Rieter Holding AG (RIEN) Earnings Call Transcript & Summary

Ladies and gentlemen, welcome to Rieter's Capital Market Day. Thank you all for joining us today. My name is Relindis Wieser. I'm the Head of Group Communications and Marketing. Today, we have 2 presentations lined up for you. Thomas Oetterli, our CEO, will present Thriving on Textile Megatrends. After that, Oliver Streuli, our CFO, will talk about financial ambition and key figures. The presentations will be followed by a Q&A session. Webcast viewers may submit their questions in writing. As always, the speeches are recorded. Let's dive into the first presentation. Thomas, the stage is yours.

Thank you, Relindis. Ladies and gentlemen, also from my side, welcome to the Capital Market Day. Over the past months, we have worked very hard to sharpen our overall strategy for the Rieter group. Today, I will present an overview. Let me start with our markets. Slide #3 shows the 5 key mega trends that are shaping our industry. The first one, of course, is sustainability. The textile industry is under pressure to become more sustainable. And our technology and know-how have a lead role to play in putting the industry on a better path. The second is labor shortage. Like many industries, spinning mills too are hard hit by labor shortages. Automation presents a compelling answer to this challenge. We see soaring demand for automation, even in markets that traditionally counted on manual labor. The third one is Digitization. The whole world is becoming increasingly connected. Our customers want to have full control over their spinning process from fiber to yarn in real time. Our answer is to have smart and connected production systems. And of course, our digital spinning suite helps to preserve the know-how of the mill employees. The fourth big megatrend is Manmade fiber. There is a rise in demand for Manmade Fibers in clothing, technical textiles and alternative fibers. And last but not least, the global economy is undergoing a process of decoupling. We are adapting to these changes by moving closer to our customers and localizing our supply chains. This will make us even more resilient in the face of this massive transformation. Now let's have a look at the global textile landscape and the value chain on Slide #4. Here, you see on the left side, the raw material which is used in the whole textile industry. This amounts to about 110 million tons of raw material per year. This is split into 60 million tons of staple fibers and about 50 million tons of filament. When we deep dive into the figures for staple fibers, we see that roughly 1/3 or a little bit more than 1/3 comes from cotton and 1/3 from polyester. These are filaments, which are cut afterwards into fibers and then spun into yarn with our machines. The rest is made up of viscose and other products. The total of 110 million tons are used to produce yarn, and we measure how many spindles we have worldwide. Production capacity for producing yarn from staple fibers is measured in spindle equivalents. In total, we have 272 million spindle equivalents. Spindle equivalent refers to ring spinning, but also to rotor spinning and to air-jet spinning. On the lower right-hand side, you see the distribution of those 272 million spindle equivalents. Still, the biggest market in terms of spindle equivalents is China with roughly 35% followed by India as a single country with 23%; the rest of Asia with 27%; then Turkey, again as a single country with 5%; and the rest of the world is just 10%. In summary, more than 80% of the installed spindles are in Asia Pacific. Now let's tackle the global fiber market growth on Slide #5. We will also take now a closer look at how the fiber market has developed in the past and how it will develop in the future. We also distinguish between different staple fibers such as cotton, polyester, viscose and filament. This filament is represented by the dark blue part of the bars. Between 2010 and 2023, the global fiber market grew from 78 million to 110 million tons. And if we fast forward into 2030, we see there will be a growth up to 136 million tons. The major share of this growth will come from filament, but all other segments are expected to grow as well. Slide #6 shows the market segmentation. There is an economy segment where price is the absolute first priority. The standard segment is where price is important, but quality, productivity, energy consumption and efficiency matters too. And then there is a premium segment. Historically, Rieter has been mainly present in the premium segment. This will remain a particularly important segment for us, where we will defend our leading position. These are cotton and cotton blends applications. This is also where mechanical recycling comes in. We have an absolute leading position in that segment, and we want and we'll defend it. The standard segment has seen steady growth over the last couple of years. We want to increase our market share there. We want to further attack the market to increase our share in man-made fiber applications, but also with certain components in the filament applications. We will take an opportunistic approach in the economy segment, which is, as I said, purely price driven. We will not push too hard here. We take a case-by-case approach and size opportunities when they present themselves. This will happen whenever we can convince the customer that he or she can have a better conversion cost with us than with our competitors. Slide #7 shows the market volume and the players in the market. The Machines & Systems market was roughly CHF 3.9 billion in 2023 based on sales and deliveries. Rieter is by far the #1 in the market. And you see here #2, #3, #4 through to #15. You also see that we have mentioned or we have noted our competitors without their names. But what we can easily say is that Rieter in this area of machines and systems was almost as big as the #2 and #3 put together. On the right side, you see the component market. The component market is roughly CHF 1.8 billion in 2023. Also here, we have a major market position. What is obvious is that this market is much more fragmented. There are many, many small players. And Rieter probably bigger than the #2 to #6 combined. The third market is the after sales market, where we talk about spare parts, services, repairs and engineered solutions. It is difficult to calculate the size of this market. Therefore, we were focusing on machines and systems and components. In the middle, you see the total industry where Rieter makes up between roughly 25% and 30% of the total market in the world. This means a clear #1 position, and this raises the questions for us. Why is our position so strong? What do we have to do to defend that strong position. What else can we even do to increase our market position, which brings me to the next topic. What is it? Our unique selling proposition. Let us have a look at Rieter at a glance on Page #9. We have a history of nearly 230 