Good day and welcome to the SFS Group AG conference call. Today's conference is being recorded. At this time, I would like to turn the conference over to CEO of the SFS Group AG, Jens Breu. Please go ahead.
Good morning, and welcome to the presentation of our first half 2022 results. Today's speakers are Volker Dostmann, CFO, and myself, Jens Breu, CEO of the SFS Group. The agenda over the next 60 minutes will be positioning of SFS, key takeaways, development by segment, development of key financials, guidance 2022, and group priorities, Q&A, before closing. I will start with the positioning of SFS. We're SFS, accompanies you usually unnoticed 24 hours a day, seven days a week, reliably through everyday life. Our precision components and mechanical fastening systems are embedded in the successful products and processes of our customers, and fulfill their service with high reliability in the required precision and cost effectiveness as needed for mission-critical applications. The end markets we serve ranked in order of sales achieved, are the construction, automotive, industrial manufacturing, electronics, medical, as well as other selective industries.
Our focused business activities aim for tailored solutions for selected niche applications. In the segment Engineered Components, this includes automotive and industrial applications under the brand of SFS, as well as electronics applications under the brand of Unisteel and medical applications under the brand of Tegra Medical. In the segment Fastening Systems, we serve the construction industry under the brand of SFS, under the brand of Gesipa, Automotive, Industrial Applications, and Distribution. The segment Distribution & Logistics pursues its development under the brand of SFS with our Swiss customer base in the application range of industrial manufacturing and construction. And under the brand of Hoffmann, we serve the European and increasingly also the U.S. and Chinese industrial customer base with tools, workshop equipment, and personal protective equipment. As such, we create across and within the three segments synergies in tooling-based technologies.
In the segment Engineered Components, this means as engineering partner of our concentrated customer base through the development and industrialization of tooling-based customized precision components and assemblies. In the segment Fastening Systems, a solution provider to over thousands, mainly mid-size and small customers by the development and distribution of application-specific tools and fasteners. In the segment Distribution & Logistics, a system partner to over thousands of mid-size and small customers, as well as some large strategically targeted key accounts through the development and trade of tools, fasteners, and work equipment. Whereas the business model and end markets differ by segment, in front of the customer, we are united by applying the SFS value proposition over all segments uniformly. Meaning, creating products and intelligent solutions with high added value for the customer, thus strengthening the partnership and leading to greater differentiation.
This aim requires a corresponding attitude, or as we call it, the constant desire to inventing success together. In relation to the total cost of our customer product, the direct cost of embedded SFS products accounts often for less than 1%. However, the associated costs on the customer side, such as internal processes and environmental costs, can be several times higher. Our value proposition, as well as our focused business activities lead then in combination with the mega trends on which we base our business strategies on to sustainable growth through the cycle. Under growing market segments, we understand niche markets with above average growth potential, having a strong link to the underlying mega trends.
By applying our operational excellence core knowledge in building up and managing robust supply chains, high volume production technologies, time to volume expertise, and best in class availability, we deliver to the customers the quality and reliability we are known for. By leveraging our global business platform through offering local for local business development capabilities, we are enabling our divisions to continuously increase share of wallet with customers. At the same time, allowing customers to achieve a reduction of supply chain complexity. A truly well-orchestrated and over the years further fine-tuned formula for growth and sustainably high margins through the business cycle. I will continue now with the key takeaways, first half 2022, which can be best summarized as growth exceeds expectations. Good growth, as said above, expectations was achieved in all regions and end markets except for automotive.
As a further highlight, the transaction with Hoffmann has been closed on May 11. As a result, first half 2022 gross sales climbed to CHF 1.223 billion or +27.8% versus prior year, consisting of organic growth of +9.8% and also the first- time consolidation of Hoffmann, which accounts for growth of 19.3%. Normalized EBIT rose by 11.5% to CHF 179.5 million, resulting in an EBIT margin of 14.7%. CHF 16.6 million of expenses were normalized in connection with first- time consolidation of Hoffmann. Profitability was impacted by uneven capacity utilization and inflationary pressure on costs. Highlights from the sustainability report for 2021 are published, or were published on June 3, 2022.
