SFS Group AG (SFSN) Earnings Call Transcript & Summary

So good morning, and welcome to the presentation on the full year 2022 results. Today's speakers are Volker Dostmann, CFO of the SFS Group; and by myself, Jens, CEO of the SFS Group. The agenda for the presentation of the full year 2022 results covers positioning of the SFS Group, key takeaways of the year, development by segment, development of key financials, the outlook for 2023 as well as the opportunity for Q&A later on after the active presentation. Also, after lunch break, we will also do a deep dive of the value added by the D&L business segment here on-site at our customer Bühler in Uzwil, Switzerland. The Bühler Group has around CHF 3 billion in sales, 13,000 employees and 30 sites globally. Billions of people come into contact with Bühler technologies to cover their basic needs for food and mobility every day. We are very delighted to have the opportunity to be here on-site. And we thank the Bühler team around, the CEO, Stefan Scheiber, for the hospitality and the valued support. I'm very delighted to welcome Mrs. Susanne Meusburger, Assistant to the CEO; Mr. Mark Macus, CFO; Mr. Holger Feldhege, COO; Mr. Hans-Joerg, Head of Global Procurement; Zeno Staub, member of the Board of Directors here at the presentation. I'll start now with the positioning of the SFS Group. SFS is a company, you usually unnoticed, 24 hours a day, 7 days a week, reliably through everyday life. Our mission critical precision components, mechanical fastening systems and quality tools for selected niche applications are embedded in the successful products and processes of our customers and fulfill their service with high reliability in the required position and cost effectiveness. Our value proposition inventing success together. In relation to the total cost of the customer product, the direct cost of SFS products embedded or used in the production process accounts for often less than 1%. However, the associated costs on the customer side, such as procurement, all logistic costs are several times higher. The focus on optimizing the direct costs of SFS products offers little room for improvement. Therefore, we always strive to understand the customer's application and to reduce the total cost for our customer, thanks to individual innovative solutions. Our focused business activities aim for tailored solutions for selected niche applications. In the segment, Engineered Components, this includes automotive and industrial applications under the brand of SFS as well as electronics applications under the brand of Unisteel and medical applications under the brand of Tegra Medical. In the segment Fastening Systems, we serve the construction industry under the brand of SFS and the automotive, industrial applications and distribution under the GESIPA brand. The segment distribution logistics pursues its development under the brand of SFS with our Swiss customer base in the application range of industrial manufacturing and construction, and new under the brand of Hoffmann, we serve the European and increasingly also the U.S., Chinese industrial customer base with quality tools, workshop and personal protective equipment. While the business model and customer groups of the 3 segments differ depending on the end markets, the organization is designed in such a way that the natural synergies generated are maximized across all areas. These primarily related to technological competence, sales and marketing excellence and the 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 and Logistics, we trade with tools. New with the Hoffmann Group also in the segment Distribution and Logistics internationally. Those making substantial progress in building in each segment, a global business platform for the benefit and value generation of our customers and SFS. The SFS organization is aimed at providing maximum customer proximity, creating clear responsibilities, promotes entrepreneurial action. The divisions are focused on the end markets. To ensure the greatest possible customer proximity, we operate in regions, business units and key account teams. These are targeted to the selected customer groups. The 3 operating segments are supported by corporate IT and finance, corporate services, corporate HR and technology. On January 1, 2023, we welcomed with Susanne Jung, our new corporate HR, responsible person at SFS, helping us to further focus on the development of our most important resource, our employees or as we call them, our co-entrepreneurs. I continue with the key takeaways, which can be best summarized as SFS realizes leap in growth. In a year characterized by geopolitical and macroeconomic challenges, SFS realized the strong growth of 45.1% and generate gross sales of CHF 2.746 billion. Sales development was driven by the consolidation of Hoffmann for 8 months and good organic growth in most end markets and regions. Operating profit boosted by 9.5% to CHF 330.3 million. The corresponding EBIT margin was 12.1% and was impacted by mix effects from consolidation of Hoffmann, volatile and occasionally lower utilization of production capacities in engineered components, onetime acquisition effects of CHF 22.9 million due to the first-time consolidation of Hoffmann, resulting in an adjusted EBIT margin of 12.9%, reflecting the underlying operational performance. Earnings per share increased to CHF 6.95 from previous year CHF 6.51, confirming the attractiveness of the Hoffmann transaction. CHF 171 million were spent in growth-related investments, including new production facilities in Heerbrugg, Switzerland and Nantong, China, an ERP system upgrade and continued strengthening of cyber security. The 2022 ESG highlights stayed clear as well. Continued progress has been achieved. Progress in renewable energy generation and energy independence resulted in large-scale addition of photovoltaic modules at the sites in Malaysia and China. A concrete plan to build and own wind turbine on the production side in Heerbrugg, Switzerland, which further advanced through the construction