years, and we were founded in 1795. By the way, this was just after the French revolution, and it was just before Napoleon Bonaparte took over the leadership in France and campaigns all over Europe. It is a very old company, and we have generations of employees and managers who have done a fantastic job. Otherwise, the company would not exist anymore. Our task as an executive committee, as a leadership team, but also as an employee at Rieter is to honor all these achievements of the past. In particular, what do we need to do today to make sure that our successors will 1 day look back and say, "Wow, this team has done a great job of future-proofing our business and we are now prepared for the next 100 years. We are present in 14 countries. We have 23 locations. We employ a workforce of around 4,800 people and we operate the whole organization through 3 divisions or as we call them business groups. One is Machines & Systems. This is the new equipment and system business. One is Components. These are very specific precise textile components. And then there is the Aftersales business. So let's have a look on our business model on Page #10. We are Rieter. We are the experts from fiber to yarn because we cover the complete process from fiber preparation through to all 4 end-spinning technologies in spinning mills. Here you see on the left side, the fiber, whether this is cotton or manmade fiber, linen, viscose and then you have to prepare the fiber. In fact, what you are doing is you are cleaning the fiber. You take out all the third-party elements. You remove some dirt and dust, so that you have a clean underlying fiber at the end. After this fiber preparation, so when you have clean fibers, you move on to spinning preparation. Spinning preparation means you take the fibers that are the most suitable ones to spin afterwards. Out of this raw material, you create a sliver or roving, which allows you to do a proper spinning at the end. This brings you to the end spinning and winding process, where either you make a yarn with ring or compact spinning or you make a yarn with rotor spinning or with air-jet spinning. Below you see the whole value creation process. We offer our customers specific textile components via our business group components. Our brands are: Accotex, Bracker, Graf, Novibra, SSM, Suessen and Temco. On top of this, we offer also to our customers after-sales services, parts and repairs to maintain or to increase the lifetime of all those machines they have bought from us. Slide #11 shows that we are the only ones who offer the whole value creation process to our customers. This is what makes us unique. Only Rieter offers all types of machines from the blow room at the beginning through to the final step of winding the yarn. All other competitors lack some parts of this value creation process or are specialized for certain individual machines within this value creation process. Nobody else offers a comprehensive system approach. I will come back to this later. This system approach demonstrates what makes Rieter unique and how we are positioned in the market. And now let's have a look on our strategic direction. Let me deep dive on our strategy house on Slide #13. Over the last couple of months, we have been fully focused on these topics. What do we really stand for? What is our vision? What is our mission? Where can we win? How can we win and with whom can we win? What do we really want to achieve in the midterm across different elements of our company? The good thing at the beginning, the vision remains unchanged. Rieter is in every spinning mill. The vision applies to Machines & Systems, After Sales or our Components business. I can proudly say to all of you that each piece of clothing you wear was in touch with a Rieter machine or a Rieter component. Everything you are wearing has a connection to this company, and we want to keep this also in the future. What we really do is summed up on the Rieter provides leading technology for fiber processing. We are the experts from fiber to yarn and the question is where we can win against our competitors. This is the critical point. We want to remain a technology leader in this part of the textile value chain. We want to be the best-in-class in terms of customer service. We want to work hard in automation and digitization and we want to offer to our customers the best financing packages. This is the reason we can say that we can really win with innovative solutions in terms of technology, customer service, automation, digitization and financing. This puts the focus on the customers' view and shall make our customers more competitive. Internally, we want to be a professional partner. We want to further professionalize the way we do business, and this will also answer how we really can win. On one side, this is sales excellence. Where do we have the markets? We can still increase our market share. Where can we tap into market segments with certain new products, which brings us to the second box, competitive products. We will not be cost leader, but we want to be a technology leader at competitive cost. We want to offer our customers the best relation between the money they pay and the value they get. And of course, we want to be a reliable partner. We are a partner that delivers on time, at high quality, at the best customer service as well. Therefore, supply excellence is very important for us. And then last but not least, as we are in a very cyclical market, we have to be agile. Agility means, we have to have our cost base in overhead functions under control. We have to be able to shift responsibilities from one place to another because we always want to be close to our customers. This extends to all those processes and organizations, which are close to customers or where customer centricity is particularly important. And this, we only can achieve when we have committed employees. Our employees have tough years behind them, and still this year is a tough year and maybe next year will be tough as well. So what do we need to do to have committed employees. Above all, we need to have the DNA -- we put customers first. They pay our bills. They pay our salary. They are the queens and they are the kings. We have to do everything at any time to satisfy and to exceed the expectations of our customers. Another element is quality. As I said, we are not price leaders or cost leaders, but we are technology leaders. We therefore must ensure that this technology comes at the highest quality possible for us. As a company with Swiss routes, everybody expects the highest quality standards. We need to meet and exceed these expectations. This also needs to be in the DNA of our people. And last but not least, we spent a lot of time at work. We have so many interactions with our customers, colleagues, with other stakeholders. It is so important that everybody perceives us as passionate. We want to have fun. We want to be proud, not arrogant, but proud. We want to have