Georg Fischer AG (GF) Earnings Call Transcript & Summary

Ladies and gentlemen, welcome to the Georg Fischer Mid-Year Results 2021 Conference Call and Live Webcast. I am Paolo, the Chorus Call operator. [Operator Instructions] The conference is being recorded. [Operator Instructions] At this time, it's my pleasure to hand over to Andreas Müller, CEO; and Mads Joergensen, CFO. Please go ahead, gentlemen.

Welcome, and thank you for joining our half year results conference call. Present on our side are: CFO, Mads Joergensen; Head of Investors Relations and Sustainability, Daniel Bösiger; Head of Corporate Communications, Beat Römer; and myself, Andreas Müller. Slide 2. In the first semester of 2021, GF has recorded a strong performance and was able to accelerate growth. Most of GF's key markets recovered amidst the ongoing COVID-19 pandemic and the challenging macroeconomic environment. Sales strongly increased by 20% organically compared with the first half of 2020 and came in at CHF 1.835 billion. All three divisions contributed to this result. The operating result increased by 120% to CHF 141 million compared with last year's EBIT before one-off items of CHF 64 million. The EBIT margin stood at 7.7%. The GF shareholders' net profit more than tripled to CHF 108 million. GF achieved a remarkable solid free cash flow of minus CHF 2 million compared with a negative free cash flow of CHF 73 million in the prior year period. Demand in key segments, such as microelectronics, car industry, medical device production, infrastructure, et cetera, showed a positive momentum again. However, the market environment remains challenging, considering the recent and ongoing supply chain constraints and raw material scarcity. [indiscernible], for example, is predominantly responsible for subdued recovery of the global car industry. Slide 3. Let's have a look at the sales development in the first half of the year as sales increased by a robust CHF 307 million to CHF 1.835 billion, organically up by 20%. GF Piping Systems contributed to this with a strong organic growth of 16% based on a healthy demand in more or less all regions and end market segments. Despite the chip shortage and consequently a subdued rebound of the global car industry, GF Casting Solutions came in 38% above the same period of the previous year. However, it is noteworthy to mention that the division benefited from a favorable base effect as lockdowns around the world heavily affected the production volumes of the car industry earlier last year. GF Machining Solutions saw a soft recovery in the first half of the year and has organically grown by 11% on the back of a still subdued order intake in 2020. On Slide 4, we highlight GF's monthly divisional and regional organic sales development. The chart on the left shows the overall sales development of the divisions on a monthly basis compared year-over-year. The relaxation of the lockdown and the rebound of the car industry compared with an extremely low base in the previous year are the main reasons for the impressive peak of GF Casting Solutions, light blue, in the months of April and May. GF Piping Systems, the dark blue line, and GF Machining Solutions, the gray line, also recorded high monthly growth rates in this period. GF Machining Solutions started to capture a strong order intake of the first half of the year in the month of June with a monthly organic growth rate of 22%. The chart on the right shows the development of GF in major regions and countries. The early lockdown in 2020 in China, in dark green, is still [indiscernible] twice as high as in 2021. The DACH region, in light green, was experiencing strong growth in the second quarter, given its later lockdown measures in 2020 compared to China, whereas growth in the U.S., in gray, was more moderate but also more steady without this pattern of any specific peak, showing growth rate in the range of 20% in the second quarter. It is worth to mention that sales in the aerospace industry continued to remain on a low level. Let's move to Slide 5. Asia further increased its share of sales from 30% to 31% with the highest organic growth of 23%, a result of the booming Chinese market. Europe remained on 45% of total sales and has grown by 18%. Growth was well-balanced across Europe with somewhat stronger development in Southern Europe. The Americas represent 19% of all worldwide turnover and has grown organically by 16%. Let us now turn to Slide 6. The EBIT margin rose from 4.2% to 7.7%. In the first half of 2021, GF increased its EBIT to CHF 141 million versus the comparable EBIT before one-off items of CHF 64 million in the same period of 2020. The strong sales development as a consequence of pent-up demand and global growth resulted in well-loaded plants and allowed GF Piping Systems to achieve an EBIT margin of 13%, well above the 11.1% recorded in the comparable period a year earlier. GF Casting Solutions swung back to a positive EBIT with a margin of 2.8%. The division's profitability was negatively affected by metal price effects and subdued demand due to the semiconductor shortage, especially in the U.S. GF Machining Solutions improved its EBIT margin to 2.3%, still somehow subdued caused by the low order book from 2020. Slide 7. Our recently launched Strategy 2025 with a strong focus on sustainability and innovation is internally and externally well accepted. Its implementation is in full speed. Innovation remains the key driver for growth. As an example, let me mention how as a part of its accelerated digitalization process, our Machining Solutions division is offering our customers an