SFS Group AG (SFSN) Earnings Call Transcript & Summary

Ladies and gentlemen, welcome to the Presentation of Full Year Results 2021 Investors and Analyst Conference Call and Live Webcast. I am Alice, the Chorus Call operator. [Operator Instructions] The conference is being recorded. [Operator Instructions] The conference must not be recorded for publication or broadcast. At this time, it's my pleasure to hand over to Mr. Jens Breu. Please go ahead, sir.

Thank you very much, and good morning and welcome to the presentation on our full year 2021 results. Today's speakers are Volker Dostmann, CFO; and Jens Breu, CEO of the SFS Group. The agenda for the presentation of the fiscal 2021 results cover positioning of SFS, key takeaways of the year 2021, development by segment, development of key financials, the outlook for 2022 as well as the opportunity for Q&A before closing. I start now with the positioning of the SFS Group. SFS are companies usually unnoticed 24 hours a day, 7 days a week, reliably through everyday life. Our mission-critical precision components, mechanical fastening systems and tools for selected niche applications are embedded in the successful products and value creation activities of our customers and fulfill their service with high reliability in the required precision and cost effectiveness. Our value proposition, sustainably inventing success together. Sustainability is important to us, it is part of our DNA. Sustainable thinking and acting is also an important innovation driver and gives us the opportunity to question our processes and products on a daily basis and to constantly improve them for the benefit of all stakeholders. The development of more sustainable products and solutions for our customers gives us as a value engineering specialist a variety of opportunities to offer our customers added value with our know-how, true to the mission statement, inventing success together. In doing so, we strive in close cooperation with customers and suppliers to continuously increase cost transparency and also to include other aspects of sustainability in the calculations. In addition, the value proposition is supported with our vision statement, every employee, a co-entrepreneur and achieving sustainable success together, which has shaped our path over the years. This driving for sustainable success through true partnership is important to us. It is firmly anchored in our core values and actively pursued inside and outside the company on a daily basis. While the business model and customer groups of our 3 segments differ depending on the end market, the organization is designed in such a way that the natural synergies generated are maximized across all areas. These primarily relate to technology, technological competence and potential cross-selling opportunities with customers. So for instance in the segment Engineered Components, we industrialize tools; in the segment Fastening Systems, we sell installation tools; and in the segment Distribution & Logistics, we trade with tools. New with the Hoffmann Group after closing, also in the segment Distribution & Logistics internationally. With the acquisition, we are making substantial progress in building in each segment a global business platform for the benefit and value generation of our customers and SFS. Other strategic core pillars, which have been proven for effectiveness during COVID-19 pandemic include our local for local strategy because customer proximity is essential for our value proposition and it allows us to achieve a more reliable delivery performance as evidenced by the many customers we have gained, especially in the Construction division during the period under review. The diversification in end markets, regions and sales channels with the benefit of having better balanced revenue development. The solid financial position and through that the ability to continue the investments in innovation and realization of growth projects and opportunities even during crisis times. Focused technologies like with our core set of tooling based technologies, relevant secondary operations and standardized machine park allow us to reduce risk and maximize flexibility. Our focus on relevant megatrends like the digital revolution, economic globalization, evolving consumption in health and wellness, resource constraints and demographic asymmetries create strong underlying demand patterns even during crisis. I continue with the key takeaways, which can be best summarized as record results and inclusion of Hoffmann. In a dynamic market environment characterized by high demand, supply chain bottlenecks and the COVID-19 pandemic, SFS boosted its sales by 11% to CHF1.893 billion. All segments and regions contributed to the growth enabled by robust supply chains and the ability to continuously fulfill customer orders. High capacity utilization drove profitability and resulted in an EBIT margin of 15.9%. Focusing on mainly temporary adjustments of production capacity during COVID-19 pandemic allowed to benefit from high demand situation. Prudent cost and price management further support the profitability. Investments into projects including production capacity expansion, a new generation ERP system and cybersecurity defense continued and amounted to CHF121.4 million. Ongoing focus to achieve the set goals and targets in sustainability, release of a CO2 road map containing measurable targets for reduction of CO2 emissions. With the inclusion of Hoffmann, we are setting, as mentioned, the prerequisites for the internationalization of the D&L segment and establish international presence in quality tools with Hoffmann. Both companies are positioned as leading providers in their industries, share similar value proposition and value systems and look back on a longstanding and successful partnership. Inclusion at the shareholder, Board of Directors and executive management levels at SFS establishes continuity and the basis for successful future development. The transaction will have a positive impact on earnings per share from the first year on. In 2021, Hoffmann generated around EUR1 billion in sales with a workforce of around 3,000 passionate employees. Joining forces will mark a milestone and result in attractive growth opportunities through cross-selling of mechanical fastening systems and electronic procurement solutions; leverage benefits in digitization, logistics, software and purchasing; getting access to Europe's largest tool logistics center. Transaction closing is expected in the first half 2022. Continuing with the development by segment where I will start with the headlines of the Engineered Components segment, in which greater profitability through higher capacity utilization could be achieved through substantial recovery driven by pent-up demand in automotive related areas and the industrial sectors. However, negatively impacted by supply chain bottlenecks in the second half of the year leading to reported sales in the fiscal year 2021 of CHF975.2 million, up by 8.6% versus fiscal year 2020. The Electronics division profited from positive market environment. The Medical division enjoyed only a slightly positive development reflecting demand in their respective niche markets. However, this was partially offset by the good progress made in the development of our global medical production platform. In general, good demand situation