confidence. Passionate employees will by far deliver the best results, which brings me to the last point of this strategic house, how do we ultimately measure that we are delivering on our promises. If our customers say, we are good, then they will give us a top rating. So we want to achieve a Net Promoter Score that is above 50. If you want to have passionate, happy, dedicated employees, our employees should say that Rieter is a great company. Here, we want to achieve even higher scores than our customers. We want to achieve an employee Net Promoter Score above 60. Happy customers, happy employees, we also want happy shareholders. When we announced our next level program, we said about the business cycle that we always want to achieve positive EBIT margins. In tough years, the margin should reach between 0% to 4%, in mid-level scenarios between 4% to 8%, and in booming years, it has to be double digit. On average, this mid scenario amounts to an EBIT between the 4% to 8%. One way of achieving this is by increasing the share of our After Sales and Components business. We aim to achieve a business mix over time, which is made up of 50% new Machines & Systems and 50% After Sales and Components business. And finally, and maybe I should have mentioned that as a first point, we also want to contribute to a better world. We want to be a good citizen. We do not only want to follow all the laws and regulations. We want to do everything in our power for ourselves, for our suppliers and for our customers so that we can play our part in making this world become greener. We have, therefore, committed to net zero carbon emissions by 2040. Slide 14 gives an overview of where we want to win. What are the enablers that can really create added value for our customers and ensure that we really differentiate from our competitors. Technology leadership is key. We are the ones who have the best knowhow of how to convert fibers into yarn. For this, we have an extensive technology portfolio and we have to manage this portfolio actively. We cannot invest everywhere. We cannot tie up too many resources. You have to be selective. Where can we add the highest benefit for our customers. This is where we have to develop innovations that are really aligned with those requirements. Customer service. Customer service means to be close to our customers. Today, we are not physically present in all countries where the customer base is. We need a well-established after sales network. Our field service engineers, therefore, need to be where our customers are: people who do service, people who do installations, people who do repairs and people who do upgrades of machines. We also need our sales people, of course, to be closer to our customers. They should not be based here at the headquarter, but it also means that we have to establish more decentralized warehouses in those countries where we have a big customer base because speed of delivery is super important for a customer. Imagine a machine is not running. And therefore, a whole production line cannot run. The cost of not producing is much higher than the cost for the spare parts. So the closer we are to customers, the faster we deliver parts and services to our customers, the less price sensitive are our customers when it comes to spare part pricing and service pricing. Automation and Digitization. This is one of the mega trends. Our customers struggle finding people. For example, mill utilization in Turkey currently is roughly 60%. In the past, it has been 90% plus. So half of the difference to 100% is because the markets are not so good at the moment. Because consumer sentiment here in the European Union, which is an important export market for Turkey, is particularly low. But the other half of the gap is because our customers cannot find people to run the machine. So in theory, they could produce much more. Their demand would not be 60%, but instead, maybe 80%. They cannot fulfill that because they cannot find people who are running the machines. The only solution for this is the automation and digitization of processes. And this is one of our key focus areas in the future. And last but not least, I come to financing. Our financing support for customers is also a key differentiating factor because investments in a spinning mill are expensive. If we can offer good terms, good conditions, good interest rates, with our financing packages, then it becomes more affordable for our customers and this is also a differentiator. This takes me to the final topic. What makes Rieter's value proposition so attractive for customers. The appeal of our value proposition is demonstrated on Slide 15. The left bar shows the system of a customer with his revenues and also his different cost blocks. The cost for the raw material make up 65% of the spinners cost in its profit and loss statement, another 15% comes from energy and another 10% from labor. And then there are operating costs, including the amortization, depreciation of their machines, but also service costs. So there is only a small spinners margin left. Now with our value proposition as a technology leader, having automation and digitization, a great customer service and good financing packages, we are able to reduce the conversion cost of our customers. Conversion cost means the conversion cost from fiber to yarn. If you use our machines, you have lower total conversion costs. The cost per kilogram yarn is lower if you use our machines than other machines. Why? Because you have lower raw material costs, higher productivity, higher efficiency as well as less waste. You have lower energy costs because our machines are much more energy efficient than anybody else's. And you have lower labor costs because we are pushing automation and digitization. As a consequence, you need fewer people to run our machines than those of our competitors. And because of our technology leadership, we also promised that the end product has a better yarn quality. This allows our customers to achieve higher prices when they sell their yarns downstream. We create customer value by enabling higher yarn quality and higher prices at lower conversion cost. Yes, thanks, God, our machines are a little bit more expensive. Our services are a little bit more expensive. But given the total cost, you will make much more money using our technology than anyone else's. Now let's take a closer look at our customers on Slide #16. We have around 3,000 customers worldwide. The structure below shows that most of them are rather small. Most of them are family owned and are just present locally. And you can see that our top 10 customers only have a minor share of our total sales volume. When you look at these customers, family-owned businesses, that are quite small, they increasingly struggle to achieve economies of scale. Most of those spinning meals of today are between 30 to 50 years old. The owners are still the founders. They are now at an age of maybe 70, 75 years. The next generation is set to