SFS Group AG (SFSN) Earnings Call Transcript & Summary

Ladies and gentlemen, welcome to the Half Year Report 2023 Conference Call and Webcast. I am Alize, the Chorus Call operator. [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, Chief Executive Officer. Please go ahead, sir.

Thank you very much, and good morning, and welcome to the presentation of our first half 2023 results. Today's speakers are Volker Dostmann, CFO, and myself, Jens Breu, CEO of the SFS Group. The agenda over the next 60 minutes will be positioning of SFS, key takeaways, development of key financials development by segment, guidance 2023 and group priorities, Q&A before closing. I will start with the positioning of SFS, where SFS accompanies you usually unnoticed 24 hours a day, 7 days a week reliably through everyday life. Our Precision Components, the mechanical fastening systems, are embedded with successful products and processes of our customers and fulfill their service with high reliability in the required position and cost effectiveness as needed for mission-critical applications. The end market reserve ranked in order of sales achieved are Industrial Manufacturing, Construction, Automotive, Electronics, Medical as well as other selective industries. 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 of our customers accounts often for less than 1%. However, the associated costs on the customer side, such as procurement or logistic costs at a all time higher. Though the focus on optimizing the direct cost of SFS product offers little room for improvement. Therefore, we always drive to understand the customer's application and to reduce the total customer internal processes and environmental costs, thanks to an individual innovative solution enabled through the SFS value engineering approach. As such, we create over and within the 3 segments synergies in tooling-based technologies. In the segment Engineered Components, this means that the engineering partner of our concentrated customer base through the development and industrialization of tooling based customized precision components and assemblies. In the segment Fastening Systems, a solution provider, over thousands of mainly midsize and small customers by the development and distribution of application-specific tools and customers. And in the segment distribution logistics assistant partners to our thousands of midsized and small customers as well as some large strategic targeted key accounts through the development and trade of tools, customers and work equipment. SFS offerings and produces at over 140 locations in more than 35 countries worldwide. Through local service and proximity to the customer, we guarantee a maximum of logistic labor and cost as well as synergy effects through optimal know-how transfer. The global business platform in combination with standardized products processes and machine part, allow the support of international customers on site. Proximity to customers has been the major driver for the internationalization of the SFS Group ever since. Our value proposition as well as our focused business activities lead then in combination with the megatrends on which we base our business strategies on the sustainable growth through the cycle. On the growing market segment, we understand niche market with above average growth potential having a strong link to the underlying megatrends. By applying our operational excellence core knowledge building up by managing the robust supply chains, high-volume production technologies, time-to-volume expertise and best-in-class availability, we delivered to the customers the quality and reliability we are known for. By leveraging our global business platform through offering local for local business development capabilities, we are enabling our divisions to continuously increase share of wallet with customers. At the same time, allowing customers to achieve a reduction of supply chain complexity. I will continue now with the key takeaways first half 2023, which can be best summarized as progress achieved. First half of 2023 was characterized by mixed business performance and destocking effects in end markets as well as continued ramp-up of innovation programs. Total third-party sales of CHF 1.58 billion were generated corresponding to another strong increase of 29.2% versus first half 2022. Scope effects of CHF 400.6 million or growth of 32.7% came from the first time consolidation of Hoffmann. On a like-for-like basis, slight organic growth of 0.8% over the group was realized. Operating profit EBIT rose by 16.6% year-over-year to CHF 189.9 million, resulting in an EBIT margin of 12.1%. Mix effects, uneven capacity utilization from new program ramp-ups and a partially increased cost basis impacted profitability. Integration of Hoffmann is progressing well. Both divisions of the Distribution & Logistics segment are realizing initial potential opened up at collaboration. Market presence of the Construction division expanded into the Denver USA region by adding 2 new distribution pipes. Last, we updated the SFS Group guidance for the 2023 financial year. Continuing with the 2022 key takeaways on the environmental side as published in the ESG report on May 26, 2023, with excellent progress on direct emission reduction and increasing fare of renewable NPUs, with a reduction of minus 48.4% compared to the base year 2020, the SFS Group has taken a major step closer to achieving the planned target of reducing direct CO2 emission by at least 90% compared to value creation by 2030. Direct emissions, Scope 1 and 2, were reduced by minus 18.7% in absolute terms in 2022 despite a 45.1% increase in sales. With a share of 49.7% and in the previous year, 37.7%, SFS, significantly increased the use of renewable electricity as a percentage of total electricity consumption. This means that the company almost achieved its 2025 target of using at least 50% of electricity from renewable sources already last year. Further note or takeaways on the 2022 ESG report includes social topics as well. Our dual trading objectives could be secured in the targeted range of 5% to 7% again. Talent development was further expanded public [indiscernible] in the area of middle management and through the Advanced Leadership Development program. This should be seen in light of the fact that SFS wants to build 70% of senior management positions with internal candidates. The number of accidents per million hours worked was reduced by minus 1.4%. However, the accident rate is still too high and with too little progress was achieved. This means that SFS must intensify its efforts to still be able to achieve the goal of helping the accident rate by 2025 compared to 2020. Coming to the prepared organizational changes as of beginning of 2024. This was the aim to foster the customer centricity of the organization. To guarantee a strong customer focus and better leverage cost selling potential, operational and application-oriented synergies, the firm's Automotive and Industrial division are being complemented with the sale-specific business areas of Riveting division. This change will be implemented with the organization as of January 1, 2024. Accordingly, the result of the Riveting division will be shown in the Engineered Components segment in future. The growth and profitability target of the Engineered Component and Fastening business segment will remain unchanged. In the interest of a farsighted succession planning, the Board of Directors appointed Urs Langenauer as the future head of the expanded Automotive division. He will take over from Alfred Schneider on January 1, 2024, who will continue to support SFS in selected projects until his retirement on May 31, 2024. The Board of Directors and Group Executive Board would like to take this opportunity to thank Alfred Schneider for his farsighted positioning of the Automotive division as well as for his enormous long-standing commitment to SFS. In addition, to make better use of the collaboration potential in the area of technology between the Industrial and Medical divisions, the 2 divisions will be merged into 1 division called Medical & Industrial Specials. This change will be implemented as of January 1, 2024. Walter Kobler who had been heading up the Industrial division as well as the Medical division will take charge of this new division. With this step, the organizational structure of the SFS Group will also become leaner. I conclude my explanation of the key takeaways, and we'll now hand over to Volker for covering the development of the key financials.