innovative live remote assistance on the HMI, which is a human machine interface, [indiscernible] to control [indiscernible] for the machine tool. Our Piping Systems division increased its central activation product range to offer comprehensive process control and automation. The strong focus on robust end markets, such as e-mobility, was underscored by the development of additional innovative battery housings at GF Casting Solutions. Lastly, we have inaugurated our competence and exhibition center for medical device production in south of Germany. The center showcases innovative processes and machining technology for this demanding medical device industry. GF is evolving its culture towards more performance and learning. Many workshops, either hybrid or in person, have been conducted to increase the learning capability of our organization. GF kept a strong focus on sustainability, and in the first half of this year, increased its share of products and solutions that create a positive environmental or social benefit. In addition, we have published our annual sustainability report in June. Let me move now to Slide 9. We show selected ESG key figures for the first half of 2020, the global trend towards a more sustainable work rate for GF's new business opportunities. With its innovative solution, GF focuses on the sustainability needs of its customers, helping them to achieve their own targets. Innovative solutions also reinforce GF's long-term growth initiatives as the generation of a sustainable performance. Many applications of GF have a substantial impact on the CO2 footprint. For example, the picture on the top right illustrates an application where GF supply PVDF piping solutions to ensure a safe installation of the electricity transmission at the new offshore wind park in the North Sea. The picture on the bottom right illustrates two GF solutions to bring CO2 emissions down: a lightweight battery housing and an energy-reduced machine tool. Overall, we increased our share of sales of products and solutions with a social or an environmental benefit to more than 58%. Total greenhouse gases of the corporation's emissions decreased 9% compared with 2019. We reiterate to announce a comprehensive climate target that is in line with the Paris Agreement and the Science Based Target initiative in early 2022. Let's now continue with the three divisions, Slide 10. GF Piping Systems achieved an impressive organic growth of 16% and reported sales of CHF 983 million. The operating result increased to CHF 128 million with a corresponding EBIT margin of 13%, which is already approaching our strategic target range of 2025. The division focuses on innovation with a strong impact on sustainability, such as the new full-bore magmeter product range, small picture on the left, as well as technology which is also used in water treatment, among other applications. The resilience seen in the previous year as well as the growth in the first half of this year are driven by the well-balanced global presence and the focus on target markets and segments. Products for the microelectronics and data center, water and gas infrastructure and building technology enjoyed a strong rebound. The integration of FGS Brasil, whose acquisition was announced last year, is well on track despite the ongoing pandemic turbulences in Brazil. The construction of a new factory in Yangzhou, China is also progressing well. Let's now look at Slide 11, illustrating the three end market segments of the division. Sales of products for the microelectronic, data center and photovoltaic went up 18% in the first half of the year to CHF 90 million. This segment is especially strong in Asia. Sales of products and services for the water treatment segment increased 13% to slightly above CHF 100 million. Finally yet importantly, we have seen a strong recovery of the Southern European and Asian building technology market, supported by healthy markets in the DACH region. The segment has grown by 18%. The marine business slightly picked up on weather from the rather low prior year level. Hence, the strong momentum of business in GF Piping Systems is not only geographically well diversified but also based on double-digit growth rates in key market segments. This further underlines the solidity and progress of the division. Slide 12 illustrates two major solutions for sustainable markets. The picture on the left shows the newly developed nondestructive testing methodology to assess the quality of the well connection. The testing is using an ultrasonic technology embedded in additive manufactured [indiscernible]. 1 out of the 300 wells is estimated to be defective and therefore [indiscernible]. Depending on the [indiscernible] to the environment, which [indiscernible] supported with [indiscernible] application for hospitals with the services and installation equipment, helping our partners to save more than USD 2 million on an annual basis on energy cost. The picture on the right shows the photovoltaic production for which our high-purity product range is an ideal solution. In the first half of the year, demand in Asia but also Central and Eastern Europe increased in this segment. GF developed an innovative nondestructive testing equipment called WBI to ensure the highest quality level of the installed piping solution. Let us now turn to GF Casting Solutions, Slide 13. The global car industry has been recovering since mid-last year. As a result, and thanks to the focus on new energy vehicles, organic growth amounted to 38.3% with sales of CHF 459 million. The global automotive industry grew approximately 30% at