Georg Fischer AG (GF) Earnings Call Transcript & Summary

Ladies and gentlemen, welcome to the Georg Fischer Media Results 2022 Conference Call and Live Webcast. I am Sandra, the Chorus Call operator. [Operator Instructions] And 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 Andreas Muller, CEO. Please go ahead, sir.

Thank you, Sandra. Welcome and thank you for joining our midyear results conference call. Present on our side are CFO, Mads Joergensen; Head of Investor Relations and Sustainability, Daniel Bosiger; Head of Corporate Communications, Beat Romer; and myself, Andreas Muller. Let's turn to Slide 2. The well-balanced global presence, the diversified group portfolio as well as the strong market positions of all 3 divisions have proven their worth in times of higher uncertainty. As a result, GF was able to significantly improve its performance and achieve the strong growth in the first half of 2022. Sales increased 7.4% to CHF 1.971 billion, organic growth was even double digit with 11.1% for the period. GF increased its operating result by 27% to CHF 179 million. The EBIT margin stood at a strong 9.1% and remarkable 140 basis points above the 7.7% in the previous year. GF's well-balanced global presence paid off once again. The subdued Chinese market was well compensated by strong organic growth of almost 26% in the U.S. and 12% in Europe. As COVID related lockdowns in China eased in Q2, business returned to pre-COVID levels. Supply bottlenecks challenged our employees throughout the first half of the year and in some cases led to operational inefficiencies. Our decentralized and diversified production setup once again proved highly resilient. The implementation of Strategy 2025 is in full swing and the focus on sustainability oriented innovations continues to deliver promising solutions for our customers. The pictures on the upper right show examples of application areas of our 3 divisions. GF Piping Systems continues to expand its range of solutions for water treatment plants. The picture in the middle shows the lightweight aluminum bulkhead for cars developed by GF Casting Solutions. This single piece can replace up to 10 previously required individual components. GF Machining Solutions creates value through high precision machining equipment for the production of medical devices. Let's turn to Slide 3. Let's take a look at the sales development in the first half of the year. Sales increased by CHF 136 million to CHF 1.971 billion and grew organically by 11.1%. GF was able to pass on price increases for input materials to the market thanks to its strong market position and its differentiated products. GF Piping Systems increased sales organically by 14% to CHF 1.094 billion despite strong headwinds from exchange rates. GF Casting Solutions organic growth of 5.4% was driven by higher metal prices while volumes remained below the previous year mainly due to plant closures in Europe as a result of the war in Ukraine and lockdowns in China. GF Machining Solutions increased its deliveries despite supply constraints and reported a remarkable organic sales growth of 10.7%. Slide 4, GF significantly increased its profitability in the first semester of 2022. The EBIT margin was 9.1%, which is already in the lower range of our strategic target corridor of 9% to 11%. EBIT amounted to CHF 179 million. GF Piping Systems' focus on value-added solutions and its well utilized plants led to a further expansion of the EBIT margin to 14.4% compared with 13% in the same period of the previous year, already in the upper range of the strategic target corridor of 2025. GF Casting Solutions achieved an EBIT margin of 3.2%. The margin was impacted by the closure of customer plants in Europe as a result of the war in Ukraine, but also by the closure of plants in China as a result of the lockdowns. Following the divestment of the stake in the GF Linamar joint venture in the U.S., the division recorded a stronger Q2. GF Machining Solutions increased its EBIT margin to 4%. Profitability was still somewhat dampened by no aerospace volumes and supply chain disruptions. Slide 5, significant reduction of CO2 equivalent emissions in all 3 business units. GF is well on track to achieve its sustainability targets for 2025. The share of products with a sustainability benefit in total group sales has increased to 60%. Solutions such as the bioattributed PVC product range or the increased sales of COOL-FIT solutions, a pre-insulated piping system; the higher share of lightweight components and the focus on highly energy efficient machine tools continued to have a positive impact. CO2 equivalent emissions fell thanks to a wide range of measures. Among others, the replacement of energy-intense production machinery, the use of biogas instead of natural gas, newly installed photovoltaic systems, but also the COVID related reduction in economic output in China contributed to this positive development. On the diversity side, 26% of our newly recruited managers were women. Let us continue with a more detailed look at the 3 divisions, Slide 6. GF Piping Systems again posted strong performance thanks to its presence in growth markets and segments that meet important sustainability requirements. The division also managed to pass on higher input costs to the market. As a result, sales increased to CHF 1.094 billion representing an organic growth of 14%. Operating result was CHF 158 million with a record EBIT margin of 14.4% compared with CHF 128 million and an EBIT margin of 13% in the previous year. The booming industrial and utility market in the Americas contributed strongly to the division sales development with an organic growth of 26%. Global industries such as microelectronics and data centers continued their growth and were 24% above the previous year. The severe COVID-19 related closures in China at the beginning of the year fortunately eased in the second quarter and GF's production is back to full speed. The new piping systems in Yangzhou is now in operation and is expected to reinforce future growth in the region. Let us now take a look at Slide 7, which illustrates 3 end market segments of GF Piping Systems. Sales of products and services for the microelectronics segment increased by 24% to CHF 105 million. The division expanded its service offerings such as prefabrication, piping systems design and logistics. Sales of products for water treatment increased by 19% and reached CHF 125 million. Global demand is fueled by the increasing need for water treatment for drinking water, but also for process water for industrial applications. Automation of these applications is playing an increasingly important role. GF is meeting these needs of its customers with its new connected generation of actuated valves and sensors. The water distribution