The number of work-related accidents were reduced by another -12.8%. The CO₂ emissions were reduced by another 11.9% on a like-for-like basis. Thomas Oertli was appointed new chairman of the board at the Annual General Assembly, succeeding Heinrich Spoerry. Continuing with the development by segment. Starting with the headlines of the Engineered Components segment, which has experienced varying conditions in the end market served. Overall, good sales growth has been achieved, leading to first half 2022 reported sales of CHF 523.4 million or +6.4% year-over-year. Industrial, electronics, and medical took advantage of the market conditions and realized good growth. The automotive development was just slightly below previous year, impacted by shortages in the customer supply chain. Project-specific capacity expansion in automotive, electronics, and medical are on track.
The EBIT margin of 15.9% has been impacted by uneven utilization of production capacity and overall increasing costs. The key message of the Automotive division, shortages in supply chain hamper development, further underlines the just mentioned development of the segment. Reduced customer demand has been encountered due to shortages in customer supply chain, for instance, with semiconductors or cable harnesses. The division's own raw material availability was not impacted and performed as per our expectation. Investments in project-specific production capacity expansion in Heerbrugg, Switzerland, are on track. Ramp-up of production started. Continued localization of ABS components production in Nantong, China, have been carried forward to ensure optimal supply of locally present customers. Looking out, the automotive market is expected to gradually recover in the second half compared to the first half. Nevertheless, our target to outgrow the market remains unchanged.
The key message of the division electronics, continued high demand of end users and supply chain in electronics alike points towards organic growth driven by strong demand, mainly in lifestyle electronics. Mobile devices with slightly positive development, while demand for HDD applications was subdued. However, consistently good product availability and efficient supply chains allowed for market share gains and supported growth too. The COVID-19 lockdown of totally 10 days in Nantong, China, had only limited business impact. The expansion of the Nantong platform is progressing as expected. Looking out, a moderate development at a high level is expected for full year 2022. The key message from the division industrial, growth trend maintained in most niche markets, underlines that the division remained on growth track in nearly all niche markets.
Particularly strong order intake was observed in the first quarter, partially driven by inventory restocking effects of the customer side. Demand for aircraft components picked up and showed significant growth. Nevertheless, market conditions remain uncertain due to implications from COVID-19 pandemic. Growth is expected to level off in second half compared to the first half, but still resulting in overall organic growth in the full year 2022. The key messages of the Medical division, record high order intake in first half year, underlines the positive sales development in all application areas. Demand for instruments and implants for orthopedic surgeries recovered as backlog of postponed elective surgeries clears. Shortages in availability of skilled labor and temporary raw materials hindered a stronger development. Ongoing operational excellence efforts allow efficiency gains and improve competitiveness. Building up the global medical manufacturing platform remains a key priority.
Unchanged market conditions in second half compared to first half are expected, leading to positive development in full year 2022. We're coming now to the headlines of the Fastening Systems segment, where market dynamics remained unchanged for the two divisions. Strong demand in construction industry supported both divisions and resulted in first half 2022 sales of CHF 334.5 million or +14.1% year-over-year. Other markets served by riveting developed well, except for the automotive market, which was impacted by shortages in the customer supply chain. Continued high attention on management of supply chains allowed to maintain good delivery performance and enabled both divisions to win new customers. High capacity utilization and thorough cost and price management resulted in a record EBIT margin of 19.1%.
Looking into the details on the development with the construction division, we can summarize it by continued strong demand above expectations. The division continued its growth trajectory and exceeded expectations. All application areas in both Europe and North America contributed to the development. Only limited effects from interest rate hikes and rising inflation were experienced. However, uncertainty on future demand remained high. Production capacity expansions in North America have been initiated to support the customer demand and further localize production. The division expects good organic growth for full year 2022. Rising interest rates and input prices are main risks to the future demand. Coming to the key messages of the riveting division, where the development varied by application area. Overall, only flattish sales development with stable growth in the industrial manufacturing and construction related applications was achieved.