the same time. GF Casting Solutions was eager to turn the previous year's operating loss into an operating profit of CHF 13 million. Nevertheless, the division's performance was negatively affected by the steeply rising cost of raw materials, which are contractually passed on to customers and only recouped with time. The subdued demand in the U.S. due to the shortages of semiconductors was also impacting performance negatively. This specifically affected our light metal facility in Mills River, North Carolina, U.S. China and Europe registered and record demand for e-vehicles in the first 6 months of the year, resulting in a sales increase of more than 60% compared with the same period a year early. Let's turn now to Slide 14. The slide highlights GF Casting Solutions focus on three strategic segments. Components and solutions for the e-mobility segment have grown by nearly 70%, addressing the CO2 emission reduction targets of all GF customers. As seen on the chart on Slide 15, e-mobility was quickly picking up in recent months in Europe and Asia. The light green box and bubbles represent the pure battery electric vehicles. The blue bar represents the so-called plug-in hybrid car sales [indiscernible]. Pure battery vehicles represent in Europe approximately 7% of all newly registered cars and in China, 12%. All indicators point to a continuation of this trend, especially in the light of the EU targets for 2035 that were published last week. These imply more or less the end of internal combustion engines in Europe. Let us turn back to Slide 16. The body and structure car components segment, which clearly is propulsion-independent, continued its growth trajectory and represents now the largest product segment of GF Casting Solutions. Components made out of magnesium and aluminum helped to reduce vehicle weight, increasing battery range and reducing emissions. Special turbine blades and structural components for gas engines have grown by 38%. New generation gas turbines are capital to partially use hydrogen as fuel and are mandatory backup solutions for renewable energy sources, such as wind and solar. As a summary, growth at GF Casting Solutions [indiscernible], on the one hand, based on the industrial rebound and, on the other hand, on the strategical and sustainable focus on growing end markets and applications. Let us now turn to GF Machining Solutions, Slide 17. Sales increased organically by 11.4% to CHF 393 million. The operating result came in at CHF 9 million, which translates into an EBIT margin of 2.3%. The sales was on a low level due to the subdued order development in 2020. Order intake in the year 2021 increased by 45% and resulted in a book-to-bill ratio of 1.2x as well as an increase in orders on-hand of 59%. Strong intakes have been reported in China and Northern Asia, [indiscernible] by good levels in Europe. The U.S. still remains on a lower level predominantly because of the high dependence on the aerospace market. Increased order intake came along with an increased utilization of literally all plants, notably with some room to grow for capacity. Despite the omnipresent semiconductor shortage and the strong increase in the demand for various raw materials, GF Machining Solutions have not been facing severe supply constraints so far. On Slide 18, we show the sales development of four selected end market segments of GF Machining Solutions. The division's expertise in high-precision automated solutions is the main reason for a successful development in the ICT market segment. The recently launched new innovative EDM machines, combined with automation, represents the lion's share of the achieved growth of 29%. The medtech segment, the only segment that did not decrease last year, has grown by 40% as a result of the integrated multi-technology solutions of GF. A rather new submarket segment for GF Machining Solutions are e-mobility applications in the automotive segment. GF provides machining solutions for [indiscernible] applications for e-engine production. Aerospace remains a key market segment. New projects are currently under discussion and are expected to materialize in orders in the second half of the year. The energy efficiency of planes is not only driven by upcoming regulations in many countries but also by sustainability aspect. We are, therefore, playing a key role in the jet engine production. On a year-on-year comparison, the segment was down 21%. We note that in the first half of 2020, GF Machining Solutions was still delivering its machining solutions out of orders from the previous year. Let's move to Slide 19. The slide exemplarily illustrates two out of many innovations at GF Machining Solutions. On the left, we see the most advanced laser texturing machines that can replace chemical etching and [indiscernible] process materials. This technology is used in the [indiscernible] but also in the ICT information communication technology and medtech industries. On the right, you see the already previously mentioned digital solution labeled LRA, live remote assistant, on HMI, human machine interface, which allows operators to immediately connect live with the service organization of GF. This solution will increase uptime of the machine and at the same time optimize the machine tool service in a substantially contract period of time. At the upcoming EMO, the world-leading machines exhibition to be held in Milan next October, the division will release [indiscernible] additional new digital solutions focusing on service and efficiency. With that, I will hand over to CFO, Mads Joergensen, for a detailed review of the figures.

