SFS Group AG (SFSN) Earnings Call Transcript & Summary

[Audio Gap] of the SFS group. The agenda [Audio Gap] takeaways of the development outlook [Audio Gap] closing. I will start now with the SFS Group. [Technical Difficulty] And fulfill their service with high reliability in the required precision 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 are used in the production processes accounts often for less than 1%. However, the associated costs on the customer side, such as procurement, or logistic costs are several times higher. Those -- 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 an individual innovative solution. 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 brands of SFS and GESIPA, 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, the segment distribution on logistics pursues its development under the brand of SFS with our Swiss customer base and in the application range of industrial manufacturing and construction. And under the brand of Hoffmann, we serve the European and increasingly also the U.S. and Asian industrial customer base with quality tools, workshop and personal protective equipment. While the business model and customer groups of our 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 synergies primarily relate 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 plus [ fasteners ] and in the segment distribution logistics, we trade with tools. SFS operates and produces at around 140 locations in 35 countries worldwide. Through local production and proximity to the customer, we guarantee a minimum of logistic effort and costs as well as synergy effects through optimal know-how transfer. The global manufacturing platform in combination with the standardized machine park allow the support of international customers on site. Proximity to customers has been the major driver for the internationalization of the SFS Group since the 1970s. Today, SFS is an international company with Swiss roots. Our value proposition, combined with our focused business activities and the utilization of our global business platforms lead [ them ] in combination with the megatrends on which we base our business strategies on to sustainable growth through the cycle. On the growing market segments, we understand the niche markets and applications with above-average value creation, innovation and growth potential. Having a strong link also to underlying megatrends. By applying our operational excellence, core knowledge in building up and managing robust supply chains, high-volume production technologies, time-to-volume expertise and best-in-class availability we deliver to the customer, the quality and reliability we are known for. By leveraging then our global business platforms 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. This, over the years, fine-tuned sorry, this over the years, fine-tuned formula for growth and sustainable high margins will carry us well through the also current more challenging part of the business cycle. I continue with the key takeaways, which can be best summarized as well on track. Despite the difficult economic environment, SFS achieved a stable development and met the targets set for the year. Third-party sales of CHF 3.09 billion were generated a plus of 12.6% versus prior year. Sales development was driven by robust organic growth of 2.1% and consolidation effects from Hoffmann of 14.6%. Strong currency effects negatively impacted growth with minus 4.1%. And operating profit or EBIT of CHF 358.6 million was generated in the previous year CHF 330.3 million. EBIT was visibly and significantly impacted by consolidation and mix effects, inconsistent capacity utilization in Engineered Components, inflationary cost increases and an ongoing appreciation of the Swiss franc. The reached EBIT margin of 11.7% compared to previous year with 12.1% is considered rock-solid in light of the economic conditions as experienced in our end markets. Earnings per share of CHF 6.84 are reported burdened by tax effects in the previous year, therefore, slightly higher with CHF 6.95. CHF 174 million in growth-related investments were carried out, including new production equipment in Switzerland here in Heerbrugg for the electric parking brake business, the expansion of our production platform in Nantong for our electronics business. And on the IT side, we can report the ongoing upgrade of our ERP system and the strengthening of our cyber security initiatives. The integration of Hoffmann is progressing well. Both divisions of Distribution & Logistics segment benefit from potential of closer collaboration. Organizational changes to strengthen the customer focus were initiated and are in implementation with the complementation of the automotive and industrial division with the end market specific business areas from the Riveting division. Besides the Medical and Industrial division were combined for the better use and organization of technologies. The 2023 ESG highlights stayed clear, we are well on the way to achieving our long-term environmental targets. In 2023, SFS Group reduced Scope 1 and 2 emissions by minus 7.6% in absolute terms compared to the 2020 reference year, the tons of CO2 equivalent per Swiss franc of value-added has been reduced by even 58.5%. That means SFS has moved another step closer to its target of reducing the [ intensity ] of greenhouse gas emissions by at least 90% by 2030. In order to reinforce its emissions reduction targets, SFS committed itself to the science-based target initiative in the year under review. Due to the general energy situation, the electricity mix in Switzerland was temporarily supplemented with electricity from nuclear energy. As a result, the share of renewable energy fell to 40%. In the prior year, we were at 49.7%. With the social targets, we can conclude the dual training objectives were secured, but the accident rate remained once again too high. SFS made further progress in the year under review, especially in the expansion of training and dual education programs. SFS is convinced of the enormous importance of the dual track system of education and training and its importance on the economy and society side. The number of employees in the dual training and education programs remained with 5.1% in the targeted bandwidth. At 4 accidents per million work hours in the year under review, the accident rate remained as mentioned, at the same level as in 2022. A total of 103 occupational accidents were reported one accident more than in the previous year. Fortunately, the SFS Group succeeded in reducing the number of accidents with serious consequences by 33.3% year-over-year and the number of lost days by minus 15.2%. SFS is making great efforts to reduce the accident rate in the coming years and to still achieve the ambitious target by 2025. Based on an accident rate of 4.7% in 2020, the target for 2025 is 2.4 accidents per million working hours. On the governance side, there were no compliance incidents at SFS that resulted in fines or legal proceedings. We additionally have no knowledge of any human rights violations with the company's [ fair ] of influence that were committed in 2023. That also includes the topic of child labor. Two compliance audits were carried out. The results of both were positive and document the code of conduct effective implementation. In the year under review, the group Compliance Officer and the local compliance officers received a total of 36 compliance-related reports, following careful examination, 19 of those reports were confirmed as being compliance violations and appropriate consequences were initiated. With that, I hand over to Volker for the development of the key financials.

