Ladies and gentlemen, good morning. Welcome to the half year results of Georg Fischer conference call. I'm Irwana, the Chorus Call operator. I would like to remind you that all participants will be listened only mode and the conference is being recorded. After the presentation, there'll be a Q&A session. You can register for questions at any time by pressing star and One on your telephone. Should you need assistance, please press Star and Zero to call an operator. The conference must not be recorded for publication or broadcast. At this time, it's my pleasure to hand over to Mr. Yves Serra, CEO of Georg Fischer. Please go ahead, sir.
Thank you very much. Ladies and gentlemen, welcome, and thank you for participating to our half year conference. Present on our side are Andreas Müller, CFO, Daniel Bösiger, Head of Investor Relations, Beat Römer, Head of Corporate Communications, and myself, Yves Serra, CEO. I'm happy to report, slide two, that the positive momentum we enjoyed last year continued during the first half of 2018. Sales increased 20% to CHF 2,396 million for an organic growth of 12%. All three divisions and all regions did contribute to the increase. The operating results went up 24% to CHF 208 million, resulting in an 8.7% return on sales against 8.4% in the first semester of 2017. The return on invested capital was up two percentage points to 21.2%. The net profit after minorities increased by 27% to CHF 150 million.
I think the first half figures show that we're well on track regarding the implementation of our 2020 strategy. Moreover, the portfolio of GF Automotive has been enriched with the acquisition of Precicast in Switzerland, a leading precision casting specialist in the promising aerospace and gas turbine field. As a consequence, the division has been renamed GF Casting Solutions. Slide three shows that all three divisions did contribute to our top line increase. This time around, GF Casting Solutions had with 28% the highest growth supported by acquisitions, but also the EUR, which did appreciate compared to the first semester of 2017. GF Piping Systems and GF Machining Solutions with 15%, respectively 18%, also did increase their turnover in a significant manner.
On slide four, you will notice that the overall profitability increase from 8.4% to 8.7% mainly comes from the strong performance of GF Piping Systems, which increased again its EBIT margin from 11.7% to 12.1%, and GF Machining Solutions, whose return on sales was lifted up from 6.3% to 8%. On the other hand, GF Casting Solutions saw its operating margin slightly decrease from 7.3% to 6.5%. Slide five shows that all three divisions did generate a substantial amount of value for our shareholders in the first half year. All three had a return on invested capital over 20%, and that's clearly above our 7.5% cost of capital, resulting for the corporation in a 21.2% return on invested capital. Turning now to all three divisions, starting with the largest one, GF Piping Systems, slide six.
Thanks to its good position in growth markets, the division increased its turnover by 15% to CHF 947 million. Organically, that's a growth of 11%. The highest growth was achieved in its industrial applications. While the treatment, for example, chemical plants or even semiconductor plants, a sector which especially in Asia, has witnessed a strong expansion. The picture of the slide shows some of the very specialized piping systems we deliver for wafer fabs. A growth in utility and building technology was also sustained, especially in the U.S. and in China for gas distribution and in Europe for building applications.
GF Piping Systems increased again its operating profit by 19% to CHF 116 million, thanks to the additional load at most plants, but also thanks to its focus on high-value products and businesses, which bore fruits. In addition, the recent acquisitions of 2016, 2017 were accretive to earnings. The division, slide seven, is also launching several promising digital products, such as a new thermal water sterilization system for hospitals to prevent Legionella and digital valves for its industrial applications. The aim is to facilitate online monitoring and calibration, as well as easily customize processes at our customer sites. Turning now to GF Casting Solutions, slide eight. The division enjoyed a high growth of 28% for a turnover of CHF 924 million. Free of acquisitions and currency effects, growth stood at 11%.
Taking into account that raw material price increases are passed on to customers, the actual volume growth was 9%, which is to be compared with a 2% growth for the car industry worldwide this year so far. The division benefited from a good demand in the truck sector, but also from a growing demand for its lightweight components made of aluminum and magnesium. An example of which is a pictured door seal frame. Worth noting is that electric and hybrid cars accounted for 30% of all new lifetime orders in the first half year. The division increased its operating result by 13% to CHF 60 million, but its operating margin retracted somewhat to 6.5% as raw material-related price increases actually reduced profitability and the ramp-up cost of its new light metal plant in the U.S. went up in preparation for the production start at mid-year.
