Earnings Call: H1 2021

Jul 21, 2021

Ladies and gentlemen, welcome to the Georg Fischer Mid-Year Results 2021 conference call and live webcast. I am Paolo, the conference call operator. I would like to remind you that all participants will be in listen-only mode, and 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 1 on your telephone. For operator assistance, please press star 0. The conference must not be recorded for publication or broadcast. At this time, it's my pleasure to hand over to Andreas Müller, CEO, and Mads Jörgensen, CFO. Please go ahead, gentlemen. Welcome, and thank you for joining our half-year results conference call. Present on our side are CFO Mads Jörgensen, Head of Investor Relations and Sustainability, Daniel Bösiger, Head of Corporate Communications, Beat Römer, and myself, Andreas Müller. Slide 2. In the first semester of 2021, GF recorded a strong performance and was able to accelerate growth. Most of GF's key markets recovered amidst the ongoing COVID-19 pandemic and the challenging macroeconomic environment. Sales strongly increased by 20% organically compared with the first half of 2020 and came in at CHF 1.835 billion. All 3 divisions contributed to this result. The operating result increased by 120% to CHF 141 million compared with last year's EBIT before one-off items of CHF 64 million. The EBIT margin stood at 7.7%. The GF shareholders' net profit more than tripled to CHF 108 million. GF achieved a remarkable solid free cash flow of minus CHF 2 million compared with a negative free cash flow of CHF 73 million in the prior year period. Demand in key segments such as microelectronics, car industry, medical device production, infrastructure, et cetera, show a positive momentum again. The market environment remains challenging considering the recent and ongoing supply chain constraints and raw material scarcity. The latter, for example, is predominantly responsible for the subdued recovery of the global car industry. Slide 3. Let's have a look at the sales development in the first half of the year. As said, sales increased by a robust CHF 307 million to CHF 1.835 billion, organically up by 20%. GF Piping Systems contributed to this with a strong organic growth of 16% based on a healthy demand in more or less all regions and end market segments. Despite the chip shortage and consequently a subdued rebound of the global car industry, GF Casting Solutions came in 38% above the same period of the previous year. It is noteworthy to mention that the division benefited from a favorable base effect as lockdowns around the world heavily had affected the production volumes of the car industry earlier last year. GF Machining Solutions saw a soft recovery in the first half of the year and has organically grown by 11% on the back of a still subdued order intake in 2020. On slide 4, we highlight GF's monthly divisional and regional organic sales development. The chart on the left shows the overall sales development of the divisions on a monthly basis compared year-over-year. The relaxation of the lockdowns and the rebound of the car industry, compared with an extremely low base in the previous year, are the main reasons for the impressive peak of GF Casting Solutions, light blue, in the months of April and May. GF Piping Systems, the dark blue line, and GF Machining Solutions, the gray line, also record high monthly growth rate in this period. GF Machining Solutions starts to capture its strong order intake of the first half of the year in the month of June, with a monthly organic growth rate of 22%. The chart on the right shows the development of GF in major regions and countries. The early lockdown in 2020 in China, dark green, is still visible with sales twice as high in 2021. The DACH region, light green, was experiencing strong growth in the second quarter, given its later lockdown measures in 2020 compared to China. Growth in the U.S., in gray, was more moderate but also more steady without this pattern of any specific peak, showing growth rate in the range of 20% in the second quarter. It is worth to mention that sales in the aerospace industry continue to remain on a low level. Let's move to slide 5. Asia further increased its share of sales from 30% to 31% with the highest organic growth of 23%, a result of the booming Chinese market. Europe remained on 45% of total sales and has grown by 18%. Growth was well balanced across Europe, with a somewhat stronger development in Southern Europe. The Americas represent 19% of our worldwide turnover and have grown organically by 16%. Let us now turn to slide 6. The EBIT margin rose from 4.2% to 7.7%. In the first half of 2021, GF increased its EBIT to CHF 141 million versus the comparable EBIT before one-off items of CHF 64 million in the same period of 2020. A strong sales development as a consequence of pent-up demand and global growth resulted in well-loaded plants and allowed GF Piping Systems to achieve an EBIT margin of 13%, well above the 11.1% recorded in the comparable period a year earlier. GF Casting Solutions swung back to a positive EBIT with a margin of 2.8%. The division's profitability was negatively affected by metal price effects and subdued demand due to the semiconductor shortage, especially in the U.S. GF Machining Solutions improved its EBIT margin to 2.3%, still somehow subdued, caused by the low order book from 2020. Slide 7. Our recently launched strategy 2025, with a strong focus on sustainability and innovation, is internally and