of a wind measuring mast. Improved transparency in the value chain: ESG risks and opportunities will be managed through a more comprehensive supply assessment with successive supplier onboarding in 2023. Results of the updated materiality analysis and stakeholder dialog determine the focus for the future, the topics are energy and emission, sustainable solutions, employee promotion and engagement, procurement, occupational health and safety. And finally, the positive integration of Hoffmann expresses itself through first nonfinancial KPIs in the Sustainability Report 2022, to be published by the end of May 2023. I continue with the development by segment where I'll start with the headlines of the Engineered Components segment in which the positioning has been further strengthened. Reported sales of CHF 1.028 billion was achieved, up by 5.4% versus fiscal year '21. Growth was supported by good development of the Electronics division in the first half of 2022 and the Automotive division in the second half of 2022. The division Industrial stayed strong throughout the year, but slightly weaker in the second half of 2022. The temporary underutilization of production capacities were leading to an EBIT margin of 14.1%. For fiscal year 2023, SFS expects a solid organic growth along the targeted bandwidth of the SFS Group and aims for that all divisions will be with organic growth. And also, we expect that the Automotive division will be with continued market outperformance of 3% to 5%. The key messages of the Automotive and Industrial division, good growth achieved, brings to light that the automotive growth target of significant market outperformance was achieved again. Capacities of the newly built production facility in Heerbrugg, Switzerland for production of automotive electric driving brakes are already fully reserved. Successful launch of ABS parts production in Nantong, China marks a further step for local manufacturing of electric driving brakes. Industrial leveraged overall good consumer demand in all application areas and demand for aircraft components bounced back and showed strong growth throughout the year. The key messages of the Electronics and Medical division. Major capacity expansion projects on track point towards good growth momentum in Electronics in the first half of 2022, but increasingly slowing down in the second half of 2022. The introduction of the stamping technology allows to grow share of wallet with key customers and medical with positive development over the course of the year, although uneven in the different application areas. Capacity expansion projects in Nantong, China for Electronics division and in Franklin U.S. as well as La Heredia, Costa Rica, both for the Medical division progressed as planned. Work to build up and leverage the global medical manufacturing platform continued, therefore, nicely. In the Fastening Systems segment, again, strong performance was achieved. The continued dynamic market environment in construction industry and strong market positioning led to reported sales of CHF 644.9 million, which is up by 12.2% compared to previous year. High material availability and robust supply chains remained a competitive advantage in the construction industry. An EBIT margin of 17.7%, driven by high-capacity utilization and good cost/price management was achieved. For full year 2023, SFS expects solid organic sales growth along the targeted bandwidth of the group. Both divisions are well positioned to capitalize on our rising opportunities in all end markets. Looking into the details of the Construction and Riveting division, we can state that the capacity expansion project in North America is clearly on track. Good momentum in North America and Europe in construction-related application require additional production capacity. The previously mentioned expansion project in Exeter, Pennsylvania, U.S. is on track and will enable to further strengthen the robustness of the regional supply chain activities. Sustainability-related fastening applications such as facade renovation, solar panels and heat pumps provide room for growth. Consistent demand from industrial customers for riveting solutions were observed throughout the year. The automotive-related applications convinced with solid development, driven by a stronger second half of 2022. The new Head of Construction division has been appointed. Thomas Jung will take over as of January 1, 2024, from Arthur Blank, who served the organization for more than 40 years. In the Distribution & Logistics segment, we have achieved a leading position in Europe. Leap in growth of 212.8%, mainly driven by consolidation of Hoffmann for 8 months, resulting in reported sales of CHF 1.073 billion. Both divisions generated attractive organic sales growth based on solid market positioning and good material availability. Adjusted EBIT amounted to CHF 102.2 million, up by 213.5% versus prior year and the corresponding adjusted EBIT margin of 9.6%. For full year '23, SFS expects solid organic sales growth along the targeted bandwidth of the group on a like-for-like basis. Looking into the details of the D&L International, D&L Switzerland division, where we are intensively exploiting the potential for collaboration. Ramp-up of LogisticCity in Nuremberg, Germany was successfully completed. The legacy logistics infrastructure was handed back to the landlords. Consolidation of logistics activities in Central Switzerland allowed the expansion of warehouse capacity and increased operations efficiency. Decisive work was performed by cross-divisional teams to start leverage of high potential business opportunities like the cross-selling of our C-parts portfolio, serving of international D&L Switzerland customers with the full portfolio, also outside of Switzerland, and optimizing the supply chain for Swiss customers by utilizing the logistic capabilities of D&L International. With that, I conclude the presentation on the development by segment and hand over to Volker for the development of the key financials. Thank you.