Demand from automotive market remained subdued due to shortages in customer supply chains. The relocation of the production site from Nansha to Nantong in China yielded expected initial efficiency improvements. Demand from automotive customers is expected to recover gradually in second half compared to first half. Overall, the division expects a rather flat development in full-year 2022. The headlines of the Distribution & Logistics segment state the transaction with Hoffmann, which was closed on May eleventh. Overall, good market demand led to reported sales of CHF 365.7 million or +111.9% year-over-year. Thereof, organic +7.2% year-over-year. Hoffmann is contributing to the segment as the new division, D&L International, since May first, 2022. Strong demand from industrial manufacturing customers led the path to organic growth.
Business with customers from the construction industry newly accounts for less than 10% of sales of the segment. Good material availability throughout the semester supported both divisions' growth. Strong normalized EBIT growth of +115.4% to CHF 34.9 million resulted. The normalized EBIT margin reached 9.6%. The key messages of the D&L Switzerland division is that the growth trajectory was upheld. The division showed solid organic growth at a comparable rate to the prior year period. Growth was mainly supported by industrial manufacturing customers across the major product group, tools and fastening systems. Market demand from construction industry was positive at a high level. Sales generated from direct channels, like sales representatives and eShop, carried forward with further good development.
The division expects a stable development in second half compared to first half, resulting in organic growth for the full year 2022. Closing the development by segment with our new division, D&L International, which was able to participate at a good market momentum. D&L International participated at a positive environment in the industrial manufacturing industry and achieved good growth, mainly in Europe and North America. For the first time after the outbreak of the COVID-19 pandemic, physical product shows were held again. Ramp up of LogisticCity remains the key priority and is planned to be finished by end of 2022. Martin Reichenecker, Head of the Division, joined the Group Executive Board in May. Stable development is expected in the second half compared to the first half, leading to organic growth for full year 2022.
With that, I conclude my explanations, and will now hand over to Volker for covering the development of the key financials.
Thank you, Jens. Good morning, and welcome everybody from my side. We look at a good start in 2022, which was carried on one side by sound organic growth compared to last year, but certainly shows a distinct mark from the first time inclusion of Hoffmann. While supply chains on customer side remain very challenging, we recorded satisfactory order intake. We report CHF 1.2 billion in sales, including two months of sales from Hoffmann being included as from May onward. Again, our team managed to adapt capacity successfully despite short-term changes in demand patterns. Looking at the sales bridge, we show in its decomposition organic growth versus prior year of CHF 93 million, or 9.8%, which is reflecting pickup in demand, but also effectuated price increases due to raw material and partially energy costs, which have been forwarded to our customers.
Pricing accounts for approximately 1/3 of the organic growth. All segments contributed to this development, which overall is well above our full-year guided growth bracket of 3%-6%. Most important step from the perspective of sales is the addition of Hoffmann into the results of SFS. Hoffmann has been consolidated as of closing in early May and is reflected in our performance as said with two months. FX effects for first half-year amount to -1.2 and -1.3% as the sales exposure to U.S. dollar and euro are partially balancing each other out. Organic sales development per quarter is along the development of the global economy, which we have seen, negative to flattish growth pattern for 2018 until Q1, Q2 2020, when the COVID-19 pandemic started to show its impact.
After a period of fierce rebounding growth, we see a flattening out and a normalization. Predominantly, supply chain issues on our customer side, namely in the automotive industry, made demand uneven and utilization therefore choppy, leading to operational efforts on the SFS side to ramp up and ramp down capacities on a short-term basis. Our teams managed to adapt quickly the resources and change the capacity which allowed to drive growth during this phase. However, we see volatility remaining on a considerable high level and increasing uncertainties on the supply chains, energy shortages, and the conflict in the Ukraine will persist for the quarters to come. Looking into our end markets, we see a step up towards industrial manufacturing based on the value proposition of Hoffmann. Organically, we have recorded in all end markets, except automotive, organic growth.