Thank you, Jens. Good morning, and welcome, everybody, from my side. Sales shows overall just a slight organic growth, which is driven by pricing efforts to the tune of 1% to 3% realized with our customers, but more than offset by adverse FX effects, development predominantly from the euro and the U.S. dollar. Adverse underlying factors in the segment Engineered Components come mainly from destocking effects on customer side, but also from lower demand from our loyal customer base. This stands against a stable demand in Fastening Systems where competition increases as availability and logistics issues have eased out. Good organic growth is shown in the D&L segment, particularly in the international environment, a scope effect of CHF 401 million is recorded for the sales January to April 2023 of the acquired Hoffmann SE, which is reported under the segment D&L. Overall, FX translation amounts for first half year to minus CHF 52 million or minus 4.3% as set from euro and U.S. dollar. From an end market point of view, we see a further step towards industrial manufacturing. This is based on the value proposition of Hoffmann. As an effect, the relative share for construction market is reducing. The decrease in electronics industry reflects the before-mentioned supply chain management efforts of our customers as well as on the lower demand by the consumer. These effects also show up in our Asia sales, which are subdued. From a geographical point of view, Europe, excluding Switzerland, is significantly gaining in importance whilst we see Switzerland and the Americas lessen. For the first time, we consolidated the Hoffmann acquisition for the whole reporting period. The good profitability in the D&L segment is well underpinning the overall profitability. However, access capacities at customer side are leading to decreasing demand in EC. The subsequent low utilization is threatening our performance as we are ramping up several growth projects in parallel. Meanwhile, we see good profitability in a more competitive environment in Fastening Systems. In nominal terms, the EBIT amounted to CHF 189.9 million, plus CHF 10.4 million versus prior year. Some inflationary effects are seen in the OpEx like elevated transportation and energy costs, although we have seen cost levels flattening again towards the end of the reporting period, we had to accept feeds during first half year 2023. We report growth of net sales of plus 28.6%, which is driven by our acquisition of Hoffmann, as we have explained before. Overall contribution margin is suffering, as said, in parallel, cautious hiring and good cost [indiscernible] other OpEx, partially sheltered EBIT and EBITDA. Financial results newly bears the cost for the financing through the CHF 400 million in bonds besides the variable interest payable on the revolving credit facility. Financing costs remained in the expected range. Further optimization potential is identified with the asset-backed commercial paper program to be refinanced over our outstanding revolver. Income taxes have seen several adverse effects. In [indiscernible], there has been a tax rate increase in the U.K. and France. For the U.S., we have used our tax [indiscernible] carryforwards. In Asia, several tax credit schemes came to an end. Additionally, ETR for Hoffmann SE is higher as we are operating in some high-tax jurisdiction. Overall, we report an ETR of 25.9% as per half year 2023. Midterm, we see potential to be at 20% to 22%, which is dependent on where profits are generated geographical-wise, but also how tax environment and international tax levy develops, particularly around [indiscernible] and new taxes. As the tax rate burdens the net income, we reported a slight increase of plus 1.1 percentage points. Average outstanding shares increased during the period by plus 2.8%. This results in a suppressed EPS by minus 1.5% or CHF 3.37. We see net working capital slightly positive, developing. Inventory management chose first results while not putting delivery quality at risk. Towards the later of the year, we plan to refinance the ABCP program as a fact commercial paper program to the tune of EUR 90 million at maturity, which may impact this ratio on this graph. I will come back later to this presentation on the refinancing of ABCP. Continued expansion in EC for specific growth projects is still underway. We have spent 5.2% on sales, mainly on expansion projects. The slide shows clearly the distinct difference between the business models EC versus FS and D&L. We expect CapEx for 2023 to be around 5% to 6%. Long term, we stick to our guided range of 4% to 6%. Free cash flow has improved, although we see further potential, it's been helped by our net working capital efforts, which are ongoing. Outlook towards year-end suggests further improvement. Based on our outlook, we expect cash flow for the year to be clearly 3 digits or in the range of prior years. Despite net debt increase along seasonality slightly, equity ratio could be further improved to 51.3%. This is in line with our target to go back to a level of plus 60%. We will make use of the financial position and refinance the existing SFS commercial paper program at end of maturity over our revolving credit facility in line as it stands, which is at more favorable cost levels. Despite this, we expect our overall net debt position to decrease slightly towards the end of 2023. The bond financing of the acquisition is hedged and the related revaluation of this net investment that is shown as a change in hedges on equity table. As per first half year 2023, we have recorded a positive effect of CHF 36.3 million. Maturity of the hedges is in parallel to the bond, which is June 2025 and June 2027, respectively. As per half year, unused credit lines are at CHF 450 million. Return on capital employed is impacted from the overall profitability described before, supported by Fastening Systems and D&L with slower profitability situation in EC. Return on invested capital shows a slight pickup to 9.4%. As previously in these presentations, we have given you the details on how we calculate the performance indicators. We have summarized the KPIs for the first half year for your reference on this slide. With this, I thank you for the interest and give back to Jens, who will lead you through the individual segments as well as through the update on our guidance in detail.