The recent acquisition, slide nine, of Eucasting in Romania, an aluminum light metal foundry, and Precicast in Switzerland, had a good start and are both accretive to earnings. Going now to GF Machining Solutions, slide 10. The division has lifted up its performance. Orders were up 8% to CHF 551 million, thanks to strong demand in Europe and in Asia. Sales reached CHF 525 million, an increase of 18%. Organically, that's a growth of 14%. As you can see on the slide, part of the growth stems from new connected devices, which generate a lot of demand for new electronic components, be it in cars or for new home appliances. The operating results increased by 50% to CHF 42 million, which leads to an 8% operating margin, against 6.3% in the first half of 2017.
The new products launched in 2017, slide 11, did contribute the most to this profitability improvements. Be it the new generation of wire cut electro discharge machines on the left, well suited among others, to the precise production of medical components, or the new milling machine for the fast machining of complex gears, as you can see on the right part of the slide. I now yield the microphone to our CFO, Andreas Müller, for a closer look at our first half figures.
Thank you, Yves. Ladies and gentlemen, welcome also from my side. It is once more a pleasure for me to present the half year figures 2018. On slide 13, we show the sales per division. The corporation reached sales of CHF 2.396 billion, corresponding to an increase of 20.3%. Besides the strong momentum in the markets, currencies such as the Chinese renminbi and euro strongly contributed to this development. Organically, sales increased by 11.9%. GF Piping Systems continued its positive development in the first half of 2018. As compared to the first half of 2017, sales grew by CHF 121 million to CHF 947 million, a 14.6% increase. Organic growth came in at 11.1%. GF Piping Systems accounts for 39% of the group sales. Sales of GF Casting Solutions reached CHF 924 million, up by 27.8% from first half of 2017.
Since most of the division's sales are realized in Europe, the currency impact was substantial. In addition, recent acquisitions nicely contributed to the sales growth. Organic growth came in at 11.3%. Rising metal prices inflated sales by 2.5 percentage points. GF Machining Solutions grew by 18.2% to CHF 525 million. All regions and technologies nicely contributed to this development, headed by Asia and Europe. All three divisions end the first semester with double-digit growth. Slide 14 shows the distribution of the sales growth per key factors. Acquisitions contributed CHF 69 million or 3.5 percentage points to the overall growth. The stronger euro and Chinese renminbi were the main drivers for the positive impact of CHF 97 million. Organic growth amounted to 11.9%, including on corporate level, one percentage point for metal price increases. On slide 15, we outline the regional sales development.
Sales in Europe increased by 22% as compared to first half of 2017. Organically, by 8.5%. All three divisions increased their sales in Asia. As a result, the group sales in this region have been up by 22%, organically 17%. Americas grew by 18%. Organic growth came in at the same level as currency and acquisition effects offset each other. The growth in the rest of world was heavily impacted by the Turkish lira devaluation. Organically, this region grew by 7%. On slide 16, a few more details about the CHF 97 million currency impact on sales. GF Piping Systems and GF Machining Solutions have not been substantially impacted by the currency fluctuations since their exposure is well-diversified globally. On the contrary, GF Casting Solutions generates 80% of its sales in Europe-based countries, and therefore, sales were strongly supported by the 9% euro appreciation year-on-year.
As you can see on the right side of the slide, the weaker US dollar and Turkish lira have basically compensated the positive contribution of the Chinese renminbi. The euro contributed the most with CHF 93 million. Let us continue with Slide 17, EBIT and operating margin per division. Year-on-year, GF Piping Systems increased its EBIT by 19% to CHF 115 million. The EBIT margin went from 11.7% to a strong 12.1%. Main drivers for the good performance were the achieved high capacity at our plants, as well as the increased sales of high-value products and solutions. The recent acquisitions were accretive to earnings. GF Casting Solutions increased its EBIT by 7 million to CHF 60 million, but the operating margin went down from 7.3% to 6.5%.