segment grew by 12% and achieved sales of CHF 143 million in the first half of 2022. Water scarcity and non-revenue water remained the main drivers for this segment where GF is constantly innovating to help its customers with their water losses. The small picture shows the next digital connected generation pressure control valve for urban infrastructure applications. GF Piping Systems is a renowned global supplier for these types of applications especially with regard to our customer sustainability needs such as water wash containment, water quality improvement or energy efficiency. The 3 market segments shown on this slide account for approximately 1/3 of the division sales. Let us now turn to GF Casting Solutions, Slide 10. Although the global automotive industry started the year on a more optimistic note, the war in the Ukraine severely affected the European automotive industry in March and April. COVID-19 lockdowns in China led to production stoppages of between 4 and even up to 8 weeks. These effects had a negative impact on the division sales performance whereas contractual metal price adjustments clearly contributed positively to organic growth of 5%. As a result, sales reached CHF 449 million. EBIT came in at CHF 14.5 million compared with CHF 13.2 million in the first half of the last year. The division once more achieved a good order intake of CHF 300 million for e-vehicle components already representing 78% of all automotive high pressure die casting lifetime orders. GF Casting Solutions expertise and innovation capabilities played a key role in securing these orders underpinning the division's strong position for the future positive short-to-midterm outlook. Lightweight aluminum bulkhead we have shown you at the beginning of this presentation, which replaces up to 10 previously required individual components into one single piece is a perfect illustration of the innovation strength of the division. In April, GF Casting Solutions entered into a strategic partnership with Mexico-based Bocar Group, a leading provider of light metal casting solutions. This enables GF Casting Solutions to develop and invest in new technologies and services to support customers predominantly in North America, but also in Europe and China. At EUROGUSS, the leading trade fair for light metal castings feature, GF appeared together with representatives of Bocar. The partnership follows the divestment of GF's 50% stake in the GF Linamar joint venture. The strategic targets for 2025 remain unchanged. Let's continue with Slide 9. E-mobility continues to thrive in Europe and Asia. According to LMC, the leading automotive research company, e-vehicles are forecasted to account for 12% of global car production in 2022 rising to 20% next year. The green bar represents the pure battery electric vehicles, the blue bar represent sales of plug-in hybrid vehicles. The image in the middle shows GF Casting Solutions sales growth in this area. Despite headwinds in Europe and China, the division increased its sales of components for e-vehicles by 18%. Lifetime order intake for e-vehicle components amount, as said, to CHF 300 million representing 78% of high pressure die casting order intake. Its ability to design and cast large or mega structural castings played and continue to play a key role in this successful development. With the strong order intake for e-vehicle components and the positive momentum of this segment, the division is well positioned for the future. Let us now turn to GF Machining Solutions, Slide 10. The division maintained its strong momentum in the first half and delivered solid performance. Order intake grew to CHF 478 million thanks to an upturn in milling machines, but also to the strong market position of the division's EDM machines. Regionally, order intake was driven by Europe and APAC as well as by a recovery in the U.S. Consequently, the division ended the first half with a robust book-to-bill ratio of 1.1x. Sales increased organically by 11% to CHF 431 million. Europe remained the largest market with sales of almost CHF 200 million and recorded a growth of 17% year-over-year. With more than 18%, APAC excluding China contributed the highest growth rate albeit on a lower base. In China, sales remained flat with CHF 112 million as a result of the COVID-19-related lockdowns and travel restrictions in the second quarter. EBIT reached CHF 17.4 million resulting in an EBIT margin of 4%, almost doubling CHF 9.1 million EBIT of the first half 2021. However, the result was still impacted by supply disruptions, logistical bottlenecks and the COVID-19 lockdowns in China. Also, we see promising orders and improving momentum in the aerospace segment. Thus our production level in this segment are clearly below pre-crisis level. The shortage of skilled labor and the high demand on plant and energy efficiency are driving cost technology automation. The picture on the right shows 1 of the 3 fully automated multi-technology lines at Schaffler in Germany. Among other things, Schaffler uses these machines to manufacture clutches for the production of the e-vehicle component. Earlier this week GF Machining Solutions announced the acquisition of the Northern Italian company Vam Control, a leading service provider for the machine tool industry. This is a further step in line with the company's strategic focus to strengthen its service offering. On Slide 11, we show the sales development in selected end market segments of GF Machining Solutions. Innovation and service remained the key underlying growth drivers across all segments. With its next-generation laser texturing, wire cutting and milling machines; the division confirmed its technological leadership in the industry. The strategic focus segment Medical recorded another strong growth of 24%. Automated precision and clean production technologies are the main drivers for this. After a strong performance in 2021, ICT segment maintained its high sales levels of the previous year. Southeast Asia and North America were able to offset the weaker Chinese market, which was affected by the COVID-19 related lockdowns. While consumer electronics slowed down, electronic systems such as cameras was driving that growth. Let's turn to the e-vehicle and automotive segment. New car models in e-vehicles are making this segment flourish. GF is well positioned here as the high precision is a key requirement for e-motors. Sales have been up by 11%. Last but not least, we have seen a modest recovery in sales in our aerospace segment with China being the main contributor. The order backlog in this industry is steadily increasing and thus showing a positive momentum of potential recovery in the coming months and years. With that, Slide 12. I will hand over to CFO, Mads Joergensen, for a detailed review of the figures.

