we achieved what we had said. And going forward, I think it is one of the most difficult things to predict in a short-term perspective because the inflationary numbers are obviously looked at from a month to month. We see certain areas like logistics or energy where the price level and the inflation impact is slightly reduced in the last months. But on the labor side, I personally believe that we will see a continuous increased pressure on that side. So it's difficult to say what the cost increase overall will be going forward. I can now you say that we are determined to continue to try to compensate for whatever it will be on the cost side, on the price side, to get the price increases in all our key markets here. And we've done it very well in the first half, so I'm convinced that we will also manage that in the second half. Jim-Heng anything?

Sorry, can I just follow up on that I get your answer, and I understand the complexity of the issue, but I'm just wondering what kind of target you've set yourself? I mean you've got your 200 basis points positive squeeze already. Do you plan to maintain this stable at this level or do you see down or upside risks to that number?

Well, it depends, I would say, mainly on the mix. Obviously, it's also a journey of learning. I think not only dormakaba, but also many other companies have never experienced this kind of inflation rates that we saw last calendar year before in the career. So it has been a learning curve here in trying to test the markets, the trade-off between volumes and price increase. And I think we have gained a lot of more insight during the first half year that we now will utilize. I think we have a clear picture of our product clusters in our markets where we can push the price further and where we will mainly then pay a very high pricing volume, if we exceed. So I think the learning from the first half will help us to get a better gross margin outcome in the second half. But I'm only saying that before I know what the inflation impact will be. But we have, of course, learned a lot during last calendar year here.

Sorry, I thought you were going to add something. But if not, can I just follow up on my second question functional cost.

I thought you were done.

Sorry?

Yes, go ahead.

The functional costs were also mentioned in the press release or the financial report as the main reason for the EBITDA margin being under pressure. I was just wondering what kind of increase do you expect for the second half? It looks to me, if I look at SG&A and R&D, they were up like CHF 25 million, CHF 26 million year-over-year. Is that an incremental number that we should also expect for H2?

I think we will try to improve. If you put these costs in relationship to the top line, I think there is potential to reduce the percentage. We try to adjust to the volume growth, which is the right KPI to measure again and see what we can do in a short-term period of time. And of course, it does -- it is important that we invest in the future. And we still believe in volume growth. The question is just how much longer will it take to get to the volume growth that we originally planned. And we need to be having a good trade-off here between investing in the future and then at the same time, to be in control of our cost structure. So we are working hard both on the sales and marketing cost structure and the R&D, not to harm the future, but to be more efficient in regard of using the resources we have, and you will probably see that the percentage will be slightly lower in the second half.

Great. Then my final and third question. Could you update us, please, on the planned restructuring charges or items affecting comparability, as you call it, for the full year? And what kind of cost savings we should put into our EBITDA bridges for '22/'23?

I mean with CHF 14 million as adjustments in the first half, right now, I would assume a slightly lower number but still a number in the second half as well. I mean it's related mainly to transformation of IT infrastructure, which helps us to work closer together and then to reduce our maintenance costs going forward. But we are not talking about a huge magnitude here, CHF 40 million first half, maybe something below CHF 10 million in the second half is what we are expecting right now.

Okay. And sorry, the cost savings from the restructuring?

I can't give you a number because that would be then mainly for next year going forward. I mean, we are guiding for next year a sequential improvement on the EBITDA, and that would also include, of course, some kind of benefit for now reducing the IT infrastructure, but I cannot give you an absolute number.

The next question comes from the line of Martin Husler, Zurcher Kantonalbank.

I have also 2. The first one is on hardware solution and Safe Locks, which you quoted as having a negative impact on the margin. Can you share some maybe details on how important those businesses are in terms of contribution to group sales? And what are the margins roughly of those 2 product lines?

I mean AH, access hardware solutions is an important part of our business, and this is referring to our door closers and architectural hardware and so on. It has significant contributions. And with Safe Locks, the reason why we have a negative impact was due to the lack of ATM activities that are not taking place in America. So going forward, we will continue to focus on ensuring that the door closers business are really an area of focus in terms of making sure that the customers demand are being satisfied through even the basic of supply chain. We have to make sure that these are really quick ship programs that we have put in place and also for many of the products that we can actually turn into opportunity. And one quick one is really a door closers that we have put and launched in America called the EHD 9000 door closers. This will help us tremendously as an example. Now the Safe Lock business continued to be a profitable one. And clearly, in our regard is that it will come back, and we just got to be patient here.

But you won't share any quantitative information on the importance for the whole group?

We don't provide such information. I'm sorry, Martin.

Sure, no problem. Then maybe on the positive side, can you elaborate a bit on the growth and margin in movable walls. Is this increase sustainable or are there some kind of catch-up effects that we should be aware of? Or is that now a run rate we could assume also for the near future?