The recently acquired foundry in Romania and the precision casting company in Switzerland were both accretive to the earnings of the division. GF Machining Solutions recorded an EBIT of CHF 42 million, a strong increase of 50% year-on-year. The operating margin went up by 170 basis points to 8%. Main pillars of this development are the healthy demand for its new innovative products, as well as the high capacity reached at our facilities. The corporation could grow its EBIT by 24% to CHF 208 million, with a resulting EBIT margin of 8.7% year-on-year. All three divisions show a double-digit increase in their operating results. On Slide 18, we see the details of currency impact on EBIT per division. As a consequence of the strong appreciation of the Swiss franc in 2015, we implemented measures to naturally hedge our currency exposure.
Main focus has been on the euro-Swiss franc business relations. On the left side of the slide, you can see the impact per division. GF Piping Systems euro gains have been partially offset by the US dollar and Turkish lira depreciation. GF Casting Solutions could benefit both from the stronger euro and Chinese renminbi. The US dollar and euro currency effects on GF Machining Solutions are offsetting themselves and are therefore negligible. Whereas the US dollar and the Turkish lira reduced the overall result, the euro and Chinese renminbi had an accretive effect with CHF 8 million and CHF 4 million respectively, bringing the total currency impact on EBIT to a positive CHF 6 million. Let me turn now to Slide 19, the income statement of the corporation.
As mentioned at the start of this presentation, group-wide sales reached CHF 2.396 billion in the first half of 2018, resulting in a year-on-year growth of 20%. The gross value added went up by 17%, while in line with the actual underlying business growth, taking into account inflationary effects such as metal price increases at our division Casting Solutions and positive currency contributions. Personnel costs went up by 15% and came in at CHF 595 million. One third of the increase is due to the currency developments. Four percentage points come from acquisitions. Ordinary headcount and salary increases account for approximately 6%. The EBITDA could be increased again and amounted to CHF 282 million, CHF 47 million above the same period of last year. Because of the higher capital expenditures and acquisitions, depreciation went up by 10% to CHF 74 million. The EBIT increased by 24% to CHF 208 million.
The financial result was basically on the same level of last year, where income tax remained stable on a reasonable level of 20%. Net profit after minority interests went up to CHF 150 million, a strong increase of 27%. Slide 20 displays the free cash flow developments. The higher EBITDA was offset by the increase in net working capital. The good performance in regards to our accounts receivable and inventory management could not compensate the increase of the respective balance sheet positions due to the strong volume growth, especially in the second quarter. The operating cash flow came in at CHF 46 million, slightly below the level of the first half 2017. Investments in property, plant, and equipment went up to CHF 94 million. The main drivers remain the new facility in Biel and the new light metal foundry in North Carolina.
Cash flow from acquisitions amounted to CHF 142 million, a result of the recently acquired Swiss-based Precicast Group. Free cash flow before acquisitions, due to the reasons explained, was below last year's figure and came in at seasonally driven minus CHF 55 million. For the full year 2018, however, we confirm our free cash flow before acquisition target range of CHF 150 million-CHF 200 million. On slide 21, I would like to summarize the key figures. Year-over-year, net debt increased due to the acquisition of the Precicast Group. However, the net debt/EBITDA multiple remains below one. In April, we successfully issued a CHF 200 million 10-year bond, further strengthening our balance sheet and debt maturity profile. Organic growth of 11.9% was even stronger than the 8.4% achieved during the first half of 2017.
The return on invested capital increased by two percentage points, whereby the better operational performance outweighed the increase of the invested capital of CHF 256 million, driven by the new facilities in North Carolina and the recently acquired Precicast Group, besides the operational increases. Earnings per share increased by CHF 8 and amount to CHF 37 as of the end of June. Our numbers of employees went up by 1,946 people, out of 1,434 employees have joined the corporation through acquisitions. Thank you for your attention. For the outlook, I will pass on to Yves.