Thank you very much, Andy. Ladies and gentlemen, also from my side a warm welcome. I will now present the consolidated financials of the first half of 2022. On Slide 13, we present the order intake for the first semester. GF Piping Systems achieved an organic growth in order intake of 14%. Growth was seen in most business areas and from a regional perspective, growth was the highest in the U.S. GF Casting Solutions also increased the order intake compared to previous year recording the strongest organic growth of all divisions with 15.4%. This growth in order intake is noteworthy given the adverse impact from the lockdowns in China and the reduction in car production following the war in Ukraine. The reported order intake number further reflects the impact of the divestment of the joint venture GF Linamar of around CHF 27 million. For GF Machining Solutions, the order intake remained slightly above previous year's period with a healthy book-to-bill ratio of 1.1x. Despite the headwinds in the first semester, GF as a group was able to reach CHF 2.2 billion in order intake corresponding to an organic growth of 11.6%. As you can see on Slide 14 in the last slide of the table, the sales of GF Group increased by 7.4% to CHF 1.971 billion. Due to unfavorable currency effects, the organic growth was higher with 11.1%. GF Piping Systems greatly benefited from strong utility markets in the Americas as well as strong industrial markets in Europe and Asia. This growth overcompensates the somewhat weaker market momentum in China. Overall, the division generated remarkable organic growth of 14% driven by both pricing as well as volumes. In the first half of 2022, GF Casting Solutions generated sales of CHF 449 million, SEK 10 million below previous year. Adjusting for the divestment of the joint venture GF Linamar and currencies, the organic growth reached 5.4%. This organic growth was mostly due to increased raw material prices being passed on through material surcharges. Actually, the volume sold decreased because of the negative impact of the lockdowns in China, the chip shortage and the standstill of the European OEMs in March following the outbreak of war in Ukraine. Finally, the market for aerospace investment casting remained subdued while increased project activity experienced in the course of the first half might signal a more positive momentum. For GF Machining Solutions, the first half of 2022 developed positively. Sales grew organically by 10.7% to CHF 431 million. Certain bottlenecks in the supply chain persisted and continued to be a drag on the division's sales potential. All technologies recorded strong sales including milling. Advanced manufacturing technologies achieved the highest growth of 33% driven by strong sales of femtosecond laser and laser texturing machines. Finally, I'd like to draw to your attention to footnote #2 on this slide with some additional information on the effects of price adjustments. As you can see, GF Piping Systems was able to pass on the cost increases to the market in the range of 9% to 11% leading to volume growth of 4% to 6%. GF Casting Solutions passed on the metal surcharges in the range of 15% to 17% and this led to a net decline in sales volume of minus 8% to 10%. For GF Machining Solutions, the price adjustments were in the range of 1% to 2% leading to a net volume growth of 8% to 10%. On Slide 15, we show the various components of the sales development starting on the left-hand side with the consolidated sales of the first half of the previous year of CHF 1.835 billion. At the end of March 2022, the joint venture GF Linamar LLC was divested. Pro rata sales for April to June 2021 amounted to CHF 21 million. In 2022 we are consolidating 2 additional months of sales of the Brazilian company FGS, which was acquired in March 2021. Next the accumulated effects across all foreign currencies amounted to CHF 51 million. This eventually leads to an overall organic growth of CHF 202 million bringing sales in the first semester very close to the CHF 2 billion mark. We now move on to have a closer look at the regional sales. On Slide 16, we see the sales per region. As mentioned, GF grew organically significantly in 2 out of its 3 leading market regions, Americas with 22.8% and Europe with 11.7%. The growth in the Americas was strongest with a plus of CHF 89 million reaching total sales of CHF 437 million. Growth in Europe was attributable to GF Machining Solutions and GF Piping Systems. Moving to Asia where growth was reduced by the lower performance of China. The sales figure in the Rest of the World includes Turkey. Despite the deterioration of the Turkish lira, sales for the region could still be increased to CHF 91 million. Slide 17 shows on the left-hand side the EBIT in million Swiss francs and on the right-hand side the corresponding EBIT margin. The strong sales of GF Piping Systems in combination with the price increases drove EBIT to new highs. In the first half year, the division grew its EBIT from CHF 128 million to CHF 158 million with the corresponding EBIT margin increasing from 13% to 14.4%. This is an all-time high for a first semester. GF Casting Solutions achieved an EBIT of CHF 14 million, CHF 1 million above the previous year. The divestment of the loss-making joint venture GF Linamar provided some relief to the EBIT. However, despite multiple positive developments, the profitability remained subdued given the adverse impact from the lockdowns in China and the reduced OEM production in Europe. However, the momentum improved towards the end of the second quarter. The new plant in Shenyang in China is still in the planned ramp-up phase and did not yet contribute to the EBIT. The EBIT of GF Machining Solutions increased from CHF 9 million to CHF 17 million. The sale of higher margin services, automation solutions and EDM machines mostly contributed to the increased operating profit. The EBIT margin reached 4%, up from 2.3% in the first semester of 2021. At group level, the EBIT increased from CHF 141 million to CHF 179 million. The EBIT margin improved by 140 basis points from 7.7% to 9.1% and is thus already within the strategic corridor of 9% to 11% for our Strategy 2025. Slide 18 shows details of the currency impact. Compared to previous year period, the effects of