In automotive end market, we see a -1.5% development, while the market decrease is approximately by -8%. From a geographical point of view, region Europe, excluding Switzerland, gains in importance, while we see growth in all regions. As we first time consolidate Hoffmann, we have normalized our performance for acquisition accounting topics, predominantly the inventory step-up. The impact from this normalization is for the first half year at CHF 16.6 million or 136 basis points on EBIT. We expect the total impact from these items to be ±CHF 20 million. In the purchase price allocation, the acquired inventories have been valued, including a part of the sales margin. This so-called step-up is amortized as this inventory is sold and decreases the margin during this period by the corresponding portion.
These impacts will be fully absorbed in financial year 2022, and we are confident to finalize the acquisition accounting within Q3 2022. Uneven utilization, cost discipline, and described pricing initiatives impacted our EBIT margins for the first half of 2022 to a normalized level of CHF 179.5 million or 14.7%. Normalized EBITDA is at CHF 233.7 million or 19.1%. As described before, we are challenged with uneven capacity utilization as opposed to first half year 2021, where we had continuous and high demand. Further, we record a leveling up of energy costs up to the tune of 20%, as well as cost pressure from labor and raw material side. Passing on these cost elements to our customers shows to be more and more challenging.
We report earnings per share of CHF 3.42 compared to first half year 2021 of CHF 3.52. At our current earnings per share of CHF 3.42, we show a very attractive performance when you keep in mind that this includes the burden of the acquisition accounting described above. That amounts for first half year 2022 to CHF 0.36 per share. As shown, we have seen growth in all of our end markets besides automotive during last quarter. Given the uncertainty mentioned before, paired with the considerable cost increases which will continue to impact our P&L. We are, of course, carefully monitoring profitability as we go forward. The seasonality which we reported comparing first half year, second half year over the last years, will most probably not apply anymore for the future. This is also based on the change in our mix.
Being confronted with the weakening of the euro, we see our exposure in Euro-Swiss francs lowering as we shift weight as a group overall. Our hedging positions prove to be very sound and shelter us from stark shifts in FX environment. The ability to grow is continuing on a steady path. After coming back from the impacts in 2020, we see good opportunities to keep such pace also in the future. At a normalized EBITDA of 19.1%, we show a strong performance for first half year 2022 in the long-term comparison. Net working capital is influenced by nominally higher receivables at lower DSO, but also significant build-up in inventories. We deem our delivery reliability as a very important value proposition.
Therefore, we have deployed a significant part of cash flow on the replenishment of raw and half-finished goods to be ready and timely in answering our customers' demand. On a group level, the net working capital remains below 30% on an annualized basis, or on a total level of 105 days. However, we are addressing inventory levels to be aligned with demand patterns closer in second half of 2022. Our strategic investment projects keep going. In Switzerland, Hall six, Automotive in Heerbrugg is taken into operation. The expansion in Nantong, China has started. Expansion in Costa Rica for medical are on the way. The project of migrating our ERP environment to S/4HANA is partially recognized as CapEx under the bracket corporate. Projects are on track and will continue as planned.
We expect CapEx reported to be in a range of ±6% for the year. Free cash flow is, given our net working capital development and the ongoing investments, showing a low result. Based on our outlook into second half year, we expect cash flow for the year to be clearly three digits, or in the range of 2018, 2019 numbers. With the Hoffmann transaction, we are reflecting an expected net debt situation. Having successfully refinanced the acquisition, we are on a projected path to establish an equity ratio above 50% as per year-end. Unused credit lines are in the range of CHF 340 million. The bond financing of the acquisition is hedged into euro, and related revaluation of this so-called net investment hedge are shown as changes in hedges on the equity table and do not impact our P&L.
Purchase price allocation is not yet finalized. As said, we expect to close this by end of Q3, 2022. Return on capital employed remains on an attractive level, given the slightly lower EBIT compared to first half year 2021 and the shown higher net working capital levels. Adding back all the goodwill positions, we show a return on invested capital of 9%, which is, at the current capital allocation and risk-free rate, considerably higher than our WACC of 7.2%. We have summarized the KPI for the first half year and can state that we have seen solid growth in challenging environments, reacting on fluctuating demand. Cost increase is and will be demanding. We will be focusing on cash flow and continue to show attractive returns as we go forward.