led in Engineered Components segment to high capacity utilization thus resulting in an EBIT margin of 17.1%. The key messages of the Automotive division, market recovery lost momentum in the second half of the year brings to light after a good recovery in the first half year driven by strong pent-up demand, the second half year was increasingly impacted by shortages in semiconductor supply chain. Large project wins in electric brake systems testimony to a strong competitive position. Growth projects require investments into manufacturing capacity in Heerbrugg, Switzerland and Nantong, China. Stable market conditions and a stepwise recovery of semiconductor supply is expected over the course of the year 2022. The Automotive division is well positioned to continue to significantly outpace market growth in fiscal year 2022. The key message of the Electronics division, good development with record results in the first half year follow the same pattern as previously outlined for the division Automotive. Record high results in first half year. The second half year was troubled by supply chain bottlenecks on the supply side of our main customers. Good development in Lifestyle Electronics and Accessories, stable demand in Smartphones. Unexpectedly strong demand for high capacity hard disk drives further supports the business activities in Malaysia. High capacity utilization in Nantong, China besides the platform requires [ media ] as media announced an expansion to cope with increasing demand also from other divisions. The Electronics division expects for fiscal year 2022 a moderate development on a high level. The Industrial division observed a significant recovery in demand throughout the year where the recovery that began in the second half of 2022 and then compares clearly every niche market served by the division. Luckily, not materially impacted by supply shortages for our customers, many business areas achieved revenues above pre-pandemic levels. The stabilization of the aircraft business was achieved at low level. The situation remains challenging with only initial signs of recovery. Overall, the Industrial division expects market demand to remain good in fiscal year 2022 than the reporting year 2021 realized new projects will further underpin the positive market development. In the Medical division, only a slightly positive development was achieved considering the most important financial KPIs. Overall the division was able to achieve a slightly positive organic sales trend, however, varying across product categories. Demand for instruments and implants for orthopedic surgeries were still negatively impacted by COVID-19 pandemic. Applications in production ramp-up for sports medicine, however, showed good growth development. Substantial progress was made on filling the attractive project pipeline, particularly also in Asia. High attention to efficiency gains and operational excellence yielding initial results. The Medical division expects an overall positive development in the fiscal year 2022. In the Fastening Systems segment, record results were achieved. In a dynamic market environment, good market positioning and robust supply chains led to a record sales of CHF574.9 million or 17.4% year-over-year. High market demand put supply chains and material prices considerable strain. Ongoing efforts to expand constructions market access were supported with the acquisitions of Jevith in Denmark and GLR Fasteners in the U.S. The successful relocation of the Riveting's Chinese production site to Nantong was completed. High capacity utilization and efficiency gains resulting in a record EBIT margin of 17.4%. Looking into the details of the Construction division, we can state that the division benefited from consistently high market demand. Strong demand led to exceptionally good growth in all application areas in Europe and North America. Market share gains were achieved thanks to robust supply chains, good material availability and a high degree of in-house value-add. Global trends towards energy efficient building envelopes, streamlined fastening processes and accident prevention remain intact and provide a solid basis for future innovation activities and growth. Market access has been expanded with 2 smaller add-ons. The Construction division expects in fiscal year 2022 market conditions to remain positive and a further growth in organic terms. The Riveting division experienced as well dynamic demand, however, in the second half dampened by semiconductor shortages. Nevertheless, stable growth has been achieved driven by industrial and construction related areas. Reduced demand from automotive customers was observed in the course of the year due to semiconductor shortages. Innovative product solutions such as network tools and sustainability related applications offer substantial growth potential. The successful relocation from Nansha, China to the Nantong platform will further benefit the division's development in Asia by becoming more attractive for customers and allowing to reduce cost by using the synergies of the technology platform. The Riveting division expects continued market recovery and overall growth in organic terms in the fiscal year 2022. In the Distribution & Logistics segment, we have worked intensively in establishing an international presence in quality tools. Stable growth throughout the year resulting in a reported sales of CHF343 million or 8.2% year-over-year. The segment focused intensively on maintaining a broad focus on customer needs through the continued offering of innovative solutions and strategic organizational alignments to be even more customer centric. The envisioned addition of Hoffmann will lend the D&L segment an internationally strong position in the attractive area of quality tools. Strong occasionally volatile demand led to good capacity utilization and an EBIT margin of 9.4%. The Swiss market conditions in fiscal year 2022 are expected to remain stable leading to an overall positive development. Besides we are already looking forward to the closing of the Hoffmann acquisition expected in the first half 2022 allowing us to even more leverage on the combined SFS Hoffmann growth potential. The targeted strategic growth initiatives can be summarized in the following 4 dimensions. Dimension #1, use of the new platform through further penetration of key accounts, targeted acquisitions of customers with high potential, development of regional growth strategies based on local expertise along our local for local mindset. Dimension #2, focus on innovation, new products and product lines, which includes continuous market launch of new products and innovative supply chain solutions, joint development together with our customers and those deeper customer integration. Dimension #3, further regional expansion. Here we target the expansion in the growth markets in the U.S. and China besides supporting existing growth initiatives for broader market access for instance in Europe and other existing activities. And then dimension #4, driving forward customer centric digitization initiatives, which include the expansion of diverse e-commerce solutions as well as the further development of digital service products for connected manufacturing. With that, I conclude the presentation on the development by segments and hand over to Volker for the development of the key financials.