Thank you, Jens. Good morning, everybody. Welcome [indiscernible] to this challenging environment from the market point of view as well as the challenges described from the CEO just now we may report a stable development in a difficult environment. The team's managed again to balance between the various constraints. And we were finding measures to realize growth potential in various areas. We are happy to present to you today the financial results 2023, which reflect the efforts and the dedication of more than 13,200 employees, and we here thank all of them for their contribution made. Overall, the group achieved the top line growth of 12.6%, mainly driven by the CHF 401 million scope effect from the Hoffmann acquisition, [indiscernible] the FX headwind of 4.1% or CHF 113 million. We may report an underlying organic growth of 2.1%. This underlying organic growth stems mainly from progress in product mix and price management in a difficult environment. Currency exposure to mainly the U.S. [indiscernible] and the euro in the segments is varying widely. Therefore, also the FX impact on the segments is spread from 5.3% in Engineered Components and Fastening Systems to 2.3% in distribution and logistics. The financial year showed especially in engineered components, difficult conditions with destocking effects in the electronics and in other industries as well as partially lower consumer demand. At the same time, volumes in the Fastening Systems segment were stable. However, the competitive environment intensified as the product availability improved and the supply chain issues [indiscernible]. The segment distribution and logistics, we get a technical issue here. In other way. Thank you very much, Domingo. At the same time, the volumes in Fastening Systems, as said, were stable, and the segment D&L showed overall a strong underlying growth. The geographic end markets show a further shift towards the European region based on the scope effects that stem from the Hoffmann acquisition relative weight of Switzerland is further reduced given the scope effects in other regions. Additionally, the slow electrical and electronics end market, which predominantly resides in Asia, is showing. Americas is very stable in nominal terms, relative shares of the Americas and Asia are decreasing mainly due to the Hoffmann acquisition. Hoffmann acquisition brought roughly 90% of sales in Europe with it. This document, also the further growth potential in the areas of Americas and Asia. Sales breakdown by end market shows the mentioned development towards our customers in industrial manufacturing and other industries as D&L International segment is well connected and represented in these end markets as their valued partner. As before mentioned, the sales in electrical and electronics end markets slowed down, as there particularly supply chain management in the industry was generally tightened. We report an EBIT of CHF 358.6 million or 11.7% on sales and an EBITDA of CHF 486 million for the financial year, which is 15.8% in sales. As our customers showed high inventory levels and demand, therefore, utilization on our end was impacted the tightening of supply chains and the subdued customer confidence [indiscernible] and this was mentioned already earlier by Jens. In parallel, we deliberately ramped up capacity in the wake of new projects and therefore, also engaged operational cost, which was done as a deliberate move towards the new products. Breakdown in the profitability between first half year, second half year was driven by the change in mix and particularly the mentioned ramp-up costs, which subdued the profit in the second half year. Swiss franc exposure looks along the geographical shifts towards Europe, we show here a Swiss franc invoiced, which goes in relation down to the 11.3%. At the same time, the operational expense in Swiss francs show a flattish development. This is mainly based on 2 factors. One is the appreciation of the Swiss franc and therefore, relative movement of the OpEx in non-Swiss franc realm. The second one is the important ramp-up that we engaged here in Heerbrugg with the buildup of the capacity for ball screw drives in the electronic brake systems arena. Countermeasures are targeted along productivity improvements, relocation of processes outside of the Swiss franc realm and the adoption of natural hedge wherever possible. Remaining FX imbalances are hedged successfully as in the past and are in place for 2024 above a level of 2/3. Earnings per share were mentioned. It's the CHF 6.84 per share, which is a decrease of minus 1.5% versus prior year. This is burdened by a higher-than-expected tax rate of 23.8%. As well as the interest cost mainly the bond when we engaged the foreign debt last year, midyear, we took 6 months of interest cost versus 12 months in 2023. Based on this performance on the earnings per share, the Board proposes to the general assembly dividend of CHF 2.50 which is paid in half from tax privileged capital reserves, which is favorable for individuals that are resident in Switzerland. With the dividend, we propose the remain -- we remain at the lower end of our bandwidth targeted for the payouts, and we pursue our aim to deleverage the balance sheet going forward. Dividend yield is at 2.4% based on the share price, 31st of December 2023. Net working capital management was a high priority in the past year. And this especially coming from a period of relatively high inventories and high safety stocks, and also with the target of the deleveraging of the balance sheet. We managed to decrease the net working capital needed, especially from the inventories, but also despite the termination of a factoring program, which was installed at Hoffmann and was carried over after the acquisition. The effect of the refinancing of the factoring program will be described with the cash flow developments later during the presentation. In the past year, we engaged CapEx of CHF 174 million, which are 5.7% of sales. With that, we strive in the new composition of the SFS Group towards CapEx bracket of 4% to 6%, given the lower capital intensity of the D&L segment. As earlier mentioned, the substantial expansions, namely in Automotive division here in Heerbrugg in Medina in the U.S.A. and our site in Nantong in China, are ongoing. All of them are well in plan progressing. Operating free cash flow is reported at CHF 139 million, which is a conversion of EBITDA of 28.7%. During the year, we managed, as said, net working capital well and kept up diligent investment but also offloaded the factoring program with an adverse impact of CHF 85 million to the cash flow. The refinancing we drew directly from the existing revolving credit lines. So therefore, within the underlying cash generation well within the expected 40% to 50% of EBITDA when we correct for this onetime effect and for the termination of this factoring program, which gave us an adverse effect in cash flow. Looking at the balance sheet ratio. After leveraging of the equity position in the acquisition of Hoffmann but where we come from, we since have driven equity ratio to meanwhile, up to 54% at the year-end. Further debt decrease is envisaged in 2024 and based on cross-currency swap, we installed in the bond, we took between Swiss francs and euro. We account for a positive equity effect in 2023 of CHF 20.3 million, which goes directly into equity and strengthens our equity position. We strive for a further deleveraging of the balance sheet to achieve the larger than 60% equity ratio, and we are confident to pursue this in force. Return on capital employed is based on the described profitability at 20.4%, respective restate a return on invested capital of 8.9%. The difference between the two is broken down into the tax effect of 3.6% and the goodwill impact in capital of 7.9%. Details of the calculation are given to the left. The effective tax rate came significantly up to 23.8%. The reasons for that can be summarized in 3 brackets. First of all, we have significantly lower profits in low tax countries like Switzerland. Second, we have exhausted our tax losses carry forward, namely in the U.S. And thirdly, we ended deliberately preferred tax schemes, which were in place, and we cannot further benefit from those. For 2024, we strive to decrease the tax rate towards the 2022 levels, and we will keep that in focus. Let me summarize the financial key figures with a successful acquisition of Hoffmann and a considerable headwind from the markets. We discussed high inventory levels of our customers, tighter management along the supply chain, subdued confidence of consumers. We may report a stable performance. The group documents a sound ability to generate cash and is able to further deleverage the balance sheet, which is very solid. With that, I thank you for your attention and hand back to Jens who will present to you the development by segment and the outlook.