externally well accepted. Its implementation is in full swing. Innovation remains the key drivers for growth. As an example, let me mention how, as part of its accelerated digitalization process, our GF Machining Solutions is offering our customers an innovative live remote assistant on the HMI, which is the human machine interface or in simple words, the control panel for the machine tool. Our GF Piping Systems increased its sensor and actuation product range to offer comprehensive process control and automation. The strong focus on robust end markets such as e-mobility was underscored by the development of additional innovative battery housings at GF Casting Solutions. Lastly, we have inaugurated our competence and exhibition center for medical device production in southern Germany. The center showcases innovative processes and machining technologies for this demanding medical device industry. GF is evolving its culture towards more performance and learning. Many workshops, either hybrid or in person, have been conducted to increase the learning capability of our organization. GF kept a strong focus on sustainability and, in the first half of this year, increased its turnover with products and solutions that created positive environmental or social benefit. In addition, we have published our annual sustainability report in June. Let me move now to slide nine. We show selected ESG key figures for the first half of 2020. The global trend towards a more sustainable world creates for GF new business opportunities. With its innovative solutions, GF focuses on the sustainability needs of its customers, helping them to achieve their own targets. Innovative solutions also reinforce GF's long-term growth initiatives and the generation of a sustainable performance. Many applications of GF have a substantial impact on the CO2 footprint. For example, the picture on the top right illustrates an application where GF supply PVF piping solutions to ensure the safe installation of the electricity transmission at the new offshore wind park in the North Sea. The picture on the bottom right illustrates two GF solutions to bring CO2 emissions down, a lightweight battery housing and an energy-reduced machine tool. Overall, we increased our share of sales of products and solutions with a social or environmental benefit to more than 58%. Total greenhouse gases of the corporation emissions decreased 9% compared with 2019. We reiterate to announce a comprehensive climate target that is in line with the Paris Agreement and the Science Based Targets initiative in early 2022. Let's now continue with the three divisions. Slide 10. GF Piping Systems achieved an impressive organic growth of 16% and recorded sales of CHF 983 million. The operating result increased to CHF 128 million with a corresponding EBIT margin of 13%, which is already approaching our strategic target range of 2025. The division focuses on innovations with a strong impact on sustainability, such as the new full bore Magmeter product range, small picture on the left, a sensor technology which is also used in water treatment, among other applications. The resilience seen in the previous year, as well as the growth in the first half of this year, are driven by the well-balanced global presence and the focus on growth markets and segments. Products for the microelectronics and data center, water and gas infrastructure, and building technology enjoyed strong demand. The integration of FGS Brazil, whose acquisition was announced last year, is well on track despite the ongoing pandemic turbulence in Brazil. The construction of a new factory in Yangzhou, China, is also progressing well. Let's now look at slide 11. Illustrating 3 end market segments of the division. Sales of products for the microelectronic, data center, and photovoltaic segment went up 18% in the first half of the year to CHF 90 million. This segment is especially strong in Asia. Sales of products and services for the water treatment segment increased 13% to slightly above CHF 100 million. Finally, yet importantly, we have seen a strong recovery of the southern European and Asian building technology market, supported by the healthy markets in the DACH regions. The segment has grown by 18%. The marine business slightly picked up for weather on a rather low prior year level. Hence, the strong momentum business in GF Piping Systems is not only geographically well-diversified but also based on double-digit growth rates in key market segments. This further underlines the solidity and progress of the division. Slide 12 illustrates two major solutions for sustainable markets. The picture on the left shows a newly developed non-destructive testing methodology to assess the quality of the weld connection. The testing is using an ultrasonic technology embedded in additive manufactured functional items. 