Thank you, Jens. Good morning, everybody. Warm welcome from my side. The positive start into the year 2021 gave us a solid base to build on. Our teams managed to balance the constraints like supply chain issues and cost pressure whilst winning new customers and living our value proposition. In the second half year, fast adaptation on capacity has to be managed. Always there was the focus on the finding of new opportunities and realizing these potentials decisively. We are happy to present to you today the financial results 2021, which we deem as a document of the dedication of more than 10,500 employees in an impressive manner. Sales pattern 2021 were characterized by a distinct rebound in first half year, which had its beginning in the latter of 2020. Organically we grew by 10.3% or CHF178 million throughout all segments as described. Currency impacts were relatively small and balanced out based on a favorable currency mix. Scope effects were limited to the base effect from the acquisition of Truelove & Maclean in 2020 and the acquisition in 2021 of Jevith in Denmark and GLR Fasteners on the West Coast of the U.S.A. Sales dynamic faded as supply chain issues in our customer base and the pandemic impact came to light. The flexible and fast reaction on these shifts have sheltered our performance. Decisive seizing market opportunities and winning new customers have further underpinned the development. Our teams managed to maintain delivery capacity towards the end markets to a large extent thus underpinning our reputation for being a reliable partner. The local for local strategy helped to secure supply chains of our suppliers and managing logistics in a difficult environment. Seasonal patterns in 2021 were distinctively different mainly due to the very strong base effect of 2020, but also due to a slightly slower demand in the second half when the supply chain issue started to show in our customer base. Therefore, growth in first half year 2021 versus prior year is 23.6%, second half is negative 0.5%. The sales breakdown by end market shows a strong demand in Europe, which slightly shifts the relative weight to the other geographical areas. From an end market view, construction was an important contributor, but also capital equipment and general industries were driving factors. Electronic end markets slightly improved on a nominal basis. which is due to an extraordinary 2020 characterized by the strong demand from the work from home shift. Medical end markets, as described, remained a bit slower and during the period where mainly elective surgeries delayed so that impacted a bit. For 2021, we managed to report compound average growth rate for the group in the upper part of our mid-term guidance at 5.9% CAGR and a normalized EBITDA of 21.3%. We reconfirm our statement that the growth through the cycle holds firm and we report a record high EBITDA margin above the targeted bandwidth. Capacity utilization paired with the distinct cost discipline gave the whole group a boost in 2021. As I mentioned before and also discussed during the first half year presentation, the uneven demand was a big ask to our organization in the second half. The significant pent-up demand of the pandemic normalized to some extent. This was paired with the expected cost increase in the second half. The seasonality, which we have reported over the years comparing first half year, second half year, therefore, did not materialize overall, it even shifted. Shown to the right of the slide, you see the breakdown into first half year, second half year. Despite all we mentioned before the challenges in the second half year, we report in the second half year still very attractive levels of EBIT. For the full year, we report an EBIT of CHF301.7 million, 15.9% or an EBITDA of CHF407.1 million, 21.5%. To optimize production footprint, division Riveting transferred its production from Nansha to Nantong. Subsequently, we have managed to sell off the plant and the respective land rights and with that, we record a book gain of CHF3.1 million. Details are given to the upper left of the slide. Rising cost levels were predominantly coming from production cost. We're talking about tooling and energy, but also workforce, transportation and other selling costs. Raw material price increases and higher factory costs were successfully passed on to our customers. The net working capital side along with the livelier top line, inventory turns increased and the net working capital came down to 29.9% of net sales or 109 days. Selectively, inventory levels were replenished and raw material stock was built up while DIO came down almost 4 days. Further the receivables management successfully reduced debtors risk and collected successfully. Infrastructure projects at Stamm in Hallau, Switzerland and for automotive here in Heerbrugg Hall 6 are making good progress along the planned levels. Parallel to that, constant renewal and improvements in the machinery part take place. The project of migrating the ERP system from the existing SAP to the S/4HANA platform is underway and is partially recognized as CapEx. With investments of CHF121.4 million or 6.4% of sales, we are within the expected CapEx range. However, we see ourselves at the beginning of a new investment cycle having launched the announced expansion in Nantong, which will start in 2022, parallel with investments into machinery and capacity expansion in other areas. Our free cash flow is at CHF203 million, which is a plus of 5.75% reflecting a conversion out of EBITDA of 50%, which is within the targeted bandwidth. This is of course including the before mentioned nominal buildup of the net working capital and including the cash flows from our sell-off in Nansha and/or the dividend payout. As a result of that, the equity base has further been strengthened and our equity is at 78.9%. Our net cash position increased by CHF135 million to a level of CHF279 million. Looking into returns on capital employed. We see the increase to 26.1% on the back of the strengthened EBIT reflecting the utilization of our infrastructure. Calculating on a flat tax rate of 17.5%, we show a return on invested capital of 11.2%, which brings us into the targeted range of returns. Differentiation between return on invested capital and capital employed can be broken down into a tax effect of 4.6 percentage points and a capital impact from goodwill of 10.3 percentage points. The effective tax rate came slightly up to 17.8% and remains within the targeted range. Underlying factors are the shift in taxable results from higher tax -- into higher tax rate countries, which is counterbalanced by the tax effective depreciations, which we take profit from. The Board of Directors suggest to the general assembly a payout of a dividend per share of CHF2.20, which is a payout of 33.3%. Depending on the authorized capital of 1.6 million shares, the maximal cash out is at CHF86 million or would reflect a payout of 34.7%. Let me summarize the KPI overview with the statement that I deem this as a demonstration of stability, consistent growth and a demonstrated ability to adapt the capacity to the current needs. The group is generating attractive levels of cash with reliability and standing on a very solid balance sheet. With this, I thank you for the attention and the interest and the subsequent questions and give back to Jens, who will take you through the outlook and the priorities.