Thank you, Volker. And yes, welcome come back to the development by segment, starting with the headlines of the Engineered Components segment, organizational course setting. Reported sales of CHF 479 million or minus 8.5% versus first half 2022 were generated. Mixed performance by divisions and end markets were observed. Electronics was impacted the most by destocking effects and reduced customer demand. EBIT margins stood at 9.4%, impacted by mix effects, uneven capacity utilization from new program ramp-ups and partially increased cost basis due to inflation. Slight improvement of market environment in second half versus first half is expected. For full year 2023, flat sales development on a like-for-like basis versus 2022 is expected. Riveting becomes part of the Engineered Components segment as of January 1, 2024, and aligns with Automotive and Industrial divisions. Growth and profitability targets of segment Engineered Components remain unchanged. The key message of the Automotive & Industrial division Riveting aligns organizational, continued good growth momentum in automotive. Capacity ramp-up of the newly built facility in Heerbrugg, Switzerland, for production of electric drive brakes components and assemblies is on track. Mixed development in industrial aircraft with continued growth, furniture and general industrial applications impacted by weaker market demand and destocking. The Riveting division will be fully aligned and becomes part of Automotive & Industrial on January 1, 2024, this to strengthen customer focus and cross-selling as well as to leverage operational and application synergies. Urs Langenauer is appointed as the new head of Automotive division as of January 1, 2024. The key message from the Electronics and Medical division, Electronics earlier in destocking cycle. Electronics was confronted early with inventory reductions by major HDD customers and reduced consumer demand in mobile phones and lifestyle electronics. The first expansion phase of the Nantong China site is in completion. The new space is mainly used for production of stamped precision components for the electronics industry. The growth was achieved in all application areas of Medical. The Medical and Industrial divisions fully aligned into 1 division called Medical & Industrial Specials as of January 1, 2024. Walter Kobler who has been heading up both divisions will take charge of the new division. We're coming now to the headlines of the Fastening Systems segment, stable market demand. Despite enduring market demand across major industries, reported sales of CHF 330.4 million, were down by 1.2% versus first half 2022 due to unfavorable foreign exchange. High inventory levels throughout the entire construction market supply chain, resulting in more intense competition. With 16.2%, the EBIT margin is well within the segment's target bracket of 14% to 17% after reaching a peak in first half 2022. Reduced market dynamics in second half versus first half is expected. On a comparable like-for-like basis, sales growth along the target of bandwidth of the Group in 2023 is expected. Riveting becomes part of the segment Engineered Components as of January 1, 2024, the growth and profitability targets of Fastening Systems segment remain unchanged. Looking into the details of the Construction and Riveting divisions implement organizational changes. Good results in both regions, Europe and North America, construction were achieved, expansion of production capacity in Exeter, Pennsylvania, is on track. The application areas in the Riveting division performed positively as well. The Riveting division will be fully aligned and becomes part of Automotive & Industrials at January 1, 2024. This to strengthen customer focus and cross-selling and to make better use of both operational and application-oriented synergies. Thomas Jung will assume role of -- I will assume the role of Head of Division Construction on January 1, 2024. In the Construction division, the presence in North America was expanded through the acquisition of CSS from July 1, 2023. Business concerning fasteners and other products of Connective Systems & Supply, Inc., CSS was acquired. The acquisition enables SFS to strengthen its market position in the United States with the 2 new distribution sides in the fast growing regions surrounding Denver, Colorado. In 2022, the acquired business generated sales of USD 15 million with about 20 employees. Augmentationally, that business will be incorporated into Triangle Fastener Corporation, TFC. With over 25 distribution sites in the U.S., TFC acts as a leading supplier of fastening systems and other products for end users in the construction industry. The headlines of the Distribution & Logistics segment, strong results. Overall, good market demand led to reported sales of CHF 771.3 million, plus 110.9% versus first half 2022 or plus 4.8% on a like-for-like basis. The positive trend continues. Business with customers in Switzerland slowed down. Scope effects from the first time consolidation of Hoffmann for the 4 months from January to April contributed plus 109.5% to total growth of the segment. Strong sales growth, prudent cost and price management and the inclusion of Hoffmann enabled an EBIT of CHF 92.8 million, a plus of 165.9% versus first half 2022. Slightly reduced dynamics in the second half versus the first half is expected. On a like-for-like basis, sales growth above the targeted bandwidth of the group in 2023 is expected. Slide 36. The key message of the D&L -- Switzerland and D&L International division realizing potential. Besides this, work by cross divisional teams continued to leverage potential business opportunities like a road map for evaluation and implementation of share, efficient processes and platforms on an optimized customer journey. Our road map for penetrating existing customers, key accounts and high potential customers with complementary portfolio of mechanical fastening systems and electronic procurement solutions. Optimized supply chain for Switzerland customers by utilizing logistics capacities of D&L International. The decision was taken to supply customers of 3 European distribution partners directly from LogisticCity. This will lead to improvements in customer deliveries and a lease in capacity utilization at LogisticCity. Coming to the guidance 2023 and Group priorities. In the medium term SFS remained convinced of the profitable growth potential and confirms the medium-term goals. The multitude of promising new projects with existing and new customers in all end markets show that the growth trends and opportunities are intact. So it's a clear focus on mission-critical precision components, mechanical fastening systems and quality tools, SFS makes a decisive contribution to the functionality, quality and cost effectiveness of the customer systems with, at the same time, a very small proportion of the total cost of the systems. In addition, SFS has strong strategic position in the end markets served through sustainable growth trends and high barriers for entry. Nevertheless, the risk of a further weakening of the economy and currency developments continue to call for caution. SFS updates the outlook on the 2023 financial year and expects sales of CHF 3.1 billion to CHF 3.3 billion, including the first-time consolidation of Hoffmann for the full year. This corresponds to an expected sales growth on a like-for-like basis along the midterm guidance of 3% to 6%. For the SFS Group as a whole, an EBIT margin of around 12% is expected, at the lower end of the medium-term guidance of 12% to 15%. The outlook is based on the assumption that there will be no significant deterioration in the underlying economic conditions or geopolitical energy or pandemic-related restrictions. Arriving at the last slide of the active part of our presentation and covering the SFS Group priorities, I can summarize on the megatrends, focus on application areas with strong underlying growth drivers due to global megatrends like digitization, demography and autonomous driving. On the growth -- investment due to growth projects, established international presence with Hoffmann to accelerate growth in North America and Asia. On the customer and dual reliable supply capability, continue improving customer centricity of the organization to further strengthen our local for local approach. On the profitability, balanced production capacity with demand, balancing oriented supply capabilities and keeping costs under control, balanced price management. Under sustainability, integrate sustainable acting and thinking holistically in the business model, the corporate strategy, protect employee health and safety. Finally, I would like to point out the upcoming Investor Relations events in 2024. First, the publication of first information on financial year 2023 will be on Friday, January 19, 2024. Then the publication of financial year results 2023 will be also on Friday, March 1, 2024, and then the 31st General Annual Meeting will be on Wednesday, April 24, 2024. With that, we come to the end of the presentation for the first half year results 2023 and are now available for your questions. First, we will start with taking questions through the call.