1 out of 300 welds is estimated to be defective and therefore could be harmful, depending on the conveyed media to the environment. In Tahiti, GF supported the seawater cooling application for a hospital with its services and installation equipment, helping our partners to save more than 2 million US dollars on an annual basis in energy cost. The picture on the right shows a photovoltaic production for which our high-purity product range is an ideal solution. In the first half of the year, demand in Asia, but also Central and Eastern Europe, increased in this segment. GF developed an innovative non-destructive testing equipment called VBI to ensure the highest quality level of the installed piping solutions. Let us now turn to GF Casting Solutions. Slide 13. The global car industry has been recovering since mid-last year. As a result, and thanks to the focus on new energy vehicles, organic growth amounted to 38.3%, with sales of CHF 459 million. The global automotive industry grew approximately 30% in the same time. GF Casting Solutions was able to turn the previous year operating loss into an operating profit of CHF 30 million. Nonetheless, the division's performance was negatively affected by the steeply rising cost of raw material, which are contractually passed on to customers and only recouped with a time lag. The subdued demand in the U.S., due to the shortages of semiconductors, was also impacting performance negatively. This specifically affected our light metal facility in Mills River, North Carolina, U.S. China and Europe registered a record demand for e-vehicles in the first 6 months of the year, resulting in a sales increase of more than 60% compared with the same period a year earlier. Let's turn now to slide 14. The slide highlights GF Casting Solutions focus on 3 strategic sectors. Components and solutions for the e-mobility segment have grown by nearly 70%, addressing the CO2 emission reduction targets of all GF customers. As seen on the chart of slide 15, e-mobility was quickly picking up in recent months in Europe and Asia. The light green bars and bubbles represent the pure battery electric vehicles. The blue bar represents the so-called plug-in hybrid car sales quantity. Pure battery vehicles represent in Europe approximately 7% of all newly registered cars, and in China, 12%. All indicators point to a continuation of this trend, especially in the light of the EU targets for 2035 that were published last week. These imply more or less the end of internal combustion engines in Europe. Let us turn back to slide 16. The body and structure cast component segment, which clearly is propulsion independent, continued its growth trajectory and represents now the largest product segment of GF Casting Solutions. Components made out of magnesium and aluminum help to reduce vehicle weight, increasing battery range and reducing emissions. Special turbine blades and structural components for gas engines have grown by 38%. New generation gas turbines are capable to partially use hydrogen as fuel and are mandatory backup solutions for renewable energy sources such as wind and solar. As a summary, growth at GF Casting Solutions is hence, on the one hand based on the industrial rebound, and on the other hand, on the strategical and sustainable focus on growing end markets and applications. Let us now turn to GF Machining Solutions. Slide 17. Sales increased organically by 11.4% to CHF 393 million. The operating result came in at CHF 9 million, which translates into an EBIT margin of 2.3%. Wear sales remain on rather low levels due to the subdued order development in 2020. Order intake in the year 2021 increased by 45% and resulted in a book-to-bill ratio of 1.2 times, as well as an increase in orders on hand of 59%. Strong intakes have been reported in China and Northern Asia, followed by good levels in Europe. The U.S. still remains on a lower level, predominantly because of the high dependency on the aerospace market. Increased order intake came along with an increased utilization of virtually all plants, notably with some room to grow for full capacity. Despite the omnipresent semiconductor shortage and the strong increase in the demand for various raw materials GF Machining Solutions has not been facing severe supply constraints so far. On slide 18, we show the sales development of 4 selected end market segments of GF Machining Solutions. The division's expertise in high-precision automated solutions is a main reason for successful development in the ICT market segment. The recently launched new innovative EDM machines, combined with automation, represent the lion's share of the achieved growth of 29%. The MedTech segment, the only segment that did not decrease last year, has grown by 40% as a result of the integrated multi-technology solutions of GF. A rather new sub-market segment for GF Machining Solutions are e-mobility applications in the automotive segment. GF provides machining solutions for 5 stepping applications for the e-engine production. Aerospace remains a key market segment. New projects are currently under discussion and are expected to materialize in orders in the second half of the year. The energy efficiency of planes, not only driven by upcoming regulations in many countries, but also by sustainability aspects, will therefore play a key role in the jet engine production. On a year-on-year comparison, the segment was down 21%. We note that in the first half of 2020, GF Machining Solutions was still delivering its machining solutions out of orders from the previous years. Let's move to slide 19. The slide exemplarily illustrates 2 out of many innovations at GF Machining Solutions. On the left, we see the most advanced laser texturing machines that can replace chemical etching and eliminate hazardous process materials. This technology is used in the mold and die, but also in the ICT, information communication technology, and MedTech industries. On the right, you see the already previously mentioned digital solution labeled LRA, Live Remote Assistant, on HMI, human machine interface, which allows operators to immediately connect live with the service