With this, I thank you for your shared interest and give back to Jens, who will lead you through our guidance.
Welcome back to the guidance and group priorities. High level of flexibility will be required in the second half of 2022, because how the economy will perform in the second half of 2022 is far from certain. Geopolitical tension, the war in Ukraine, an impending energy shortage in Europe, sustained disruption in supply chains, and ongoing restrictions as a result of the COVID-19 pandemic are increasingly having an impact on the global economy. The associated high inflation is having a negative impact on consumers and supply chains in form of rising prices and costs. Against this backdrop, SFS expects business activities to slow in the second half of 2022.
Nevertheless, SFS expects sales growth to remain unchanged at 3%-6% for the year as a whole before the consolidation of Hoffmann. In addition, a sales effect of CHF 720 million-CHF 770 million for eight months of Hoffmann consolidation in 2022 is expected for the current financial year. For SFS Group as a whole, including Hoffmann, an adjusted EBIT margin of 12%-15% is expected. The change from the previous SFS standalone guidance of 13%-16% EBIT margin is attributed solely to mix shifts resulting from the acquisition of Hoffmann. The reported earnings per share as per half year is CHF 3.42 per share. This includes a one-time P&L impact from the Hoffmann transition of CHF 0.36 per share.
The full year impact is estimated at 0.43 CHF per share, and should result in an earnings per share of greater than 7 CHF. This outlook is based on the assumption that there will be no significant worsening in the underlying economic conditions or pandemic-related restrictions. Due to the strategic international positioning of the D&L segment and the resulting mix shifts, SFS revises its medium-term guidance. While the sales growth target for the entire company remains unchanged at 3%-6%, the target range for the adjusted EBIT margin is newly set at 12%-15%, solely due to mix shifts resulting from the Hoffmann acquisition. Arriving at the last slide of the SFS part of the presentation and covering the SFS Group priorities.
As strongly rooted in our D&A, we aim to focus on specific priorities and relevant mega trends, which means strengthening innovation, especially in the mega trends of demography, digitization, and autonomous driving. Under the key priority growth, we focus on further investments in future growth projects, namely Engineered Components, as well as working on establishing international presence with Hoffmann. On the customer side, we ensure reliable supply capability and continue improving customer centricity of our organization. Under profitability, we focus on balancing production capacity with demand, ensuring full supply capabilities while keeping costs under control and forward increases within the supply chain. Under sustainability, we continue to integrate sustainable acting and thinking holistically in the business model and corporate strategy, while continuing high focus on protecting employee health and safety.
Next, we also would like to point out to the upcoming Investor Day on September fifteenth in Heerbrugg, focusing on the segment Engineered Components and Fastening Systems. With that, we are at the end of the presentation of the first half-year results 2022, and now available for your questions. We will start with the questions from the telephone.
Thank you, sir. If you would like to ask a question, please signal by pressing star one on your telephone keypad. If you're using a speakerphone, please make sure your mute function is turned off to allow your signal to reach our equipment. Again, press star one to ask a question. We will now take our first question from Jörn Iffert from UBS. Please go ahead.
Yes, hello, and thank you for taking my questions. It would be three to four quick questions. The first one would be your organic EBIT growth in the first half, before the one-off was quite limited, and your guidance on the midpoint also would include a very limited organic EBIT growth. Does that also reflect that you maybe overearned on margins a little bit last year, and now you are hit more by the rising costs? The second question would be, please, on your very high margin Fastening Systems, which is likely coming from the construction market, are you seeing any signs of slowdown that your customers, for example, start to reduce their crews?
The last question, if I may, did I understand correctly, you're looking for EPS for full year 2022 above CHF 7, and this is before the CHF 20 million one-off, right? Just to double-check this. Thanks a lot.
Good morning, Joern. Jens speaking here. On the EBIT margin development, we certainly expect in the second half of the year that we'll have more headwind due to rising costs and lower utilization of the production plants. As we referred to, we would then see a slowdown in the business activities, which will certainly have an impact. Besides that, I believe we also need to consider price increases we continuously giving to the market, and that's the other element of uncertainty. Depending on the customer groups and the industries, it's not solely just up to us to decide whether we can follow the price increase. It's also in agreement with the customer, and that's something we do not have in our hand.