Thank you, Volker, and welcome back as I continue with the outlook 2022. The guidance for fiscal year 2022 reflects the expectation for SFS stand-alone without Hoffmann. Performance in the 2022 financial year will remain characterized by major uncertainties as a result of geopolitical developments like the current war in Ukraine, trade conflicts and sustained disruptions in supply chains, Uncertainties in the mentioned international supply chains, which should gradually subside as the COVID-19 pandemic abates, are expected to persist until early 2023. In this environment, ensuring the highest possible focus on customer service takes top priority. Investments in the selective expansion of our production capacity and the implementation of ambitious growth projects will continue. Major projects during the current financial year include the start to expand the production platform in Nantong, China, moving into the new production hall at the Heerbrugg site, Switzerland and the first larger go-live of S/4HANA, the new generation ERP system. The expansion of our global production platform for medical device application remains strategic priority as well. Besides, we expect the successful closing of the transaction with Hoffmann to take place in the first half of 2022 once the usual closing conditions have been met. Looking out further, SFS expects product call-offs to be partially subdued in the first half of the year, but for this to pick up over the course of the year. Given the solid project pipeline, we are confident that the development will be positive in all end markets. Based on that, SFS expects stand-alone sales growth of 3% to 6% for the 2022 financial year at an EBIT margin of 13% to 16%. The outlook will be updated once the transaction with Hoffmann has been closed. On the operational side, we continue to focus on specific priorities tailored to be most relevant and beneficial to reach maximum performance for the end markets and customers we serve. These are strengthened innovation, especially in the megatrends of demography, digitization and autonomous driving. investments in future growth projects namely in Engineered Components. Establish international presence with Hoffmann in the segment Distribution & Logistics. Ensure reliable supply capabilities despite the current global sourcing challenges and disruptions. Continue improving the customer centricity of the organization. Balance production capacity with demand while ensuring supply capabilities and keeping costs under control. Itegrate sustainable acting and thinking holistically in the business model and corporate strategy. And protect employee health and safety. With that, we are approaching the end of the active presentation of the full year 2021 results and are now available for your questions. First, we take the questions from participants on the phone before we take the questions from the chat.

[Operator Instructions] Our first question from the telephone comes from the line of Jorn Iffert with UBS.

The first question would be on the margins in Engineered Components in the second half 2021 falling to 15%. I think this was the weakest margins I can remember for the second half. Is there any special in this? Is there a lack of pricing power? And also would you expect that for the full year '22 you can keep margins relatively flattish year-over-year in Engineered Components around 17%? The second question would be on your average selling prices in Fastening Systems and also the margins, which doubled during the crisis. Is this something that you're saying okay, look, the average selling prices are now sustainable given the strong construction sector or would you expect average selling price to decline again in the next 2 to 3 years if margins are normalizing and if normalizing, what is the reasonable level in Fastening Systems? And the last question, if I may. I mean the cash conversion was pretty strong in the last 2 years. Is the free cash flow to sales margin of around 10% something which is structural now also considering the rising CapEx needs over the next 2 years?