organization of GF. This solution will increase uptime of the machine and at the same time optimize the machine tool service in a substantially compressed period of time. At the upcoming EMO, the world leading machine tool exhibition to be held in Milan next October, the division will release various additional new digital solutions focusing on service and efficiency. With that, I will hand over to CFO, Mads Jörgensen, for a detailed review of the figures. Thank you, Andi. Ladies and gentlemen, also from my side, and warm welcome. I will now present the consolidated financials of the first half of 2021. On slide 21, we present the order intake for the first semester. GF Piping Systems achieved an organic growth in order intake of 29.8%. This was driven by a number of industrial projects worldwide and by the Chinese market in particular. GF Casting Solutions rebounded from the very low quotes, which happened during the lockdown period in 2020, and the order intake was growing strongly on all three continents. For GF Machining Solutions, the highlight of the semester was clearly the significant growth in order intake. With CHF 471 million order intake, was up 45% organically, implying a healthy book-to-bill ratio of 1.2. Thus, for Georg Fischer overall, a very promising development in the first half. Moving to slide number 22. Here you can see in the last line of the table, the overall sales of Georg Fischer increased by 20.1% to CHF 1,835,000,000. Organically, the growth was almost the same with 20.0%. The three divisions experienced different levels of recovery on the backside of the COVID-19 lockdowns, which occurred globally in the first half of 2020. During the course of the first semester, Georg Fischer Piping Systems experienced a strong surge in demand for industrial and building technology products worldwide. Division came close to CHF 1 billion mark in sales with CHF 983 million, representing an organic increase of 16.4%. For your recollection, the organic decline in sales in the first half of 2020 was only -3.1%. The first semester of 2021, also sales of Georg Fischer Casting Solutions recovered clearly from the lockdowns of the OEMs that we experienced in the second quarter. Sales grew organically, very strong, by 38.3% to CHF 459 million. This compares to an organic sales decline of 27.6% in the first semester of 2020. The European and Chinese automobile markets saw a strong comeback in the first half. From April onwards, the global shortage of automotive semiconductors lowered the growth momentum substantially. Whereas the aerospace investment casting markets remained fairly subdued, the maintenance business of industrial gas turbines picked up considerably. For GF Machining Solutions, the first half of 2021 also developed positively. Sales grew organically by 11.4% to CHF 393 million. The low order backlog when starting into 2021, as well as bottlenecks in the supply chain, caused challenges in fulfilling deliveries. In the first half of 2020, sales declined organically by 21.3% and could therefore not fully be recovered in the first semester of 2021. Nevertheless, the division saw a strong recovery of the ICT, medical, and the traditional automobile businesses. From a technology point of view, the growth mainly took place in the EDM segment and in services, with growth of 36% and 18% respectively. On slide 23, we show the various components of the sales development, starting on the left-hand side with the consolidated sales in the first half of the previous year of CHF 1,520,000,000. The acquisition of Brazil-based FGS, a leading manufacturer of PE piping systems for the water and gas utility markets, was closed at the end of February 2021 and added CHF 111 million to sales. The accumulated effects across all foreign currencies amounted to minus CHF 9 million. Whereas the U.S. dollar's decline against the Swiss franc, both euro and the Chinese yuan appreciated the first half and partly compensated for the negative U.S. dollars effect. Hence, overall sales for GF grew organically by CHF 305 million. An estimated CHF 34 million of this organic growth relates to price increases to compensate for the global surge in prices for a number of key raw materials. We now move on to the EBIT on slide 24. Shows on the left-hand side the EBIT in the Swiss franc, and on the right-hand side, the EBIT margin in %. Please note that in order to make the numbers more comparable, the column for the first half of 2020 shows the EBIT before the one-offs and hence excludes the CHF 7 million negative effects from the GF Casting Solutions, their Döle relocation project. Driven by high growth rates in higher margin industrial and buildings technology products and the leverage from an increase in plant utilization, GF Piping Systems grew EBIT from CHF 94 million to CHF 128 million. This corresponds to a growth of 36%. The EBIT margin increased from 11.1% to 13%, which is an all-time high for a 1st semester for the past 10 years. The Chinese markets were also accountable for a sizable part of the increase in profitability. GF Casting Solutions achieved a turnaround in EBIT from a loss of CHF -25 million faced in the first half of 2020 to record a positive CHF 13 million EBIT in the semester in review. Most European and Chinese plants were able to capture the effect of the strong comeback of the automotive industry. It should not go unnoticed that the situation in the U.S.