take over, and this is a unique opportunity for us because this next generation is familiar with digital products and with automation. They are much more interested to buy cotton and to sell yarn. They are not so much interested in mill manufacturing or managing all those machines. They are happy to ask, "Hey, Rieter can you take over these tasks. I just want to buy and sell. Can you also help us to manage those mills." We will enter into this area in the future. Now to Slide 17. When I look at the priorities of our 3 different business groups, let me start with the strategic priorities of Machines & Systems. I mentioned before that it is super important that we defend our leading market position in this premium market, which is mainly cotton and cotton blend applications. We will attack more in the manmade fibers and blend applications. Of course, if we want to stay the #1 or even attack #1s in new market segments, we have to be cost competitive, not always cost leaders because we want to be technology leader, but we have to be cost competitive. Internally, we have to apply this Best Cost Country approach, and more than 90% of all the components and parts are in the future locally purchased. We cannot purchase around the tower of the church here in Winterthur where everything is super expensive. In components, as you can see on Slide 18, the strategic priorities are quite similar. Technology leadership is also here super important. You will see it afterwards in the breakout sessions. We want to increase our market share in the area of filament with the support of our business group components. And for this reason, we are also open to one or the other bolt-on acquisition as we have done it in the past. We want to create very selectively, a family of specialized component manufacturers in the different range of applications. We will pursue also here selective opportunities with M&A growth. Slide #19 shows the strategic priority in the business group of the sales. Oh my god, this presents a great opportunity for us. The chart shows our key markets. And you see again the distribution of the spindle equivalents of the total market, not only for Rieter installations, but for really the total market. In China, for example, you see that roughly 60% of this market is ring and compact spinning, then you have maybe 1/3 that is rotor spinning and maybe 10% is air-jet spinning. And this distribution, you see also for the other Asian countries. You see for India, for the rest of the world and for Turkey and interestingly enough, not every country has the same distribution of end-spinning technology. For example, in India, the share of ring and compact spinning is much bigger than in China. And you see that rotor spinning in the rest of the world or in Turkey is very important. But in Turkey, you also see that compact spinning is particularly important because this is where you create the highest quality ring spinning yarn. So every country is a little bit different. And of course, in the different countries with this different baseline, we are also selling different types of systems. India is a dominant ring spinning market, which is why we have our ring spinning manufacturing in India. And you have a big rotor market in China and in the rest of the world, and this is why our rotor manufacturing is in China and in Europe. Different countries have a different installed base. The question is what is the potential we could create with after sales, services, repairs, upgrades and spare parts. If you take that as 100% because you know this part, you have to replace every 2 weeks. And this part, you have to replace every 3 years. You can calculate what is the potential, the market potential of this installed base in a certain country, and this brings me to these blue bars. You see here how much of the potential we are already realizing in these different markets, and it's nowhere 100%. On the right side, you see China and Asia Pacific. Here, we do not really realize all of the potential we have. On the left side, you see India; the Rest of the World, which is Europe, America and also Africa and where we currently stand maybe close to 50%, and also in Turkey, we are still quite low. If we realize our potential more effectively, we should be able to grow our after sales and component business dramatically in the future. And this is super important and brings me back to our strategic house where we said, we aim for a balanced mix between new machines and systems and aftersales and components. I will come back to the last point now of the presentation, which brings me to sustainability. In sustainability, we have a clear statement. We want to become carbon neutral by 2040. We also know that the reporting requirements have dramatically increased. So we will comply with all these different legal frameworks here in Switzerland, but also in the European Union. And I am sure, there will be more and more regulations in the future. Now we have set ourselves a short-term target which is in 2030, mainly focused on Scope 1 and Scope 2, where we want to have everything either produced or bought with renewable energy. We still have a couple of years' time and we have clear plans where we can install further photovoltaic installations on our production sites and where we can buy green energy. Scope 3, of course, is much tougher, that brings us to our long-term goal, which is to become carbon neutral in 2040. Those 3 deals is the whole life cycle of our product. So going backwards into our supply chain and going forward to the usage of our products for our customers. What have we done so far this year? We have agreed that we are participating in the science-based targets initiative, the SBTI. Over the coming months, we are developing the road map to net zero in 2040. I do not have all solutions yet, but we are working on this now. First, we have to make an index analysis of our Scope 3 emissions. So we can then develop the right action plans in order to become carbon neutral in 2040. This is the overview of our overall strategy. We are fully committed to this. I even would say we are excited about it. We have presented this strategy to our leadership team, to our employees, and all of them understand our strategic direction. Our Board of Directors has approved it. So today, you will have 3 deep dive sessions on this first line of the strategy house, where to win with our innovative solutions. There will be a technology leadership session, which covers mainly machines and systems and components. We will show our customer service. What we really plan to do there, which is our aftersales business, covering components and the aftersales division. And then along all the 3 business groups, of course, we will show you automation and digitization and how we are driving these initiatives in the near future. Thank you very much for your attention. And with this, I would like to hand over to Oliver Streuli for the financial ambition and key figures.