Thank you, Andi. Well, ladies and gentlemen, we are now exactly at the midterm of our 2016-2020 strategy. Looking back at the first half of 2018, slide 23. Organic growth is with 12%, well above our annual average target of 3%-5%. Both return on sales, that's 8.7%, and our return on invested capital with 21.2%, are well in line with our profitability target ranges of 8%-9%, respectively 18%-22%. Sales have been expanding fast in the growth markets of Asia and America, thus reducing stepwise our dependence on Europe, which is our first strategic thrust. Our shift to higher margin businesses, our second thrust, is proceeding apace, and margins have been clearly increased, at least at GF Piping Systems and GF Machining Solutions.
Our third thrust, our strong focus on customer-driven innovation, is being intensively pursued in order to anchor this important skill set into our culture. This is part of investments into our future. What do we expect for the full year 2018? Slide 24. Our momentum remains positive at all three divisions. GF Piping Systems enjoys a high growth, especially for its industrial applications. At GF Casting Solutions, the demand for lightweight components, our specialty, remains strong, and newly acquired companies are expected to contribute additional volume. At GF Machining Solutions, the order book stands at a very high level. Therefore, barring unforeseen circumstances such as potentially escalating trade tensions, we are confident to achieve a sales growth clearly over our 3%-5% annual target.
Profitability figures went in line with our 8%-9% target range for the ROS and 18%-22% range for the return on invested capital. This concludes our presentation. We are now ready for your questions.
We'll now begin the question and answer session. Anyone who wishes to ask a question may press star and one on their touchtone 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 handsets while asking a question. Anyone who has a question may press star and one at this time. The first question comes from Joern Iffert from UBS. Please go ahead.
Hello, gentlemen, thanks for taking my questions. The first one would be please on piping systems. You're speaking about improving product mix and good utilization supporting operating leverage. However, the EBITDA margin, which should reflect this, was in brackets only flattish year-over-year in the first half 2018. Can you elaborate if you see improvements in the second half coming from these two value drivers? Second question would be please on the raw material cost side. Where do we stand here right now? Have you adjusted all your prices already, and should we see the benefits in the second half, in particular also then in the division casting solution? Third question on gross profit margins, can you confirm that the gross profit margin was up year-over-year except for casting solutions, so in piping and in automotive?
Where do you see the trends here also for the next 12 months? Thanks very much.
Okay, thank you very much. I think we have three questions. One is about the EBITDA, right? Second about the material cost, and third about the gross profit margin at all three divisions. Maybe I'll start with the last one. Yes, I think the gross profit margin increased at GF Machining Solutions and GF Piping Systems. I think the main reasons were the focus on higher value, higher margin businesses and products. At GF Casting Solutions, as we explained in the text, basically, we had the high cost in the U.S. in preparation for the so-called start of production. We had headwinds due to the raw material price increases, which reduced the profit margins. Regarding material costs, yes, we have had headwinds in material cost in the three divisions. In plastics for GF Piping Systems and especially in metals for GF Casting Solutions.
For example, the scrap iron went up 20% during the first six months. Yes, we have had some material cost headwinds. We passed on part of it, but with a delay, especially at GF Casting Solutions. Okay. At GF Piping Systems, we increase the prices months after months according to increase of material cost. But of course, there's also a bit of a delay, right? Regarding the third question, the EBITDA margin, right? You have seen the EBIT margin is up 330 basis points, right? EBITDA margin is up about the same. I think yes, there have been some headwinds in material costs, but overall, I think the focus on higher margin businesses is paying off in our view.
All right, thanks. Then to sum it up, what you have stated on the price increases and the mix benefits, shall we expect that the EBIT in the second half can reach a similar level like in the first half on group level?
Well, it will depend whether the material costs continue or not, right?
Things are spot rate.
Yeah. The material increases, material prices. If material prices continue to go up, we just chase them with a two to three months delay, right? That's a bit the dilemma we don't know. We don't know what will happen with material costs. All things being equal, I think there should be no major change as far as gross margins are concerned.
All right, thank you.
The next question comes from Charlie Fehrenbach from AWP. Please go ahead, sir.
