Ladies and gentlemen, welcome to the half year results 2022/2023 of dormakaba Holding AG conference call and live webcast. I am Alice, the conference call operator. I would like to remind you that all participants will be listen only mode, the conference is being recorded. The presentation will be followed by a Q&A session. You can register for questions at any time by pressing star and one on your telephone. For operator assistance, please press star and zero. The conference must not be recorded for publication or broadcast. I would like to remind you that the conference call does include forward-looking statements, which are subject to risks and uncertainties. Listeners and readers are therefore strongly encouraged to refer to the disclaimer, which is part of today's media release. At this time, it's my pleasure to hand over to Jim-Heng Lee, CEO. Please go ahead.
Thank you, operator. Good afternoon, ladies and gentlemen. It is my pleasure to welcome you to our webcast on dormakaba's half year results for 2022, 2023. With me today is our new CFO, Christina Johansson. Welcome. This is a quick preview of today's agenda. We will give you an overview of our results. I will next provide you some insights into our current operating environment, and I will update you on where we stand with the implementations of Shape4Growth strategy. I will go into more details about how we perform at group level and in our regions. Christina will lead you through details of our financial performance. We will talk about the outlook for the current financial year. You will have the opportunity to ask questions.
Let me summarize our performance in the first half of this financial year, 2023. We posted strong organic sales growth, mainly driven by pricing. There was strong growth in Region Americas and Key & Wall Solutions, as well as good growth in Asia- Pacific and Europe and Africa. Our adjusted EBITDA decreased due to currency exchange rate effects and higher energies, material, and labor costs. Our adjusted EBITDA margin stands at 13.0%, in line with our expectations. We saw positive growth effects offset by a negative product mix, an increase in functional costs due to investments in profitable growth initiative and slower volume growth due to reduction in customers' inventories. It's pleasing to note that net cash from operating activities more than doubled to CHF 104 million. Our net profit decreased due to a lower EBITDA contribution and a higher financial expenses.
Let me give you some insights on our current market environment. We continue to be one of the international market leaders in an attractive industry. By 2050, 2/3 of the world's population will be living in cities and smart cities, I mean. Dormakaba will be a main player in setting standard for smart, sustainable solutions across building life cycles. However, our industry, like many others, is currently operating in a challenging and yet fluid macroeconomic environment. Affected by geopolitical instability, this could impact global economic growth. Inflation, rising interest rates, higher material and labor costs, and a decline in economic activity could have a negative impact on our profitability. There's still some risk of construction delay due to COVID-related restrictions. Specifically, the destocking of customer inventories had an impact on our performance. To our relief, we are also seeing that supply chain shortages are somewhat easing.
Where do we stand in transforming dormakaba into an organization that delivers sustainable, profitable growth? As I said last fall, we continue to focus on accelerating our profitable growth through sequential improvements. Shape4Growth is about focus, it's about customer centricity, it's about efficiency. Overall, we are on track. Here are some examples. Our new operating model aims to reduce the company complexity and increase efficiency. Part of its implementation is a global reduction of 300 full-time equivalents, of which almost 200 were already realized by the end of December. We have also reduced complexity in our America sales organization, while investing in building up specification writers and specification getters. We see a significant increase in specification output and are confident that these will translate into sales in due course.
We see progress in transforming our America business, which the key for the success of our strategy. Our strategic focus on our core business was confirmed. Our core product together outperform the group average in organic growth by 200 basis points. We will be focusing on our new technology developments efforts on digitally connected platform solutions. In response to a challenging business environment, we have launched a cost efficiency program across the entire dormakaba organization. Increasing connectivity lays the foundation for driving additional customer benefits from experience to productivity to sustainability. We aim, we want to disrupt this industry with smart, integrated digital offerings, adding value across the building life cycle. I am convinced that we are the company to deliver this integrated future. Shape4Growth includes a clear vision for our future offering grouped around five principles.
Developments will be supporting our connectivity strategy. Our new solutions will be embedded into EntriWorX EcoSystem. We enable integration as a core elements of our broad strategy. New product design will start with a clear value proposition supporting our service strategy. Last but not least, new development will articulate a clear value proposition supporting our sustainability strategy. Our global product roadmap has been redrawn to reflect these five major principles. We will present these first results at the coming key industry trade fairs, namely ISC West and BAU 2023. In an increasingly populous and digitized world, access and security are no longer simple mechanical processes, but an integrated part of the urban infrastructure and a key to smart people flow management. Dormakaba is an international leader in smart and sustainable Access Solutions. We are a partner of choice for customers managing complex products around the globe.