Thank you, Thomas. Good afternoon, ladies and gentlemen. Welcome to Winterthur at our brand new technology campus. It is a great pleasure for us to host this Capital Markets Day. Ahead of the deep dive sessions later on, I am now going to present to you our financial ambition for the coming years. Let me start with a look in the rearview mirror on Slide 23. We operate in a cyclical industry where sales tend to fluctuate heavily from year-to-year. However, regardless of the sales environment, we have been unable to deliver a sufficient level of profitability in the past. In difficult markets, we have generated substantial operating losses. While in good markets, our profitability lagged behind expectations, especially in the last 5 years. I had the opportunity to meet my 3 predecessors personally and without exception, they all mentioned our cyclicality first when characterizing Rieter. But apart from the ups and downs of the cycles, Rieter has an attractive business model, especially also from a financial point of view. Firstly, the price level of our Machines & Systems is healthy as evidenced by solid gross margins that we can achieve. I have seen other industries with significantly lower gross margins on new machinery business. So the basis, I'm convinced is healthy. Secondly, our Aftersales and Components business is an important source of profitability, yet underdeveloped when measured as a percentage of group sales. We have a significant growth opportunity at hand, not only from a sales perspective but also from a profitability mix perspective from after sales and components. And finally, we operate an asset-light business model. We receive down payments for Machines & Systems and partly even for after sales and components. And since we are a system integrator, the CapEx needs of our business are limited compared with other industries. These financial features together with the industry megatrends as outlined by Thomas earlier, convince me that our equity story is attractive. And our target is now to persuade you of these 2 in the coming hours. Let's start on Page 24. To keep return on net operating assets above the cost of capital is what I call the absolute golden rule for value creation and thus of any good equity story. Over the past decade, the Rieter share price had almost perfectly traded in line with order intake, upwards and unfortunately also downwards, and most recently, mostly sideways. What we want to do is we want to generate long-term value add and long-term attractive returns on net operating assets. And when we deliver on this ambition, our share price should to some extent decouple from the pure momentum spurred by order intake and depreciate also over the longer term. Many of the textbook drivers of return on assets are addressed by our new strategy and we kickstarted also a lot of them by next level last summer. Now over the following slides, I would like to give you more details on the key value drivers from an operational, but also from a financial point of view. As you can see on Slide 25, our end market demand is very cyclical, given to which we must adapt. Historical sales numbers show that our Machines & Systems business can oscillate within a 30% range. We do not expect this to change in the future. In comparison, our components business fluctuates roughly 15%. And after sales is less cyclical, fluctuates roughly 10%. So firstly, we need to cope better with the strong cyclicality of our Machines & Systems business. Secondly, it becomes evident that if we increase the relative share of after sales and components in our business mix, the group overall will become less cyclical, which further underpins the importance of our growth strategy in those areas. Now what does that mean specifically? As we can see on Slide 26. The absolute sales increases from the past trough to boom years were mainly driven by Machines & Systems. After Sales and Components also increased, but less significantly as evidenced when you compare the year's 2019-'20 and 2022-'23 on the chart on the left-hand side. This led to various challenges, especially with regards to order, execution and supply chain issues, but also regarding margin mix. Since our margins are lower in Machines & Systems compared to After Sales and Components. So what do we want to change? Most importantly, we will adjust our capacity in the Machines & Systems business downwards. The market does not pay for overcapacity. This means we will adjust our base capacity to a mid-level sales scenario. And this also means that in the event of a market boom, we will need to act more conservatively and find alternative solutions with our customers instead of accepting all orders regardless of capacity constraints. Specifically, we will need to be selective and either increase pricing and prioritize production slots or extend lead times to ensure that we can deliver on time, cost and quality. And what we also aim for is a dedicated growth strategy in components and after sales, as you can hear later on then to exploit the significant market potential that we have there, most importantly with our own installed base. This altogether is intended to lead to a more balanced business mix mentioned by Thomas earlier, between Machines & Systems on the one hand and After Sales and Components on the other hand. Specifically, a 50-50 split in a low scenario and a 60-40 split in a high scenario at max. Now to Slide 27. Our ability to successfully cope with the high cyclicality of our Machines & Systems business will be a key success factor of our strategy. As illustrated in this chart, we distinguish between the fixed, which is the bar; and the variable direct costs, which is the coil. Together, this is the cost of goods sold. And then we have R&D and SG&A, our overhead costs. Now flexing capacity is a common word, especially these days. And it's a key skill that most manufacturers of industrial goods need to master. However, it's not possible to flex the entire cost base as can be seen with this bar with the fixed direct cost. Now what we did on the next level is we immediately cut the overhead costs since these measures had the fastest impact on our income statement. Now in the next phase, what we will do is we will adjust our fixed production capacity, the bar to reduce our overcapacity and to bring it in line with a more conservative base market scenario for the Machines & Systems business. And this will then put us in a position to reliably deliver a positive EBIT margin even in a low scenario. Consequently then, we will have a high capacity utilization in the mid-level scenario, which is not the case today, and we will benefit from economies of scale in a high scenario with the support of a temporary workforce and external work benches up to some point. Now so far, we have made great progress in improving our cost base. As we presented with our half year financials, we got overhead costs by CHF 42 million in the first half year 2024 compared to the prior year, this is roughly 1/4. However, we are also working hard on our direct costs on the so-called continuous cost leadership program, as you can see on Slide 28, we call this CCL. CCL initially started as an initiative on the next level and is now a fully integrated organizational program within Rieter addressing all 3 divisions. The target is clear, we want to cut our material costs by 5% every year. Furthermore, we also target our logistics and other indirect production costs. And next up, we will also start to work on the entire indirect spend for the group, which is to date still organized essentially. What you do in the first phase, the key savings driver is price renegotiations. We have done supplier campaigns, and we have addressed more than 300 individual suppliers in negotiations to bring prices down again after the heavy increases, especially during the last years. Another important potential is the internationalization of our supply chain. We still procure a lot of material and components in Western Europe, while our markets and main production facilities are located in Asia, region, which also offers highly competitive local suppliers for our products. And lastly, we also see a significant design to cost potential, which we will start to unlock. In general, we look at every design, which does not directly impact machine performance or reliability and optimize it for costs. In most cases, simplification and standardization can lead to cost savings without our customers even noticing. As you can see on Slide 29, all these measures are targeted to lead to a new steady state in a still cyclical and challenging market, delivering profits in any scenario. In a low scenario with roughly CHF 1 billion sales, up to 4% EBIT, in a mid scenario of roughly CHF 1.3 billion sales, 4% to 8% EBIT and in a high market scenario with roughly CHF 1.6 billion and EBIT margin of 8% to 12%. To sum it up, we have an ambition, which stands also in contrast to the past, as can be seen on Slide 30. We aim to grow off the sales and components to improve the business mix, to balance cyclicality and to increase the margin mix, to cut overcapacity, to improve our direct cost base and to optimize our overall cost structure, not only in overhead, but also in direct product and production costs. We are convinced that this is possible because we have a solid plan, and we have dedicated measures on how to achieve this plan. So what's in it for you, dear investors you might ask? I would like to give you a perspective on capital return on Slide 31. In the first half year 2024, we had net operating assets of roughly CHF 770 million, a proxy of invested capital. Thereof, around 1/4 is goodwill for the record. To illustrate capital return perspective, let's assume a constant asset base because in the event of a market recovery, we plan to balance an increase in receivables to payables and an increase in inventories should largely be financed by advanced payments. And now let's assume a WACC of around 9%. We need to deliver roughly CHF 70 million in EBIT to cover our capital costs. Now if you recap our margin ambition in a mid-level scenario, we plan to generate sales of roughly CHF 1.3 billion at 4% to 8% EBIT margin. The midpoint of which is around about CHF 80 million. This translates into a return on operating assets of more than 10% in this very simple calculation example, including goodwill. So as you can see, a positive return on capital, as mentioned in my previous slide, my first slide, is already forecast in our base case scenario. I think this is an attractive prospect. Now to Slide 32. Speaking of goodwill and assets. We want to pursue a selective M&A strategy as most companies do. Our focus is on the return on capital accretion and bolt-on acquisitions. We want to specifically support our growth strategy in Components and After Sales. And we want to especially complement our expertise in fiber processing. And as you have seen before, the still fragmented market, especially in Components, offers attractive opportunities to grow inorganically. I would like to conclude with our midterm financial guidance on Slide 33. This is nothing new compared with our next level communication so no revolution, but it is summarized in a compact manner. We expect a base case sales in a mid-market scenario of CHF 1.3 billion and a consequent EBIT margin of 4% to 8% in such a scenario. We aim to become an attractive return on capital story with subsequent dividend payouts of roughly 40% of net income. Obviously, both our equity ratio and also our net debt levels are not yet where we want them to be. We want to reduce net debt over time, and we want to increase our equity ratio to at least 35%. With that, I conclude my presentation, and I hand back to you, Relindis for the Q&A. Thank you very much.