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

Just to check, can you hear me?

Yes.

And 3 questions, if I may. The first one would be on the question in Engineered Components with the margins being down around 600 basis points year-over-year. I think half of this seems to be linked to lower volumes. And the other half, can you just give us more details what has happened? And also by when and to what extent you expect the margins to recover in this division? The second question would be, please, on your personnel expenses. It seems to go up as a percentage of sales in the first half versus the second half 2022, adjusted for Hoffmann despite the head count being down somewhat. Is there any structural change we have to consider or it's just pure wage inflation? And the third question, if I may, you commented on CapEx? And if your CapEx program fully up and running versus your initial plans beginning of the year for 2023 or '24? Or are you adjusting maybe here and there some capacity expansion projects due to lower volumes?

Jorn, thank you very much for your questions. First, when we take a look into Engineered Components on the development overall, we can see the development in Engineered Components is mainly driven by the top line development. We see underutilization mainly in the electronics end market. That certainly has a heavy impact on the profitability. Secondly, we certainly also have some still a delay with price increases, which we forward to customers. That's probably a second level lever, which we see in Engineered Components. But overall, it's the damped demand. It's the inventory adjustment cycle in which we are now heavily since last September for mainly the electronics divisions and markets and then also since beginning of the year in the industrial applications -- selective industrial applications like furniture as we have said. On the Automotive side, we had present double-digit growth on -- then also the Medical side of there, we had good single-digit growth on the Medical applications. So it's the stagnation in industrial, and it's the heavy impact due to inventory capacity, mainly on the HDD side with electronic customers. That may be on your first question. If I jump to the third question and then Volker will answer the second question. CapEx, 2023 is truly an unusual year because I would say slightly more than 90% of the CapEx, which we have planned for the year, is dedicated to specific growth projects. So certainly, as we see overall and as we also expected for the year that we see inventory adjustment cycles going through every division, we have also adjusted already the CapEx for the year 2023 early on. And what we see planned for the remainder of the year and what we have seen in the first half of the year, those were strategic large-scale investment projects which we have on the agenda to be pushed forward. And those will also contribute to sales growth in the second half of the year, but also will contribute to growth in the coming year. So that's more strategic and the tactical element of CapEx we have taken out already when we did the budget. That maybe on those 2 questions.

Happy to take question #2, Jorn, percentage of tax. There is not a stark shift in structure in the tax that we record. It's merely the composition when you look into D&L International. But what we can say from a wage increase point of view, we have a mix. We have a 3% to 4% budgeted wage increase that we also plan to implement that we plan to implement usually during summer. But this has also been accompanied by onetime payments in addition to the regular pay increases in order to help our employees with the current inflation in their living costs. So there is a mix in that coming into play. Generally, we are slowing down with recruiting partially, still whole labor markets difficult to find the talent. We managed to find the talent, but we do so at a slower pace, and that is what you also see in head count and in the [indiscernible]. Hope that helps.

Yes. If you allow me, just 1 quick follow-up on the margin question in the Engineered Components. By when do you expect the improvements to happen and when can you return to EBIT margins of 50% plus just to give us a rough time horizon or a rough budget sharing?