Thank you, Andy. Ladies and gentlemen, also from my side, a warm welcome. I will now present the consolidated financials of the first half of 2021. On Slide 21, we present the order intake on the first semester. GF Piping Systems achieved organic growth in order intake of 29.8%. This was driven by a number of industrial projects worldwide and by the Chinese market in particular. GF Casting Solutions rebounded from the very low orders, which happened during the lockdown period in 2020. And the order intake was growing strongly on all three continents. And for GF Machining Solutions, the highlight of the semester was clearly the significant growth in order intake with CHF 471 million, 45% organically, implying a healthy book-to-bill ratio of 1.2. Thus, for Georg Fischer overall, a very promising development in the first half. Moving to Slide #22. You see in the last line of the table, the overall sales of Georg Fischer increased by 20.1% to CHF 1.835 billion. Organically, the growth was almost the same with 20.0%. The three divisions experienced different levels of recovery on the backside of the COVID-19 lockdowns, which occurred globally in the first half of 2020. During the course of the first lockdown, Georg Fischer Piping Systems experienced a strong surge in demand for industrial and building technology products worldwide. The division came close to CHF 1 billion mark in sales with CHF 983 million, representing an organic increase of 16.4%. And for your recollection, the organic decline in sales in the first half of 2020 was only minus 3.1%. The first semester of 2021, also sales of Georg Fischer Casting Solutions recovered clearly from the lockdowns of the OEMs that we experienced in the second quarter. Sales grew organically very strong by 38.3% to CHF 459 million. This compares to an organic sales decline of 27.6% in the first semester of 2020. The European and Chinese automotive markets saw a strong comeback in the first half. However, from April onwards, the chip shortage of automotive semiconductors lowered the growth momentum substantially. Finally, whereas aerospace and investment casting markets remained fairly subdued, the maintenance business of industrial gas turbines picked up considerably. For GF Machining Solutions, the first half of 2021 also developed positively. Sales grew organically by 11.4% to CHF 393 million. The low order backlog, which started in 2021, as well as bottlenecks in the supply chain caused challenges in fulfilling deliveries. In the first half of 2020, sales declined organically by 21.3% and could therefore not fully be recovered in the first semester of 2021. Nevertheless, the division saw a strong recovery of the ICT, medical and the traditional mobile bank businesses. From a technology point of view, the growth mainly took place in the EDM segment and services with growth of 36% and 18%, respectively. On Slide #23, we show the various components of the sales development, starting on the left-hand side with the consolidated sales for the first half of the previous year of CHF 1.528 billion. The acquisition of Brazil-based FGS, a leading manufacturer of PV piping systems for water and gas utility markets, was closed at the end of February 2021 and added CHF 11 million to sales. The accumulated effects across all foreign currencies amounted to minus CHF 9 million. Whereas the U.S. dollar declined against the Swiss franc, both euro and the Chinese yuan appreciated in the first half and partly compensated for the negative U.S. dollar effect. Hence, overall sales for GF grew organically by CHF 305 million. An estimated CHF 34 million of this organic growth relates to price increases to compensate for the global surge in prices for a number of key raw materials. We now move on to the EBIT on Slide 24, shows on the left-hand side, the EBIT in the Swiss franc and on the right-hand side, the EBIT margin in percent. Please note that in order to make the numbers more comparable, for the first half of 2020, shows the EBIT before the one-offs and hence excludes the CHF 7 million negative effects from the Georg Fischer Casting Solutions Werdohl relocation project. Driven by high growth rates in higher-margin industrial and building technology products and leverage from the increase in plant utilization, GF Piping Systems grew EBIT from CHF 94 million to CHF 128 million. This corresponds to a growth of 36%. The EBIT margin increased from 11.1% to 13%, which is an all-time high for the first semester for the past 10 years. The Chinese markets were also accountable for a sizable part of the increase in profitability. GF Casting Solutions achieved a turnaround in EBIT from a loss of minus CHF 25 million in the first half of 2020 to record a positive CHF 13 million EBIT in the semester in review. Most European and Chinese plants were able to capture the effects of the strong compact of the automotive industry. However, it should not go unnoticed that the situation in the U.S. base plant in Mills River has become even more challenging. First, key OEM customers was forced to shut down production in February due to severe weather conditions in the southern part of the U.S. And late in the semester, the impact of the automotive semiconductor shortage led to a stop-and-go pattern in the call-offs from key accounts as their assembly plants were only working 2 out of 4 weeks in the month of May and June. This obviously impacted utilization of our plant adversely. And in addition, the company faced a delay in certain ramp-up of the projects. On the other side, the investment casting business in Switzerland was able to improve profitability through a combination of cost reduction measures and efficiency improvements. This, despite the ongoing subdued aerospace market. The EBIT of GF Machining Solutions increased from CHF 1 million to CHF 9 million. Most of the profitability increase comes from the growth of the EDM and service business. In particular, the Chinese operations contributed significantly. Nonetheless, with an order backlog, which is up more than 50%, we expect to achieve a further improved profitability in the second half. At consolidated level, the EBIT increased from CHF 64 million in 2020, excluding the one-offs, to CHF 141 million, equal to an increase of 120%. As a result, the EBIT margin improved on a comparable basis from 4.2% to 7.7%. As mentioned earlier, during the course of the first half of 2021, the prices for key raw materials increased substantially. However, due to common trading price increases, Georg Fischer was able to more than [ eliminate ] the adverse effects on profitability. Slide 25 shows details of the currency impact. Compared to past years, the effects of currencies were less pronounced in the first half of 2021. Overall, the