-based plant in Mills River has become even more challenging. First, key OEM customers were forced to shut down production in February due to severe weather conditions in the southern part of the U.S., and later in the semester, the impact of the automotive semiconductor shortage led to a stop-and-go pattern in the call-offs from key accounts, as their assembly plants were only working two out of four weeks in the months of May and June. This obviously impacted utilization of our plant adversely. In addition, the company faced a delay in certain ramp-up of the projects. On the other side, the investment casting business in Switzerland was able to improve profitability through a combination of cost reduction measures and efficiency improvements. This despite the ongoing subdued aerospace market. The EBIT of GF Machining Solutions increased from CHF 1 million to CHF 9 million. Most of the profitability increase comes from the growth of the EDM and service business. In particular, the Chinese operations contributed significantly. Nevertheless, with an order backlog, which is up more than 50%, we expect to achieve a further improved profitability in the second half. At consolidated levels, the EBIT increased from CHF 64 million in 2020, excluding the one-offs, to CHF 141 million, equal to an increase of 120%. As a result, the EBIT margin improved on a comparable basis from 4.2% to 7.7%. As mentioned earlier, during the course of the first half of 2021, the prices for key raw materials increased substantially. Due to compensating price increases, Georg Fischer was able to more or less eliminate the adverse effects on profitability. Slide 25 shows details of the currency impact. Compared to past years, the effects of currencies were less pronounced in the first half of 2021. Overall, the currency effects on sales amounted to approximately minus CHF 9 million, compared to almost 10 times more adverse effects in the same period of the previous year. The main part of the currency effects was attributable to GF Piping Systems. This is caused by the division's exposure to many different foreign currencies. GF Casting Solutions was impacted by the appreciation of the euro and the Chinese yuan, and GF Machining Solutions, on the other hand, was impacted by the declining US dollar. The relative high-level effects of EBIT relates to the high volatility of the US dollar in the past six months. Overall, the biggest positive effect was from the euro and the Chinese yuan, with CHF 18 million and CHF 14 million respectively. Unfortunately, as in other years, the decline of the Turkish lira continued throughout the semester and accounted for a negative effect of -CHF 13 million on sales and CHF 1 million on EBIT. Slide 26 brings us to the income statement of the corporation. As mentioned earlier, sales increased by 20% to CHF 1,835,000,000. Gross value added increased by CHF 151 million compared to previous year, growing by 27%. The over-proportionate growth in growth value added is due to the following factors: favorable changes in inventory, lower foreign currency-related losses, and lower growth in operating expenses due to the general lower level of activity. Gross value added in percentage of sales has increased from 36% back to 38%, which is at the level of 2019. The personnel cost increased only by CHF 60 million or 14%, which is worthy of the increase in sales and highlights the operational leverage of the organization. The increase in costs was caused by a related increase in headcount of 740, thereof 243 relating to the acquisition of FGS in the GF Piping Systems division. Secondly, the reduction of short time work compensation added CHF 24 million of cost compared to the lockdown period of last year. Overall, the cost ratio decreased from 29% to 27%. The EBITDA increased by CHF 91 million to CHF 209 million, and the EBITDA margin increased from 7.7% to a strong 11.4%. Depreciation and amortization increased by CHF 7 million. Of this increase, CHF 3 million relates to a value adjustment to outdated and obsolete production equipment in one Georg Fischer systems plant in the U.S. Moving on to the financial results, which increased marginally from -CHF 10 million to -CHF 11 million. The small increase mainly relates to the additional interest expense from the new CHF 200 million COVID bond placed in 2020. Another factor was the reduced interest income from Fondium, the former iron casting business in Germany. Income taxes, as you can see, increased from CHF 9 million to CHF 27 million. This corresponds to a decrease in tax rate from 22.5% in 2020 to 20.8% in the period under review, and is largely back in line with the tax rate that we have seen in previous years. The reduction was mainly caused by a substantial decrease in loss-making entities due to the global recovery. Finally, net profit attributable to Georg Fischer shareholders increased from CHF 34 million to CHF 108 million. Turning to slide 27, which shows the balance sheet as of 30th June 2021 compared to the 31st December 2020. The liquidity situation of Georg Fischer remains strong. Cash and cash equivalents only decreased by CHF 63 million to CHF 778 million. This seasonal use of cash is well below previous year's level. Due to the strong growth in sales and trade accounts, receivable increased from CHF 550 million at year-end to CHF 705 million. The days sales outstanding remain stable around 65 days compared to year-end. Inventories and stock increased from CHF 638 million to CHF 780 million. This was related to the increase in production as well as our