High uncertainty on the economic side, as we mentioned, but also uncertainty on how well and how quickly we can forward cost increases we get from the energy sector, for instance, but also, for instance, from the labor market or other cost elements. Raw material, on the other hand, we have seen to come slightly back or flatten out. From that side, we do not expect a major increase. Your second question on the Fastening Systems slowdown. Seasonally, we expect a normal pattern as we usually do. We have not seen that our customers reduced their crews in the market overall. We still expect the capacity will be maintained, and we also expect in 2023 that there's a solid and robust construction market out there available to be served.
In terms of earnings per share, yes, the greater than CHF 7 is before any impact of one-time costs due to acquisition.
Okay, many thanks for this. The greater EPS above CHF 7, this would indicate that the EBIT is likely around the midpoint of your guidance around, what is it? CHF 330, CHF 350, CHF 360. I mean, is this a fair assumption you're looking for as a base case?
That's probably an assumption which could be taken by you, yeah.
Thanks very much.
We will now take our next question from Christian Bader from AWP. Please go ahead.
Good morning, gentlemen. Just one question for a better understanding. Did I understand this correct that you expect a total of one-off costs for the integration of Hoffmann Group of around CHF 20 million? So for the second half, you will just have to book something between CHF 3 million and CHF 4 million? Question one. My second question is, what are the implications of possible energy shortages in Europe in the coming winter, and how do you prepare for that? Thank you.
Thank you very much. Yes, we will normalize the inventory step-up. This is not the full cost of the integration, but we deem rest of the costs as negligible on that level. The inventory step-up is what we have in the course of the acquisition accounting. As said, these amounts are not finalized, but are in total in the range of CHF 20 million, and that would lead to these roughly CHF 4 million going into second half, as you indicate correctly. Second question, what will be the impact of potential energy shortages in the winter of 2022-2023.
Overall, I think we have to explain that first of our main energy carriers is electricity followed by gas we need for heating and also gas we need for our processes overall. In general, we can say we are not a very intensive energy user in our processes. There are within the supply chains other manufacturing processes which consume more electricity and gas, for instance. Due to that, we expect and based on experience, we believe that customers usually run out of other production materials first before we even will get into a shortage. We expect similar like in COVID-19 and the following recovery that we can attract or that we can selectively gain additional market share by our better availability.
We do not expect that we have a sharp impact due to energy just solely on SFS. We would expect we swing with the market as it goes up and down in activity in the industrial sector and selectively gain some additional customers due to having a better position. Also, we certainly have a good inventory in place, so if there are shortages on a rolling basis, you know, a few hours or a few days, we can still cover our customers' demand with our inventory. Secondly, also to keep in mind, we have a strong local for local strategy, meaning in North America and Asia, we usually would not see any limitations. The local plants would serve and continue to serve well our customers. If we see shortages, we would mainly see them within Europe.
Once again, there we have the fallback position of our inventories. Secondly, that we are not as energy intensive as other ones. On the buying side, certainly some of the costs will increase as we will experience.
Thank you very much.
We will now take our next question from Andreas Müller from ZKB. Please go ahead.
Yes, thank you very much, gentlemen, for taking my questions. I have three. One is, I was wondering if there is a difference between SFS standalone and Hoffmann in pushing through price increases given the somewhat different exposure of the two businesses. Have you sensed any change in the last six months in the ability to pass on prices in general?
In general, we can say that it differs by segment. In the segment Distribution & Logistics and Fastening Systems where we mainly have small and mid-size customers, the ability to increase prices is larger. In the segment Engineered Components where we have the larger tiers and OEMs where strong framework agreements usually govern this relationship, there we do not have such a freedom to increase prices. In terms of forwarding it to the market, certainly more flexibility within D&L and Fastening Systems, and we do not see much difference between the different organizations, whether it's Hoffmann or other organizations within those two segments.