Jorn, thank you for your questions. And first question about the EBIT margin in Engineered Components, you're absolutely right. We have seen an increased volatility in the Engineered Component EBIT margin due to higher and lower utilization and there is different divisions having a different impact on the margin as you see it in the Engineered Components. Overall we have achieved a 17% margin, which we deem as okay. We would certainly expect that under throughout the year good utilization of the capacity, we should see EBIT margins of 18% and slightly higher. Looking out into the year 2022, we certainly expect that the volatility will remain first half year probably a little bit lower utilization, second half year much better utilization. I would say we expect a similar EBIT margin in the year 2022 as we have seen it in the year 2021 plus/minus based on utilization of the capacity we provide to the end markets. Certainly uncertainties are out there and we expect fully loaded second half of the year and probably a little bit lighter loaded first half of the year. Hopefully then in 2023, we will see more even utilization of Engineered Components capacity throughout the year. On the other hand, I have also to mention that for instance in Electronics, we had the best year ever in terms of utilization. We had a well loaded plant situation in the first half and second half of the year so the swing down in the second half of the year 2021 mainly came through the lack of order calls from our automotive customers and in some areas also from our industrial customers and in medical also due to orthopedics and in aerospace also due to the lack of demand on those customers. So you see plenty of upside potential. I think we've managed the year very, very well last year. We expect 2022 to probably fall into a same or similar pattern and in the future, we expect increased utilization of capacity. The second question is then on the selling price sustainability within division Construction in the segment Fastening Systems. Also here we have seen price increases on a quarterly level at least and we also would expect that this will continue in the year 2022. Prices depending on the region and the country will be changed or increased on a quarterly basis at least. In some countries we even increase prices on a monthly basis due to increased inflation and due to increased cost in the supply chain. So I would not expect that we will see a slowdown of price increases in construction in the year 2022. Maybe even 2023, we will see increasing pricing momentum due to supply chain issues as we observed due to COVID. But also now with the Ukrainian conflict and the tight involvement of Russia, we'll probably see more disruptions in the supply chains, which will then increase prices and which will be an absolute necessity for us to maintain our EBIT margin that we follow those price increases and push them through to customers, which is one of the top priorities we have within the organization. So for the next 2 years, it will remain volatile in the supply chains, costs will increase and we will certainly do the maximum to forward those cost increases to our customers and they will forward to the consumers. With that, I hand over to Volker for the third question.

Your question regarding the free cash flow to sales, 10% is certainly kind of an area we strive for. We have certainly learned a lot in improving the inventory management, I alluded to the faster turns in inventory. We see also the upside of normalizing of the supply chains in raw materials, which certainly would help what goes in. Contrary to that is the choppy demand situation from the large customers, these call-offs that are very difficult to plan for. That could be a counter trend. The second topic that we see is that we have a very close and good working receivables management, which we further hone, but which will come under pressure once interest rates should pick up. I mean we will see what that is. Certainly the biggest factor is our investment side where we see for 2022 a pickup in investment activity. Hall 6 is going to be finalized through the latter of this year and machinery will be invested. In parallel, we have the Nantong platform that is going to be built. That will certainly put the strain, but the mentioned 10% I think is a good target to strive for.

And if you allow me a follow-up to Jens' answer on Fastening Systems. So with average selling prices further going up to mitigate rising costs, then you're looking for an EBIT margin relatively flattish in 2022 versus '21 in Fastening Systems?

Certainly in Fastening Systems, we would expect a more flattish development of the EBIT margin.

The next question comes from the line of Andreas Muller with ZKB.

I've got also questions on the raw material price increase, which you expect is going to continue in the construction sector. You mentioned already that you can pass it on pretty well. But can you talk about the other segments or end markets, how the ability to pass it on is here? That's the first question.

Good question, Mr. Muller. And overall, we see this as the top priority in the organization and already made it as a top priority also in the previous year. We see in the Fastening Systems and Distribution & Logistics segment where we have usually thousands of customers usually with smaller purchasing power than for instance in Engineered Components. We see there the need to ongoingly increase prices because also due to the supply chains and the nature of products, we get more frequent price increases. So in Fastening Systems and Distribution & Logistics, we usually see 3 to 5 price increases throughout the year. Certainly it's an effort, certainly it will keep people busy to do so, but I think there's also a broad acceptance within those customer and end market groups that this is absolutely necessary to secure also the supplies. And especially in the Construction division for instance, we see that half of the growth is achieved through new customers because they do not get the products, they do not have the availability within the existing sources. So there's a high willingness there also to pay the increased prices and with that or through that secure the materials they need to have. In the Engineered Components segment, it's a little bit different. There the prices usually increase maybe 2x a year. That's mainly driven by the raw material supply side, which also has been usually 2 sometimes maybe 3 price rounds -- price increase rounds. There's a higher visibility out because of the nature of the raw material which are secured there. So for instance today we secure raw materials for the year 2023 and already make allocations with suppliers and tell them what we expect for 2024. So there's a much longer buying cycle and a much longer visibility, higher visibility on that side. So due to that, we see less increases. Maybe with stronger customers, larger customers, maybe the price discussions are more intensive. On the other hand, we have proven over time that we also are able to increase prices there. As long as we don't see any swift changes overnight like currency fluctuations up and down by 5% to 10%, we are usually able to maintain the margins because we start the discussions early. So I think overall, we are optimistic about the capability of pushing through prices, but we are certainly very careful in terms when we see swift changes, overnight fluctuations of currencies. Then we usually would see an immediate impact, which usually then takes 6, sometimes 9 months to cover for and to adjust again for. I hope I was able to answer your question.