currency effects of sales amounted to approximately minus CHF 9 million compared to almost 10x more adverse effects in the same period of the previous year. The main part of the currency effect was attributable to GF Piping Systems. This is caused by the division's exposure to many different foreign currencies. GF Casting Solutions was impacted by the appreciation of the euro and the Chinese yuan and GF Machining Solutions, on the other hand, was impacted by the decline in U.S. dollar. The relative high-level effects of EBIT relates to high volatility of the U.S. dollar in the past 6 months. Overall, the biggest positive effect was from the euro and the Chinese yuan with CHF 18 million and CHF 40 million, respectively. Unfortunately, as in other years, the decline of the Turkish lira continued throughout the semester and accounted for a negative effect of minus CHF 13 million on sales and CHF 1 million on EBIT. Slide 26 brings us to the income statement of corporation. As I mentioned earlier, sales increased by 20% to CHF 1.835 billion. Gross value added increased by CHF 151 million compared to previous year, growth by 27%. The overproportion of growth and gross value added is due to the following factors: favorable changes in inventory, lower foreign currency-related losses and lower operating expenses due to the general lockdown of activity. Gross value added percentage of sales has increased from 36% back to 38%, which is at the level of 2019. The personnel cost increased only by CHF 60 million or 14%, which is [indiscernible] the increase in sales and highlights the operational leverage of the organization. The increase in costs was caused by a related increase in headcount of 740, thereof 243 relating to the acquisition of FGS in the GF Piping Systems division. Secondly, the reduction of short-time work compensation added CHF 24 million of cost compared to the lockdown period of last year. Overall, the cost ratio decreased from 29% to 27%. The EBITDA increased by CHF 91 million to CHF 209 million and the EBITDA margin increased from 7.7% to a strong 11.4%. Depreciation and amortization increased by CHF 7 million. Of this increase, CHF 3 million relates to a value adjustment to outdated and obsolete production equipment in one Georg Fischer systems plant in the U.S. Moving on to the financial results, which increased marginally from minus CHF 10 million to minus CHF 11 million. The small increase mainly relates to the additional interest expense from the new CHF 200 million COVID bond raised in 2020. And another factor was reduced interest income from [indiscernible] higher cost of business in Germany. Income taxes, as you can see, increased from CHF 9 million to CHF 27 million. This corresponds to a decrease in the tax rate from 22.5% in 2020 to 20.8% in the period under review and is largely back in line with the tax rate that we have seen in previous years. The reduction was mainly caused by a substantial decrease in loss-making entities due to the global recovery. Finally, net profit attributable to Georg Fischer shareholders increased from CHF 34 million to CHF 100 million. Turning to Slide 27, which shows the balance sheet as at 30th of June 2021 compared to the 31st of December 2020. The liquidity situation of Georg Fischer remained strong. Cash and cash equivalents only decreased by CHF 63 million to CHF 778 million. This seasonal use of cash is well below previous year's level. Due to the strong growth in sales, trade accounts receivable increased from CHF 550 million in -- at year-end to CHF 705 million. The days sales outstanding remained stable around 65 days compared to year-end. Inventories on stock increased from CHF 638 million to CHF 780 million. This was related to the increase in production as well as our discretionary decision to build up safety stocks for specific parts and materials in the light of the persistent supply chain constraints. Days inventory outstanding, nevertheless, decreased from year-end of 110 days to 108 days by mid-year. Current liabilities increased from CHF 986 million to CHF 1.128 billion. Around CHF 72 million relates to an increase in accounts payable, leading to an increase in days payable outstanding from 62 to [ 72 ] days. The equity ratio remained strong at around 39%, close to the ratio at year-end. Slide 28 shows the development of free cash flow. The higher EBITDA has a significant positive impact on the operating cash flow. The increase in net working capital is largely due to the significant growth in sales mentioned earlier but is clearly underproportioned. In the first half of 2021, GF was able to achieve a positive operational cash flow of CHF 59 million. Investments in property, plant and equipment amounted to CHF 61 million, CHF 9 million lower than in previous year. The decrease is not intentional and is related to delays in some strategic investments, for instance, the new GF Piping Systems production plant in Egypt. We have seen these projects to gain momentum again and to be implemented in the second half. This overall leads to a negative free cash flow before acquisitions of only minus CHF 2 million and marks the fourth best free cash flow before acquisitions over any of the first semesters out of [ 16 years ]. On Slide 29, we have summarized some key figures. Net debt decreased substantially by CHF 214 million to CHF 206 million. The net debt-to-EBITDA multiple decreased accordingly from 1.52 to 0.53x, among the lowest ratios [ over a decade ]. Return on invested capital increased year-over-year by 5 percentage points to 15.8%. GF Piping Systems grew 36.6 -- 31.6%, clearly earned above its cost of capital whereas the ROIC of the other two divisions still remains below despite positive momentum offset in the period under review. Increase at corporate level which is obviously attributable to the increase in net operating profit of the taxes. And we see that adjusted for the one-off effects, the ROIC is 6.3% in the first half of 2020. The number of employees increased from -- by 740. The acquisition of FGS accounted for 243, followed by an increase in headcount in GF Casting Solutions and optimization of capacities at Georg Fischer Machining Solutions. Let me finally summarize the first semester of 2021 in a few words. GF acted agile and adapted swiftly to capture the global surge in demand. We managed the cost base and the net working capital strictly and demonstrated our ability to substantially improve free cash flows. The ROIC above 15% highlights that we are back to create value for our shareholders. And as we stand now, our balance sheet remains solid and the liquidity abundant for future strategic investments. Thank you very much for your attention. I'll now pass on to Andreas for the outlook.