Volker and yes, welcome back. As we continue with the headlines of the Engineered Components segment, which faced a challenging environment. Mixed development of the segments divisions were observed. Electronics and Industrial were impacted by strong inventory adjustment cycles. On the other side, dynamic growth was achieved with automotive and medical applications. Reported sales amounted to CHF 987.7 million, down by 3.9% to prior year. However, recovery was good in the second half of the year with growth of 6.2% in the second half 2023 compared to the first half 2023. An EBIT margin of 10.5% documents the impact by mix effects, inconsistent production on capacity utilization, inflationary cost increases, ongoing Swiss franc appreciation also took a further toll on the EBIT margin. Nevertheless, after single-digit EBIT margin in the first half 2023, we have seen now a clear improvement, a movement back to double-digit EBIT margins at this point in time. Riveting, as mentioned, becomes part of Engineered Components as of January 1, 2024, and aligns with the Automotive and Industrial divisions, midterm growth and profitability targets of engineered components, sorry for that, remain unchanged. Further we can state the important growth projects develop on track and the innovation pipeline is filled well with new projects. But not just our market-driven innovation projects are well on track. Also, for instance, our in-house digital transformation project, of which we give you a snapshot here will enable us to further realize productivity improvements in the operations. Currently, we are in rollout of digital production assistance systems across major production sites because large volume of data calls for Big Data and Analytics systems. Along with enhanced manufacturing processes by leveraging digital tools, production and machine data, we improve efficiency and quality of product industrialization, ramp-up and then also production at maturity. Based on substantial testing over the last years, we expect a boost of productivity of the connected equipment yearly by an additional 2% to 3%. The activities are led by a specialized internal digital transformation team for the manufacturing operations. In Fastening Systems segment, the strong position in the construction market was defended. Reported sales of CHF 615.3 million were generated in the full year 2023, which is a minus 4.6% versus prior year. On a comparable basis, slight growth of 0.7% was achieved. Over the course of the year, the segment was negatively impacted by weakened market environment and occasionally, high inventories across the entire value chain. An EBIT margin of 14.9% resulted comfortably within the target range. Riveting also here becomes part of Engineered Components as of January 1, 2024 and aligns with the automotive and industrial divisions, midterm growth and profitability targets of Fastening Systems segment remains unchanged. Last but not least, important new product introductions are ready to be launched. This just mentioned ongoing market introduction of product innovations will add additional flexibility and options for environmental footprint reduction to the customer installation crews. These are yet individually small steps, but important drivers in the daily hunt for cost savings and environmental improvements on our customer side. We start here from the left side, you see the isoweld field fastening solution, which is now available in a battery version. With that, much easier for the installer to move around the building, install faster, more flexible installation points and with that increased productivity and reduce cost to the customer. In the middle, we see a new full stainless steel self-drilling screw which has a considerable lower carbon footprint than the previous version, the bi-metal screw and is also easier to install and to handle. And on the right side, we see the new centering sleeve of the Center Point System, which is made out of biodegradable plastics and further helps to fasten more secure and at lower cost. This is mainly used for static façade sheets, which need to be installed without being scratched or damaged. Also here, we help the installer to do it better, faster with higher quality. And also the customer does not need to take care of the scrap, which is producing because that's biodegradable and he can just leave it down in the soil on the construction site. Then in the Distribution & Logistics segment, we realized the potential earlier than expected. Overall, good market demand led to reported sales of CHF 1.487 billion, which is plus 38.7% versus prior year. After a strong first half of the year, market demand deteriorated over the course of the year. The decline in order intake was partially offset by the high auto backlog, which was there in place before. Scope effects from the first-time consolidation of Hoffmann for the 4 months from January to April contributed 37.3% to total growth of the segment. Strong sales growth, prudent cost management and price management and the inclusion of Hoffmann enabled an EBIT margin of 11.1% or CHF 164 million, which represents an increase of 60.5% versus prior year. And since we talk about increasing, then we should also mention the ongoing drive with high focus on market introduction of digital solutions, expected to add additional revenue and margins in future to the existing bread and butter business of distribution logistics because digitization of products and processes belongs nowadays to the core competencies and follow 4 clear strategic initiatives as we see here below. First off, I've to mention a team of around 60 experts from sales, product management, IT and finance is working on these initiatives and initiative number one is optimizing, simplifying and also tailormaking the customer experience by enhancing all front-end channels, like, for instance, e-shop. Initiative number two is harmonization and digitization of internal processes by switching to the next-generation ERP system, that's the S/4HANA. Initiative number three is then leverage data and analytics capabilities to realize analysis such as product recommendations and demand forecasts kind of giving the customer more information of potentially what he needs and what he needs to look out for and what additional products he could use from us in order to improve his productivity. And then initiative number four is implementation of Industry 4.0 solutions with clear focus on enabling customer solutions such as automated supply of indirect materials to the factory floor. so this could be, for instance, a cabinet you've on the factory floor and every time you take something out, the system replaces it automatically. So you don't need to take care about your orderings anymore. It's always there when you need it, the specific supply you need for your production activity. Yes. With that, I come to the outlook, 2024. And the guidance for full year 2024 is basically focusing on growth and profitability. Nevertheless, I've to say the outlook continues to be characterized by considerable uncertainty. This is because of economic and geopolitical developments. In this volatile environment, coupled with low visibility, ensuring maximum customer focus, continuing innovation projects to realize future growth and ensuring efficient and profitable business processes remain the highest priority. SFS wants to identify opportunities and possibilities that the current changes bring with them at an early stage and consistently use them based on the communicated midterm guidance. For the year 2024, SFS expects an EBIT margin around the previous year level because we just do not have visibility and also because we believe the research out there is well balanced, good in place. We've, at this point in time, nothing new to add, no additional data points. Yes. And due to the described environment, we further sharpened our strategic priorities through a careful focus on our main strengths, which we seek to take one step further. And this is diversification through a balanced focus on different regions, end markets and distribution channels. On the mega trends, we focus on application areas with strong underlying growth drivers. On the local-for-local, it's the close customer relationship, which is essential for the successful realization of our value proposition. This strength going hand-in-hand with the superior supply reliability, thanks to short and robust supply chains, which we employ with our local-for-local strategy. Then we certainly focus on technology. The maintenance of a clear core set of tooling-based technologies allows leadership in such technologies. Standardized processes, systems and equipment reduce risks and increase flexibility overall. Solid financing as well, good profitability and a solid balance sheet enable ongoing investments in innovations and the implementation of growth projects. Yes, with this, we're approaching the end of the active presentation of full year 2023 results and are now available for your questions. We first take the questions from the room here and then switch to the chat. But before we do so, we carry over here a table to the middle and then be ready for you to answer your questions. So maybe give us here 2 more minutes. And then there's a microphone available. So if you hold up your hand, you'll get access to the microphone and you can ask your question there. Yes, Patrick?