Yes. That's certainly a good question. I think we -- when we went into the year, we clearly had understanding that we will face a strong year of inventory adjustment on the electronics side. And honestly, we expected it's being through and done by end of first half of this year, or maybe third quarter. What we now foresee is that it will continue probably more towards the end of the year, beginning of the year. So I personally would be cautious. I would expect that we see again solid EC EBIT margins probably more towards the second half of 2024. I would not be too ambitious at this point in time because of the inventory adjustment cycles in which we are. We see interest rates are still going up by the national banks. And we would expect that a leveling off or a bottoming out probably this year in 2023 in terms of demand, and then a steady but slow back ramping up on the demand side, especially on the electronics side, towards the second half of 2024, mainly due to HDD for smartphones, we expect the normal cycle in the second half of 2023 for all accessories like smart watches and other gadgets. We clearly see that consumers are not spending so much on those topics. So that's probably also take another 12 months until we see new gadgets coming to the market, which excites consumers again. And then we probably see a more normal buying cycle again towards second half of 2024. I think this goes back to also the COVID crisis. Remember, we always said consumers are adjusting their habits. We have seen now a down cycle in end markets where we had a high cycle during COVID. So everything in hold in improvement, everything around electronics is in a down cycle since second half of last year, partially this year. We expect an improvement. Besides that, we also expect that we see continued growth in the automotive end market. We have a strong project pipeline. So we have ramp-ups in Automotive. We have ramp-ups in Medical, and we have partial ramp-ups in Industrial, in aerospace. On the other hand, as mentioned, we have some end markets in Industrial and some HDD applications, which are just not performing well. And there we see facilities. We see factories heavily underutilized.

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

Yes. Can you hear me?

Yes. We can hear you.

Right. Just a follow-up on this margin in Engineered Components and then I have a couple of other questions. First, on this margin, can you quantify the mix effect and the capacity effect really on that margin?

That's truly a difficult one. We would see the electronics, as you know it, and particularly there, the HDD volume that is hurting over-proportionately. And we are -- when we talk about underutilization, I think that the most important factor is our production here in Heerbrugg. We are in the midst of the ramp-up. You'll have the chance to see that. We see volumes coming, but that ramp-up will take at least 18 months until we see serious volumes going through there. But to give you a number, I would need to come back to you.

Okay. Well, thank you for the additional color. Maybe when we look at Engineered Components, now we have Automotive has good growth, but as far as I understand, right, Automotive, good growth, but ramp-ups. This is maybe something that is having on our margin. Then we have electronics, destocking, really underutilization, et cetera. What about -- and then you mentioned a little bit in the industry. What about Medical? Is Medical performing better or there are also issues there on the margin side?

No, Medical is performing well. We see a good top line growth, and we see also bottom line improvement as envisioned for the year. There, we are on track.

Right. So as a broad summary for this margination in Engineered Components, is there anything that is really structural or is it just a series of things that typically happen and they all happen at the same time today?

Exactly. That's what it is. As we mentioned, the large inventory adjustments at our customer side, it's not structural. I think HDD, we talk now for the last 4, 5 years about the changes in HDD that we see less drive bills, that we see more a shift towards nearline HDD demand applications, we see more value in the future applications than in the past months. We see good growth opportunities in projects with this new applications but -- and that's owed to the end customers of our customers. We see the big tech companies, they just have stopped to expand the cloud capacity. And it's a cost measurement initiative on the big tech companies, which comes all the way through to us, small SFS because once again, the expansion of the hard disk drive is being halted to a certain degree for the time being. When we talk to our customers, they say purchase orders have been postponed out towards the back end of this year. That's the story here in HDD. And then unfortunately, it's happening also in industrial at the same time. I think that those 2 are the strong combinations that we just see large shifts in demand on solid product lines, which cannot be compensated by other business initiatives, other growth initiatives, which go normal in parallel. So I would say very unusually then. If I think back in my 28 years with the SFS Group, I think this is an event like we have seen in 2008, 2009, for instance, a major impact in HDD. Around it, we don't see that heavy impact. We see smaller inventory adjustment cycles in other industries. So HDD and furniture are hit the hardest in the inventory adjustment. Other end markets, all are adjusting. I mean we talked to construction customers now for the last 8, 9 months in detail. We see here and we see there some inventory adjustments. We see customers giving back rented space, they just rented to store products to have security of supply. That's built in within the business plan, and we see it happening, and we see the executing as per plan, less dynamic, less organic growth for the time being. But underlying the momentum, the demand is still there in the end markets with the exemption of HDD with the exemption of furniture.

All right. Thank you for the session and color. Let's leave it there. I would like to move on to another sort of a small bundle of questions. Your organizational changes. Can you sort of, if possible, quantify or at least qualitatively tell me, what do you expect in terms of synergies of this merger of the automotive with I guess maybe half of the Riveting business? And then same question for the remaining half, in the industries.

We don't give out any specific numbers and figures on synergies. So first off, it's the objective to bring organizations closer together which work with the same customers and with the same application. So it's more towards growth. It's more towards reorganizing, making sure that we see shifting customer demands that we also shift our focus and our attention. So for instance, we see more electric vehicles, more electric vehicles, they need more rivets and more screws on the fastening side. That's why we want to bring the riveting and the fastening technology closer together in the division of Automotive, for instance. Same, we see, for instance, in the Industrial division that we have some heat pump customers. They use screws, they use rivets. So we bring the sales driven and operational areas together which do rivets and screws, and they will be much better suited to serve those customers. Synergies, we mainly see in overhead, that means that we'll be able to service those units with less overhead, less controlling needed. On the HR side, we will also get more focused on the IT side. There will be an opportunity over the next 3 to 5 years to bring systems a little bit closer together and use them uniformly. So I would say this is another opportunity to continuously year-by-year improve efficiencies in the organization by 1% to 2% as we envision it every year. And so this gives us more, I would say, food, more potential to fund again work on those 1% to 2% organic efficiency improvements, which we have.