the currencies were much more pronounced. Overall, the currency effects on sales amounted to approximately minus CHF 51 million, [ CHF 3 million ] more adverse than in 2021. On a divisional level, the major negative currency effects was with GF Piping Systems. Both GF Casting Solutions and GF Machining Solutions were adversely impacted by the depreciation of the euro whereas GF Machining Solutions on the other hand profited from its strong position with the U.S. dollars. On the right-hand side, you can see that the main positive effects were attributable to the U.S. dollars and the Chinese yuan while the euro and especially the Turkish lira had substantial adverse effects. On the EBIT, the total foreign currency effect amounted to minus CHF 23 million. Slide 19 brings us to the income statement of the corporation. As mentioned earlier, the sales increased by 7% to CHF 1.971 billion. The overproportionate growth in gross value-added to CHF 765 million is explained by an under-proportionate growth of external services and operating expenses relatively to sales and hence the growth value-added as a percentage of sales increased from 38.4% to 38% -- correction, 38.4% to 38.8%. Personnel expenses increased by CHF 29 million or 5.8%, which is well below the increase in sales and highlights the operational leverage of our business. The number of employees remained basically unchanged versus the previous year level and overall the personnel cost ratio slightly decreased from 27% to 26.6%. EBITDA increased by CHF 31 million to CHF 240 million and the EBITDA margin expanded by 80 basis points from 11.4% to 12.2%. Depreciation and amortization decreased by CHF 7 million. Of this decrease, CHF 3 million related to the divestment of the joint venture GF Linamar and another CHF 3 million to extraordinary value adjustments which occurred in 2021. Moving on to the financial result, which increased from minus CHF 11 million to minus CHF 18 million. The increase was due to higher interest rates in Turkey, an increase in foreign currency hedging costs and value adjustments on noncurrent loans that were booked because of an increase in interest and in discount rates. Income taxes increased from CHF 27 million to CHF 34 million while the effective tax rate remained unchanged at around 21%. Finally, net profit attributable to GF shareholders increased strongly from CHF 108 million to CHF 125 million. The corresponding earnings per share was CHF 1.53 compared to CHF 1.32 in the previous year period. Both earnings per share numbers takes into consideration the 1:20 share split, which was executed in April 2022. Turning to Slide 20, which shows the balance sheet as of June 30, 2022 compared to December 31, 2021. The liquidity situation at GF remained strong. The temporary reduction in cash and cash equivalents to CHF 827 million reflects the increased dividend payment in April as well as the higher investments into net working capital. Due to the growth in sales, the trade accounts receivable increased from CHF 611 million at the year-end to CHF 735 million. The day sales outstanding went up from 59 days to 65 days compared to the year-end. The level of inventories grew from CHF 776 million to CHF 864 million. The increase was explained by higher raw material prices and higher safety stocks of certain raw materials to ensure continued production. Days inventory outstanding corresponding declined from 170 days to 129 days. Current liabilities increased slightly from CHF 1.318 billion to CHF 1.346 billion. Currency movements and the divestment of the joint venture GF Linamar reduced current liabilities by CHF 41 million while the higher business activities and inflation led to an increase of CHF 69 million. Days payable outstanding rose from 63 days to 74 days. The equity ratio increased to around 42%, 210 basis points above the level at year-end. The higher profitability and the lower asset base mainly related to the divestment of GF Linamar were the main causes of this improvement. Slide 21 shows the development in free cash flow. It can be seen that the EBITDA had a significant positive effect on the operating cash flow whereas the increased net working capital caused a strong adverse effect. The investment into net working capital meant that the operating cash flow turned negative with minus CHF 30 million also mirroring the characteristic seasonal pattern observed in previous years. Investments in property, plant and equipment amounted to CHF 68 million, CHF 7 million up compared to previous last year. This leads to a free cash flow of minus CHF 37 million compared to minus CHF 32 million in the previous year period. Free cash flow before acquisitions and divestitures was minus CHF 98 million due to the before mentioned net working capital issues. Slide 22 summarizes the key figures. Net debt decreased substantially by CHF 154 million to CHF 52 million. The net debt/EBITDA multiple decreased accordingly from 0.53x to 0.12x. This is an all-time low for Georg Fischer. The return on invested capital increased year-over-year by 4 percentage points to 19.8% reflecting a strong value generation. GF Piping Systems with 35.6% and GF Machining Solutions clearly earned over and above their allocated cost of capital whereas the ROIC for GF Casting Solutions remained below. The increase in ROIC at GF Corporation was mostly attributable to the increase in net operating profit. The number of employees increased marginally by 13 to 14,957. The divestment of GF Linamar reduced the employees by 439, but especially GF Piping Systems increased divisional headcount in the areas of industry and utility. Let me summarize the financial performance of the first half of 2022. Despite the disruptions and the challenges faced in the first semester, GF continued the implementation of our Strategy 2025 and made an important step towards achieving our growth and especially our profitability targets. Our strong market positions and differentiated offering enabled and continue to enable us to pass on the substantial increase in raw material prices. Our balance sheet is more solid than ever and the liquidity abundant for future strategic investments as and when they arise. Thank you very much for your attention and I will now pass on to Andy for the outlook on Slide 23.