Thank you very much, Jens. Welcome from my side, ladies and gentlemen. With the important step change with Hoffmann we saw in the last year, combined with the challenges that Jens described quite a successful year, and we are happy to state that the teams managed again to find ways to be the reliable supply chain partner to our customers throughout the year, which was not easy given various disruptions. We are happy to present today's financials, and we thank the 13,282 employees who made that possible. Overall, the group achieved as before mentioned, 45.1% in growth, which is based on an underlying organic growth of 9.1%, which is a significant step driven by 8 months newly consolidated sales of the Hoffmann Group shown in the D&L segment as we said before. The sales volume from that step change in euro were achieved as expected, having seen considerable appreciation of the Swiss franc against the euro in the second half year. We are in the bandwidth that we announced. Looking at the newly formed D&L segment, we can state that we see in that segment, an organic growth of almost 10%, which is in our expectations given at the acquisition date. All 3 segments show solid organic growth and significant contribution, of course, came from the Construction division in the Fastening Systems segment, as said. And the Engineering Components divisions contributed all. Currency impacts are minor effects given that we had also counterbalancing developments of the U.S. dollar and the euro during the year as the pattern was different. When we look into our growth ability, we show a CAGR of 9%, which, of course, is heavily driven by the acquisition of Hoffmann in the last year. But even if we restate for that, we would be at the CAGR of 5%, which is in the midpoint of our growth targets. And therefore, we're looking at an organic development that is stable and robust. Also given the fact that in later years, we have included in that growth, the acquisitions as well. So going forward, we see that as confirmed. And if you look into 2021, as a decomposition first year, second -- first half year, second half year, we can say that we see more even underlying patterns as opposed to in earlier years, historic increase in the second half year, so that, as expected, flattens out. If you look into end markets from an industrial perspective, then we see a clear shift towards industrial manufacturing. This is the home turf of our D&L segment, where they act as the valued and reliable partner of our industrial manufacturer customers that grow there in relation to the other segments. Likewise to the right hand of that slide, you see a distinctive step into Europe. Hoffmann, as a customer base, is mainly active in Europe. And therefore, you see the relative weight of Europe, excluding Switzerland, as we show it here, you see that growing the regions, North America and Asia in percentage relative weight goes down and underlines our growth potential in these areas. If we go into operating profitability, we are happy to report CHF 330 million; EBIT 12.1%; EBITDA of CHF 448 million, 16.4% for the financial year 2022. The result includes profitability of Hoffmann for 8 months, and the acquisition led to an important revaluation of the inventories, the so-called inventory step-up. That was to the tune of CHF 23 million, which we expensed in the Q3. The last part we expensed in the Q3 results. So if we restate for that, we look at an EBIT of 12.9% and the respective restated EBITDA of 17.2%. Like-for-like comparison shows that SFS did not match the record result of 2021, but stand-alone profitability for SFS before the acquisition would be in the midterm of our guidance, and therefore, solid and the patterns that you see are primarily impacted by the mix effects and the effects that Jens alluded to before. Demand swings is always a big challenge to the teams in adapting capacity. That is what you see in the second half year shining through apart from the mix effect but still the operations managed to balance that. In parallel, we see significant efforts in managing energy costs, labor costs, et cetera, that is also topics that are reflected in the price negotiations with our customers. Decomposition of the profitability is mainly related to these 2 factors. And if we look into our Swiss franc exposure that we are usually looking in, we are producing in Switzerland. Denominated in euro sales for the automotive market, then our relative operational expense share in Swiss francs comes down to 1/3, shy of 1/3. Our sales in Swiss francs go down to 13.6%. We are adopting on the remaining exposure successfully, hedging strategies which, on one hand, gave us an advantage on the sales in the last year of CHF 4.8 million in sales and also contributed significantly to our financial results, which I'll come to at the later stage. If you look into our overall P&L, this leap in growth shows on almost every line. And we explained the major impacts here. I want to go into the financial result, which is probably the underlying most significant change as we took on significant debt when we acquired Hoffmann. We have a financial result that is, on one hand, charged with the expense on the foreign capital. Foreign capital, we have at roughly interest cost of 1.1% overall, which we deem as very attractive, and we have in the financial result, the devaluation of the euro debt that we took on which is a favorable impact of almost CHF 14.6 million. So that is the decomposition of the financial result that you see on the lower of that overview. We are happy to report that after the capital increase, we still can see denser earnings per share on CHF 6.95. That is a CAGR of 11.2% since the IPO. That is a net income increase of 9.4%. That is a result, which you keep in mind is charged with CHF 0.43 per share by the acquisition accounting effects. So the potential on the earnings per share, we are happy to state is absolutely given. Based on that earnings per share, the Board of Directors will propose to the general shareholders meeting dividend of CHF 2.50 per share, which will come half out of capital reserves, which is an advantage for Swiss resident individuals and which brings us to a payout ratio of slightly above 35%. The bandwidth that we set long term, 35% to 50%. We are not seen as a dividend title, but we look at a dividend yield of 2.3% as per 1st of March closing stock price. Coming to the net working capital, we said that with Hoffmann, we see a mix effect that will be favorable in our capital utilization. We bring down capital utilization to 99 days, restated cash per cash cycle and 27.2% in perspective of sales. We saw during the first half year, significant demands on inventory buildup, which we accepted as a trade-off to be the reliable delivery partner to our customers. And we therefore had in the first half year, cash flows that we will come back to, but we managed to find ways to break that effect for the second half year. Still remaining the delivery partner. But we are on the right track. I think we can demonstrate that this is going then also into the right direction of cash generation. When we come to cash generation, capital expenditure, we are in a significant investment cycle as we have Heerbrugg side on the hand, we have Nantong expansion on other hand. We have significant investments in ERP systems going on. We mentioned that beforehand, we are at 6.2% on sales, CHF 171 million that we invested. We are profiting from a depreciation ratio that goes down. On the one hand, we had exceptional depreciations in prior years. On the other hand, we have couple of investments that run out of the depreciation. We will come up with that slightly as we go online with Nantong and with Heerbrugg. And as we keep investing, in the long run, with Hoffmann in the mix, we see the target bandwidth of 5% to 7%, coming down probably more to the tune of 4% to 6%. But we are in the moment in this investment cycle. Looking into operating free cash flow, which is for the year at CHF 117 million, reflecting an EBITDA conversion of 24.8% included this 8 months of cash flow of Hoffmann. We have a significant pattern of supply chain issues, which you see here at the -- particularly in the first half year, we found back to cash generation and our target is still to convert more than 50% of EBITDA into cash. And we show that in the second half year, we came towards these ranges. So we will confirm our position as a reliable cash generator. When we acquired Hoffmann, we gave the target that by year-end, we are going to surpass 50% of equity ratio, which we do. We took on dual-tranche bond at a very attractive interest window. For our purpose, we managed to renegotiate the revolving credit facility, and we deployed, of course, our cash on the acquisition. We are confident to come back to the ranges of above 60% in due course and will therefore as we are today, be a very solid financed industry. We allowed ourselves to give that a bit of a graphic view, what happened on our balance sheet, not only did we enlarge it by 40% coming from CHF 1.8 billion to CHF 2.6 billion in overall, but also in taking on CHF 680 million in debt, as said, the foreign capital is solidly financed, its cross-currency swapped into euro. So we are sheltered from that point of view and very solidly positioned. When we look into return on capital equity, we show 22.7%. Now if you restate that for the Hoffmann effect, then we would look at 24.4%. On invested capital, where we burdened calculation not only with the tax effect, but also with the impact from goodwill that we have in our equity, we look at 9.7% restated. We are deeming our weighted average cost of capital to the tune of 7.2%. Effective tax rate came up. As we indicated, we were indicating that we're looking at the tune of 20%, that materialized. One part of that is that we have a more relative share of profitable tax in high-tax cost countries. We have seen a significant growth in the U.S. We have seen a significant growth in other European countries. And we have profited in the past from tax losses carryforward that we successfully used up. But now we have to -- we have to face here and there the situation as it is. 99% we are not expecting significant impacts from OECD minimal tax initiative as we are positioned in a local-for-local situation. And as we are having not any aggressive tax structures implemented, we are looking at that with minor impact. As usual, we have the last slide here, the KPI summary, and I think without going into the details here, it's the documentation of a successful step change that we made. The potential for continued and consistent growth is given. The group is providing a resilient and attractive earnings per share that has also the potential. And we are in a position to generate cash, deleverage the balance sheet further, and we'll stay as we are already today very solidly financed group. With that, I conclude the remarks on the current results and hand over back to Jens for the outlook and the guidance. Thank you very much.