discretionary decision to build up safety stocks for specific parts and materials in light of the persistent supply chain constraints. Days inventory outstanding, nevertheless, decreased from year-end 110 days to 108 days by mid-year. Current liabilities increased from CHF 986 million to CHF 1,128 million. Around CHF 72 million relates to an increase in accounts payable, leading to an increase in days payable outstanding from 62 to 72 days. The equity ratio remains strong at around 39%, close to the ratio at year-end. Slide 28 shows the development in free cash flow. The higher EBITDA has a significant positive impact on the operating cash flow. The increase in net working capital is largely due to the significant growth in sales mentioned earlier, but is clearly under proportion. In the first half of 2021, GF was able to achieve a positive operational cash flow of CHF 59 million. Investments in property, plant, and equipment amounted to CHF 61 million. That's CHF 9 million lower than the previous year. The decrease is not intentional and is related to delays in some strategic investments, for instance, the new GF Piping Systems production plant in Egypt. We have seen these projects to gain momentum again and to be implemented in the second half. This overall leads to a negative free cash flow before acquisitions of only minus CHF 2 million. It marks the fourth-best free cash flow before acquisitions over any of the first semesters of the past 15 years. In slide 29, we have summarized the key figures. Net debts decreased substantially by CHF 214 million to CHF 206 million. The net debt EBITDA multiple decreased accordingly from 1.52x to 0.53x, among the lowest ratios over decades. Return on invested capital increased year-over-year by 5 percentage points to 15.8%. GF Piping Systems with 31.6% clearly earned over and above its cost of capital, whereas the ROIC of the other 2 divisions still remains low, despite positive momentum observed in the period under review. Increase at corporate level was mostly attributable to the increase in net operating profit after taxes. Can we see that adjusted for the one-off effects, the ROIC is 6.3% in the first half of 2020. The number of employees increased by 740. Acquisition of FGS accounted for CHF 243, followed by an increase in headcount in GF Casting Solutions and optimization of capacities of Georg Fischer Machining Solutions. Let me finally summarize the first semester of 2021 in a few words. GF acted agile and adapted swiftly to capture the global surge in demand. We managed the cost base and the net working capital strictly, and demonstrated our ability to substantially improve free cash flows. The ROIC above 15% highlights that we are back to create value for our shareholders. As we stand now, our balance sheet remains solid and the liquidity abundant for future strategic investments. Thank you very much for your attention. I'll now pass on to Andreas Müller. Thank you very much. Let's move on to slide 13. Thanks to the leading positioning of its 3 divisions in their end markets, GF is well-positioned to address the upcoming needs of their customers, which are more and more driven to impact positively all aspects of sustainability. We expect that markets will continue to further recover and grow in the second half of the year. Government infrastructure projects will further support the development of national economies. Barring unforeseen circumstances, including a COVID-19 resurgence, we expect sales growth in the double digits for the year 2021, as well as a significant increase in profits. However, it is worth to note that supply chain constraints and raw material scarcity remain the biggest headings. With that, we conclude our presentation and are ready to take your questions. We will now begin the question and answer session. The first question comes from the line of Walter Bamert from Zürcher Kantonalbank. Please go ahead. Good morning. Last year, at the same time, you guided for an operating result in the second half at comparable level to the first half. Could you explain which parameters you expect this time to differentiate significantly between H1 and H2? Thank you very much for your question. I think, as said, barring unforeseen circumstances, we expect an organic growth in the second half of the year in the upper single digits. That would result in mid-teens double-digit organic growth for the entire year 2021. That would also give us the chance, or the chances would be intact, to achieve a similar performance, EBIT performance, in the second half of the year 2021. You mentioned the raw material effect for the individual divisions, and I especially remember that you said there is a lag of about 3 months. That would mean you already experienced the need to increase prices in the casting, but that will continue as prices are keeping up at a very high level. Is that correct? Thank you very much for this question. I just summarize, you're talking about the time lag in passing on the raw material prices in our Casting Solutions divisions, where we predominantly talk about the aluminums and the magnesium raw materials. Here we are contractually allowed, if they go up and down, to adjust these. Normally, they have a time lag in the range of 3 months. That means what we have seen, the steep rises in the first half of the year, particularly comparable with the last month of last year, that prices are partially being now passed over to the customers, and that will continue to be