Thank you very much, Mads. Slide 24, Outlook 2022. GF confirms its full year guidance. GF ended the first half of 2022 with a strong order book of CHF 973 million compared with CHF 814 million at year-end 2021. GF Piping Systems can build on its strong position in several end markets, the continued shift to higher value businesses and the growing sustainability requirements of its customers. For GF Casting Solutions, the global chip shortage is still expected to weigh on sales while China is forecast to gradually recover in the course of the second half of the year. In aerospace, there are signs of a slight recovery, which will support the development of GF Casting Solutions and GF Machining solutions. GF Machining Solutions expects to capitalize on its favorable order book in the second half of the year. Despite ongoing geopolitical and macroeconomic tensions such as the war in the Ukraine, the inflationary environment and supply chain disruption; GF's financial outlook for the full year 2022 remains unchanged. Assuming that the challenges mentioned subside and no further unforeseen circumstances arise, GF expects to make in 2022 further progress towards achieving its 2025 strategy targets in terms of both sales and profits. Slide 25. Before we move to the Q&A, we would like to invite you to the upcoming Capital Market Day on the 27th of September 2022 in Schaffhausen. Thank you for your attention. We are now ready to answer your questions.

[Operator Instructions] The first question comes from Martin Flueckiger from Kepler Cheuvreux.

I've got 3 in fact. I'll take one at a time. I was wondering whether you could elaborate a little bit on the net pricing situation, i.e., the price cost spread at the EBIT level. I've seen your indications for the pricing component in the individual divisions in H1, but I was just wondering what the actual impact was net at the EBIT level. And speaking about EBIT, were there any exceptional items at the operating income level? Because I seem to remember that the book gain for GF Linamar was said to be neutral. Was there anything else? That's my first question.

Mr. Flueckiger, I will hand over the microphone to our CFO, Mads Joergensen.

In terms of pricing there, we have 3 different situations. At Piping, you could say that there has been a light overcompensation of the input cost increases so there we have a slight positive EBIT impact. In case of GF Casting Solutions, they have of course worked very hardly on their metal surcharges, but you can say that we have not fully been able to compensate for all the cost increases in that division so they are a little bit behind on that topic. For Machining Solutions, it can really be said that there is a neutral impact on the EBIT. They have more or less been able to cover their increases. So the conclusion at the corporate level, I'd say it's not something that has really a material impact on the increase in profitability. Increasing profitability has much more to do with the very good load of the factories that we have as well as the strong change in the product mix towards higher value-added products.

And in regards to any exceptional items on EBIT, we can actually confirm there are no exceptional items on EBIT. As said in our Media Conference during the course of the second quarter, divesting the Linamar stake in the joint venture that was a 0 transaction.

Great. And my second question would be on the exit rates for organic growth in Piping Systems and Machining Solutions in June. I was just wondering given the progress or the development I should say in the geopolitical situation in Ukraine, whether there has been an impact -- or whether you had seen an impact in any of those 2 divisions towards June?

I think at this point of time since we have a connectable business in Russia and in the Ukraine, we don't see any effects at this point of time in regards to our sales of Piping Systems nor Machining Solutions.

Yes. Sorry. Just remind me what was the overall group sales exposure to these 2 markets. Was it around 1%, 2%?

No, it is not that much. It is CHF 20 million on an annual basis. CHF 20 million so it's 4.5% of group sales.

Okay. And my third question and I'll step back in line was whether you could provide some kind of a rough indication of where you see pricing overall for the group in the full year 2022? Because I've tried to do the math for H1 at the corporate level and it looks to me like you were close to 10% in H1. Just wondering where you see group or corporate pricing ending up for the full year in 2022.

All right. I'll answer that question. In terms of the second half there, we do see a change in the situation. In particular in Casting Solutions, you have seen that the metal markets have corrected downwards. So we expect that less of these material surcharges will be passed on in the second half as the markets come down. On the Piping Systems, here we also have seen a flattening of -- not a decline necessarily, but a flattening of the resin prices. So also there we expect a less pronounced effect on the pricing in the second half. And as you can see already in the first half, the pricing effects on Machining Solution is in a very low area and probably for the second half will remain in the same 1% to maximum 2% or 3% for the second half.

The next question comes from Charlie Fehrenbach from awp.

I have 2 questions if you allow. Do you see through the -- any implications for Georg Fischer through possible energy shortages in Europe or maybe also in other countries for the next winters if either it's electricity, oil or gas and how do you get prepared for that? Question one. And the second is in March you said -- you specified the outlook for the sales growth in the whole year. You said that you expect a mid-single-digit growth. You did repeat this, is this still valid? I guess yes, because only price increases should be that much as well. A bit more color there.

Energy shortages and stoppages obviously would have an effect on GF as it would have to any other company across Europe. Our exposure to natural gas is rather limited. Of course we have various companies across Europe, which are going to use it. We have created emergency contingency scenarios for all of our sites for shortages or whether we also have to be -- if we're going to miss energy supply for a longer period or production could not be kept as it would have to be done with sufficient energy. So there would be an exposure and our all facilities are being prepared for such kind of scenarios, which not means that we would continue to produce, but we would actually structurally and well organized reduce production output wherever it's necessary. Our sales growth guidance from today onwards will be in the mid-single to high single-digit percentages. That's what we expect as for the entire 2022. Does this answer your question, Mr. Fehrenbach?

Sorry, I didn't -- I'm not sure if I got it right, mid-single to high single-digit in the second half?

Mid to high single-digit for the full year 2022.

For the whole year, okay.

The next question comes from Christian Obst from Baader Bank.

I have 3 questions. Just for clarification again, how much was the impact of Linamar in the first half which will not occur in the second half? And second one is about free cash flow. How much of the free cash flow -- negative free cash flow and increase in working capital you might -- should recover in the second half? And the last one is on Piping so we had that increase in pricing from 9% to 11% in the first half and while we have stable pricing going forward, I think also your prices will stay as they are. But with the decline of resin prices, maybe then your margin should increase in the second half. Is that some kind of a true assumption so that maybe you can reach more than 15% in the second half?

I think I will straight forward them over to our CFO.