Thank you very much, Volker. And welcome back here. As we take a look at the outlook 2023, the SFS performance also in '23 will continue to be shaped by considerable uncertainties as a result of the macroeconomic and geopolitical developments, which we see. Regional restrictions in supply chains will impact the course of the business in the individual end markets also over the course of the year 2023. Safeguarding the business processes, ongoing effort to pursue forward-looking innovation projects and the sharpening of the group's customer will be the focus and the top priorities in this kind of volatile environment. SFS expects, as you see here, in the 2023 financial year, sales of CHF 3.2 billion to CHF 3.3 billion, including the first-time consolidation of Hoffmann for the full year. With this, SFS also expects before consolidation effect, sales growth along the midterm guidance of 3% to 6%. For SFS Group also as a whole, including Hoffmann, an EBIT margin along the midterm guidance of 12% to 15% is expected. The outlook is certainly also based on the assumption that there will be no significant deterioration of the underlying economic conditions or geopolitical energy or pandemic-related restrictions. On the operational side, as always, we focus on specific priorities in order to achieve the outlook we have given. And those are tailored to be most beneficial to reach the maximum performance of the organization in this new year. Under the topic of the megatrends, we focus further on application areas with strong underlying growth drivers due to global megatrends in digitization, demography and autonomous driving. On the growth, we focus on investments into the future growth projects, the larger ones in Nantong and Heerbrugg but also very much smaller ones in all the other organizations as well. We also established international presence with Hoffmann. That's a continued project, which will be carried forward over the next 3 to 5 years. We also expect to accelerate growth in North America and Asia to further balance the group revenue taking globally. Under customer, we -- that was too fast, sorry. Under customer, we ensure reliable supply capability that was probably one of the enabler of the growth -- organic growth track we have seen also was one of the enabler to achieve the profitability, which we were able to achieve in the last 2 years. We continue improving customer centricity in the organization and also further strengthen the local-for-local approach because this is what we see widely in the industry. It's a major [ concern ] to be locally supplied and have local speaking partners available to the value-added of the customers. On the profitability, further balance the production capacity with demand while ensuring also supply capabilities and keep costs under control. We also further focus on balanced price management. We believe we are through the most difficult increases over the last 2 years. We still expect in 2023 and '24, that also there will be occasional increase in cost in the supply chain, but not as widespread as we have seen it in the last 2 years. Under sustainability, further integrate sustainable acting and thinking holistically in the business model and the corporate strategy, we believe this is a great opportunity we have as an organization, and last but not least, also protect the employee health and safety. With that, we are at the end of the active presentation for the full year 2022, we now are available to take your questions. And as usual, what we do is we take first the questions within the room. We have a microphone available. And in the next 60 seconds, we are going to organize ourselves to sit down here and just be ready for your questions. Thank you for your attention.