Right. And you mentioned cross-selling. Is there really something that can happen there?

Absolutely, yes. Cross-selling is a strong opportunity because -- especially on the Industrial side, we have many customers where we sell rivets and where we sell fasteners. But we have no approach yet defined on how we can extend beyond fasteners and rivets, how we can maybe go into with metal stamping, for instance, how we can go into with injection molding activities, for instance. So especially those, I would say, Industrial customers, they need more material categories, which we have in our portfolio, but which we don't offer systematically enough to them yet.

And is there any type of synergy between Medical and Industry?

Medical industry, yes, absolutely because here we settle on the same and similar core technologies. So that means, for instance, over the last 2 to 3 years, we worked heavily with industrial engineering competency to help Medical to improve automation and to standardize processes. And that will lead to efficiency improvements, which we will see then in better EBIT margins on the Medical side. This is kind of the second initiative besides portfolio and product line adjustments in Medical. In the background, we also have worked on standardizing the processes within Medical because the Medical division will also use some of the industrial sites in the future to opt for medical products, especially in Europe.

Great. I have another question, but I'll go back in the line.

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

I have roughly 3. I was wondering in Fastening Systems, do you see some relief on the competitive front when inventories have normalized? Or would it just be a lower price point and sticking there? And what would be a realistic time horizon? That's the first question.

Yes. Thank you for your first question. On Fastening Systems, absolutely right. We see that competitiveness in the market has picked up after we had, I would say, super dry supply chains first half in 2022. It was kind of a sellers market. We see now normalization since the second half of 2022. Overall, we are within the EBIT band and within the growth expectation of the division and of the segment as we have envisioned it for the year. So it's back to normal. We don't expect much further acceleration because we still see good steady demand, solid demand out in the construction market, maybe some less new builds, more renovation initiatives and then the topic of energy is still also enabling future -- enabling new applications and new opportunities. So still strong demand. We still see that our customers are maintaining their installation capacities. From that side, I believe we have seen in the first half of the year, as we mentioned, some stock reduction on customer side because they kind of secured products in the crisis '21 and '22 to make sure that they could [indiscernible] running and working on the top side. So that's a normalization we see in the year 2023. And that's also reflected on the EBIT margin side that we have seen there normalization.

Okay. And then in the D&L the margin was 12%, the level -- is that a level we could work on going forward? Or were there are some outstanding positive effects on the cost development that cannot be extrapolated maybe in the future? I think at some point, you mentioned that the D&L would be structurally, I don't know, 10% to 12% from a profitability side.

I believe usually, our expectation is that we are between 7% to 10% EBIT margin in D&L, and we have not adjusted this expectation. As we are in unusual volatile times, we see step-ups and we see all the step-down. You see that -- the nice part about the SFS Group, we see P&L being up and Engineered Components being down. We would expect also a further normalization of the trend in 2024, probably D&L, the margins will come back slightly and the Engineered Components, we see improvement of the margins. At this point in time, visibility is not that great. That's why we would not adjust our aspiration 7% to 10%. We probably will know more towards the end of the year or beginning of next year whether we can step forward and kind of step up with the aspiration on the D&L EBIT margin, which is clearly there. I think when we announced the Hoffmann acquisition, we also clearly said we would reach -- or we would like to reach at one point in time, a double-digit EBIT margin band. But I think today, it's too early. Visibility is too short, and I think there's too much volatility still in the end markets in which we serve to call for a steady outlook on that side.

Okay. I was wondering, maybe it's too early for next year. You mentioned next year. Would you see the midterm growth target applicable at this stage for next year as well? And to keep the margin at '23 level, how much revenue growth would you need given the inflation and capacity ramp-up?

Overall, I think we reconfirm today our midterm growth and margin guidance. So when we prepare now for next year, we clearly see good opportunities. As we see, we heavily invest with the CapEx, 5% plus. So we are confident about the growth opportunities and projects. But the question will be what about the consumer end of the day? Will the consumer spend money? Then will be on the good side, on the positive side, and that's what we still project at this point in time.

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

I have a question concerning the -- there was a saying that Swiss francs and [indiscernible] is a baseline for any kind of expectations going forward. So looking at the first quarter, first half and then seeing rising interest payments, the high tax rate, it seems to be that it will be out of reach this year. So when can we expect or how much can we expect that you maybe have a lower interest payment? And you mentioned tax rates going towards 20% or 22%. Can you give us a little bit more of details there? That's your first question.

Just for clarity, your question is what we expect for tax rate to come down to 20% to 22%?

Yes. When?

When? Okay. We see 2 factors that we are working on. One is, clearly, we're looking into OECP 2.0 and the new taxes that come along. Not a lot is firm and clear yet. But we see some constraints, but also, as always, some opportunities depending on what the decision on tax rates are going to be. But structurally, we know that is the growth and the utilization projections that we are doing. If they materialize, our profit allocation geographically will help us towards next year and certainly 24%, 25% to come into that bracket, right? So our growth projections suggest that we are driving down tax because we are having profits in lower tax jurisdictions. Number two, we are closely looking into that 2.0 and new taxes. And if that falls into the right direction, we could take slight benefits from these measures overall.

Okay. And from the interest payments, so strong cash flow and a little bit change in the refinancing patterns. This might lead to a lower interest payment in the second half of the year, right?

This will lead to a lower financing costs in the second half of 2023, but will be really visible in 2024. First, lower cost, you would see in 2023. But the predominant part is 2024.