I'd start by answering the free cash flow question first. The free cash flow, there we actually do expect an improvement in the second half on the net working capital. If you look at the development in the first half, we of course have some seasonality in that number, but there is also an increase in the raw material prices. Some of the raw material prices have come down somewhat already now. So we expect overall an improvement of this effect in the second half and we should come in, mainly because of the increased profitability, within our range of the guidance we have given of CHF 150 million to CHF 200 million at year-end. In terms of prices, the margin increase in Piping when markets come down. It's a special situation with Piping. About CHF 350 million sales can be characterized as commodity sales that are mostly relating to pipe and they follow the market prices that is daily quotes. So there when market prices for resin come down, those market -- those prices for the pipe and the commodity part would also come down. These are typically markets in China and the U.S. However, for the majority of the sales you can see in Piping Systems, most of the raw material prices or the increase were more sticky. So you will not see necessarily a substantial margin squeeze or drop in margin when materials come down. So overall, we should have some sort of positive effect when the markets for resin are correcting, but we're not seeing it now necessarily. We're seeing a flattening of the curve more than a steep dive at the moment.

Maybe also, Christian, since most of the specialty chemicals are contractually hedged so you have then normal 6 to 12-month time. So therefore, we will not see any further impact out of that. In terms of the Linamar, as we said in recent years, the effect was north of CHF 300 million on EBIT. So the first Q was approximately a high single-digit number in the range of CHF 9 million [ plus ].

The next question comes from Tobias Fahrenholz from Stifel.

Two questions from my side. Let's start with the supply chain situation and the issues here, which are luckily limited for your company. How do you see the situation developing here in the recent weeks and when and how do you expect it to be solved?

We're going to take this question. We see relaxation of many components in our supply chains although there are still components which have very long lead times that didn't change. But overall, I think we see certain easing of the constraints we have seen just 3 times let's say in Q1, but also towards Q4 in 2021.

Okay. And in general, I mean everybody is speaking about cyclicality now going forward that are some years out of course. On the other hand, there's structurally another topic which is showing up this kind of near-shoring deglobalization how you call. This is I guess visible for your Piping business and Machining, all this doubling of production sites. How long do you expect this trend to last and what kind of growth could this bring for your company structurally? Is it -- I guess it's not fully taking away any cyclicality, but is it a significant topic for you or...?

Thanks a lot for this question, Mr. Fahrenholz. I think it's a very complex question to be very honest. It's a lot of prediction. It's a lot of guessing answering that first of all this normalization or further regionalization doesn't mean that globalization also -- we strongly believe that globalization remains an underlying momentum or whether what we see with microelectronic plants being created and built up across Europe, but also battery facilities being built all over the world. Such factories normally have construction times of 2 to 3 years. If you want to include planning, it might want to add another year. So that's quite long term. So it's not here to disappear in the weeks or months to come. So there is a lot of installation and construction ongoing all over Europe -- not only Europe, but also in the U.S., but also in Asia and in all areas. So therefore, we assume this kind of capital goods requirements will remain solid and therefore -- but when will it end no one can say. What is actually replacing that? I think today already it is more or less how to manage the scarcity of labor, scarcity of resources to conclude and execute on this kind of [indiscernible]. So I think that's the best what I can give you as an answer to be honest.

The next question comes from Alessandro Foletti from Octavian.

I have a couple on Machining, please. The order intake growth was 2.5% if I remember properly and this has been -- I mean the book-to-bill is still good, but the growth rate was slowing. And I wonder if this is an indication of customers starting to order less or they had ordered a lot already last year, maybe also because of supply chain constraints. Is this an early sign that the cycle is sort of cooling off? What is your view here? That's my first question.

I think we had a very robust order intake in the first semester and we see the end market segment, particularly medical device industry but also the e-automotive investments, well intact. So therefore, I think it is for us not that we see a weakening in our end markets. We rather expect the aerospace businesses to come back in the quarters to come. So we have seen, as already stated earlier this year, increased project activities and now it's a question of finally orders being placed. But no, we don't see that not in our markets. Since we are not increasing our production, we are more in the production -- pieces in the production of equipment so we are not too much in the volume. We are more in the say diversification of our end customers' products.

Okay. And on the sales also for Machining, the conversion of orders into sales was kind of lower than I was thinking. You still have a growth of 11%, but I was going for CHF 460 million. I wonder now if you can in the second half year sort of compensate for that and if you can make again what you did last year in the second half, CHF 480 million or maybe even more than that, maybe even more than CHF 500 million. Is that possible? Is it due to supply chain or you don't have the capacity to do that?

Well, first of all, capacity is obviously available. It is a question of having the right products on time in our assembly facilities. The ordinary seasonality of this division is that we have a clearly elevated second half of the year. So we are good and set to leverage and capitalize on our strong order book for the second half of the year.

So basically you believe you can make CHF 500 million easily if the products are available, if let's say the shipping is possible, if the supply chain improves?

Normally, as you know, we are not so much the ones which are going to give the competitive statements about the future. But your assumptions are more or less correct comparing also previous year second half. We have demonstrated once again that we are able to deliver more and our facilities are capable to do more what we have seen in the first half. That's also clear.

All right. Great. My last question on the cash flow. There are the CHF 61 million cash in from divestment. Is that all from Linamar and does this also include the CHF 20 million that you said is a contingency? What is that contingency related to?

You're right. The CHF 61 million is the cash upfront and then, as disclosed in the notes, there is a contingent purchase price and that is tied to the EBITDA performance of the company going forward for a couple of years. So it's more a longer-term plan that we are entering into. So there is a potential upside to cash on that one.