Bernd Pomrehn, Vontobel. Two questions for me. Firstly, you are providing a pretty confident growth outlook for this year, indicating that you are not planning to participate in any recession, but you're targeting a pretty sound growth this year. What do you believe? Will this be rather volume-driven or rather price-driven? And in which regions do you expect higher growth or less growth? That would be my first question.

Yes, certainly, the recession plans which were there for 2023, I think what we see around ourselves is that we realize that everyone sheltered for a difficult winter for shortages in gas and electricity, and we realize this is not happening. And what we clearly bank on is that the demand will be stronger, maybe not as strong as we have seen in the last few years after recovery of COVID, but we expect a stronger demand overall. There are still plenty and you may ask the host we have here today, we have plenty of customers that sit on an order bank, which is substantial, first. And secondly, we also expect the world will not be as negative as it may be seemed. Certainly, we expect a certain cooling off and slow down, but not to the level as you read it in the newspaper, that will come probably second half of 2023, we'll see a further slowdown maybe 2024, but not be too dynamic overall. But in the first half of the year, we still expect very solid business development. Secondly, on the pricing side, we still expect here and there may be some moderate minor price increases. I would make the guess today and say, greater than 95% of growth will be volume driven. Less will be sales increase driven. That's the current view. But as we know, the world is volatile, we change directions sometimes quarterly, yes.

Okay. Excellent. And then the second question, you achieved an adjusted EBIT margin of 11.5% in the second half of the year. You're targeting now an EBIT margin of above 12% again in 2023. What are the main levers for improving the profitability in the current year despite some currency headwinds, rising personnel costs, probably rising or higher energy costs?

As we said, the second half year has been impacted by 6 months consolidation effect of Hoffmann, which is the mix effect that you have in the first half year only -- for the part of the first half year. The other point is we saw a quite challenging patterns of customer demand in the second half year with still not evened out supply chains of our customer with still difficulties in logistics with shutdowns in particularly the electronics industries, which from our business pattern are very difficult to conquer. And usually, these swings in predominantly the engineered components part make -- give us headaches on margin perspective that is the case, yes. So we're looking at a better situation or an improved situation in supply chains. We look at a better situation already today in logistics, right? The container price came down from [ some over 20,000 ] from Asia to the U.S. down to acceptable, not pre-prices but acceptable [ 4 digits. ] I mean, that's good. So we have a couple of things that we think we are over the hump and look into next year with a bit more confidence on that one.

Andreas Müller from ZKB. I was wondering you expect a solid and robust consumption market also in 2023. What should we expect about profitability in Fastening System, is kind of the -- is there room for better margins, given that they are already relatively high?

Good question. And certainly, we see the 3 segments with uneven development. We have seen that in the segments Fastening System and Distribution & Logistics, we were able with the many small customers to increase prices earlier on time as needed. And we see we have a lag in engineered components because they're usually -- first, we have a waiting period until we can increase prices. So we believe in the year '23, we will now see a shift. We'll probably see a stabilization on price levels in Fastening Systems and D&L, mainly maybe some moderate price decreases overall. And we would expect in engineered components an improvement. And we should see that also on the EBIT margin. I would expect EBIT margin to -- towards second half of the year in Engineered Components to improve. And I would expect Fastening Systems and D&L probably to come slightly more under pressure on that side.

Yes, coming to EC underutilization, you explained that, so probably relatively low still in the first half, second half better. Is then, let's say, the 2021 margin, which was clearly higher. Is that sort of a blueprint already for 2023 in EC?

It could be a blueprint 2021. We had almost perfect conditions. We came out of a cost hovering saving COVID environment and jumped right into absolute demand-driven environment. So revenue grew faster, much faster than cost did. I would not see it as much or as dynamic as in '21 overall. I would see it more moderate and more stepwise. But certainly, the expectation is in Engineered Components to recover from I would say, almost record low EBIT margins as we see it right now in Engineered Components back towards the 18% to 21%, which is our targeted window for Engineered Components. We will do a step in '23, that's the expectation.

Okay. And my last question on order book and order intake. You mentioned your clients are at a pretty good level, probably order book. But how is the order intake currently? Is that matching sales right now, given also that you are a bit delayed typically from what you see from, say, these indicators?

Overall, as mentioned, what we see is a strong December, we have seen a very strong December. We have seen in Fastening Systems and Distribution & Logistics record sales in December. And we expect that this will continue to some degree forward into the year 2023 because, as I mentioned, everyone hovered for a challenging winter, a challenging situation, which is not the case. So right now, demand is, I would say, strong.

Stefanie Scholtysik, Mirabaud. One year ago, we visited Nuremberg and LogisticCity and the major parts of the floor were still empty. Can you share with us what businesses you have filled it up and how you intend to leverage the sales from there?

I think the ramp-up overall is on schedule. We gave back the previous locations to the landlords. So efficiency-wise, we made a further step. But certainly, the investment, as you have seen, it is built for more. And we expect over the next 3 to 5 years, increasingly to load the facility as the business grows. Right now, we, for instance, start shipments from LogisticCity directly to Switzerland. That's, for instance, a topic we do. So with that also increase efficiencies overall. And we also work on potential transfers of warehouses from other divisions to LogisticCity in the next few years. Those are some of the projects, but they will come step-by-step overall.

But when you compare to what you've seen during our visit, then you would see considerable more -- already considerable more activity just because of the consolidation effect and the finalization of bringing other sites that, as Jens mentioned, have been given back to the landlords into LogisticCity. So continuously, we increase utilization of that asset.