As an example to illustrate this, our offering has convinced Kempinski International to select us as the official global supplier for all hotels owned or managed by this famous brand. We are proud. Our contribution will include individual product, complete solutions, and a range of services from planning to installation to ongoing operations, all designed to support our customers' reputation for excellence. As you know, sustainability is part of our strategic positioning and helps to differentiate us from our competition. We make significant progresses. The world's largest and most trusted provider of corporate sustainability ratings, EcoVadis, recently awarded us its gold medal. Last November, we achieved Prime Status in the ESG rating of ISS. At the end of 2022, CDP raised our ranking from B to A -.
Europe's largest associations of wholesalers and distributors in the construction, hardware, and fitting industry name as, dormakaba as the best sustainability program in 2022. I will shift gear to look at the groups and the regional performances. On a group level, we achieve year-on-year sales growth of 5.2%. Organic sales increased by 8%. 6.5% was driven by price realizations and 1.5% by volume. Adjusted EBITDA decreased by 4.6% to CHF 184.6 million. The adjusted EBITDA margin was at 13%. Price realizations and efficiency improvement in this half year could not offset a negative product mix and slower volume growth due to destocking of customers' inventory. We also saw increased costs due to investment in future profitable growth.
Items Affecting Comparability came to CHF 14.0 million and are mainly related to reorganizations and restructuring costs. Into regional performance, come Region Americas. I'm happy to report that almost all markets and all product classes in the region contributed to increased sales. There was double digits growth in service, access control solutions, and access automation solutions. Organic sales growth was 8.2%, driven by higher sales prices, steady U.S. commercial construction activity, robust growth in multi-family housing demand, and a positive performance in Latin America. The adjusted EBITDA margin decreased by 70 basis points to 17.6%, which was mainly due to an unfavorable product mix. Price increases could not compensate for elevated cost inflations. In the Americas, we are currently developing EntriWorX Planning 360 as a new platform for specification writing and project coordinations.
Providing real-time coordination of electronic and mechanical Access Solutions will increase end-to-end productivity and alignment for designers, manufacturers, contractors, and channel partners. Turning to Region Asia-Pacific, we experienced some challenges due to COVID-19 restriction in China, which is one of our core markets in APAC. We still generated organic sales growth of 5.1%, driven by higher sales prices and volume gain in both sales and services. This growth was supported by all markets. We performed particularly well in Australia, as an example. We also saw positive contributions by global core products, including door closers and entrance systems. Our adjusted EBITDA margin increased by 160 basis points and was well supported by price development, cost management, and efficiency improvements. Region Europe and Africa, almost all our markets within Europe experienced solid sales increases.
Germany, in particular, delivered double-digit growth due to strong project activity and price realizations. This led to a total sales growth of 7.1%. A negative currency effect of 7.0% led to an overall sales figure unchanged from last year. The adjusted EBITDA margin for Europe and Africa stands at 18.8%. It was affected by inflation, continued investment in operational improvement, and lower sales for access door hardware products, especially door closers. In Key & Wall Solutions, overall organic sales growth climbed to a combined 14.3% year-over-year. Key Systems saw 6.8% organic sales growth with all the geographies contributing. On the other hand, movable walls, we were pleased to see the organic growth of 25.3% in movable walls.
The business clearly continued to convert part of its COVID-related project backlog into sales. We also saw benefits from market share gains and increased market presence. The adjusted EBITDA margin increased by 470 basis points to 17.4%. This increase was largely driven by improved product profitability in the movable wall business unit. Higher sales prices and volume further compensated for cost inflationary impact. With that, I close my part of my presentation. I will now hand it over to Christina, who will give you more insights on our financial performance. Christina.
Thank you, Jim-Heng. Ladies and gentlemen, from my side also, a very warm welcome to our half year analyst conference. My name is Christina Johansson, and I joined dormakaba as CFO on December the 1st last year. I'm very much looking forward to meet all of you soon in person. Today, I will guide you through our financial figures for the first half of the 2022, 2023 business year. The first slide is a reminder of what we changed in our operating model in the second half of 2021, 2022, which is important for the understanding of our segment reporting. Because of the new operating model, we restated the previous year for the segment reporting. I would like to remind you of the steps we took so that you can better understand why the segment numbers now look a bit different.
What you see on this slide is the starting point of our old operating model with the four Access Solutions segment. Key & Wall Solutions is not affected by the changes. In the first step, we made some organizational changes, such as merging AS DACH and AS EMEA into the Region Europe and Africa. In a second step, we moved the new global functions out of each legal entity. These functions include marketing and products, product development, and global operations. Moreover, we split the corresponding legal entities into sales and plant organizations to form global operations. This was a crucial step in implementing the new operating model. In the third step, we reallocated the operations and marketing and products global functions back into the three regions based on value creation and the full value chain concept. This now gives the full picture for regional development.