All right. Did I understand correctly that it made a loss of CHF 9 million in the first quarter basically?

Around that number, yes.

The next question comes from [indiscernible].

I have few questions. First on machining. With 1% to 2% pricing and looking at traditional gross margins for machining players, I find it really difficult to understand how pricing inflation shouldn't have a negative impact with the lead times because you can imagine that prices only increased by that little. Probably you can explain that a little bit more. That would be the first question.

The Machining Solutions business is on the sales, but also on the supply a very much hedged business. It's also so that all contracts for components normally are the same tenure as the ones as we're going to see when we forward our products to our customers. So that's first of all one of the topics why this doesn't have such a big impact. It's also certainly quite complicated to compare machine tool sales with the previous year machine tool sales since all of the equipment are actually made to the requirements of our customers. So the drilling machine might be priced at CHF 500 to CHF 300,000, it might could come along with some integration services, it could come along with some application services. So it's not that easy on a comparable base. Overall we have seen that our margins remained strong in the first half of the year. That means that we have been pleased that we will not pass on the input price increases to our markets.

Okay. That makes sense. That would mean that at some point, these higher prices which are hedged now will lead to bigger price increases in 3, 6 and 9 months probably then, which we will see from Machining.

That comes along with to increase prices for our products in the months and years to come because machine tool you order today would not have the same price level as you would have ordered in a year ago. So we're going to keep care that there is not a negative development out of the input prices versus the sales price.

Perfect. And then a more general question for all the divisions. We all see these PMI contractions, low consumer confidence numbers and I've heard of quite a few industrial companies about weaker sales numbers in June. What can tell us about your divisions, what you see in your end markets over the past few weeks?

Piping Systems remains a very resilient situation as you might have seen; water scarcity, water distribution, non-revenue water, water treatment remains a key theme for that division as much as industrial segments such as microelectronics, battery production, but also chemical process industry is keeping all its good equipment. So since we are in the capital goods and not so much in the parts production, we have rather a solid forecast for these developments at the end markets for our customers. So we don't see the signs of weakening as you might see if you are in a part production where suddenly the volumes due to consumer spending is going down. So that does not really affect these businesses. As much as it doesn't affect our Machining Solutions business since we are also there not in the part production as I said. Here we're going to see capital expenditures for new medical device production for new production technology. Take the battery production, battery production has much more stamped components than anything else what you have seen in the past where you had a fuel tank in the past, which didn't require energy of machining solutions installation. You now have some fine stamping, ultra precision stamping, which means in 1 micron accuracy level and you're suddenly going to need a machine tool who produces these kind of stamps being used for example in the battery production. Or if you take a fuel cell, if you want to build a fuel cell facility, you're going to need to have fine stamping for the electrodes. And therefore, there is -- it has to be differentiated looked at in terms of what kind of requirements being needed in our end markets. So we see there's an ongoing good demand. In the ICT, we see the consumer spending. But however, we are not so much depending on the volumes of the gadgets being sold. We depend much more on the next-generation approach and whether our clients and customers are going to produce in the same end markets. For example our biggest customer is deciding that he needs to move part of his production to another country in the APAC region. That means it comes along with new investment requirements for the mold and die production of this supplier and that drives a lot of momentum in ICT, but also there's a momentum in ICT which means that autonomous driving is requiring much more of these kind of technologies. Just going to name first camera systems, but also many of the sensors are going to require this kind of installation. So it's shifting and it's a wide end market range and once again it's not so much the volume which creates our space, it's more the innovation in the end markets itself.

And then last part on Casting Solutions. Can you remind us what kind of EV share you had in revenues in H1 of the total division?

It was in a range of 12% now and constantly growing. That means we see this segment as the fastest growing segment in combination with our body infrastructure segment.

And this 78% is not a total automotive order you had or EV, that's just for that specific product category. What is it for the total automotive part in terms of orders, the EV share in H1?

It's in the range of 60% when you take the total casting solutions which comprise also aerospace, energy and also industrial applications. For example we also produce houses for windmills, we produce axles for e-haulers of very large construction equipment company out of Scandinavia. So there's a lot of more than the only automotive related or car sales related components, but out of that one it was 78%. So CHF 300 million out of CHF 350 million. But overall, it is CHF 100 million higher.

Okay. Perfect. And then last question on inventories and not about your inventories, but we hear about a lot of buildups of inventories in all the supply chains because of all the shortages. Safety stocks are getting increased in many companies. What do you see there for your customer? Do you also see heightened inventory levels in the different supply chains?

Some of the inventories for instance on the Piping side has been increased on the customer side, but that's mainly related to some of the announced price increases. So there has been -- in Q1 at least there was some stocking with our customers before the price effects came in, which typically come in on the 1st of April onwards. But for Georg Fischer in terms of heightened inventory, it's not something that is really across the board. It is very specific on either a material or a component. It's not so that we overall have increased our inventory levels due to safety or supply chain. It's really specific on for instance material PBDF or on certain electronics components from Machining Solutions, that's where we have decided to increase it, but it's not across the board as such.

And at your automotive clients, do you see heightened inventories too or not?

This is normally not a typical fundamental. What we see for our components normally the throughput time for production until the product is being installed is between 3 and 5 working days that's just due to the sheer size and volumes. So I think safety stocks taken up by our customers is rather in the electronics components field, but not in the casting components.

The next question comes from Remo Rosenau from Helvetische Bank.