Then maybe on your investments in China, we just directed this morning that Foxconn, another supplier to Apple is opening a plant in India. Shouldn't you invest more in India than in China?

That's a good suggestion. So yes, we are clearly aware of that situation. We see that most customers have a strategy adjustment done, China plus is usually a little bit the theme in the supply chain. I go back to 2018 with Donald Trump and the start of the tension with China. At that time, we have seen a first wave of considerations and then it stopped because everyone thought, yes, he will not be reelected. So problem gone. Now companies came back and said, "Listen, this will be probably a longer-term challenge which we have with the supply chain, so we evaluate other locations. India is one of them; Indonesia, Vietnam, other considerations. And from our side, it's good news because our competitors do not have those options available as we have. So we are working on our platform in India already intensively to support our main customers out of India for India. And in parallel, what we do in China is expand the factory because we go into stamping technology new. When you open up your smartphone and you start counting pieces, you find out that right now, we have around 80 components in there with the option to add another 20 to 30 stamping components by implementing this technology, and that's the plan for China. So we would expect that some transfer from China to India will be happening over the years, and we expect, in the meantime to refill that and also increase the scope in China with the stamping technology. And with several locations already active in India, we are really well positioned to take on these demands and react to those as we go along. Even Foxconn as being a first mover will not bring that up in interest in a year or 2, right? This is a whole ecosystem of suppliers that they're building up there, but we are confident that we can capture that demand in India. And we also believe it will take years to reach the level of efficiency holistically in electronics in India compared to China. That's a long journey for our customers to achieve that.

[indiscernible]. You mentioned that your new factory for electric brakes is already fully booked. Given the cycles in the automotive industry, this basic concerns the next 6, 7 years. So what -- will the sales ramp up? What is your budget for this plant? I mean there will be a ramp-up. So how does that look like in terms of sales, 23%, 24%, 25%. I mean you have the plan, don't you?

Yes, it's there. Luckily, we have it.

And starts depreciating, no doubt. Today, we have a base of around -- in that product category, at site Heerbrugg, we have a base of CHF 20 million in sales today. And we expect that by 2026, 2027 will be around CHF 80 million or slightly more in sales. And in between, there will be the ramp-up that will come in smaller and larger steps as we see it right now.

Okay from CHF 20 million to CHF 80 million until '26.

'26, '27 years.

However, the profitability contribution will be -- I don't know -- better and better?

It will be better and better exactly. And that's always the challenge in this business that usually whatever we take on and bring online the first 1 or 2 years, it's a drag because it's new developments, it's smaller volumes and then usually after 2 years when the volume increase further, then we see contributes on the profitability side. And that's a normal cycle. This is not just new with this. This is just, I would say, a lighthouse example. On average, within division automotive within the last 6, 7 years, every year, we booked business in the range of 15% to 17%, and that's continuously. So as we are concerned with the automotive industry overall with the technological change as we see it, and the volatility in the supply, I think that has the main impact on our development. And the second impact is the new business, the ramp-up. That's something we can manage internally in-house, and there we are quite experienced. So we expect headaches. Well, we expect headaches along the normal course of the business.

Okay. Great. Then about Hoffmann, will there be any additional acquisition-related costs in '23, like the CHF 22.9 million or is that now all over?

That's all gone now. As you look at inventories that turn rather fast, we have digested the last impacts from inventory step-ups in Q3 and the projects for integrating, working closer together. These projects are fully operationalized in the budget for 2023. So we are not considering any extraordinary anymore going forward.

Okay. But as the projects still run, the efficiency will get better still.

That is the [indiscernible]

We only have -- will have positive impact in '23 because the costs have already...

We said for the D&L segment, we'll be looking at a range of profitability, 7% to 10%. And that is what we strive for.

Yes. Alessandro Foletti from Octavian. A couple from me as well, if possible. In the -- coming back to the margin in Engineered Components, you mentioned it's a record low. Can you maybe dissect a little bit more in detail what's the effect of the capacity underutilization? And what's the effect of the delayed prices? Maybe to start there.

It's certainly a question which is challenging because both come together. I mean in the division, we see it in the different divisions, we have both effects together, the price effect situation and the underutilization situation. From my point of view, I would guess half and half, roughly, plus/minus. So if we would assume we would like to make 4 EBIT point step up, then I will give it 2 EBIT points delayed price increases, which we need to forward to the customer overall. And then probably 2 percentage points is underutilization in that area.

Right. And just to be sure on the capacity utilization, is it possible that just some volatility, as you mentioned, in H2, may have such a big effect for the full year?

Absolutely, absolutely because the capacity underutilization happened in electronics in the second half of the year, and it started as of September, and it did not finish by year-end. So it was a substantial impact of underutilization, partially due to COVID in China, as we have seen change in strategy on how to deal with COVID. There was probably a minor impact. The major impact was HDD weakness because the big tech companies elected to also go into a cost-saving mode and not expand the server farms and all the other investments they do into those capacities.

Right. And this answers already half of my next question about electronics. What about automotive with respect to capacity utilization, et cetera, and maybe location-wise?