Product and development remains a standalone segment. That should also give you a clearer picture of our R&D investments for the future. All of this has been done in order to provide clear responsibility and transparency for our company steering, clear customer orientation and customer centricity, and strengthened focus on performance and value creation. For full transparency, we have again disclosed a transition from the old operating model to the new operating model for the first half of the 2021/2022 financial year in the notes to the financial statements. In addition, we have also simplified the principles for internal audit cost allocation as of July the 1st, 2022. In alignment with the principles of the Shape4Growth strategy, previously, charges to the segments were based on consumed services within a service catalog. The new structure reflects IT cost by user as a share of the total costs.
The change structure increases the transparency of segment performance and functional cost based on the full IT cost per employee. To reflect this change in the internal accounting policy, functional cost in the consolidated income statement, as well as the financial performance of the individual segments in the segment reporting, have been restated. We have disclosed the correspondence of these costs in the chapter that restates prior year financial information. Let me run through the key figures. Overall, our net sales totaled CHF 1.4 billion, with sales growth of 5.2%. We reported a very strong organic sales growth of 8% for the dormakaba Group. We had an adjusted EBITDA of CHF 184.6 million, which is 4.6% below the previous year.
Our adjusted EBITDA margin decreased by 130 basis points to 13%, and this due to volume shortfall in access hardware solutions and negative currency exchange effect and also a negative product mix outcome, as well as investments in growth initiatives related to the Shape4Growth strategy, and here, especially in sales and marketing and PD. Net profit stood at CHF 84.9 million. Return on capital employed was affected by the increased level of net working capital and a lower profit margin and ended at 23.3%, which is 250 basis points below the previous year first half. Coming on to the sales development. The top line was driven by organic growth of 8%, of which 1.5% was volume growth and 6.5% attributable to increased pricing.
M&A added a further 0.1% to net sales. Currency translation effects were negative, reducing the sales figure by 2.5%. All regions contributed to organic growth, supported by strong pricing measures. Volume grow by 2% in the Region Europe and Africa, as well as Asia-Pacific, and 1% in Americas, as well as in Key & Wall Solutions. Moving to the adjusted EBITDA, the picture is slightly different. The adjusted EBITDA, as I said, declined by 4.6%. There was a negative currency translation effect of CHF 4.5 million. There was further a positive margin squeeze effect of 2% due to higher sales volumes and increased sales prices.
This effect was more than offset by a negative product mix effect from lower Safe Locks sales and higher functional costs, mainly due to strategic investments in growth initiatives such as an FTE buildup in specification. Additional factors included inventory revaluation and lower margin contribution from production plant due to lower volume for access door hardware. In particular, door closers contributed less as customers destocked inventories in response to increasing supply chain constraints. These factors impacted margin, especially in the Region Europe and Africa. In Region Americas, the adjusted EBITDA margin declined as well. Key & Wall Solutions and the Region Asia-Pacific, however, increased their operating margin. Asia-Pacific also did so despite the challenging situation in China from COVID-related lockdowns. M&A activities improved the adjusted EBITDA margin, mainly due to the Mesker divestment last year.
Benefits of other acquisitions in 2021, 2022 were offset by the divestment of the interior glass business in the same year. I will now proceed to the condensed income statement. The gross margin for the reporting period was 39.4%, below the previous year's level of 40%. This is due to inflationary pressure on materials in engineered components as well as increased labor costs. The gross margin was further affected by lower capacity utilization in our production sites for door hardware products, primarily due to destocking of inventory along the whole supply chain, which resulted in lower sales and some inventory impairment. Sales, marketing, and general administration costs rose to CHF 364 million. This increase was primarily because of investments in growth initiatives.
The net financial result for the first half of the financial year amounted to - CHF 17.7 million. This is attributable to higher net debt from net working capital, dividend payouts, and slightly higher interest rates. The income tax decreased slightly. The tax rate increased to 26% due to one-time benefits last year. The Items Affecting Comparability were at CHF 14 million on EBITDA level. They consisted of reorganization and restructuring expenses, CHF 6.6 million of which are attributed to ERP harmonization and IT infrastructure optimization. A couple of remarks on the cash flow statement. Cash flow from operations increased to CHF 137.6 million due to a sequential improvement in the net working capital. Net cash from operating activities stood at CHF 103.9 million.