Good morning, gentlemen. You mentioned the trade dispute between the U.S. and other regions. How big are your sorrows concerning this, really? Together with this, you have a big exposure to the German car market. If Germany sells less cars, you will lose sales there. How do you see this situation? Also a familiar question, how does the trade agreement between Europe and Japan, does this have any impact on Georg Fischer? Thank you.
Well, thank you very much for your questions. Basically, the trade disputes issue, as long as it remains at the present level, the effect is minimal because the only effect we have so far is on the export of some machine tools we make in China to the U.S. This affects less than 0.2% of our sales. Basically, we don't know what the next steps in this trade dispute will be, but as long as it does not escalate more than that, it will be quite minimal. If it escalates, then we'll see. The German car markets, I think the same comment. It will depend very much whether the disputes between the EU and America can be solved or not. On the other hand, we have a, let's put it this way, well-balanced exposure. We have an exposure in Asia.
We also have not only the German car manufacturers, but the truck manufacturers and all the manufacturers in Europe, America, and Japan as customers. It's difficult to say. In the EU, Japan free trade agreement does not affect us much because basically Japan is for us, a market of about, let's say, CHF 100 million. It accounts for about 2% of our sales.
Thank you very much.
The next question from the phone comes from Michael Isberg from Bank Vontobel. Please go ahead, sir.
Good morning, gentlemen. I would have maybe three questions. Firstly, just really the highlight for me was the Machining Solutions, and the EBIT margin there of 8%. This is basically on the upper end of your midterm guidance. Do you think this 8% is sustainable, or would you see some pushback and this was just kind of a very good half year for you in Machining Solutions? Maybe another question on financing costs with this new financing that you secured lately. Can you maybe give us a guidance how we should model our financing cost forecasts going forward? The third question would be on CapEx. In the first half, we've seen quite an increase compared to the last year CapEx. What is the guidance there, if you could maybe comment on that?
Well, thank you very much for the questions. I think I will answer the first and our CFO Andreas Müller will answer question two and three. Regarding Machining Solutions, I think the stepwise shift we have done the last five years towards market segments like aerospace, like medical, like ICT, information communication technologies, is slowly paying off in terms of margin, and therefore we think it's sustainable.
Okay. Thank you.
In regards to our recently successfully launched new bond of CHF 200 million with a maturity of 10 years, there will be rather a marginal impact on our finance costs since the replacing bond in September currently carries a coupon of 1.5% versus the new one carries a coupon of 1.05%.
Therefore the impact is rather negligible. In terms of capital expenditure guidance, we remain for the year end on our forecast of CHF 200 million-CHF 220 million, whereas the most investments will take place in our new Biel facility as well in the North America facility in Mills River. Both of them are clearly investments into the future
Of our corporation.
Okay. Thank you very much. No further questions from my side.
For any further questions or comments, please press star and one on your telephone. The next question from the phone comes from Armin Eichberger from Zürcher Kantonalbank. Please go ahead, sir.
Hello, gentlemen. Just, I didn't get the last one, the CHF 200 million-CHF 220 million CapEx, you said two projects. One is Carolina and the other project?
Is our new innovation and production facility center Biel for Machining Solutions.
My questions regarding casting solutions in second half year. I see material you don't know the influence, but from the side from Carolina, with the start up there, do you see similar costs to bear in second half year? In general, my question would be, what do you expect for EBIT margin in second half year? It should be higher, isn't it?
Thank you very much. I think for the new plant in South Carolina, we'll start the production of one component. Right? I think in November, we start the production of second component. Of course, the cost will increase. We get a bit of revenue. Right? It will not be enough to compensate the cost. Therefore, for 2018, I mean, we'll certainly make losses in this plant. We don't know whether the losses will be in the second half at the level of the first, but probably not so far. We expect an improvement of situation in 2019 as long as more components come on stream. For the time being, we need to have the people there to start with all the prototypes, the first series for five, six components, whereas one and or two components will be sold this year.
It will be stepwise increase in production as usual, and therefore we expect a break-even, let's say, more in 2020 and the profit in 2021.
My other question regarding the war Mr. Trump started. Well, you mentioned where you see no problems at the moment, but where do you fear some problems? Where could some problems arise, especially if there will be some new taxes on cars from Europe in the U.S. and vice versa?