Patrick, Berenberg. I've a couple of questions, sorry for that. Maybe I missed this one, but how was your start into 2024? And do you see a sequential improvement in Q1 versus Q4? This would be my first question. And then maybe the second one would be -- let me see, yes, can you remind us your EBIT margin guidance for all 3 segments? And how do you see margins evolving within the margin, let's say, the margin -- the guided margin range for '24. These were the 2 first questions, and I'll having some follow-up.

Yes. I'll take the first question, Volker the second one later on. Yes, start into the year 2024. More or less, we can say we see a continuous up and down, very high volatility already since mid of last year, meaning 1 month, you've high order income, 1 month, it's lower. It's an adjustment. So there's no clear direction, which is visible, whether it's a down or an up direction, it's just a volatility on a high level. This is owed more or less also to the, I'd say, the inventory adjustment cycle in which we're still with most end markets meaning we've more than 100,000 customers. And each one is going through an adjustment cycle. And depending on their replenishment cycle, we've a strong month and maybe a weaker month overall. I think that's information number one. Yes, it remains volatile, and we, expect for the first half of the year, do not have clarity in which direction it will go. Second half of the year is today unknown. Usually, we've, I'd say, an indication of what second half will do at this point in time, which the visibility is just not given, too many unknowns geopolitical challenges, which we see exit out of China out of many industries, the conflict in Ukraine/Russia, which is dampening demand in Europe, consumer confidence, which is not high at this point in time. So the election year in the United States, which can go in two completely different direction. So we see a certain reluctantness in business to make decisions. So just holding back. That's what we see on a daily basis. This is with the existing base business, which we've that there, it's an up and down. On the other side, when we take a look at the innovation projects, we're very comfortable, and that's the bread and the butter for the future. We see, as we said, in Engineered Components, the pipeline is full. We -- I'd say, we rather have to be more selective than the other way around. And I believe in Fastening Systems and Distribution & Logistics, we've a very strong position in the market. We're the innovator. We're the leader. We're the one to go to, to solve problems. And especially -- and I think that's the huge opportunity at this time. All of our customers have a P&L challenge. They've higher personnel costs, they've inflationary costs and that's the right time exactly for us to come in because we sell productivity improvements, and that's what they need at this time. So from my side, optimistic about the market position and gaining relative market share on the volume, we're not sure yet. That's maybe on point number one, yes.

Yes. Point number two, when we give the guidance of the 12% to 15% in midterm, we go to the segments, and we stick with Engineered Components with the 18% to 21%. We stick to Fastening Systems with the 14% to 17%. And we're stick and we documented the EBIT margin in Distribution & Logistics of 8% to 11%. So we're -- we've the ambition to go double digit here, and we're on a good track. And I think underlying is we're prepared and ready to take microeconomic pickups when they happen in our end markets. And that's also why we keep the investment pipeline opened and prepare ourselves for the ramp-up of the product mentioned here.