This represents an improved operating cash flow margin of 7.3%. Inflationary pressure was partially offset by stock reduction programs, resulting in an inventory buildup of CHF 28.4 million compared to CHF 71.7 million in the previous year. Despite organic sales growth of 8%, our trade receivables only increased by CHF 2.7 million. Net debt increased by CHF 28.4 million- CHF 736.7 million, mainly driven by inventory buildup and dividend payments for the financial year 2021, 2022. As you will see in the notes to the financial statements, we also have a change in the mix of the financial debt. In October 2022, a new CHF 275 million, 3.75% corporate bond, which is due in 2027, has been secured on the Swiss debt capital market.
This was to refinance the CHF 300 million bridge to bond credit facility with a major Swiss bank. The financial debt profile now shows again a balanced short and mid-term maturity profile. Overall, financial leverage was 2x. The company fully complies with the covenant of the syndicated credit facility. With this, I thank you for your attention, I would like to hand back to Jim-Heng Lee. Thank you very much.
Thank you. Thank you, Christina.
I will make a few remarks on what lies ahead before we come to the Q&A sessions. First, let me point out some changes to our Board of Directors. As you know, the Board announced an accelerated staggered renewal in 2022, last year. As part of this process, Riet Cadonau will step down as Chair and member of the Board as of 30th April this year. I'm honored to thank Riet Cadonau, also in the name of the Board and my colleagues on the executive committee, for his valuable contributions to the developments of dormakaba and his tireless commitment over so many years. I wish him the best of luck and every success in his future. Svein Richard Brandtzæg will take over as Chairman on 1st May 2023, and Thomas Aebischer will assume the role as Vice- Chair of the board.
Before we take your questions, I would like to share with you how we see the current business environment, as well as the outlook for the second half of the 2023 financial year. The global macroeconomic and geopolitical situation is categorized by limited visibilities and uncertainties. Our customers in the commercial property and construction industry remain exposed to the twin pressures of price inflation on one hand and higher interest rate on the other, as well as supply chain disruptions. Under these circumstances, dormakaba expects a sequential improvement to a slightly higher adjusted EBITA margin for the full financial year and continued organic growth above our midterm target range of 3%-5%.
Independent from macroeconomic conditions, we are strongly committed to improve gross margins and profitability, and we will therefore continue to focus on implementing our Shape4Growth strategic initiatives and taking targeted measures to reduce the cost base of our entire organization. With that, I close our presentation for the first half of the 2022-2023 financial year. Christina and myself will be taking your questions. Before that, can I ask operator to give instruction on how to ask question remotely. Alice, please.
Thank you, sir. We will now begin the question-and-answer session. Anyone who wishes to ask a question or make a comment may press star and one on the touch-tone telephone. You will hear a tone to confirm that you have entered the queue. If you wish to remove yourself from the question queue, you may press star and two. Participants are requested to use only hands for asking a question. Anyone who has a question or a comment may press star and one at this time. Our first question comes from the line of Patrick Rafaisz with UBS. Please go ahead.
Thank you. Hi, everyone. I have two or three questions, please. The first one is just on the EBITA margin in the Region Americas. I understand what you said about things like hiring specification teams, maybe some slow passing on of inflationary pressures with pricing. I was still surprised to see the margin drop here, especially with Mesco Doors now out of the mix. Can you maybe explain a bit more what happens? What was the main driver here of the cost and how much do you expect to maybe recover near to midterm here? That's the first question.
Okay. Thank you, Patrick. Let me try to understand your question better. Is around America, you wanted to better understand the margin development in America and what is the expectations. In America, I'm of the strong opinion that we must get the basic right. The basic to me is where we get to get customer centricity, stickiness to our customers, even in the basics of trying to make sure that we deliver what was ordered on time, every time. I repeated that emphasis last fall, and if I remember correctly, it was also the first time, March 2, 2022. Without that basic right, I think America's opportunity will never be realized. The truth is that the margin in America had sequentially improved.
We have increased our margins by almost 1 basis point to what, 1 percentage, closely to what we are now. Clearly, we see that continued investment in specifications. We'll continue to improve our order pipeline and create a demand pool situations. We have also done numerous things, as an example, in getting our sales team closer to the market, in making sure that we are reducing the complexity of our organizations. There remain work to be done, Patrick. My view is that we are on the right path, and we will continue to sequentially improve in these regards. Your second question, Patrick?
Okay. Yeah, yes. Thanks for these explanations. Then staying with margins, but now more on the, on the midterm, right? I mean, it's clear what you've guided, for this fiscal year, a bit better than the 13.0%, which we saw in H1. Let's make it, I don't know, 13.5% for H2. The bridge then to your midterm target, it is in fact very steep, right? It looks like a very back-end loaded performance if you were to achieve that. Can you maybe explain where your confidence is coming from, what the main building blocks are for you now to get to those-
Yep.
- to that range?