It is difficult to say. The main effect of a trade war would be felt globally and first on the customer sentiment worldwide, right? If there is a All companies will be affected, I assume. It is difficult really to say whether it is a bit of bluff or a lot of bluff or no bluff at all. Right? I think we take it as it goes. Basically for us, what is important is to produce where the customers are and to be well diversified per customer geographically, so at least we can compensate one continent with the other and one country with the other. If one, for example, car manufacturer is doing less well, then we sell more to the other because customers buy more cars from the others.
I mean, in the U.S., we have a lot of orders now from U.S. car manufacturers as well. We could also imagine that sales could go up in the U.S. and so on and so forth. Difficult to speculate today, frankly speaking.
Okay. Thank you.
The next question is a follow-up question from Mr. Joern Iffert from UBS. Please go ahead.
Sorry, gentlemen, that I'm coming back. Just two follow-up questions, please. The first one is, it wasn't 100% clear to me regarding the question in GF Piping Systems. If I'm not totally wrong, the EBITDA margin was flattish year-over-year in the first half, and you stated that the gross profit margin improved in GF Piping Systems the first half. There must be some impact on the SG&A cost base. I mean, was it wage inflation or what was happening exactly that we haven't seen any margin improvement on EBITDA in piping? The second question is, I sense this is also coming from acquisitions, but your headcount is up 13% year-over-year. How are you running your company? How are you planning your company going in 2019? How flexible are you, and what other instruments you have if an economic downturn is happening?
Regarding temporary workers, et cetera. Thanks very much.
Okay. I answer the second question, and Andreas Müller will answer the first. I think basically it's our, let's say, duty to look forwards at all scenarios. Of course, we look always at which companies are doing well, which companies are not doing so well, and have to, for those companies not doing so well, what kind of measures we should take, right? For example, we had a company in the U.S. not doing very well two years ago, making plastic polyethylene pipes. We restructured the company, now it's running at a very good return on sales. Of course, we look at the fixed cost structure that we have, and in case we see there would be a downturn, we are ready to act on this fixed cost structure. That's for the second question. For the first question, it's on EBITDA of GF Piping Systems.
Can you answer, Andi? Yeah. Or you.
I think, the EBITDA obviously is influenced by quite a lot impacts. The situation which we have experienced in the material was definitely not helping our EBITDA margin in terms in the development of the first half of 2018. I think, that's most of the explanation when it comes to our EBITDA development in Piping Systems.
This means that the gross profit margin was not up year-over-year in Piping?
Oh, no. I think, the question makes kind of turns to become a little bit more complicated when we look at gross profit margins. We are not talking about raw material margins, but you may mention this, Daniel.
I think the gross profit margins were up. We monitor that every month. The gross profit, I mean, the raw gross profit was up. I think what happened in my view is more in China. We have a big company in China. This joint venture is the one which suffered the most from the raw material price increases. It has a big impact on the EBITDA. Overall, I think the margin was quite sound.
Okay. Maybe we can follow up at some later point in time, because still not 100% clear to me.
Sure.
Thanks very much.
We have another follow-up question from Mr. Eichberger from Zürcher Kantonalbank. Please go ahead, sir.
Yes. Your sales figures were very high in Casting Solutions. I'm a little bit worried because years ago we had the situation, you had overload in some foundries, and I am afraid a little bit that we have the same situation again with Sunday shifts, night shifts on Sunday and so on, and neglected maintenance, which causes some interruptions in the whole system, which are very costly. Can you elaborate a little bit on the situation, especially how much loaded are your foundries in general?
Well, thank you very much. Yes. The light metal foundries have a load of about 95%, and the iron foundries from 85%-95%. We're not yet in a situation of overload, but what you mentioned is correct. It is exactly a point that we watch.
Okay. Thank you.
Ladies and gentlemen, that was the last question. I would now like to turn the conference back over to Mr. Yves Serra.
Well, I would like to thank you very much for your questions and for your interest in our company, and we like to wish you a nice day. Thank you.
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.