Okay, thanks. That's clear. I was wondering in EC, what does it mean for the EBIT margin in H2, with the recovery you see in customer orders from the automotive division? Do you see an overall better capacity utilization, better pricing, meaning also that margins could be well supported in H2?
Yeah. We see a range of implications overall. We certainly see that we have ongoing discussions with the customer to increase prices. That's certainly a plus we would expect on the second half of the year. We also expect that utilization should be slightly better. That's also a plus in the second half of the year. Towards the very end of the second half of the year, we have some supply agreements on the electricity side, which are running out. That's probably a negative. Also we have the increase of the Swiss franc compared to the euro, which also will be a negative. Varying developments, I would say overall, but certainly the strongest lever is utilization of the plants, which we have to keep in mind.
Their visibility is there week by week and not more at the moment. That's still the challenge, you know, we have to face that we do not have greater visibility.
Okay, thanks. Can you then, last question, clarify the CHF 5.2 million in the corporate segment. What is in there and what will be the pro forma run rate for the full year?
I have to ask back, Mr. Müller, 5.2, you are referring to what? Just the CapEx. Mr. Müller?
Yes. Sorry, I was on mute. No, I was referring to the EBIT bridge from the segments, the three segments into the overall EBIT. It was minus CHF 5.2 million in the other.
We-
The corporate.
Are you referring to our half-year report or are you referring to the slides?
To the half-year report.
Okay.
Sorry. Page 24.
Give me a second.
Half-year report, 2024, on the left-hand side, really the first table there.
Okay. We are recording their consolidation effects, and we are having one of the major strategic projects at SFS ongoing, which is S/4HANA, which has a part that is not capitalized. As I said, we are having a part of the efforts going in there that is capitalized and a considerable part of this CHF 5.2 is linked to the project that is expensed.
Okay. The run rate then for the year would be?
We will add to that probably to the tune of CHF 2 million, and then we are seeing a normalization of that project. The project is due to go into operation in Q3.
Okay, thanks. That's clear. Thank you very much.
Thank you. Sorry for the asking back.
We will now take our next question from Alessandro Foletti from Octavian. Please go ahead.
Yes. Good morning. Thank you for taking my questions. I just have a couple, maybe on hedging first. I think Mr. Dmann, you said that the hedging for the transaction price did not go into the P&L. Can you tell me about the hedging for foreign exchange, if that has an impact on the P&L, and if yes, sort of can you quantify it and tell me where it goes?
There is a couple of elements in your question.
We have not hedged the purchase price as such. What we hedged is the financing part from the bond. We gave out the bond in Swiss franc, and we are artificially made that a euro bond with a cross-currency swap. The impact from cross-currency swap we show in the equity table as a net investment hedge, changes in hedges, because it is clearly linked to the assets that we acquired. The rest of the foreign exchange fluctuations are related to revolving credit facilities that we draw in euros. This is a financial asset or financial liability. The FX effect we show under financial results. First half of the year, that was up to the tune of expense of CHF 600,000.
The rest of the foreign exchange impact, payables or receivables are linked to the respective expense item in the P&L. On the receivable side, you would find that back in the other selling expense and on the receivables, you will find it in the margin.
Okay. Was it a big effect so far?
It was a quite mild effect so far. We are lucky that we see our exposure to euro and to U.S. dollar. We have seen the euro weakening by some 5.8%, and we've seen an appreciation on the dollar of 4%. That helped to equalize the effects out.
Yeah.
For the euro exposure.
Sorry, just a second.
The euro exposure.
That's fine.
We are hedged. The euro exposure that we have been operational expense in Swiss francs and revenues in euro. That's what I showed on the graph, on the exhibits slide. There we have hedges in place.
Okay, thank you very much. The next question would be on return on invested capital. Talking about the measure that includes goodwill, you showed that it went below 10%- 9%. Now you didn't say anything with your midterm targets, so I imagine that the 10% is also your target now, so that you plan to go back into that level. Can you confirm this? Maybe also indicate when do you expect to be able to get back there?