Okay. So putting this all together, in the end, the CHF 7-plus EPS, which consensus so far expected, for this year is more or less out of reach, so with my consequence in the end. I have another question concerning the merger of Medical and Industrial. So you stated that there is the same core technology. I understand this. But when it goes to products and customers in the end, there is a clear differentiation, right? And this -- that remains the case.

Absolutely. The division, Industrial, has a clear standardized technology portfolio. They are working with -- but then towards the customers, they are highly specialized. And I think that the strength of that division being able to focusing on niche and yielding good margins.

Okay. So the interesting part is to combine technologies and optimize production processes?

Exactly.

And the next one is on Asia. So you said sales is subdued. And of course, this is a little bit related or mostly related so far to the flow demand in the electronics side made mostly. Do you see any other developments, especially from China? So we hear on an ongoing basis now real bad development coming out of China when it comes to economic sentiment and customers. Do you see something special also coming from China, which may last a little bit longer?

Good question. We -- when I compare different divisions being active in China, we, for instance, have 50-50 joint venture on the automotive side. We see good growth and development there because we also positioned us in new more electrified solutions. So on the electronics side, we also have new programs which are ramping up. So I say whatever follows the megatrends, as we identify, there we see good growth and development. But you are right. We also see consumer confidence is not on the high side in China. And that's why we focus on very selective, very megatrend-oriented applications in China. Outside of China, in Malaysia, we have our plant, which is focusing on HDD. We see a normal environment, confidence is there, but we see the big tech companies sitting in the West Coast of United States, we see that they just postponed their investments.

[Operator Instructions] The next question comes from the line of Marta Bruska with Berenberg.

Firstly, I would like to clarify at least your previous comments regarding the HDD business. And so in the past calls, you have given us indication that HDD business accounted for CHF 70 million back in 2021. And I was just surprised that it could have wiped out like 650 basis points of margin from a division that makes CHF 1 billion yearly, so about CHF 80 million for the profit for annualized. So did I notice that number wrong? And can you please help us square those numbers and how big this HDD actually is? And then I have some other questions, please.

Yes. Thank you, Marta. Jens speaking. As you -- as I referred to the Electronics business, I mentioned, I said it's HDD and accessories. So it's HDD which is heavily suppressed and we also see an equal heavily downturn on the accessory side. Those are the 2 main levers which we see which reduced sales substantially on the electronics side, as normal in the first half usually of the year, overall electronics sales is down because the strong cycle comes in the second half of the year. Those are the 2 main levers for the weakness on the electronic side.

Okay. So basically, it's the electronics all together. So then for the -- in order to meet your guidance, it implies the acceleration of sales growth about 7% for like for like in the second half. Do you assume basically that these headwinds in electronics are resolved? What's reason to happen for that target to be met from your side, please?

Maybe I'll also remind that we had heavy FX headwind also in the segment Engineered Components to be complete with my explanation, yes. And as you rightfully have, second half of the year, we expect first recovery step, I don't say a final recovery step, the first recovery step on the electronics side, new programs coming to the market, gadgets, phones, other things, where we see good value contribution. On the HDD side, we are a little bit torn. We expect the recovery, but honestly, we -- there's an unknown by how much HDD will recover. Will it be in the fourth quarter? Will it start already in the third quarter? Or will the recovery be postponing to the first half of 2024? That's not an answer we can give today. But we have kind of calculated that uncertainty into our -- the sales growth and margin expectation which we announced today for year-end.

Okay. But -- so for like-for-like for you includes FX? So basically, you expect FX to be better in the second half, and this is which should improve the sales overall?

The expected FX will be more under pressure. And we expect an improvement, as we said, in electronics, communication devices, some improvement in FX and maybe an improvement in the HDD.

All right. And with regarding to the free cash flow, that has improved over the previous year considerably. But still, when they make a rough mask, it's still only 27% of EBITDA conversion ratio, which is well below the historical levels. Will that improve going forward? Or do you think it stays around the same level, please?

As said, yes, the 27%, as we stated, is correct, and we stick to our historical where we said we want to go in to the tune of 50%. We will continue our net working capital management as we said. And we will also see, going forward, different patterns of CapEx levels. And therefore, we are confident that we will midterm, long term, go back to the 50%.

Okay. That's helpful. My last one, if I may, please. So you reported 48% direct emission reduction, so Scope 1 and 2. Do you think that is the right way to look at the environmental impact of SFS now when you have on sales come from distribution business, which has actually only Scope 3 emission?

Good question, Marta. We are working on Scope 3, and we will complete goals and incidents with regards to scope 3. I think our suppliers are not yet there that's why we cannot show it structurally. We said we do Scope 1, Scope 2, Scope 3. We are early on with Scope 1 and 2. Certainly, yes, in the trading business, you look better with Scope 1 and Scope 2 and you look probably worse with Scope 3. But I think also the market very well understands that the true challenges in Scope 3, 90% of the emissions are born there. And I assume we know knowledgeable and educated market participants know that that's why we report on Scope 1 and 2 because there we have the data available.

The next question is a follow-up from Mr. Foletti from Octavian.

Yes. I was wondering on your organization plan. If number one, the fact that you are waiting until the first of January to make this implementation, is that not kind of a little bit slow? You have decided, why not do it right now?

That's a good question. The first question is whether it's slow. It's usually will be solved into the bottom preparation in the second half of the year. That's why we said to amount to midyear then have time in budget presence [indiscernible] organization to prepare the organization structure further and have it up and running as of January 1. So for us, it fits perfectly into our corporate schedule. We usually announce and implement that of beginning of the year because we want the organizational structure and hierarchy and reporting to be perfect and in place when usually the new assigned heads of a division starts step up officially as of January 1. So that's kind of, I would say, old to a routine, which we have implemented over the years when we make, I would say, planned ordinary changes to the management team.