Maybe if you don't mind, 2 follow-up questions here. Can you remind us where you're currently having some ramp-ups in your production? And what could be the cost related to this ramp-up process? This would be my third. And the last one is how do you see input pricing this year? So raw maths. And what about product pricing?

First, with the ramp-ups. We've, in Electronics, further ramp-up in site in Nantong for smartphone customers, where we implemented the stamping technology as of last year, and we're able to acquire this new technology and share of wallet with our customers on stamping technology. In the year 2024, we expect to do another larger step within this ramp-up in this technology, get more volume there from our customers. That's one direction. That's in China and Electronics. The second direction also in Engineered Components is with the electronic driving brakes. Here, we've major ramp-ups in the United States, which are going along and we've major ramp-ups here at site Heerbrugg, which are going along. These are the large projects, which we usually talk about, present to you. Behind that kind of in the second row is usually a range of 10% to 14% of new business, which we implement annually, which are usually also going into ramp-up, smaller scale, not as CapEx intensive overall. But I think it's important to get this brief and taste that ramp-ups is a continuous ongoing business, which we manage and do. Thirdly, with the larger projects, as I mentioned, we had building extensions. We've substantial new machines and purchases we needed to do. We were seeing that also then in the profitability that second half of last year was loaded with personnel and depreciation from these ramp-ups, which did not materialize yet on the top line. So that will be the year '24, that we'll see major steps in the ramp-up and in the year '25.

When we look to the input cost side, Energy, we see that normalizing out a bit. We've seen ridiculous peaks at times, and they do not happen anymore. And it normalized -- although it normalized at the higher level, we remain comfortably within the 1% to 2% range. When we look at raw materials, that again, flattened out and reduced from its peaks in '22. We see a trend of slightly reducing, generally speaking, and transportation prices, I' say, we came down, right? That, again, the prices that we've seen in the heydays, they're gone, and it is much more stable. From a personnel cost point of view, we see a long inflation, the OpEx is rising. Here and there, we expand workforce, but that is well within budgeted and projected limits.

Alessandro Foletti, Octavian. I'd like to start first with a brief follow-up. I had the same question on the ramp-up. Can you quantify how much it impacted your cost base last year?

Quantify the cost base. I can quantify that the ramp-up in terms of total sales volume in 2024 will be CHF 20 million in ramp-up. And usually, there is a contribution margin too of around 75% to 80%. So....

So if I make the difference, I exclude the CHF 20 million, take the margin of the rest of the group. To make the difference, I get more or less to those.

Exactly.

Okay. My question is on the margin, again, you mentioned Volker that particularly in H2 or the difference between H2 and H1 profitability was due to mix. You mean mix of the 3 segments or mix in terms of products within the segments?

Well, there is 2 factors in it. But the predominant factor is that usually, we would see a very strong market in electrical and electronics end market, a very strong second half year. And this year, we would have not seen such a peak and that gives us that effect in mix underlying and that goes for the whole year. We've seen mix effects towards other products, and then we've seen also some extent of price management.

Okay. And the other question on this subject is on the operating leverage. Can -- you sort of said that the volumes were headwind, but you didn't mention it when you spoke about it. So I was wondering, if again there, you can say how much is the effect of operating leverage on your margin?

Overall, I think we can state that the volumes have stagnated overall. And what we've seen is mainly that we had organic sales growth through price adjustment, price management on one side. And here and there, some new customers, which came along. But largely, we can say the volumes have stabilized.

Okay. So but -- because I always thought that in Engineered Components, in particular, when you've the capacity going up, then you've a good operating leverage and the other way around. So....

But we also clearly mentioned that we had an underutilization in quite a few manufacturing sites because of the cyclicality, stock adjustments on the customer side. So we've seen good growth in Automotive and Medical, but we've seen rather a negative growth development on the Industrial and Electronics side.

Okay. But I would have 2 more, if I may. One is directly to you regarding these productivity initiatives in Engineered Components. If you can tell a little bit more why you need that really? And what can be expected in terms of margin uplift from those measures?

Certainly, as we've seen, we had last year, midyear, record low EBIT margin in Engineered Components due to mainly, I'd say, 2 factors. First is underutilization of production sites. And secondly, it's also inflationary cost increases, which we were not able to bring forward to customers as quickly as we'd wish to do so. Now going forward, we see the utilization slowly, but truly increasing also because of the new ramp-ups, which we had also underutilized capacity there. And secondly, we also see continued price increases to the customer sites, which we're carrying out. So there's a -- there's then positive effects from 2 sides, but this will not be an easy swing up that we say '24 will correct it. This will take probably an additional 2, maybe even 3 years until we're back into the range of 18% to 21% EBIT margin. The environment is too volatile. And again, the capacity is a cost, its fixed cost more, so to say, which is there waiting for orders.

Okay. The last question, maybe something for the end of the Q&A session. I'd like to hear you appointed 2 new managers for the division Automotive and Construction. And I imagine, they're here. So I'd like to hear from them what the ideas are and their plans for these 2 divisions?