Yes. I have another one, if I may, about -- it seems that you're a bit more relaxed in the second half about the supply chains and all the issues, the strength in the supply chain. On what is that based that it's going to be better going forward relative to first half?

It's mainly based on the discussions we have with our customers. We certainly see that material changes have been implemented in the supply chains. We see that capacity has also been built up. And I think that the lessons learned cycle we had to all go through happened. So we would expect that the necessary precautions are put into place and due to that, in the second half we will see better availability especially on the semiconductor side. which was kind of the halting or the stopping or the braking cause for lower utilization of capacities in the second half of last year because our customers did not have the semiconductors they needed to keep also their products in the market. So overall I think the supply chain learned a lot, adjusted a lot, became more flexible, also increased the capacity bandwidth a step up. So that's a plus. On the other side as we see with the Ukrainian crisis currently, there will be also some indirect movements in the supply chains, probably in the first half of this year, which also need to be absorbed. But overall, we see also that the closer you come to the OEMs, the more flexible the capacities are. So we also would expect that a catch-up of pent-up demand will be again happening. In the second half of this year, we should see good utilization again, probably similar to what we have seen in the first half of 2021 overall in the industry.

Okay. And then really on this conflict, you just mentioned indirect kind of impact. I don't know if you addressed that at the beginning, but do we have employees in this conflicting countries and also what's the sales exposure directly to say Russia, Belarus, Ukraine? Do you have assets over there as well? That's my question.

Very good question. No, we have not addressed it yet. In the 3 countries as you mentioned; Belarus, Ukraine, Russia; we do sales of slightly below CHF10 million. We do not have employees on the ground in those countries. We do not have a strong exposure in Eastern Europe anyhow. So from that point of view, we have a limited impact. Certainly indirectly we'll see a slowdown. We may have customers which do business in those regions there and they will certainly also be impacted. So on some customers, some segments, we'll see probably a weaker demand pattern in the first half of the year. And as we expect the Ukraine war involved probably to last a while from today's perspective, also second half of the year there will be an impact on the demand. On the other hand, we also have heard and seen that the rest of the world is reacting. We see material initiatives to build up and improve the defense side of the countries, which then on the secondary side -- not on the primary side, on the secondary side will then also generate additional needs and demands especially with the segment Distribution & Logistics and probably Fastening Systems and also in some industrial customers. Because infrastructure improvements will need to happen and also the need for production and ancillary products will be needed to improve and increase the output of those goods, which will be more in demand when the Western world increases their defense, infrastructure and capabilities overall. So luckily, nobody on our side impacted. We expect some secondary impact, some downs, some ups. Overall, this is the current state of view.

The next question comes from the line of Tobias Fahrenholz with Stifel.

First one on the H1 outlook, trying to understand your H1 cautiousness a little bit. To which extent this is driven by just a high basis or do you really see here an ongoing volatile and challenging environment at the moment? Maybe to clarify this. I mean maybe you can say something on how the start into 2022 was in reality? So did you see some growth and remained margin flattish or did they even drop?

For the first half of 2022, we see both effects as you just have mentioned. We see a strong base, which we run against due to excellent utilization in the previous year. Currently some of the supply chains on the customer side have improved compared to the second half of last year, but probably are still not as affluent as they were in the first half of last year. So we are running against a strong base. That's certainly true and we expect that. And then probably the second issue to be kept in mind is the volatility overall in the supply chains. So it's not just the base, it's also there's still the existing volatility. We see patterns of strong demand and we see patterns of weaker demand as customers get in their supply. And as we just mentioned in the current environment of the Ukrainian conflict, we don't -- we will probably see more challenging situations than more situations where problems have been solved. So overall, first half of the year challenging. Second half of the year, we expect a smoother ride.

Okay. And on the '22 growth outlook, you're giving us typical targets, including your 3% to 6% sales growth. Normally there's kind of a 1% to 2% M&A part in there. This is still the case for the running year? And if you split it up especially the organic growth targets between volumes and prices, which should be both in there, how is the split looking there? So at the end, what's the pure volume target for the current year?

I think that what we can do is look little bit back and tell you what we have experienced in the past and you may be able to apply that to the future. Overall we are not in a position to be more precise about the year because there are many uncertainties out there. But I think overall we can say that in past times we were able to grow a little bit more than 3% organically and the difference between the 3% to the 6% where we stay right now has been inorganically. But in those years we did not see a lot of price increases. So maybe this year if we maybe don't see additional M&A activity, we see between the organic normal portion and the gap to the 3% to 6% is probably price increases. Last year growth was driven by 2/3 volume and 1/3 prices so we may or you may apply a similar model to the year 2022 on the expectation side for next year.

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

On the price increase question, I mean in an environment where input costs go up, obviously you always have a time lag effect so you pass on these high input costs to your customers plus there might be or there is more or less a larger or smaller time lag. So could you define how long it takes in your 3 divisions in order to compensate these input cost increases?

