Earnings Call: H2 2017

Mar 9, 2018

Good morning, and a warm welcome to the presentation of the 2017 financial year results. As you may note with our new cover page, besides further growing top-line sales and profit in the past year, we have also achieved further progress in the positioning of the SFS Group. Working closely with our customers, we are often able to put efficiency gains into their value chains and thereby invent success as expected of our partnership. True to our value proposition of inventing success together, which you now see first time in the new corporate design. Today's speakers are Rolf Frei, Chief Financial Officer of the SFS Group, and myself, Jens Breu, Chief Executive Officer. The agenda for the next 60 minutes will cover the key takeaways of the year 2017, the development of the key financials, the development by segment, the guidance for 2018, as well as the opportunity for questions and answers before closing. I start with the key takeaways for the full year 2017, which can be best characterized with the message as shown in red, "Dynamic sales growth and high advance outlays." In the financial year 2017, sales increased by 13.7% to CHF 1.63 billion, driven by strong organic growth of 7.4%, and including first-time consolidation of Tegra Medical. EBITA rose by 10.7% and reached CHF 235.8 million, which corresponds to an EBITA margin of 14.4% compared to previous year with 14.8%. Profitability was burdened by high advance outlays for realization of new growth projects, especially in the segment Engineered Components. In the segment Fastening Systems, cost of projects to sharpen the production profiles had also a considerable impact in 2017. Besides the rapid increase in procurement cost in the segment Distribution & Logistics due to the swift appreciation of the euro in the third quarter 2017. The attractive project pipeline, which quite frequently calls us for upfront development costs like we experienced in 2017, is also reflected in the CapEx spending of the past year with CHF 132.8 million compared to previous year with CHF 84.6 million. These high pre-investments are expected to support us continuing the strong organic growth path. The realization of new projects requires keeping in mind our business model, new CapEx. Nevertheless, the high CapEx levels are in our business seen as reliable indicators for future organic growth. The typical time lag between CapEx spending and growth stimulus can range between one to three years. With that in mind, I move to the next agenda point, development of key financials, and hand over to Rolf. Well, good morning, ladies and gentlemen. Jens just presented the main and key messages 2017. I am pleased to elaborate on the development of key financials and to give you some background information. Let me start with a preliminary note. Last summer, our board of directors decided to apply the Swiss GAAP FER as new financial reporting standard. These standards are more practical for the SFS Group than IFRS, which is becoming increasingly complex. This is particularly true for IAS 19R post-employment benefits. This leads to unwarranted volatility in balance sheet and the income statement. These fluctuations are largely eliminated with Swiss GAAP. In addition, Swiss GAAP allows the offsetting of goodwill and intangibles against the equity, and SFS will apply also this option. These major changes affected our KPIs in balance sheet and the income statement considerably. The next two slides will highlight these implications and the reconciliations from IFRS over to Swiss GAAP FER. The offset of the intangible assets has substantially shortened both equity and the balance sheet total. All intangibles acquired and capitalized in the past under IFRS have been converted to Swiss francs at the exchange rate 2015, and then subsequently CHF 909 million have been eliminated. This means that we have went back in time as far as in the year 2004, when we acquired the aircraft business, or 2008, when Gesipa joined the SFS Group. From a total of 11 intangible amounts offset against equity, the largest derived from the Unisteel acquisition in 2012. The release of the pension provisions, together with the recognition of the economic benefit out of the patronage fund, increased the equity by CHF 30 million. Currency translation adjustments and other items amounted to CHF 18 million. Nevertheless, the equity ratio, according to Swiss GAAP FER, remains rock solid and with 71.6% very healthy. It is vital to understand the reconciliation in the income statement for EBIT and net income. In the transition period of 2017, amortization of intangibles on the Swiss GAAP FER are lower by CHF 28 million in comparison to IFRS. These lower expenses increased both EBIT and net income. Pension costs under IAS 19R are no longer accounted for, and hence strengthen the profitability by CHF 2 million and accordingly CHF 3 million. These changes result in a negative impact with increased deferred income taxes by CHF 5 million. In general, both KPIs are notably higher than under IFRS. A foresight