They're not available here on this call, yes. But I can say a few words to that. Yes, we've had 2 changes. We've in division Automotive, if we start alphabetically. We've Alfred Schneider, who went into retirement or will go now into retirement as of May. He has been with SFS for 37 years. He took over the Automotive business in the year 2008 and he had, I'd say, a particular focus on globalizing our Automotive business and also position SFS, especially with these new braking systems applications. Urs Langenauer is now taking over as of January 1. Urs Langenauer is with SFS since 1995. He made his apprenticeship here. He was then in the United States for a little bit more than 10 years doing the Automotive business or being in charge of the Automotive business. And then as of 2019, he took over the Riveting division and relocated with his family to Frankfurt in Germany. There, we had also a particularly challenging situation at that time. We had lacking growth. Profitability was also not there where we wanted to seek it. And he has turned it around. We've seen now last year of organic growth with Riveting. We've seen good EBIT margins. And he will kind of take now this Automotive portion of the Riveting division, along with him into the Automotive division, which he is now also responsible for, and we're convinced he's now exactly the right person for the challenges which we see now focusing on efficiency, focusing on improving the EBIT margin. We've enough projects in the pipeline. It's mainly a topic now of price negotiation with customers and once again, focusing on efficiency. So well balanced, and I'd say, well capable of managing the next step in the Automotive division's development within the SFS Group. Secondly, we've Thomas Jung, who is in charge of -- who joined the SFS Group back, I think, in 2010, '11. At that time, he first off was in charge of our Construction division for the German market, then moved into a position of being Head of Region Middle and East in Europe for division Construction. And then around 4 years ago, he relocated with his family to North America and has been the Regional Manager for the Construction division in the U.S. and Canada. Also, he certainly helped us to further enhance our footprint in the North America through M&As, acquisitions, which he supported and has also a very positive track record in developing the top line, but also the bottom line of our Construction business in the Americas. As of January 1, he's now in charge of the division and managing the full Construction division. We have to keep in mind the American portion of the Construction division is around 50%. So now he took over the additional 50% of the Construction division. Also with him, we're convinced, right capabilities, right experience, very sales focused and also high focused on digitization and further growing of our trading business within the Construction division. That may be a few words on the 2 gentlemen.

Stefanie Scholtysik from Mirabaud. I also have a couple of questions and one is on your guidance. I mean, one important factor for you, EBIT margin is actually operating leverage. And you're saying having stable EBIT margin in 2024, you must have a certain view on organic growth. So can you please share with us your base case scenario for your top line? I mean you can -- on the EBIT margin, I'm sure you should be able to do that on the top line as well. The first one.

As you see, the visibility is lower. And that's why we said the right message to everyone to be open, clear and transparent is to say we've no new piece of information for 2024. We believe the current status is what we most likely see the best or can replicate the best at this point in time with the data we've. We certainly have major ramp-up projects, which will bring fresh revenue in. On the other hand, we see that the existing business is going up and going down, bumping along the road a little bit. And due to that, we do not have a concrete model at this point in time. We've a budget. We've an expectation for the year, certainly. But I'd say, underlying the data points, which we usually have, its just too soft to give a clear and firm commitment here to the market. So we believe stating an EBIT margin around the current level is good practice to clearly express the challenges in visibility. Certainly, as soon as we see a pickup in demand, EBIT margin will step up instantly because as you said, it's usually leverage. It's utilization of installed capacity, which is there. Commitments, which we also have made. We need to maintain this capacity towards the customer. That's another challenge, certainly. And we believe further in the year, we'll be probably in a better position to answer this question. But today, visibility is just not there.

Okay. And maybe a second one on Hoffmann, you increased EBIT margin there, which is nice. What was the reason for it? Was it the implementation of your pricing strategy or other factors that lead to a higher EBIT margin? And what is there more to come in that respect? And also Hoffmann having a high exposure to Germany, how do you view 2024 for the D&L segment?

Yes. In the year 2023, certainly, we've good EBIT margin overall, and this is certainly owed to the fact that the year started much better than expected. Remember, last year, at this point in time, we all were concerned about energy crisis, about not having enough electricity and maybe gas. And the industry prepared itself for probably a slowdown. Later on when then the year started, it was very clear and visible that this will not be happening and many customers ordered at record pace. And this very high utilization, leverage helped us to also achieve a good EBIT margin overall, which we were able to carry along the year. Secondly, also due to good price management, on the supply side, but also on the customer side, we're able to produce a healthy EBIT margin, which we believe, which we also need in future. Those were probably the 2 major reasons. Going forward, 2024 also here it will be vital to understand where the ordering books are of our customers, are they average? Are they low? Are they high? That's certainly a question of visibility again. We also expect for '24 somewhat an inventory adjustment cycle with our Distribution & Logistic customers, but we cannot tell you the magnitude yet. This depends also on the order intake they get from their customer along the way, probably the first 6 months will be very important to watch our customer base, machine builders, industrial producers on their order intake level on how many new orders they get. So it's a little bit wait and see and to also explain why are we in such a situation. We've to imagine we came out of corona and had supply chain shortages all around. So customers increased their bookings, and we had record high bookings at that time. Now it's a normal phase that customers go down and normalize their books -- order books more or less and their inventories. But plan-wise, the visibility and the adjustment levels they need to do or need to have are just not matching yet. So when we talk to our customers, they've challenges because of complexity, because of also large product lines they carry to clearly give us an answer and say, "market demand is strong, yes, but what does it mean for the supply they need because in between its the inventory and certain uncertainties there." So I'd say, it's a pendulum that's swing very hard to the left side and now swings to the right side. And we've here to be a little bit patient. I believe in the next 6, 9 months, this will solve out. This will solve itself and then we'll see a more, I'd say, stable, steady path again. Disruption is always the worst enemy to any supply chain and to any supply chain manager because he lost his capability to indicate to you where exactly he stands with his supply chain.

At the same time, we may mention that we see a clear need of these guys to increase their productivity. And as soon as that pendulum comes back, they will act on that. Probably, they're not acting at the moment as decisive as they should or could, but when the pendulum comes back and that is probably true for several of our end markets, when the economics in these end markets turn around or given impulse, we're certainly prepared then to pick up that demand and go with the end market.