Good question. And as I alluded a little bit before, we see 2 types of price increases. We see the ones with longer visibility and this is what we have seen last year and the year before. So we have pretty good indication what the raw material prices will be doing, what overall energy prices will be doing throughout the year and build that into the model and we're able to announce price increases pretty much tailored to when we see actually the goods coming into house and into inventory overall. So we were able to -- good visibility to match that pretty well increase on the sales side pricing-wise and the incoming goods with a higher pricing point. Looking out into the year 2022, we still believe that this will be the case so that there will be no time lag or time delay. On the other hand, if we see shifts in currencies overnight as I mentioned before, then it will take us 6 to 9 months to restore or recover the margin again or normalize the margins again to the previous level if an overnight shift is happening into the downside direction for the EBIT margin overall. So I think we are prepared for the year. But once again I think we all look forward and hope that we'll not see a major shift in currency.

And probably for your model point of view, factor in that we see roughly 15% to 17% of raw material price in our bill of material and that a large portion of this can be planned -- due to the specialized raw material that we need can be planned ahead quite well and is contracted ahead quite well. So we have not only a short time lag, as Jens explained, we have also the ability to plan ahead what our cost levels are looking.

Okay. Great. Then another one. I mean the whole world talks only about higher prices, higher prices, higher prices. Are there any spots where there are no price increases? I mean for instance I heard that steel has become cheaper specifically in the U.S. not so much in Europe. Things like that or where it at least didn't increase that much.

We don't see -- in our materials and goods, which we secure and buy, we have not seen a leveling off of pricing levels. Maybe we had selective suppliers, which had a short-term gap because maybe some, I'd say, automotive customers did not call off products and they maybe came to us and offered us products for construction market or wire for construction market to be used. But that will be a very spotty development. This would not be something which would subside in a P&L to a large degree. There may be a small tactical gain here and there where we see a spottiness due to a weakness in a certain end market and due to overcapacity of a supplier who is very much exposed to a specific end market. So overall not -- we see on the labor side, on the energy side, on the raw material side; we see price increases happening on a daily basis.

Okay. Then my last question is the whole situation would sometimes change again, difficult to measure at the moment, but things change and you have seen different cycles in the past. So if raw materials go down, what happens at your side? I mean do you proactively go back to your customers and say okay, now we reduce our prices or do your customers then need to come up to you or are there mechanisms or how is this the mechanism?

I think usually yes, customers -- certainly the larger customers, which are more organized and have sizable purchasing departments, they monitor that very specifically and they come instantly back to us and will tell us about their view and demands in our direction. And there may be smaller customers, which maybe do not have such a concern on the raw material that they're buying because it's a smaller portion of their value added, which they have in-house. So it varies a lot between customer groups. Overall I think we also need to take a look and keep in mind what happens around it. If, let's say, only the raw material prices start to stagnate or slightly start to reduce, but cost of labor and cost of energy is still going up; then there will not be much of a shift in pricing. It may be kept stable or maybe only slightly increase or maybe only slightly decrease. I think overall what we can say is there is no falling off the cliff. We have never experienced before in a cycle that all in a sudden raw material prices drop by 20% or 30% and due to that, we see an immediate demand from customers to reduce prices. This only happens in currency shifts that maybe overnight the Swiss franc appreciates 10% or 15%, then customers would come and request an immediate adjustment. But on the raw material side, usually things happen in a slower pace. Usually developments are seen in advance and so usually suppliers -- the supply chain customers are aware of it and start building it into their models. And there's usually visibility I say between 3 to 9 months before it happens. So there will be a soft landing if the change comes from the supply raw material side. There will be a little bit harder landing if the change, the fluctuation comes from the currency side.

[Operator Instructions] The next question comes from the phone and is from Alessandro Foletti with Octavian.

I just have a couple of small follow-ups. On the wording in your outlook, you went through all the divisions and then you gave some sort of outlook for '22 and like for example for Construction and Riveting, you said we expect organic growth and then for a couple of others including Medical and Electronics et cetera, you said we expect positive development. What's the meaning? Is there a difference in the meaning of these 2 wordings?

Alessandro, no, there's no difference in the meaning. We just like not to be too boring as an industrial organization and use always the same term. But you were pretty specific in picking that up, yes.

All right. Good. Then on the depreciation, it went up. If I calculate correctly, depreciation and amortization together like CHF6 million or about 6% less than sales. But is this -- was this anything special? Is it like the new level and like in percentage of sales, it will continue that direction?

It's reflecting the normal investment cycle. There is no particular extraordinary effects in that.

All right. And then on your CapEx plan?

As we said, we are looking into a CapEx plan that is slightly elevated. That goes more to the tune of the 8% if we're looking out into next year just because of the parallel ramping up of Hall 6 and ramping up in China Nantong. So we see ourselves at the beginning of a new investment cycle like we've seen it probably in the last time when we had a larger platform building. This time probably not as pronounced as well.

Right. But probably 2022 and 2023 up to 8% of sales and then back down or how should I...

Yes, that could be a proxy.

All right. And then my last one. I think yesterday or the day before, BMW announced the closure of the factories in Munich because of the lack of cables so I imagine at some point, there will be some disruptions there as well. I wonder if this type of situation is already including in the statements you made today or if this is new?