Let me, Patrick, first of all, put this into context. When Shape4Growth was announced back in November 2021, it was a different world than what it is right now. The world has changed quite a lot since then. We are no longer operating, dormakaba is no longer operating in a normal market conditions environment. We are committed to sequential improvement. We did achieve our guidance for the first half of this financial year at 13.0%. We intend to enter the range of 16%-18% adjusted EBITDA in the course of 2025/2026. We confirm the organic growth and the ROCE as well. This is where we stand right now, Patrick.
Okay. Okay. I get it.
Good. Thank you.
The last, the last question is, I'm sorry, it's still on margins, right? I'm now looking at the mix for the remainder of the fiscal year. It seems that in various segments, the mix was a problem, right? With door hardware closures and the destocking at customers. Is that already reversing or stabilizing, or how do you expect that the mix development for the rest of the year may be into the first half of the next fiscal year?
Thank you again, Patrick. I took comfort from our first half performance in terms of being able to have price contributions to 6.5%. It confirms dormakaba's status as a market leader in the industries, and this is an attractive industry to be in. The first half outcome was a relentless effort to fight against inflations. In the process of fighting inflations, we encountered destocking activities due to our customer repositioning their inventory position, and we ended up in a situation where we are. Going forward, we have to continue to evaluate our position, and we are currently reevaluating our position in views of different markets, different volume elasticity to price movement, as well as our competitive strength in the different product classes.
Sufficient to say, we have to drive sufficiently enough high margin traditional bread and butter businesses of dormakaba. These fall into the door closure range. An effort is already underway. The tailwind that we have from pricing that will drive growth will be increasingly challenging. We continue to believe that with the unique offerings of dormakaba focusing on verticalization and solution offering, we are able to continue to command a premium in most of our geographies across our markets.
Okay. Thanks for this color, Jim-Heng , very useful.
Thank you, Patrick.
The next question comes from the line of Rizk Maidi with Jefferies. Please go ahead.
Hi, good afternoon, Jim, Christina. Welcome on board. I have a few questions, and I'll take them one at a time. Firstly, Jim, just want to talk about this stock, and I'm a bit surprised by it because your peers have seen it in the residential side, not on the non-residential side, which you are mostly geared to. Can you first just help us quantify destocking? Tell us whether it's happened amongst your distribution customers or its OEM customers. Any color on selling versus sell-out, and where do you see overall distributor inventories at this stage? I'll start here.
Hi. Thank you, Rizk, for your questions. It's a mixed picture here. I mean, let me try to walk you through our major markets. In Europe, that's where we experienced quite a bit of destocking in the first half of this year. In Germany we see that the destocking is going on, and it is happening. We are not seeing a decline. We are not seeing a decline in the order situations. In Austria, destocking in the process of door hardware is happening, clearly we are also closely monitoring the situations in the other major markets in United Kingdom, Netherlands, France and Spain. The impact of destocking in these markets are rather pronounced. We can see that orders are now returning but somewhat at a lower pace.
We are primarily active, Rizk, as you know, in the commercial and not so much in the residential market. However, we have as well a channel that's selling the residential market through the OEM manufacturers. That's where we are also seeing a slight destocking effect and also a reduced level. All you know, the cost of inventory is the motivations for the destocking. It is also interesting to know that our customers have greater confidence in dormakaba supply chain capabilities, that they feel that the safety stock we had enough. Therefore, this is also triggering the destocking at their end. The external market uncertainty, especially in the residential, is also affecting the OEM channel. The no manufacturer channels that we are serving. That is in a nutshell the entire situations.
We do not see quite a lot of that happening in Asia-Pacific and America is a mixed bag what you see between the smaller market in Europe and also in Germany.
Thank you. The second one is, it's just really a follow-up on what you've mentioned before. You said we're operating in a different world versus when Shape4Growth was announced. In this environment of slower growth, Jim, does it really make sense to still commit to the same Shape4Growth investments that you sort of initially targeted? While I'm at here, can you just give us a sense for how much savings you achieved in H1 and how much Shape4Growth investments have been deployed in the period?
I will leave the second part of the questions to Christina. I'll first try to put a picture around how we see the Shape4Growth investment. What Shape4Growth has committed was around customer centricity. Leadership in the core, investment in core countries, marketing, hands-off product developments that are channeling to these leading geographies. This is an important part of our strategies. In this regards, we continue to invest in specifications in America that we are now seeing clearly. After the reorganizations of our spec team, we are seeing clearly that we are generating more output to the tune of 60%, and that we will continue to drive. Equally it's true that I explained to you earlier on about dormakaba being a established, a connected integrated solutions in EntriWorX as an example.