And maybe a last one on Hoffmann, the integration. What were the sales synergies you -- or were you able to capture any sale synergies so far last year? What are the next projects and can you give us some concrete examples how this will look like?

We're closing the integration as of May this year, kind of formally. We've gone a long way with each other, very good relations, well aligned with each other. I think find very good constellation, where we can produce a win-win situation for everyone. So that's on the positive side, clearly to note. Secondly, we're working also on strategic projects, where we then also have synergies, where we can probably gain more share of wallet with customers. But we've to keep in mind because before we already were in a partnership situation, we had no overlap. So there was no short-term gains, which we could kind of produce. But mid and long term, we're working, as we said, on a project to implement product lines from SFS D&L Switzerland with Hoffmann. That's due to be decided formally in the first half of this year. And then the rollout plan will be done. We've also to bear a little bit in mind, it is fairly complex. This is a product line with around 70,000, 75,000 SKUs. So this will need to be well planned and managed and the resources brought in place because as soon as we switch it on in the e-shop and customer order, they expect orders within 24 hours at their door. So whatever we plan, we need to do it very precisely, high quality because there is an excellent reputation out there of Hoffmann, and we would not imagine or we do not want to imagine jeopardizing this reputation by doing maybe a not thought through implementation of additional product lines. So on track, positive. But it will certainly take time until we'll see their full momentum, probably it will take 2, 3 years until we see substantial sales revenues from those synergies ahead or before that. What we see right now is the ramp-up of new innovations, Hoffmann developed, and they also need now a sales focus and capacity to implement. So we'll do it step by step. So digitization right now is the first priority. Here, we invested substantial amount of money in these new solutions. This will be the focus in the next 2 to 3 years and then right after, we'll follow with additional product lines in the rollout. Besides that, we've also geographic expansions in U.S.A., India and China going on as we speak. So the plate is very well loaded with new projects and initiatives.

Jörn Iffert from UBS. Just one question regarding your plans to delever, can you give us some guidance on what that means exactly? Are you looking to get hold of that through net cash? Or will you continue to drive a certain amount of net debt for the foreseeable future?

What we explicitly guide today, Iffert is that we're striving for an equity ratio of 60% plus. When you look at our bond structure, then you see that one of the bonds becomes mature next year. So we've a revolver in place. And we're making our minds up as towards autumn where we go. And with that, we will certainly then use our cash position and act on the debt. Yes, whether that necessarily means a net cash position remains to be seen.

Any further questions? I see in the chat, we've no questions at this time. Everyone seems to be hungry. Yes. Please, yes.

Stephan Sola, Sola Capital. Two quick questions. Last September, we met. Towards the end of September, you just started with the new capacity or new fab in Nantong. Back then, obviously, it was a bit too early to ask how that ramp-up went. Well, now it's probably a better time to do that. So that's my first question. And the second one is regarding pruning. That's also something that we spoke about last September that you wanted to increase the pruning. I think it was specifically in the Industrial segment. And just briefly wanted to know how you're going there to reduce costs, obviously, they're also in that segment?

Exactly. Two good questions. First off, yes, Nantong, we had to ramp up with stamping technology, the new factory or the first portion of the new factory went into ramp-up. And we've seen that we achieved the objectives as envisioned, we've gotten, I'd say, all allocation as agreed and have also seen that especially the ramp-up also helped us in Engineered Components to the top line and the bottom line to improve the results compared to midyear of last year. So overall, we believe a strong success, once again, showing the strong capabilities of our Nantong facility and the capability to reduce suppliers for our customers. So here, we're certainly good on track. And the second portion of the building is now finished, and we expect once again for '24 a further ramp up there. On the pruning side, that's mainly division Automotive, where we clearly said it's now time with all the new projects coming in, the new business that we take a look at the existing legacy business and start some pruning activities. Here, we've intensive discussions with our customers at this point in time on how this pruning shall go ahead. Right now, we do not have any final answers we can give to you. But I'd say the lengthy of discussions already show that our customers have challenges finding other sources for the products, which we'd like to prune. So we need to find an agreement with our customers on how we manage that. But certainly, high push on that side to also, I'd say, adjust the portfolio of business lines.

I've 2 follow-ups as well. Maybe on the more financially used, the transaction effect from foreign exchange. Can you quantify how much it impacted the margin, that one?.

The transaction effect itself, I'd need to go back into that. I'll come back.

Okay. And the second on Automotive regarding somewhat the positioning. Here, you've ramp-ups in Switzerland, of course, in the U.S. and your products then they go globally with your clients. Can you tell us something about your positioning in China or with Chinese clients, particularly in the EV segment, which according to every estimate they'll be those with the volumes in the future?

Exactly. That's a good question. And here, what we've to keep in mind is the vehicle itself, if we say the vehicle is the envelope here. In the envelope inside, you'll find the same Tier 1 suppliers as you've with the other local market participants. This is a mix of Korean, Japanese, Chinese, Western Tier 1s, which supply into it. And through our relationship with those Tier 1s, we're also in those new vehicles. So for instance, when we just take a look at ABS systems, we've more than 50% market share with ABS systems in China. So we're specified in, I'd say, almost all brands, on almost all geographical representatives of the automotive industry, doing business in China, including the Chinese. Secondly, when we then take a look at new applications, whether it's electric parking break or driving brake, also there, the technology on the Tier 1 level is usually Western technology. It's not Chinese technology. Chinese players have not yet developed to that size. But the ones which are developing also in contact with us. So we've, I'd say, a smaller volume business with both applications with local Chinese. And that's the nice part. Usually, the industry focuses very much on the OEM. And they maybe also on the tier, but below the component side is too little of a strategic target to go after. It's too distributed. It's too niche. It's not in target to be a national, I'd say, topic to convert it all to Chinese. And thirdly, I can mention in China, we're considered a Chinese company. We've Chinese management. We've local facilities. It's not so that we're now under the magnifying light due to the trade conflicts that customers say "we do not want to do business with SFS or with Unisteel because this is a Western company." That's not the case. So we -- on that side, well positioned, ready to take market share and already see good inroads with Chinese customers.