Piping Systems generate around 84% of operating profit with around 55% of sales, great achievement over the last 10 years. Now looking at your 2025 strategic targets, which entails a 9% to 11% EBIT margin. Is it fair to assume that in order to hopefully get to the upper end of this range, the main contribution needs to come from Casting Solutions and Machining Solutions whereas Piping Systems might rather keep their current profitability which is already quite good or do you see even further improvement potential also at Piping Systems?

But you correctly observed since the 2 smaller divisions are still not yet in their target profitability ranges, the contribution needs to come from these 2 divisions where we are confident with the measures implemented even to achieve our strategic targets 2025. You also correctly note that the Piping Systems performance is better. It's very high level, which is to be kept maintained. Whether there is still some expansion possible, we will not refrain if it becomes more profitable, but we are happy with the performance that we've seen in the first half of 2022.

Okay. And looking at Casting Solutions in particular even on the Swiss [indiscernible] without any intangibles, you showed the 5.7% return on invested capital in the first half of '22 in Casting Solutions. I mean what is your WAC assumption there? I mean usually people take something like 7% to 8%. So is it fair to say that the value generation in Casting Solution would start with a ROIC of around 7%? Is that also your calculation?

I leave that to my CFO.

That has for a very long time been the number. But as you have surely also noticed that the interest rates have gone up and also the WACs have increased somewhat. So probably its starting point is between 8% and 9% for Casting Solution before it returns or generates value.

So the EBIT from current level need to improve around 50%, 60% to reach kind of the threshold, right?

No. The ROIC of course is a different number and there we have quite a lever. So we would still expect within the 7%, 8% EBIT margin should come closer to the area where it starts to generate value.

Yes, of course because then also sales are higher of course.

Yes, exactly.

The next question comes from Walter Bamert from ZKB.

The first question on the order backlog that even outgrowth in percent to sales growth. Is that the kind of product mix that you are installing with longer lead times or is that just the inflationary effect? How do you assess that growth rate and what conclusions can we draw from that? And the second is regarding your luxury problem. You have a too strong balance sheet, you don't find acquisitions. Will you resort to a share buyback? And here is the question. Why don't you make acquisitions in Piping System? Does the obsession with ROIC also in management compensation with a divisional ROIC of 35.6% prevent you from doing any transaction that would dilute that ROIC a little bit because for sure you won't never find an acquisition that brings you the same 35.6%?

Before we start into answering your questions, Mr. Bamert, let me confirm you now that any STI considerations would not hinder us to acquire a company, which will fit and make strategical sense to GF. I think that it's been clearly underpinned. And I will leave the microphone to our CFO to give you some answers on the other question.

Sorry, we have – I'd answer r continue the answer on the topic of this ROIC, right. In terms of liquidity, we have a very strong situation again and we want to continue to keep that liquidity available to have a high level of agility and be able to act when the opportunities are there. I can assure you that we are maximizing our efforts in implementing our M&A strategy. As you may understand that we're not trying to blame everything on the COVID, but we predominantly or exclusively buy privately owned companies and the private owner don't sell his company over MS Teams. He needs to see the faces and meet the people that is going to buy his company. And what we're doing is intensifying these visits. Since the lifting of the lockdowns here in Europe, we have been traveling extensively and are developing and nurturing these relationships. So we are focusing a lot on the M&A side. Of course we give priority to Piping, but also Machining Solutions here and there offer some interesting technology that we should not rule out completely. In terms of dilution, you will notice that our Strategy 2025 numbers actually indicate now I see between 20 and 22 and they were lower than the previous period with a specific idea of making sure that we are growing and we are allowed for growth. That's why that you cannot draw the conclusion that we do not have any motivation to do a large acquisition that would also dilute Piping Systems from a ROIC point of view. It is really specifically lowered in terms of targets so that we can also do something large and interesting for the division. I hope that answers your question on the M&A program.

Coming back to your first question in terms of our order book outperforming our sales level. I think it is also due to end market developments of Piping Systems which, as I said, we saw the utility markets for example in the U.S. but also industrial markets in the U.S. and Europe being very strong. And so therefore, we had a strong order intake for the month, but also let me say for the next couple of quarters to come.

[Operator Instructions] We have a follow-up question from Martin Flueckiger from Capital Cheuvreux.

I've got 2 questions and one is a clarification question I think for Mads. Did I understand you correctly that you were saying CHF 350 million of Piping sales can be characterized as more commoditized? Is that the correct number, CHF 350 million?

That is around that number, yes, that's predominantly pipe, polyethylene pipe and also certain PVC pipes.

So PE and PBC, yes?

Yes, PE and PBC.

Great. And second question is on your new pipings plant in Yangzhou in China. I was just wondering whether you could give us a little bit more granularity on the ramp-up on the stage of commissioning this new plant and what the -- I guess the contribution to sales has been rather small? But any kind of indication and how much it's lowered EBIT in H1? That would be quite useful and interesting.

I think it has a neglectable negative impact on H1. Since Piping Systems plant can be ramped up more or less seamless and as we have said, we've done in the capacity for production in China, but we're also expanding our services. We have a new roll prefabrication facility, which will allow us to serve sensitive end markets such as microelectronic pharmaceuticals, but also data centers installations and prefabrications. And what we're currently doing is we're relocating step-by-step the production facilities to this new facility. The facility by the way is in operation and continues to be in operations during the ramp-up period. And once again as said, the amount that contributes in the first half, it did not really contribute to a negative development and I think in the long run we can double the production output.

Gentlemen, so far there are no more questions.

All right. We thank you for your interest in our company and wish you a great summer break. Thank you very much.

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