Thank you, Oliver. Ladies and gentlemen, we will start the session here in the room and then move to the questions from our webcast audience. And finally, we will open the floor for those on the telephone line. As usual, the Q&A session will be recorded. I kindly ask all participants here in the room to wait for the microphone and to introduce yourself with your name and company before asking your question. The floor is open now for your questions. Who wants to start? Over there [ Lucia ], please.

[indiscernible] from Zurcher Kantonalbank. You highlighted the importance in the growth perspectives of the manmade fiber. As [indiscernible] disclosed that they want to get rid of that business. Could you share with us how good that would fit into your ambitions?

Thank you for the question. You can be sure we also have -- we also are a reader of the announcement of potential other competitors. But of course, we don't do any comment from our side. In general, we believe there are different ways how you can participate in this filament business. The strategy we have is mainly that we are focusing on component companies, who are, let's say, a supplier to this big OEM competitors in the manmade fiber business. That's one side. And the other side is, usually, manmade fiber is especially in the clothing industry is very often a blend between manmade fiber with cotton. And this raw material has some other reactions than a pure cotton or a pure manmade fiber raw material. Very often, customers are mixing that, and they create the blend. And so we are focusing ourselves that our existing machinery part becomes also better and better in this planned applications. Other questions in the room? Here in the front.

Christian Arnold from Stifel. Coming back to your guidance, you adjusted with half year figures, this CHF 900 million sales you are expecting, that's actually below the low scenario. And you still are very confident to reach this to 2% to 4%. So do you have to reduce your low, low scenario? That's one question. And then I mean, the 2% to 4%, you already guided with sales expectations of CHF 900 million to CHF 1 billion. So do we have to now think more about the 2% and before maybe more about 4%? Or what's different this year that you can still reach a profitable result with clearly lower sales than the CHF 1 billion you have in your low scenario?