Follow-up would be, again, on this subject, would there not be scope to do more? For example, end of January '24, Fastening Systems will only include the Construction business. A big part of it, when I look at Triangle is older distribution. Would that not make more sense to bring everything into like a larger distribution and logistic umbrella and really push the distribution in all your geographies?

The point is that we have in distribution and logistics, we do not have application expertise like we have in Construction in the building envelope and it's truly in Fastening Systems, the business model is, as you said, focusing on fastening and distribution, it's focusing on distribution. But as you are right, also in Fastening systems, we have an element of distribution. We also serve distributors, but we are not a pure distribution player that we could honestly and straightforward move Construction into a framework of distribution. I think this would not represent the competencies and capabilities of the Construction division.

Ladies and gentlemen, there are no more questions on the phone. I would now like to turn the conference over to Benjamin Sieber who will readout questions from the webcast. Benjamin?

Thank you. So we will now start with the question from the chat. There are several questions about pricing. And I would ask Jens and Volker to summarize pricing impact per segment and also the impact on pricing on bottom line, not also top line and then also on the group.

Yes. Thank you for that question. We see certainly still an upside opportunity on the pricing side between 1% to 3%. That means that we see the -- besides volume impact, we see a pricing impact for the full year of 2023. We see the 1% to 3% mainly in Engineered Components and Distribution and Logistics materially. Maybe some contribution in Fastening Systems, but materially more in Engineered Components and Distribution and Logistics. That's in negotiation, that's in planning. We'll see how much will materialize by the end of the year. Usually, we have a materialization rate of 80% to 90%. We'll find out more as we go into those discussions.

Then the next question comes from Torsten Sauter from Kepler Cheuvreux. With H1 FX being negative, minus 4.3% year-over-year, what's the headwind for the second half and for full year 2023 on current spot FX rates? Is this effect in the top line guidance for 2023 considered?

Good question. Thank you very much. The FX thought was really the -- one of the factors that led to this adjusted guidance, the headwind in second half year, we expect to keep on and the effect is factored into the guidance. That's what we can confirm.

The next question is from Thomas Jager from Mirabaud regarding the tax rate. What is a sustainable going forward tax rate assumption, including Hoffmann?

The tax rate going forward, as I said, we see to -- in the bracket of 20% to 22% to midterm to probably even the lower end of that bracket, that would be including a full consolidated Hoffmann.

Then we have 2 questions more on the outlook side. First question from Bernd Pomrehn from Vontobel regarding the Engineered Components development. Have you taken any mitigation actions, specifically in the Engineered Components segment, to conquer the margin decline? And what is the outlook for several other end markets with this regard?

Yes. Thank you for the question. We certainly have taken initiatives already last year. Since this is not a new development, we have started seeing inventory adjustment cycles as of September 2022, have implemented a few measures. First off, had a hiring freeze for nonstructural, nongrowth-oriented activities. Secondly, we certainly also started a cost-saving program. Thirdly, we reviewed again the product lines, which we have, the pricing positions and went back out and have implemented the price increases of the beginning of 2023, and further price improvement measures for the segments and the divisions throughout 2023 and the beginning of 2024. So certainly, we are almost 12 months now with our minds and thoughts in a different environment than probably the public around us. We see those inventory adjustment cycles. We see more pressure on the cost side because also our customers are challenged on lower demand, lower volume, higher costs due to inflation. And so we are managing this strongly as we have done in the past, but we have not structurally adjusted. We still believe in the end markets and the product lines and the growth opportunities, which we have identified and have made adjustments as needed to offset the lower demand, maybe the higher prices, maybe the higher cost due to inflation, but we still believe in the growth opportunities and the product lines which we support.

Final question in the chat comes from Tobias Fahrenholz from Stifel. For 2024, has your general view somehow changed for next year? Would you still be optimistic to show a flat or small organic growth despite recently falling PMIs?

That's a very good question. And we believe that the PMIs are too pessimistic. I mean we have to see and realize what's going up out there. We come from a '21 and '22 with record high bookings because availability has been challenging because everyone wanted the secure production materials, machines, equipment, capacity, and now we are in the cycle where we see normalization. Inventories are being adjusted back to normal. We see commitments which are usually made in forms of purchase orders are being also normalized and time-wise not extended so far out in the future. And we see due to that, some people panicking because the order book or bank is being reduced, which is, I would say, a normal human reaction to that development. So from our side, we are not as pessimistic. We believe under -- underlying, there is still enough momentum and opportunities and megatrends out there, which will call for growth, which will call for opportunities. On the other hand, we see raising interest rates. We see consumers having less available money to be spent. And from that side, we'll probably see organic growth in 2024, but it will probably also not be very much driving engaging environment overall. So midterm guidance, as I said, we confirmed and this midterm guidance has also a band and most likely on that band we'll need to consider then, again, where we would see a year '24 and where we would see a year '25 and maybe where we would see a year '26. But that's probably too early to talk about. So we see no more questions in the chat, and we would like to thank you all for attending the call as we head off today, wishing you a good summer break, and then see you back later on in the year. All the best to you, and bye-bye.

Thank you very much. Bye-bye.

Ladies and gentlemen, the conference is now over. Thank you for choosing Chorus Call, and thank you for participating in the conference. You may now disconnect your lines. Goodbye.