passed over to the customers. If prices continue to rise, that will come ultimately exactly with the same time lag. How is that material effect for Piping Systems? I think, Mats, you want to manage this? Yes, I can. For piping systems, it is a different situation, where there are no contractual restraints in managing the pricing. GF Piping Systems is a premium provider, thus it has a good pricing power in the market. Traditionally, we have been able to pass on increases of the raw material cost to the market, and it has actually no adverse effect on the EBIT. If we remain where we are with the prices today, you should not expect that we would increase prices further in the second half. We are more or less compensated to the current level at the moment. Thank you. Does this answer your question? Thank you very much. Thank you. The next question comes from the line of Charlie Fehrenbach from AWP. Please go ahead. Charlie Fehrenbach. Mr. Fehrenbach. Hello? Mr. Fehrenbach, we did not understand your question. Yeah, sorry. I got Mr. Fehrenbach's remark in between. Okay. The EBIT margin of GF Casting Solutions and GF Machining Solutions is still between 2% and 3% on a low level. How far do you think these margins can recover in the current year? Thank you. Thank you very much for your question. I think, GF Machining Solutions definitely will recover its margins on the back of the strong order book, what we have seen now mid-year. I think orders being up more than 40% in that division, that will bring relief, but also obviously, an increase in its EBIT margin. With GF Casting Solutions, we have to be aware that the second half of the year is marked by two holiday months, so we cannot see August, but also December, but still let you know we assume that also a slight recovery is possible in that division. Thank you very much. The next question comes from the line of Bernd Pomrehn from Vontobel. Please go ahead. Good morning, gentlemen. It seems that the efficiency of the light metal casting plants in Europe and the U.S. was quite negatively impacted by highly volatile customer orders. Is there anything, for example, regarding production planning, flexibilization of production plants or contract structuring you can do to sustainably improve margins of these plants? Thank you. Thank you very much for your question. Yes, you're absolutely right. Currently our light metal foundry in the U.S. has been marked by the subdued and volatile customer call-offs. As mentioned by our CFO, Mads Jörgensen, we had on short notice reduction of call-offs by more than 50%. That means out of 4 weeks of production, sometimes only 2 weeks of production have been called. However, what has to be said here, this is a new company, which we are ramping up over the last couple of years and also still ramping in new projects. Labor cost in the U.S. is one of the key drivers, and therefore flexibility in terms of cost base is limited. We keep our people, which we are ongoing training, to cope with the challenges of this situation. However, we are going to see improvements, particularly towards the end of this year in terms also flexibility, but also resiliency to call-offs, which are very volatile. Our European plants are much better off in regards to that one, since they are well-established facilities and they can react. Also to be said here, the erratic call-off situation in Europe is not as that bad as it is in the U.S. It's much more plannable and foreseeable in Europe. Okay, got it. Thank you very much. The next question comes from the line of Christian Obst from Baader Bank. Please go ahead. Yes, good morning. I have 3 questions. One is the utilization rates in machining are still below a sufficient level. Can you give us an indication of these rates, maybe in Europe and in China? What do you expect in the next 6-12 months there? Coming to free cash flow on the second half, which will be the main driver for the free cash flow, which is normally very strong in the second half compared to the first half. What will be the main driver for you now in this second half? The last question is on M&A. Can you give us some kind of an update of the current market description or your M&A pipeline? Thank you. Thank you very much for your 3 questions. I will give you an answer on the question 1 and 3, and our CFO on the number 2. First of all, our capacity utilization across the world. If I'm not mistaken, you specifically asked about our Machining Solutions division? Yeah. Our Machining Solutions division is currently loaded on average of 70% across the world, with strong development in China, more or less at their standard capacities. There's still some room for additions, and the European ones, in particular the Swiss ones and the American one, have been subdued. Also, here we have seen the low order intake in the aerospace business giving its marks on these facilities and factories. Overall, as said, it is 70%, and you're going to see a slight below number of that in Europe.The M&A pipeline, your third question, this is something which is obviously quite intensively managed by us, or whether, as we have seen already in the past, acquisitions require its time. For example, the FGS acquisition, which we did earlier this year, is being prepared for a couple of years, and the first contact actually happened already 10 years ago. It will take some time. We are not the only one looking for targets at this point, I think. We continue to intensify our activities in the M&A sector. I