Maybe I pick that up. This low, mid and high scenario is, of course, based, first of all, on certain historical trends. That's point number one. And I would say a normal environment. Now we do have sometimes years where this normal environment just doesn't work. We had it in 2020 when we had the COVID pandemic. And this year, I think we have a lot of geopolitical turbulences combined with macroeconomic turbulences over the last 24 months, we had not foreseen that impact in our scenario topics. And then secondly, if you look ahead, and we always said, looking ahead, we have this low, mid and high, if you listen to what we have presented now and what you also will see afterwards in these breakout sessions, we do have growth opportunities, especially in after sales and components that in the future, this lower than low scenario still brings us to CHF 1 billion. Because today, we are still very much depending on the cyclicity of the new machines and systems business. So I think the CHF 1 billion, CHF 1.3 billion, CHF 1.6 billion is still valid, midterm in minimum. Now the reality is we were expecting that in the second half of '24, the market is already starting to recover. And it is true we have seen that China is quite stable, and you have seen in the news that we made the one or the other success. And India also is coming back there, for example, mill utilization is above 90%, which shows it's a very healthy market now. But due to high interest rates and still some tension on the consumer side, they are still almost reluctant sometimes to buy. They don't dare to invest already now. Now for that reason, we had to say, okay, we thought it is at the beginning of the year, CHF 1 billion, then it was CHF 900 million to CHF 1 billion because we always have in mind the second half will be much better than the first half. And the second half will be better than the first half, but not as much as we thought. Now I cannot change the market or we cannot change the market. But of course, we have to change somehow our attitude. If times are tough, you have to demonstrate a tough love towards yourself. So you have to push the cost breakeven more. And this is what we have done to -- in all different areas where we have this possibility, we are just extremely cautious at the moment to spend any unnecessary costs. And so the guidance, we were able to keep it in the same area and the guidance is the guidance. You are responsible for where in this guidance, you want to place your assumptions, restate the 2% to 4%. In absolute terms, it's not so much, let's be honest. But of course, structural under-absorption, what Oliver mentioned before, does not help when your top line is even going further down, then you have to act immediately, and this is something we are doing.

If I just follow up. So this press release or press we have seen last week about additional layoffs that is linked to that.

Only partially, it is, in fact, we always said on the next level and now with our strategy house with this block customer service, we want to have customer-centric functions where the customers are. I don't need too many back-office functions here in Winterthur. I don't have customers here in Winterthur. The reality is that in our assumption, we had when we started with next level, that we somehow over time, will move and shift step by step. And it's true. Now we had to accelerate that because the environment is asking us to be fast and agile. And so we were somehow condensing some of our planned over the time initiatives in a faster manner.

But that's the cost side. And then on the sales side, I mean, this CHF 900 million, I mean, we had, I think, CHF 167 million something like that in the third quarter. So coming from below CHF 600 million to CHF 900 million, I mean you have to have a Q4 being double as good as Q3 in terms of sales. How much is visibility? And how much is hope that you actually get there?

I mean, of course, you have one part of the business, especially after sales, which is more transactional, and which also follows a certain cyclicality or a certain I would say business momentum. But then the machinery business, this is all in the books. These are all orders that we have now, which are even in production in summer. So we know exactly what we will deliver and to whom we will deliver. So there, it is no -- it did not surprise us that Q4 will be so strong. Now what the key uncertainty, of course, always is, is whether we get the final payment, the final financing over the line if the customer really wants the machine now in December or whether he wants in January, but this is normal in project business. So from a workload and also execution perspective, a double as high fourth quarter versus the third quarter is not unusual. Also last year, the fourth quarter was super strong. And I would say the large majority of the sales planned in Q4 is with the high visibility at the moment.

Other questions here in the room?

Sebastian Vogel from UBS. A quick one with regard to the service organization and the buildup there. How should we think about any potential costs that are being associated to that sort of buildup? That would be the first question. The second question, I would just put them both together in that sense. If I understood you correctly, that there would be some ambition over time in the future to potentially help your customers to facilitate the textile mills to work with textile mills. Can you elaborate a little bit further on that, what you meant by those comments?

So point number one, there is no substantial cost increase foreseen for the buildup of our aftersales organization for what reason. Point number one, some of certain -- some certain functions today are based here in Switzerland. So we also want to benefit from a certain labor arbitrage. This will help us to reduce the cost of the existing organization. And part of that, we will use to finance a certain buildup of new organizations. And in these markets, we are already present. We are just not present with our own people, we are working mainly with agents. And the agents, in my opinion, is good if you are more in a project business. But in a transactional business, day-to-day, you should do it by yourself. This is the most profitable business model we have is aftersales business. So if you are an agent and very often those agents, they are selling for us a new spinning mill for CHF 15 million to CHF 20 million. They get a fantastic fee for that. And besides this, we ask them to do the nitty-gritty small transactional staff. They are not interested in that. So only if we do it by ourself, we will be able to create more density and penetration in this market. And yes, it will cost a little bit, but it is compensated by less agent fee costs on one side. It is reduced by the labor arbitrage we are doing from high-cost countries to lower-cost countries. And then honestly, of course, I believe we should create very quick certain top line revenues with a very good margin, who then will overcompensate the remaining additional costs. So we are convinced that this business model in the midterm scenario really adds not only top line but also a lot of bottom line.