Thank you very much, Mads. Let's move on to Slide 30. Thanks to the leading positioning of its three divisions in the end markets, GF is well positioned to address the upcoming needs of the customers, which are more and more driven to impact positively on all aspects of sustainability. We expect that markets will continue to further recover and grow in the second half of the year. Government infrastructure projects will further support the development of national economies. Barring unforeseen circumstances, including a COVID-19 resurgence, we expect sales growth in the double digits for the year 2021 as well as a significant increase in profit. However, it is worth to note that supply chain constraints and raw material scarcity remains the biggest challenges. With that, we conclude our presentation and are ready to take your questions.

[Operator Instructions] The first question comes from the line of Walter Bamert from Zürcher Kantonalbank.

Last year, at the same time, you guided for an operating result in the second half at a comparable level to the first half. Could you explain which parameters you expect this time to differentiate significantly between H1 and H2?

Thank you very much for your question. I think barring unforeseen circumstances, we expect an organic growth in the second half of the year in the upper single digits that would result in a mid-teens double-digit organic growth for the entire year 2021. And that would also give us the chance or the chances would be intact to achieve a similar performance, EBIT performance in second half of the year 2021.

You mentioned the raw material effect for the individual divisions. And I especially remember that you say there is a lag of about 3 months. So that would mean you already experienced the need to increase prices in the casting, but that will continue as prices are keeping up at a very high level. Is that correct?