Exactly, capacity in automotive was not well utilized in the first half of the year. Remember, you create conflict. OEMs did not have cable trees and did not need our component. So we had there underutilization. We had also short work weeks in the Swiss operations plus also short work weeks in Czech, in U.S., for instance, China, India, not so much. Those were performing more strong. So we had underutilization first half of the year. And then second half of the year, it's mainly delayed price increases due to contractual matters. We have a 6-month delay before we can increase the price. And that's right now -- yes, that's right now the discussions and the measures we take.

Okay. Understood. Any other effect like the ramp-ups that you have?

Maybe just hang on a bit on this capacity utilization topic. I think we must not underestimate the sheer pattern of utilization. If you have swings that is over-proportionately impacting our margins because of ramp up, ramp down. And in the overall, you look at the utilization, right? But what is for us an important factor is, have we steady demand even on a lower level. But as long as it is steady, it's better for our margin. The challenge during the last year was this stop and go, right? And this is just for the whole team, that was a very big ask. Sorry.

And I believe it's also important to mention that the new programs, we have situations that customers demand more than what we can bring out and the legacy programs is usually where we see the demand fluctuations. So new business, usually, it's designed, it's developed, it's ready, it's available. It's a matter of bringing the machines, ramping up and deliver to the customer. Some pains, some depreciation of cover, that's natural. On the other hand, the true pain is with the legacy business.

I have 2 more questions, if I may. One on the Hoffmann. My calculation tells me that the margin of Hoffmann was 9.2%. Assuming 10% in Switzerland. That's very easy arithmetics. If I start from there, last time we spoke, you said that there are probably CHF 5 million of gains from LogisticCity. The step-up is finished. So we are pointing towards kind of 10% for Distribution & Logistics in 2023. Then you mentioned before the prices, it sort of reduced a little bit my enthusiasm, but double-digit is possible or not.

We believe in this business double digit is possible. Question is in which year and in which environment but overall, it's possible and it's also a strategic objective to achieve that, yes.

Right. And then my last question. My last question is on M&A a little bit. Maybe I misinterpreted what you said in the closing slide with respect to rebalancing the geographic distribution of sales. But it sounded like more acquisitions -- next acquisitions to take place in the U.S., in Asia, how's the balance sheet looking like for that, first of all. And second, how is the pipeline?

We have an organic focus in China. We have an organic focus in the U.S. with segment Engineered Components, Fastening Systems and D&L. Although Hoffmann has good plans for those regions to organically grow, and we hope we grow faster. And secondly, on the M&A side, we have a focus in the United States on construction, but those are usually smaller add-ons, maybe CHF 5 million, maybe CHF 10 million, maybe CHF 15 million of sales. We certainly don't do a big step forward in the next 12 to 24 months, same like we have seen with Hoffmann. We probably have very selective add-ons to increase our distribution network with small hardware outlets.

And from a balance sheet point of view, I think, I gave you an indication. I think we are a cash generating. We have enough of dry powder, and we have never curtailed that ability to do steps wherever they are needed, but we are not looking at a big one at the moment.

More questions in the room. Otherwise, we switch to questions we have on the chat. Now, we should see the questions here. I read the question, Q&A from the chat. And the first question we have here is from Jörn Iffert, UBS. What gives you confidence electronics will grow in 2023 amid a weak consumer environment? Certainly challenging prediction to be made. But usually, over the course of the last 10, 15 years in which we were in the electronics environment, we have seen that when crisis came, it usually took maybe 6 to 9, sometimes 12 months until the consumer cycle went truly through, and then consumers were usually were at the point where they needed replacement of their electronic gadgets. So that's point number one. Point number 2 is we also see that the new innovations which come to the market in second half of 2023 are attractive. So we also believe those attractive products will find consumers which are willing to spend. And also number 3 is that we also see, especially we've augmented virtual reality glasses, we see more opportunities. That's usually the area of growth overall. And number 4, and that's probably most important is we also expect substantial more stamping business to be ramped up. We built a new building that should be ready in June, ready for the ramp-up, and we have roughly around 40 stamping presses on order, which should find its way to the building and should also find its way to ramp up for the second half of the year. So there are no further questions from the chat. And if there are no further questions in here, then we thank you. There's 1 question. Yes, please.

Yes. I was wondering in this 99 days cash conversion cycle is that also kind of what you try to achieve next year or even lower?

I mean that's probably kind of a new level that we achieved given the mix. It will be challenging how we build up inventories and how we manage supply chain towards our customer. Jens alluded to it, we see in the construction business, completely different patterns of customers asking us to increase stock, but certainly, that is where we want to be, right? I mean we are continuing or even increasing the focus on net working capital management as we just want to drive down risk from there, right? That is mainly coming from inventory management and supply chain management. And the focus is there, and we'll try to make that a new normal, let's call it like this, yes.

And last question on the refinancing costs. You mentioned 1.1 percentage interest rate, what's going to be the interest rate after the refinancing?

That is the interest rate that we refinanced. We have a dual-tranche bond 3 and 5 years out. And we have a revolving credit facility that has an attractive margin pattern that is driven down by our net cash EBITDA ratio. And given the cash generation projections we are looking at, we see that remaining very attractive, depending on what the underlying is. But I mean, when we laid out the bond with 3 and 5 years, that would roughly reflect our expected cash generation patterns going forward.

Another one for me on Hoffmann. CHF 770 million, you said for 2022. That's what you have consolidated. If I add back the foreign exchange, I get to what you mentioned in...

CHF 735 million.