think I need the microphone shortly for the question. Free cash flow, our expectations for the full year is at the upper end of our range. We would probably say CHF 175 million to around the CHF 200 million mark. Please recall, free cash flow last year ended up, free cash flow before acquisitions, ended up at CHF 230 million. However, as you can see from the cash flow statement at year-end, that also contains a one-off positive effect of CHF 23 million, which stems from the sale of a number of properties in Switzerland. That, of course, will not also be happening in this year. The driver of the free cash flow will be the increase in profitability. As you can probably understand, the element net working capital is a difficult number to manage out of CHF 1.4 billion invested capital, around CHF 850 million. It's net working capital. Depending on an acceleration or a deceleration in the business towards year-end, we can have a different number there. That's why we are remaining in that range of guidance for the full year. Okay, perfect. Maybe I have an additional question on that or on the cost side. You are improving your underlying profitability by implementing measures to reduce the structural cost base. Will there be some sufficient see-able impact in the next 6 to 12 months from the measures you are currently taking? We have announced a cost reduction efficiency improvement program called Fast Track, which in its end state was supposed to generate about between CHF 100 million to CHF 120 million of improvements. We should expect for the full year, you see already part of the results in the numbers as they are here at half year. At full year, we should be coming up to the target that we have been setting a couple of years ago. Okay, perfect. Thank you very much. The next question comes from the line of Alessandro Foletti from Octavian. Please go ahead. Yes, good morning. Thank you for taking my questions. I have a couple. Can I go back on the price effect in the casting division? The aluminum prices were up about 25%-30% in the first half of the year. Now, considering the three months lag, can you quantify a little bit of the 38% organic growth in sales that you had there? How much of that comes from the prices, really? Okay. Shall we take the questions one by one? Yes, because they are all connected. I'm staying around this topic. Okay. They're all connected. First of all, yes, on an average year-over-year, and it depends a little bit on which kind of aluminum. The casting division is mainly relying on secondary aluminums, that means recycled ones. These prices have seen a steep rise in the first six months compared to the last three months of 2020. We talked here about a price increase of 7%. Okay 30%. We have to be very specific in regards to which kind of trends of aluminum we got to take. The three months is on average now, it'd be in the range of two to four or sometimes even a little bit more. What we gonna have seen now towards the end of the first semester, we have seen the first price increase. Overall, out of this organic growth, there's only two percentage points growth through the metal price increases, which we could pass on to our customers in the first half of the year. All right. Thank you. That's very important. Now, same question for the orders. They were up about 80% organically, I believe. Could you repeat, Mr. Foletti, just repeat the question? I wonder if on the order intake, you published CHF 462 million order intake for GF Casting Solutions. That's up 80%. I imagine the organic growth is probably similar because FX was not a problem. I wonder if in the orders, that effect of prices is much more than this 2%. I think the orders increase effect is, let me say, marked by 2 effects. First of all, a pretty abnormal 2020 first half, where we have seen cancellations of call offs, which obviously reduced in the month of April, if I'm not mistaken, last year, orders to a zero, right. Which is also not completely correct because we still had a base of 40% sales in that month. Order intake has been distorted by the rather turbulent situation which we have been faced last year. The 80% growth. You're right, the order intake is slightly marked with a higher material price inflation. I would guess that it is at least in the range 5% plus. Okay. Let's take this 5% plus. Maybe it's a touch more than that. This is something that should now come into your sales in the second half of the year. I'm trying to understand how the development is in sales, and then also how much you lost basically on EBIT, which you then should recover then in the next six months. I think, Philippe, the answer is quite straightforward. There is a negative effect on our result in the range of a high, mid-high, single-digit number. We talk about approximately CHF 7 million negative effect of this metal price time lag invoicing. Most of that, we will normalize the price levels which we can invoice to our customers during the course of the second half of this year. Okay, great. That answers my questions on the subject. Thank you very much. You're welcome. That was the last question. All right. We would like to thank you for your attention and the interest in our company, and looking forward to meet all of you in person with the year 2021 figure presentation in March 2022. Ladies and gentlemen, the conference is now over. Thank you for choosing Chorus Call, and thank you for participating in the conference. You may now disconnect your lines. Goodbye.