It is a planning tool that will allow us to create pull-through demand at a upstream level. This is one projects that we have invested quite substantially in Europe and in America, and we will continue to do that in order to bring it to fruitions. However, on the other hand, we have also generated FTE, full-time equivalent reductions to the tune of 200, that we have committed 300, and the saving has now come through in the first half of this year. We have to be selective in order to strongly project dormakaba unique competitive advantage and unique selling argument in order to bring the customer centricity to the forefront.
Good. I don't-
Okay, I think... Sorry.
Sorry. I think.
Go first, Christina. Sorry.
Yeah. Thank you. I think when we relate to that the market conditions have changed since November 2021, I think it's visible in regard of the volume growth that we have achieved in the first half. The expectations were higher that we would have higher volume growth. We also then expected that we would need to invest to support this growth, which you also clearly see in regard of sales and marketing and R&D costs that have increased if you compare with the year before in the same period. On the other hand, we have taken action at the later end of the first half year to be a stricter cost management in regard of people, but also areas like travel expenses and professional fees.
We see that we have achieved at the later end of the second half more savings. We have also, of course, been working extremely hard on the procurement side to be able to compensate through procurement savings, also the increase in costs. It has been a combination, but the intention was obviously to create more volume growth than what we saw in the first half, and we wanted to get ready for that. I think we need to slow down a bit and definitely now in the second half be more cautious when it comes to our cost structure and make sure that we in the second half are having a good trade-off between getting ready for the future, but also performing in the short-term perspective.
Christina, can you quantify the savings? I think you had procurement savings of 1%-2% of CHF 1.2 billion and CHF 30 million of SG&A or the operating model. How much was that was achieved in H1?
Yeah. I can only say that we are in line with our expectations when it comes to procurement savings, not mentioning a short-term number here. Procurement is contributing to compensate some of the inflation costs that we have seen, especially on the labor cost side. Of course, labor is the largest cost factor for dormakaba, and we have all around the world, of course, seen that the labor costs have increased more than we expected, and especially in the U.S., which has been the biggest challenge in the first half.
Okay, thank you.
Thank you.
The next question comes from the line of Martin Flueckiger with Kepler Cheuvreux. Please go ahead.
Hello, Martin.
Good afternoon, Jim-Heng Lee and Christina. Martin Flueckiger from Kepler Cheuvreux here. I've got several questions, and I'll take one at a time. Can we just first go back to the topic of pricing and the 200 basis point squeeze that was mentioned earlier on, and what your targets are specifically for the full financial year 2022-2023? That would be my first question.
I can start off on that question.
Please go ahead.
Jim-Heng, add if there is anything. I think we have done a terrific job in regard of trying to make up for the cost increase, especially in energy, labor, and material, to get these pricing ups all through the dormakaba group. We actually managed that very well. On the top of that, in the gross margin, we had some negative effects that then forced us to lower the gross margin versus last year. Things like inventory impairments, factory utilization, the mix. In total, we then lost in the margin for gross margin. When I look at the cost increase versus the pricing, we achieved what we had said.
Going forward, I think it is one of the most difficult things to predict in a short-term perspective, because the inflationary numbers are obviously looked at from a month to month. We see certain areas like logistic or energy, where the price level and the inflation impact is slightly reduced in the last months. On the labor side, I personally believe that we will see a continuous increased pressure on that side. It's difficult to say what the cost increase overall will be going forward. I can only say that we are determined to continue to try to compensate for whatever it will be on the cost side, on the price side, to get the price increases in all our key markets here.
We've done it very well in the first half, so I'm convinced that we will also manage that in the second half. Jim-Heng , anything?
Yeah. Sorry, can I just follow up on that? I get your answer, and I understand the complexity of the issue, but I'm just wondering, you know, what kind of target you've set yourself. I mean, you've got your 200 basis points positive squeeze already. You know, do you plan to maintain this stable at this level, or do you see down or upside risks to that number?
Well, it depends, I would say, mainly on the mix. Obviously, it's also a journey of learning. I think not only dormakaba, but also many other companies have never experienced this kind of inflation rates that we saw last calendar year before in the career. It has been a learning curve here in trying to test the markets, the trade-off between volumes and price increase. I think we have gained a lot of more insight during the first half year that we now will utilize. I think we have a clear picture of our product clusters in our markets, where we can push the price further and where we will mainly then pay a very high price in volume if we exceed.
I think the learning from the first half will help us to get a better gross margin outcome in the second half. I'm only saying that before I know what the inflation impact will be. We have, of course, learned a lot during last calendar year here.
Next questions.
Jim-Heng . I'm sorry, I thought you were gonna add something. If not, can I just follow up on my second question? The functional cost. Sorry?
Yes, go ahead.