Marc Possa, VV AG. And you mentioned basically 3 things that I thought were interesting. First, automation because of labor scarcity, then the high complexity, i.e., blended filaments. And then the other word, third, the mill management, can you allude a bit on that? I mean, how far would you go -- you're not wanting to become a mill manager or a mill owner. So where are the limitations?

It also goes into the second question of your predecessor a little bit. So today, when you look at the spinning mill and you look on the people who really work in the mill, we have 50 degrees. It's very dusty. It's very noisy. And some of the tasks are rather repetitive, let's call it like that. If you bring that all together, it's just not interesting. It's just not interesting. And it's not only a question in a country like here in Europe or in the U.S., even in India, or in Turkey or in China, our customers have more and more the problem to find people who want to work in a spinning mill. Now when you look on those people, I would say there are like 2 different type of persons. There is really the low, low skill work, what I mentioned before, they are maintenance people, who are very knowledgeable about all those type of machines such as spinning mill has. Now we don't find the guys anymore who want to do the low skill work because they don't want to do it anymore. And we don't develop anymore in those countries, the high-skilled maintenance people. So over the next 10 years, those spinning mills will not only have not enough people, but also not enough skilled people. And this is where we can jump in. And you will see in one of the breakout sessions that we are working on so-called service level agreements. So service contracts, which you can build up in a modular way. This does almost not exist today because those family companies, they want to do everything by themselves. But the new generation doesn't want to do that. So there are areas you can step in. Do we want to have everything run by ourselves. I think that's a really very far away. But yes, you can have a transactional-based or incident-based maintenance, something does not work and then you go. But then you can go more into a preventive maintenance model into an interval maintenance model. This will be new for the industry. Then maybe somewhere at the horizon, you will come to a performance-based maintenance model, where you are almost mill -- where you run mill as a service. I think that's really still in the future. And I have learned, let's focus on the things we have under control. So let's now do step 1 and let's do step 2. I think that's already a potential, and we can learn and also our customers can learn that this works. And I think that's enough. Now you need for this automation and digitization because with the digital monitoring, you can give the services to your people. And our guy doesn't have to do all the checks from here to here to here. But he already gets all the symptoms, all the tips and tricks, hey, deep dive here and do this and this and this. And you will see afterwards that we have that. And the more we automize, of course, the fewer resources we need ourselves to offer those services to our customers. So it's, in fact, 3 things: automation, reducing the number of labor required, digitization, being faster and more clever and having own service contracts to replace the work force of our customers because it's probably more interesting as a maintenance guy to work for our company to go here to go there, to go there, do this and that and that you can do a career path. At the customer side, we have 200 people. You want the maintenance guy with 35, and that's your job for the next 30 years. So we believe those 3 elements really can create the transformation in the relationship with our customers. It takes time. It takes time. It does not come from today to tomorrow. Other questions here in the room?

My name is [indiscernible]. The first question is regarding your cycle on Page 29. I just wonder what is the free cash flow in a low and free cash flow in the mid and the free cash flow in a high market scenario in absolute numbers? And the second question is, what is the war chest for M&A?

Well, it's a lot about money. I will give those 2 questions to my CFO.

It's actually a very good question. I would also like to know the free cash flow in those different scenarios. No, just joking. We do not guide on free cash flow depending on the market scenarios. But what I can give is perhaps a bit of a hint that you can bridge from EBIT into cash flow. So first of all, we do not expect to expand our CapEx. So CapEx numbers you have seen in the past of something of a mid-double-digit figure something like that without giving a guidance now, but this can help as an indication. And then on net working capital, we are working heavy to improve our net working capital. What we do is we extend payment terms quite substantially now again to pre-COVID levels. So there, we expect a higher number of payables in the event of a next ramp. Inventory levels, we are working on reducing it also in the hope that in the next boom phase, we could keep a certain level for as long as possible. Key in inventories is that you only store basically the fast-turning parts, especially in the aftersales business and in the machine business or machines and systems, it's important that you get it quickly and then out again. So on net working capital, I would not expect a significant spike in case of next boom. CapEx levels as evidenced in the past, also no expansion plan, and this should help you in getting an EBIT to free cash flow bridge. Now with regards to M&A, as I mentioned before, our key priority is to drive our return on assets. So we will look very carefully at every target, not just from a strategic point of view, but also from a profitability and asset intensity point of view. And what we also want to do is we want to focus on bolt-on acquisitions. Because then the integration effort is also easier than if you do large-scale M&A.

And maybe to -- just to add on that, if you want to spend money, you first have to earn money. So we are focusing on profitability improvement and the profitability improvement will improve our net debt position and it will improve what we have available as cash to really do M&A.

But coming back to the free cash flow in the low scenario, you are burning cash. Is that correct?

This is -- I would say -- well, it depends what you mean with burning cash?

Free cash flow negative?

It is very much depends. As I mentioned, we do not give free cash flow guidance. You have certain elements which hurt you in the case of a down market scenario, in a low market scenario, especially unfortunately, and this was evidenced in 2023, if your advance payments decrease. Because then like-for-like, you have less advanced payments and you execute orders and then you don't get cash in for sales that you generate. This is something that hurts. Now for this year, we are relatively confident that we can compensate some of those effects. And you can rest assured that the cash flow generation is very high up on our agenda.

We can even say it is as important like EBIT.