Thank you very much for this question. I'll just sort of summarize, you're talking about the time lag in passing on the raw material prices in our Casting Solutions division, where we normally talk about the aluminum and the magnesium raw materials. Here, we are contractually allowed, if they go up and down, to adjust these. And normally, it has a time lag in the range of 3 months. That means when we have seen the steep rises in the first half of the year particularly comparable with the last month of last year, that prices are partially being now passed over to the customers. And that will continue to be passed on to the customers. If prices continue to rise, that will come ultimately exactly at the same time lag.

And how is that -- and how is that material effect for Piping Systems?

I think, Mads, do you want to take this?

Yes, I can. For Piping Systems, it's a bit of -- it's a different situation. There are no contractual restraints in managing the pricing. Piping Systems is a premium provider, thus it has a good pricing power in the market. Traditionally, we have been able to pass on increases of the raw material costs to the market and it has actually no adverse effect on the EBIT. And if we remain where we are with the prices today, you should not expect that we will increase prices further in the second half. We are more or less compensated to the current level at the moment.

Thank you. Does this answer your question?

Thank you very much.

The next question comes from the line of Charlie Fehrenbach from awp.

[Foreign Language]

We did not understand your question.

Yes. Sorry, I can't [indiscernible] this remark in between. Okay. The EBITDA margin of Casting Solutions and machining is still between 2% and 3%, on a low level. How far do you think these margins can recover in the current year?

Thank you very much for your question. I think Machining Solutions [indiscernible] with the recovery of margins on the back of the strong order book, what we have seen now mid-year, I think order has been up more than 40% in that division. That will bring [indiscernible] but also obviously an increase in its EBIT margin. With Casting Solutions, we have to be aware that the second half of the year is marked by two holiday months. So we're going to see August but also December, but still we assume that also a slight recovery is possible in that division.

The next question comes from the line of Bernd Pomrehn from Vontobel.

It seems that the efficiency of the light metal casting plants in Europe and the U.S. was quite negatively impacted by highly volatile customer orders. Is there anything, for example, regarding production planning, flexibilization of production plants or contract structuring you can do to sustainably improve margins of these plants?

Thank you very much for your question. And yes, you're absolutely right. Currently, our light metal foundry in the U.S. has been marked by the subdued and volatile customer call-offs, as mentioned by our CFO, Mads Joergensen. We have on short notice reduction of call-offs by more than 50%. That means our 4 weeks of production, sometimes only 2 weeks of production, have been cold. However, what has to be said here is this is a new company, which we are ramping up over the last couple of years and also still ramping in new projects. And labor scarcity in the U.S. is one of the key drivers of, therefore, flexibility in terms of cost base is limited. So we keep our people, which we are ongoing training, to cope with the challenges of this situation. [indiscernible] we are going to see improvements particularly towards the end of this year in terms of also flexibility but also agility to call-offs, which are very [indiscernible]. Our European plants are much better off in regards to that one since they are well-established facilities and they can react. But also to be said here, the erratic call-off situation in Europe is not as that bad as it is in the U.S. It's much more plannable and foreseeable in Europe.

The next question comes from the line of Christian Obst from Baader Bank.

I have three questions. One is the utilization rates, machining are still below a sufficient level. Can you give us an indication of these rates maybe in Europe and in China? And what do you expect in the next 6 to 12 months there? Then coming to free cash flow in the second half, which will be the main driver for the free cash flow, which is normally very strong in the second half compared to the first half? But what will be the main driver for you now in this second half? And the last question is on M&A. Can you give us some kind of an update of the current market description of your M&A pipeline?

Thank you very much for your three questions. I will give you an answer on the question one and two and our -- one and three and our CFO on the number two. First of all, our capacity utilization across the world, if I'm not mistaken, you specifically asked about our Machining Solutions division?

Yes.

Our Machining Solutions division is currently lowered on average of 70% across the world, which is with a strong development in China, more or less at their standard capacities. There's still some room for additions. The European one, in particular the Swiss one, and the American one have been subdued. Also, clearly we have seen the low order intake in the aerospace business, given its marks on these facilities and factories. Overall, as said, it is 70%. And we're going to see a slightly low number of that in Europe. The M&A pipeline, your third question, this is something now which is obviously quite intensively managed by us [indiscernible]. As we have seen already in the past, acquisitions required its time. So for example, the FGS acquisition, which we did earlier this year, it is being prepared for a couple of years. And the first contract actually happened already 10 years ago. So it will take some time. And we are not the only one looking for targets at this point, I think, but we continue to find our activities in the M&A sector. And I think I'll leave the last one for...