The functional costs were also mentioned in the press release or the financial report as a main reason for the EBITDA margin being under pressure. I was just wondering what kind of increase do you expect for the second half? You know, it looks to me, if I look at SG&A and R&D, they were up like CHF 25 million, CHF 26 million year-over-year. Is that an incremental number that we should also expect for H2?
I think we will try to improve. If you put these costs in relationship to the top line, I think there is potential to reduce the percentage. We try to adjust to the volume growth, which is the right KPI to measure against and see what we can do in a short-term period of time. Of course, it is important that we invest in the future, and we still believe in volume growth. The question is just how much longer will it take to get to the volume growth that we originally planned. We need to be having a good trade-off here between investing in the future and then at the same time, to be in control of our cost structure.
We are working hard both on the sales and marketing cost structure and the R&D, not to harm the future, but to be more efficient in regard of using the resources we have. You will probably see that the percentage will be slightly lower in the second half.
Great. Thanks. My final and third question. Could you update us, please, on the planned restructuring charges or Items Affecting Comparability, as you call it, for the full year and what kind of cost savings we should put into our EBITDA bridges for 2022, 2023?
I mean, with CHF 14 million as adjustments in the first half, right now I would assume a slightly lower number, still a number in the second half as well. I mean, it's related mainly to transformation of IT infrastructure, which helps us to work closer together and then to reduce our maintenance costs going forward. We are not talking about a huge magnitude here. CHF 14 million first half, maybe something below CHF 10 million in the second half is what we are expecting right now.
Okay. Sorry, the cost savings from the restructuring?
I can't give you a number because that would be then mainly for next year going forward. I mean, we are guiding for next year a sequential improvement on the EBITDA, that would also include, of course, some kind of benefit for now reducing the IT infrastructure. I cannot give you an absolute number.
Okay, thanks.
Thank you, Martin. Can we move to the next question, please?
The next question comes from the line of Martin Hüsler, Zürcher Kantonalbank. Please go ahead.
Yes. Good afternoon. Thank you for taking my questions.
Hello.
I have also two. The first one is on hardware solution and Safe Locks, which you quoted as having a negative impact on the margin. Can you share some maybe details on how important those businesses are in terms of contribution to group sales? What are the margins, roughly, of those two product lines?
I mean, the AH, the access hardware solutions is an important part of our business, and this referring to our door closers and architectural hardware and so on. It has a significant contributions. With Safe Locks, the reason why we have a negative impact was due to the lack of ATM activities that are not taking place in America. Going forward, we will continue to focus on ensuring that the door closers business are really an areas of focus in terms of, again, making sure that the customers demand are being satisfied through even the basic of supply chain. We have to make sure that these are really, quick ship programs that we have put in place and also for many of the products that we can actually turn into opportunity.
One quick one is really a door closers that we have put and launched in America called the EHD9000 Door Closer. This will help us tremendously as an example. Now, the Safe Locks business continue to be a profitable one, and clearly in our regard is that it will come back. We just got to be patient here.
You don't want to share any quantitative information on the importance for the whole group?
We don't provide such informations. I'm sorry, Martin.
Oh, sure. No problem.
Thank you.
Maybe on the positive side, can you elaborate a bit on the growth and margin in movable walls? Is this increase sustainable? Are there some kind of catch-up effects that we should be aware of? Is that now a run rate we could assume also for the near future?
I think we have to look at the movable wall, the performance that we had, 2.5 In a year. It is growing around 27% organically, the movable wall business. Bearing in mind that we were in negative territory, the half before, and the half before, we didn't have a impressive growth as well. I think we benefited from a lower base, number one. True enough, we have also benefited from a very strong COVID-resistant order pipeline that is now converting into sales. In that dual effects, I think you are seeing the positive growth right now. To your questions, is that going to be a run rate for the future? I honestly hope so, but I don't think so.
Clearly, if you combine these two factors, we can only say that movable wall continue to be one of our growing business. We find a niche in the market. We are a market leader.
Okay. Thank you.
You're welcome.
The next question comes from the line of [Remi Business] with Baader Helvea. Please go ahead.
Yes, hello. Good afternoon. Thank you for taking my questions. I will start with the first one. How was the volume growth in January and February of this year? Do you also expect a similar volume slash price growth split in the second half versus the first half?
The January and February that we have just experienced did not show any difference in pattern from the past. We have normal festive season, and in particular, the Chinese New Year that we had had. I do not see any significant blips or developments that we would be able to share here. For the outlook of second half, I think in the earlier remark, Christina had alluded to the fact that, you know, we will want to continue to sequentially improve, and we will sequentially improve. However, the trend of the pricing contributing to our growth comparing with a stronger second half last year will be increasingly challenging.