So if I may -- very interesting. If I may -- and I want to ask this one. So you don't see the Chinese like BYD, which is the #1 name that everybody speaks behaving like they used to behave that Toyota is building up their Kratos and then coming in....

That's not the same, exactly. It's not the same. The Korean and the Japanese used to do that?

For the Korea, Yes. Yes.

The Chinese, we don't see that. No. Then we've questions from the chat here, yes. Maybe first one, yes. Maybe, I missed that. The question is from Christian Bader, Zürcher Kantonalbank. Maybe I missed that, please quantify your capacity utilization in 2023? Very challenging question because since we've not a homogeneous business, we've some areas like aerospace, where we're in ramp-up, where we've well utilized the capacities, probably around 90% to 95%. And then we've also areas, which we see an underutilization, which is probably more with the hinge industry, kitchen cabinets and such, which go to an inventory cycle, there we probably have a capacity utilization of around 75% to 80%. This is probably the range in which we see the operations running. On the Medical side, we're fully booked. Here, we've capacity constraints, already booked for the year. There, capacity utilization is closer to 100%. They're working 5, 6 days a week. Then considering your earlier comment, it seems your workforce will increase slightly in 2024. Overall, once again, it depends on the development. Overall, we've staffed now our organization, I'd say, accurately. And as just mentioned, we also have here and there some pockets where we're not completely and fully utilized that. It depends where the growth comes in the year 2024. If growth comes more on the Medical side, we'll add more personnel. If growth comes more on the Automotive and Electronics side, probably there's less of an increase overall. But certainly, when you check back in the half year, we'll have a seasonal increase and then second half of the year, a seasonal decrease, but we'll not see that 2024 will be a year, where we'll substantially be hiring and increasing the number of employees. And then please quantify your CapEx budget for 2024, a range at least and early indication of '25?

And given what I said before, we're striving for the 4% to 6% bracket in sales, and we'll handle that cautiously and strive to be in that bracket. That's going to be our aim also mid and long term to drive that down, as we've shifted current needs with a higher weight in Distribution & Logistics.

Then we've a question from Tobias Fahrenholz, Stifel. Portfolio fine-tuning, efficiency measures looking at your less profitable business in the Engineered Components segment that could be partly discontinued, especially within the Automotive part. What could be this special negative top line effect, which we might look for -- in for 2024, 2025? Good question, which you asked. And actually, yes, that's where we also seek an answer to at this point in time with our customers. What we see is that the orders are more sticky than maybe what we imagine or have imagined that means getting rid of product lines, which we maybe would like to phase out. It's more challenging because we understand customers do not have many options at this time or the flexibility to move quickly. So we quantified it at one point in time and said, maybe it will be around CHF 30 million to CHF 50 million of business over 2 years, which we may be phased out or which we may be pruned away. We're still a little bit away from it. Cannot give a clear indication. We believe that the Automotive business, all in all, will still be growing, maybe just at the lesser pace. And as we gradually ramp up new business, we maybe see here and there some small pockets of business, which we prune away. Good. Then we've from Annika, Raiffeisen Vontobel, a question. In Fastening solutions, margin dropped to below the target range in second half '23. Is it now increasingly challenging to remain in the target range in 2024?

Well, we said that it is -- Fastening Systems is heavily impacted by this destocking effect. We saw that particularly to the latter of the last year. And in some pockets, certainly, also, we saw interest rates impacting or at least slowing down some of the investment projects. So there was a situation, a particular situation in second half year last year. We're confident that we're -- and we confidently stick to the bracket of 14% to 17% in that segment. We're well positioned, close to the customer, able to fast fulfill the needed now need of our customers who want to keep their construction sites moving. So therefore, we see it challenging, yes, but we're also very confident to stay within that bracket.

Good. No more questions from the chat. Alessandro?

Since we were speaking about this FS margin, I was wondering if the effect of transferring Riveting out has an impact on the incoming division and on the outgoing division?

We split Riveting into the respective end market. On the overall, given the size, we would not see that as a reason for adapting our brackets.

I understand that, but I still wonder if it could go into Engineered Components and be sort of subsidized. And then maybe that's why construction goes back into the range, but in reality, not doing anything or maybe -- it's on average. So it is...

They are very close to each other.

Very close, very close. We -- as we said, we were splitting the division at a point in time, where the division was in a very good cycle, very fit also to take that leap, and we're satisfied with the integration on the other side. Good. Before we come to an end, I've to make a personal announcement. I -- you all have witnessed last year, Alessandro took a different position on a number, and he proved me to be wrong, and I lost on that, PET bottle of wine. And I just want to fulfill here duty of honor and that -- and hand you over that. And I hope we'll conclude with that. Thank you very much, Alessandro. Go ahead. Welcome.

So with that, we concluded for today. Thank you for coming. Thank you for your interest. Please be aware of our next dates to attend Annual General Meeting, publication of half year results and then looking forward to an Investor Day, which we've here on site, September 5, and there we'll certainly be able to talk more on the ramp-up of the new programs and see where we stand overall with the business cycle. Thank you all. Enjoy lunch. See you soon again. Bye-bye.

Thank you very much.