Free cash flow, our expectations for the full year is at the upper end of our range. So we will probably say CHF 175 million to around CHF 200 million mark. Please recall, free cash flow last year ended up, free cash flow before acquisitions, ended up at CHF 230 million. However, as you can see from the cash flow statement at year-end, that also contains a one-off positive effect of CHF 23 million, which stems from the sale of a number of properties in Switzerland. And that, of course, will not also be happening this year. The driver of the free cash flow will be the increase in profitability. As you can probably understand the element net working capital is a difficult number to manage out of CHF 1.4 billion invested capital, around CHF 850 million is net working capital. So depending on an acceleration or a deceleration in the business towards year-end, we could have a different number there. And that's why we are remaining in that range of guidance for the full year.

Okay. Perfect. And then maybe I have an additional question on that, on the cost side. So you are improving your underlying profitability by implementing measures to reduce the structural cost base. Will there be some sufficient seeable impact in the next 6 to 12 months from the measures you are currently taking?

We have announced a cost reduction efficiency improvement program called [ Fast Track ], which in its end state is supposed to generate about between CHF 100 million to CHF 120 million of improvements. And we should expect for the full year -- you see already part of the results in the numbers as they are here at half year. And at full year, we should be coming up to the target that we have been setting a couple of years ago.

The next question comes from the line of Alessandro Foletti from Octavian.

I have a couple. Can I go back on the price effect in the casting division? The aluminum prices were up about 25%, 30% in the first half of the year. Now considering the 3-month lag, can you quantify a little bit of the 38% organic growth in sales that you had? How much of that comes from the prices really?

Okay. So we take the questions one-by-one.

Yes. Yes, because they're all connected. I'm staying around this topic.

Okay. They're all connected. First of all, yes, on average year-over-year, it depends a little bit on which kind of aluminum. The Casting Solutions division is mainly relying on secondary aluminum, that means recycled ones. This price has seen a steep rise in the first 6 months compared to the last 3 months of 2020. We talked about the price increase of 70%, not only [indiscernible] 30%. So we have to be very specific in regards to which kind of trends of aluminum we are taking. The 3 months is on average. Now it'd be in the range of 2% to 4% or sometimes even a little bit more. And what we're going to have see now towards the end of the first semester, we have seen the first price increases. So overall, out of this organic growth, there's only 2 percentage points growth through the metal price increases which we could pass on to our customers in the first half of the year.

All right. That's very important. Now same question for the orders because they were up about 80% organically, I believe.

Could you repeat -- Mr. Foletti, please repeat...

On the order intake, you published CHF 462 million order intake for casting. That's up 80%. I imagine the organic growth is probably similar because FX was not a problem. I wonder if in the orders, that effect of prices is much more than this 2%.

I think the order increase effect is, let me say, marked by two effects. First of all, a pretty abnormal 2020 first half, where we have seen cancellations or call-offs, which obviously reduced in the month of April, if I'm not mistaken, last year, orders to 0, which is also not completely correct because we still have a base of 40% sales in that month. So order intake has been distorted by the rather turbulent situation, which we have been faced last year, so the 80% growth. But you are right, the order intake is slightly marked with higher material price inflation. I would guess this at least in the range 5-plus -- 5%-plus.

Okay. Let's say this 5%-plus, maybe it's a touch more than that. This is something that should now come into your sales in the second half of the year. Because now -- so I'm trying to understand how the development is in sales and then also then how much you lost basically on EBIT, which then should recover then in the next 6 months.

I think, Mr. Foletti, the answer is quite straightforward. There's a negative effect on our result in the range of a high mid-, high single-digit number. So we talk about approximately CHF 7 million negative effect of the metal price time lag invoicing. And most of that, we will normalize the price which we can invoice to our customers during the course of the second half of this year.

Okay, great. That answers my questions on the subject.

That was the last question.

We would like to thank you for your attention and the interest in our company, Looking forward to meet all of you in person with the year 2021 figure presentation in March 2022.

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