Therefore, I think when we make that comparison six months down the road, we have to be aware that the baseline is quite different comparing the baseline first half and the baseline we had last year.
All right. Thank you very much.
You're welcome.
Maybe a quick follow-up on Items Affecting Comparability, do you expect also a similar amount than in 2023, 2024 as in this full year?
Honestly, I think that's too early to say. We are right now in the process of preparing also the budget for next year, it's too early. I can only say that EBITA adjusted on this journey should be a sequential improvement. Down to the level of IAC, I cannot say anything for next year yet.
Okay, thank you very much.
Thank you.
Your APAC growth was among the regions the weakest, but nevertheless, it seems that it was quite positive when compared to some of your peers, your bigger, your main peers that are active in that region as well. Do you know what could be the reason for that differential in growth or why you have performed better?
I think we are better.
All right.
Please allow me to give you more colors. I think there is significant pre-sales investment that we put in. This is an area that I would like to, you know, build the bridges to the earlier questions around what are we gonna stop? Should we stop? Should we continue with Shape4Growth? Shape4Growth is all about customer centricity. One of the good reasons why Asia-Pacific has been able to grow to the where we are and looking at our competition is clearly because we have a strong specifications team, both getters and writer. I think this put us in a good position. With regards to that, if we continue to repeat that across our global leading markets, we are definitely a force to be further reckoned with.
Thank you very much.
You're welcome.
I have one last clarification question. Your Shape4Growth EBK margin guidance. Today, have you officially now basically postponed the margin guidance for two years? Did I understand that correctly?
I will restate my statement earlier on in responding earlier questions. Dormakaba intend to enter the range of 16%-18% adjusted EBITDA in the course of financial year 2025, 2026. 2025, 2026. We further confirm the organic growth and our ROCE.
All right. Thank you for reclarifying that.
You're welcome.
The next question comes from the line of Remo Rosenau with Helvetische Bank.
Hello, Remo.
Please go ahead.
Yes, thanks for clarifying the midterm target. That was my question, actually. Then we can be sure that you change it on your website as of tomorrow, because as of now, it's still 2023, 2024. My second question is that on page 24 of your presentation, you basically say that you're pretty happy with your leverage of 2 x net debt EBITDA, respectively 2.3x if we take the non-adjusted number, and you're comfortable with the 2.5x leverage ratio.
Why are you so comfortable with such kind of debt level which is not that low and you haven't brought it down the last few years? Interest rates are going up. I mean, shouldn't you aim to get this net debt down without doing any significant deals?
I think you should never be happy with numbers. You should always drive for constant improvement. Given the performance during the last years and also the cash generation in dormakaba, I think it is a good achievement in a short-term perspective. I have nothing against improving the net debt ratio going forward here by improving the profitability and the cash flow.
Yeah. It is not a stipulated target.
Well, I think it is. You get it if you improve, what we have said, I mean, in regard of our clear targets. You get it automatically if you improve cash flow and you improve your EBIT and you also grow the business. The major area, I think net working capital, there was a good achievement in the first half of this year. Obviously, I see scope for further improvement that also will help us. The further improvement, especially in the inventory, is also something both from a financial point of view, but also from a risk point of view that I would like to see that we can improve further during the next coming years, which also would then help, the ratio.
Okay. Okay, fair enough. Thank you.
Thank you.
Thank you, Remo.
The next question is a follow-up from Mr. Flueckiger at Kepler Cheuvreux. Please go ahead.
Thanks for taking my follow-up. Just on the topic of wage inflation, can you put a number on that, what you expect for the financial year 2022, 2023, and potentially also for the subsequent financial year? Trying to get my data bridge right here.
I can give you a best best guess here. It has been quite a jou-
Sure.
It has been quite a journey during last calendar year. I think many of our entities expected round about 3% last year. If I would calculate an average for dormakaba, I think we are right now between 4% and 5%, more like 5%. There are big variances. As I mentioned before, U.S. has been the one that has been running away much faster than, for example, all European countries. The expectations would be somewhere around that also for the next calendar year. Obviously, we have tariff agreements in place in many of our countries in Europe. These tariff agreements normally go from mid-calendar year to next mid-calendar year. Right now the outcome has been 4%-5% in most of the countries.
Okay. Thank you so much.
Thank you. Thank you, Christina. Further comments, questions? Operator.
As a reminder, if you wish to register for a question, please press star and one on your telephone. Star followed by one. Mr. Lee, there are no more questions at this time.
Thank you very much. Since there's no more questions, I will kindly ask for your permission to close these sessions. Definitely very thankful for all your participation in listening in to our first half result release of 2022, 2023. For that, we would like to say goodbye. Until then, see you. Bye.
Thank you very much.