I think we have to look at the movable wall the performance that we had 2 halves and a year. It is growing around 27% organically, the movable wall business, bearing in mind that we were in negative territory, the half before and the half before, we didn't have an impressive growth as well. So I think we benefitted from a lower base, #1. And true enough, we have also benefited from a very strong COVID-restricted order pipeline that is now converting into sales. So in that, dual effects, I think you are seeing the positive growth right now. To your question, is that going to be a run rate for the future? I honestly hope so, but I don't think so. Because clearly, if you combine these 2 factors, we can only say that movable wall continue to be one of our growing business. We find a niche in the market, we are a market leader.

The next question comes from the line of Emrah Basic with Baader-Helvea.

I will start with the first one. How is the volume growth in January and February of this year? And do you also expect a similar volume/price growth split in the second half versus the first half?

The January and February that we have just experienced did not show any difference in pattern from the past. We have normal festive season and in particular, the Chinese New Year that we have had. So I do not see any significant blips or developments that we would be able to share here. And for the outlook of second half, and I think in the earlier remark, Christina had alluded to the fact that we will want to continue to sequentially improve, then we sequentially improved. However, the trend of the pricing contributing to our growth, comparing with a stronger second half last year will be increasingly challenging. So therefore, I think when we make the comparison 6 months down the road, we have to be aware that the baseline is quite different comparing the baseline first half and the baseline we had last year.

All right. Maybe a quick follow-up on items affecting comparability. Do you expect also a similar amount than in '23, '24 as in this full year?

Honestly, I think that's too early to say. We are right now in the process of preparing also the budget for next year. So it's too early. I can only say that EBITDA adjusted on this journey should be a sequential improvement. But down to the level of IIC, I cannot say anything for next year yet.

Okay. The APAC growth was -- it was among the regions, the weakest. But nevertheless, it seems that it was quite positive when compared to some of your peers, your main peers that are active in that region as well. Could you -- do you know what could be the reason for that differential in growth or why you have performed better?

I think we are better. Please allow me to give you more colors. I think there is significant presales investment that we put in. And this is an area that I would like to build the bridges to the earlier questions around when are we going to stop? Should we stop? And should we continue we Shape4Growth. Shape4Growth, it's all about customer centricity. One of the good reasons why Asia Pacific has been able to grow to where we are and looking around our competition is clearly because we have a strong specifications team, both getters and writers. And I think this put us in a good position. And with regards to that, if we continue to repeat that across our global leading markets, we are definitely a force to be further reckoned with.

I have one last clarification question. Your Shape4Growth EBITDA margin guidance. So today, have you officially basically postponed the margin guidance for 2 years? Did I understand that correctly?

I will restate my statement earlier on in response to an earlier questions. dormakaba intend to enter the range of 16% to 18% adjusted EBITDA in the course of financial year '25/'26 -- 2025/'26. And we further confirm the organic growth and ROCE.

The next question comes from the line of Remo Rosenau with Helvetische Bank.

Yes. Thanks for clarifying the midterm target. That was my question, actually. So then we can be sure that you change it on your website as of tomorrow because as of now, it's been 2023/'24. My second question is that on Page 24 of your presentation, you basically say that you're pretty happy with your leverage of 2x net debt EBITDA, respectively, CHF 2.3 million, if we take the nonadjusted number and you're comfortable with the 2.5x leverage ratio. However, why are you so comfortable with such kind of debt level, which is not that low? And you haven't brought it down the last few years, interest rates are going up. I mean shouldn't you aim to get this net debt down without doing any significant deals?

I think you should never be happy with numbers. You should always drive for constant improvement. Given the performance during the last years and also the cash generation in dormakaba, I think it is a good achievement in a short-term perspective. But I have nothing against improving the net debt ratio going forward here by improving the profitability and the cash flow.

But it is not a stipulated target.

Well, I think it is -- you get it, if you improve what we have said, I mean, in regard of our clear targets, you get it automatically if you improve cash flow and you improve your EBITDA and you also grow the business. The major area, I think net working capital here was a good achievement in the first half of this year. But obviously, I see scope for further improvement that also will help us. And the further improvement, especially in the inventory is also something, both from a financial point of view, but also from a risk point of view that I would like to see that we can improve further during the next coming years, which also would then help the ratio.

The next question is a follow-up from Mr. Flueckiger, Kepler Cheuvreux.

Just on the topic of wage inflation. Can you put a number on that, what you expect for the financial year '22/'23 and potentially also for the subsequent financial year? Trying to get my EBITDA bridge right here.

I can give you a best guess here. It has been quite a -- it has been quite a journey during last calendar year. I think many of our entities expected round about 3% last year. And if I would calculate an average for dormakaba, I think we are right now between 4% and 5%, more like 5%. But there are big variances. And as I mentioned before, U.S. has been the one that has been running away much faster than, for example, all European countries. So the expectations would be somewhere around that also for the next calendar year. Obviously, we have tariff agreements in place in many of our countries in Europe. And these tariff agreements normally go from mid-calendar year to next mid-calendar year. And right now, the outcome has been 4% to 5% in most of the countries.

[Operator Instructions] Mr. Lee, there are no more questions at this time.

Thank you very much. Since there's no more questions, I will kindly ask for your permission to close these sessions and definitely very thankful for all your participation and listening in to our first half results release of '22/'23. For that, we would like to say goodbye until then, see you. Bye.

Thank you very much.