Definitely, that remains our target. We are looking at the moment into the planning of when we will come back there. At the moment, we see ranges of two to three years.
Okay, thank you very much. That's very clear. Maybe on the Hoffmann guidance for 2022 is quite a wide range. It was wide as well in June when we met, but I thought that by now maybe you would have a bit of a better view. Why is it so big?
That still goes back to the uncertainty we have in the market. As I mentioned and alluded before, one direction or one hand is the industrial development, whether we will see there a slowdown. Secondly, also the price increases we continuously give into the market. Both of those have elements of uncertainty. Due to that, we decided to keep the bandwidth the same.
Okay. My final question is on the Engineered Components business. The margin is lower and was in a way, at least for me, the only sort of negative surprise of this result. If I'm not mistaken, Mr. Dostmann, you mentioned that the automotive market for you was down only 5%. I would think that with auto only down 5%, the impact on the margin will not be that big. Can you give more indication why it developed in this direction?
We have to keep in mind that we have substantial growth projects ramping up, so we're installing heavy capacity, we are hiring people. At the same time, the existing business, let's call it the legacy business, is not having the utilization we expect to have. That's basically one part of the explanation overall in there. Secondly, we have also to keep in mind that in general, the utilization in Engineered Components segment is usually picking up in the second half of the year. That usually then yields or drives the margin in the right direction.
Last year, we had a very unusual situation with a very much driving automotive, industrial, and electronics end market in the first half of the year due to COVID recovery. When you compare it against first half 2021, you have to keep in mind that 2021 was a very unusual year. To add into that, first half year 2021 was a steady high demand. As I said, ramping up and ramping down of capacity is just an operational effort that you have to immediately reflect on the margin. That adds into the whole mixture.
All right. Thank you.
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Hello. Good morning. I have a couple of questions, please. If I may start, one by one with a clarifying question. On page 21 of your presentation, you show the NL, EBIT margin before adjustments at 17.7%, while in the H1 report, page 15 in the table, you state the unadjusted and unadjusted EBIT margins both at 9.2%. Could you please clarify which of your reported statement is correct, or am I missing something here?
Yeah. Jan speaking here. We're checking the papers. You say on Distribution & Logistics, page number 21.
Yeah, for the previous year. H1 2021. Basically, my question is what was the Distribution & Logistics unadjusted operating profit margin in H1 2021? That, yeah.
Unadjusted? They are 9.9-
Exactly.
9.2%. Yeah.
All right. That's the. Okay. Thank you. Then my second question, please. I would like to clarify your EBIT adjustments for acquisition-related one-off. Is that only related to EBIT or do you adjust also EBITDA?
We adjusted, as said, both, and between is the tax effect.
This also impacted gross margin.
The inventory step-up impacts gross margin, EBIT, and. We normalized EBIT and EBITDA. EBIT we normalized by CHF 16.6 million, and we normalized also the EBITDA. Of course, there we reduced the normalization by our tax rate.
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Okay, we take questions from the chat. In the webcast tool, you have the opportunity to ask questions via the chat function by clicking to the red question mark on the page. We start with a first question from Torsten Sauter from Kepler Cheuvreux. Could you please provide the FX sensitivity of SFS EBIT or net profit after the Hoffmann integration with respect to transactional exposure and the Euro-Swiss franc pair? What Euro-Swiss franc rate is assumed in your 2022 guidance? And the second question is, am I right to assume that Hoffmann is acquired for an EV of slightly more than CHF 700 million? Acquisition costs of CHF 550 million plus CHF 200 million capital increase. The first question on the FX sensitivity.
When we look at FX towards the latter half of the year, we are looking at the Euro-Swiss franc rate that we assumed of 0.9750. That is also where we did the analysis on translation effects on EBIT. Looking at the 0.5 Up and down, we did simulations, and we look at 20 basis points of impact on the EBIT margin. I would call that a minor translation effect. That's basically due to the mix and the cross-currency effects that we're seeing there.
To your second question, the CHF 550 million you see from the cash flow statement, that is the cash that we deployed and the CHF 200 million from the capital increase. I would see that as a correct assumption. Yeah.
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