I think that the volatility in the first half of the year as we build it into our plan can be manyfold. We do not expect that the first half of the year will be smooth. We also expect continued shutdowns on the OEM side. And we believe -- in our guidance, we believe that there is ample capacity on the OEM and tier side to make up for any closings in the first half of the year and the second half of the year. Pretty similar to what we have seen last year first half loaded, second half lighter. We expect this year first half lighter, second half loaded.

There are no more questions on the telephone at the moment.

So since we have no questions, we maybe go over and answer the questions in the chat. So first question we have from [ Nicandro Barile. ] The question is what do you expect for labor cost increases in the different countries?

If we look into what our projections are and then we go into an overall labor cost increase, which is very patchy and regionally -- not only country-wise, but even within countries regionally different. If we look overall, we see a labor cost increase of 3.5% which given the time lag that this is kicking in for next year will come down to some 2% plus on our P&L.

Then the next question also from [ Nicandro ] is can you please also give some flavor regarding the U.S. business? Is it also very difficult to find good people and the salary costs are strongly increasing?

Yes. I mean that neatly goes into the first part of my answer. Yes, we see that. We see that regionally within the U.S. definitely. Certainly the market there is hotter, but we still are able and managed to find the talents we need to keep our organization growing and on the market.

Then third question, same source. What is your observation regarding the out of China production trend for certain products?

No. I mean that is the -- we mentioned it quite a couple of times. The local for local strategy allows ourselves to have a production in China for Chinese direct customers, which help a lot. And certainly the production out of China, logistics we mentioned it is a constant topic that includes customs and logistic as such. Certainly not an easier market at the moment.

Overall when we take a look at our customers we see, as Volker said, the local for local is becoming more vital. So Chinese OEMs on the car side they localize even more heavily than what they have done before, which falls right into the direction as we said local for local. We have a local footprint and due to that are better capable in receiving and getting new products, which we can produce in Europe for Europe, China for China, North America for North America overall. So in automotive side, this is helping us very strongly to further expand our footprint in China with other customer groups. On the electronics side for instance, we see customers trying to break out left and right with initiatives to maybe try to establish on a much lower basis value-added activities outside of China. But usually after 2, sometimes 3 years, they slow those initiatives down or fold them down completely because the efficiencies as observed in China cannot be met and cannot be copied and pasted to other regions due to strong knowledge and scale effects in China. Then we have the next question from Torsten Sauter. How about Hoffmann's exposure to Russia, Ukraine? Whether we can give there an update? We cannot give you an update about Hoffmann in detail about their exposure. This will need to wait until we have the closing and then we will be able to give you a more detailed update on the exposure of Hoffmann in Eastern Europe and the impact of the Ukrainian crisis on the developments there. The next question comes from Christian Obst. Can you give us an update on the Hoffmann takeover time line discussion with cartel authorities expected 2022 impact on top and bottom line?

I certainly can give you an update on the timeline. The discussions with the cartel authorities are working very well. We are on time and we got questions back. We got first green lights already. So when we say first half year, we affirm and we have a very good level of discussion with the sellers on the process and are proceeding as planned. As said before, expectations for 2022 and guidance, we will update that as soon as closing happens as we have issues talking about Hoffmann outlook before that date.

Then there's another question from [ Nicandro Barile. ] How many people are involved in the integration of Hoffmann with regards top management as well as middle management? Did you already have the first get together meetings of the top management? Here we can update that we have, I would say, very high level discussions at this point in time where we define the workstream topics and the work screens, which all work on the integration side. We believe those will be around 8 to 10 key topics, which will focus on the top and some mid-level management side. We do not expect that this will be a broader topic for all of the organization to be involved into the integration. We expect that a top management topic 8 to 10 key initiatives, which will start in the year 2022 and which will continue into the year 2024, which will keep us busy there. Besides that, on the lower level on the tactical daily level activities, we do not expect much of a change. We already worked together since we are their partner in Switzerland and we expect this cooperation to continue as lean and as efficient as we have done it throughout the previous years. So meaning there will still be bandwidth for Volker, myself, the Hoffmann management team, the SFS management team to focus on the existing business and this will be an additional project, which we'll be able to manage with the resources and bandwidth we have already.

Besides that, it is important to note that as long as we do not have the official go from the cartel authorities, we are not in a position to go any deeper in management discussions and/or gatherings, et cetera, and the like.

So since there are no more questions on the chat and on the phone, maybe we go to the next slide before we close and give you an update on what's coming next. We see the Annual General Assembly on April 27, which will be without physical presence. Then we will publish the Sustainability Report towards the end of May. After closing, we'll announce a specific date for an Investor Day in Nuremberg where we focus on Hoffmann. Expect this towards second quarter or most likely happening in June. Then due to the expected closing and integration of Hoffmann, we will communicate our first half 2022 results in August this year, August 26. And then for all the other SFS divisions, we plan to do a SFS Investor Day again in most likely Q3, maybe in Q4, we also will announce the date. With that, we closed the information on the full year 2021 results. We thank you for your attention. Wish you all the best, good health and talk to you soon. Bye-bye.

Thank you. Bye-bye.