That's still quite low with respect to the initial range that you gave. Initially, you said CHF 720 million to CHF 770 million.

CHF 720 million to CHF 740 million, we said.

Are you sure? Okay. I'm going to have to look at the first presentation. All right. Well, then in this case, the question is not so relevant anymore. I wanted to know why it's not been growing much faster.

No. I mean it -- we are -- I mean -- why is it not growing faster? When we look at new D&L business, and we will take a bet on the range. But when we look at the growth, we say organic underlying growth in the new D&L segment is close to 10%, right? So we have seen a good growth in that business, right? And at stable currencies, we are in the mid of our expected range. If you look at euro, we are almost bottom.

Okay. What can we expect for '23? Because we see, if I hear about what you just said and all this, it should continue to grow at that rate.

I mean we have laid out the guidance at 3.2% to 3.3%, including Hoffmann. And that would imply that we have over the group at 3% to 6% growth pattern, which is more or less applicable to all 3 segments.

Exactly. And the rest, we will see.

Okay, okay.

In a year from now, we are going to take up the discussion, yes.

Certainly, what we can say based on our experience and history, right now, the business environment is easier for trading business than for manufacturing business. And I think the whole volatility speaks to that. And we still believe 2023 will be probably more slightly in favor of D&L and Fastening Systems and probably slightly less in favor of engineered components. But as soon as we go into an environment which is again more predictable, then this may shift to the other side. And Alessandro now has another question.

I need a witness, I have opened here...

So I owe you a beer, and that's what you are trying to say.

Can you read the numbers that has been indicated in August 26...

CHF 720 million to CHF 770 million.

May 2022 impact from Hoffmann, CHF 720 million to CHF 770 million.

Okay. That's a beer on the house.

Underlying still, it's the euro exchange rate. We have been...

In euro, we are spot on, yes. And depreciation was -- in the second half year was more than 5%. 104, we make the -- we took the guidance. And at year-end, we ended up in [indiscernible] yes, but anyway I owe you a beer that's the conclusion we have.

[indiscernible]

We'll find out. Exactly. Good. One more, yes, question. [indiscernible] you have the microphone already, yes?

Torsten Sauter, Kepler Cheuvreux, a very quick question. Can you clarify what your guidance and outlook is for the tax rate going forward? Because I think we have so many moving parts, basically, the footprint change. I think you also had a bit of a step down there of some tax assets and so that's probably -- medium-term and a long-term outlook that's probably needed at this stage.

I mean, we come from a basis of 17.5%. We see a shift in the allocation of taxable profits, as I said, right? We are now to the tune of 20%. We see that as something that midterm, we will probably stay at. Now depending on where we go with global minimal tax, but as I said, we are today deem the impact is minor.

You made 1 interesting comment. You mentioned that in general the environment in the trading business is more favorable, a little bit easier than in your manufacturing business. Apologies, but you probably have realized, we are still not so comfortable with the trading business. What are the main reasons that the trading business is currently in a more favorable environment than the manufacturing business?

It's the volatility. The volatility is the enemy of the operations and within the manufacturing environment, you need stability and continuous utilization of the equipment, 24/7, 5, 6, 7 days a week. And what we see is right now is that availability of orders, sometimes raw material is not as great. So we have customers calling in and saying, we still don't need because we don't have the other components, please don't ship, don't deliver. And this all on short notice. So that gives this volatility, these interruptions, the stop and go effects and in manufacturing, there's little room to even that out. On the other side, in the trading business, we have inventory. And what we have seen also on cash flow statement is, strategically, we have decided crisis comes, everyone tries to hide money in the pocket. We go the opposite way. We say we increase inventories. We maximize availability, we get new customers, and that's what we did. And secondly, also customers clearly said it's worth to us to come into your supply chain. So we certainly also signed attractive deals for the SFS Group in that part of the business. So right now, in trading, it's more attractive because of that development. As soon as we go into patterns again, where for 3 years, the world is not changing too much, and purchasing can track you every year and keep track on where you are with your prices, then that business usually feels a little bit more pressure than the manufacturing business. That was very helpful. Stefanie?

I have 1 more question on working capital. How should we think about working capital going forward? And in the past, we could assume something like 23% to 25% of sales. And now with the Hoffmann acquisition, is this going to change? Or what would be the right assumption?

I mean from a mix point of view, it would rather come down. But when we look at Slide 30, and you look at net working capital in the past, we were trailing at 110 days plus/minus. And we see now this step change of coming down, right? And we think that with Hoffmann, we have a very well-established supply chain inventory management at place and that this is going to keep the ratios going forward.

Okay. So it's rather going down if I hear you right.

So I see it as we discussed before, I think this is probably more a new normal. This is not a trend that you could extrapolate and drive down. I think with roughly 99 days plus/minus, we will have that step change of 10 days will probably something that we maintain.

Good. There are no more questions. We are right on time. We thank you for your interest coming here on-site, and we certainly invite you for lunch. And then after lunch, we have the opportunity to do a tour at our important customer, Bühler here in Uzwil, and I believe it's worthwhile to stay. And also, they get the foot into the water also on the trading business with SFS and understand what are the key characteristics of this business and why it's available to have a broad assortment of products and product lines available and what's the benefit of the user on the other side of the customer. So thank you all. Enjoy the lunch.

Thank you very much.