indicates that CHF 40 million out of the remaining CHF 42 million will drop out of the income statement 2018 under Swiss GAAP FER. As a consequence, EBIT and net income will grow by another CHF 40 million, respectively CHF 35 million. Summing it up, in future, the total operating expenses will be lower by CHF 68 million due to lower amortization with the new accounting standard. Going forward, it makes sense to measure the SFS profitability, as many other companies do, based on EBIT instead of EBITA. This new benchmark would have shown an EBIT margin 2017 of 14.3% or a value of CHF 234 million. After this preliminary note, let me return to the financials 2017. These are the drivers of the strong sales growth with CHF 197 million to over 13.7% year-on-year. The organic growth with CHF 113 million or 7.4% was pretty pronounced and dynamic. Tegra Medical in North America and Ncase in the U.K. extended our scope of consolidation and contributed with 5.8% to the increase. In the course of the year, the second half 2017 showed stronger momentum, and sales was 9.7% higher than in the first six months of 2017. Thanks to the acquisition of Stamm Switzerland and Tegra Medical, both concluded in 2016, the share of sales in the medical device industry jumped from 1.9% to 6.4% in 2017. You see that on the pie chart on the left side. The good growth momentum witnessed in the automotive sector for the past years was sustained with a plus of 9.2%. Its share of sales amounts now to 26.2%. Sales in the electronic sector turned very positive again after a year of transition in 2016, with the growth of 18% year-on-year. Electronics accounts now for 20.6% of group sales. The development by region is shown on the right side of this slide. SFS made a step forward and is even better balanced in terms of geographies than a year before. The importance of the Americas regions increased significantly. The share of sales gained 320 basis points and increased to 17.2% of total sales. This is largely attributable to the integration of Tegra Medical, but also to the contribution of the automotive and construction sectors. All in all, the increase in sales in the U.S. was 40% year-over-year, and U.S. sales now amounts to CHF 280 million. As such, SFS approaches its midterm target to reach 20% sales share in the regions America, Asia, Switzerland, and the remaining 40% in Europe. In 2016, the normalized earnings before interest, taxes, and amortization, EBITA, recovered from the unexpected appreciation of the Swiss franc in January 2015, fast and strong from 12.6% to 14.8%. In this reporting period, the EBITA margin accomplished 14.4%, which we consider still as an attractive level. The temporary dip in 2017 was burdened by exceptional high at once outlays to realize growth project in the segment Engineered Components to one of transition costs in optimizing the supply chain in the segment Fastening Systems and a stronger euro exchange rate against the Swiss franc, together with rapidly raising procurement costs due to raw material prices. We expect that at least the last two mentioned impacts, optimizing the supply chain and increased procurement costs, are temporary nature. Without these one-off impacts, the EBITA margin 2017 would have passed the hurdle rate of 15%. We are aware of the challenges to operate a substantial production footprint and value chain out of Switzerland. The blue curve benchmarks the portion of Swiss franc expenses against total group operating expenses. The percent portion continues to decline year-over-year. The drivers of this trend are the strategic targets to relocate labor intensive products to foreign SFS sites, to intensify international acquisitions, and to consistently improve the Swiss productivity. Even so the percentage is shrinking, the workforce in Switzerland has been increased since 2013 by 10% or 230 employees to roughly 2,500. The Swiss sites are important technology and innovation flagships. For excellent productivity levels, knowhow, and passion are key to the SFS Group. The development of net working capital measured at year-end was rather stable, both as a percentage of net sales with 31% and as a cash to cash cycle with 113 days. After 2014, now also 2017 shows up with record capital expenditures. This year with 8.1% of net sales or almost 133 million CHF. These CapEx were triggered based on actual customer project, but also based on existing bottlenecks in the production. Expenditures in property, plant, and equipment will support growth impulses for the next years. Additional new projects in the Nantong site, which is currently under construction, will keep CapEx in 2018 on a high level. As said, Switzerland focuses on knowhow and capital intensive processes with an above average value added and with a high degree of automation. This is also reflected in the substantial Swiss share of 43% of Group CapEx. Furthermore, it is obvious that 60% of CapEx has been released in the segment Engineered Components, a segment that attracted an EBITA margin of over 25%. The volatility in capital expenditure directly impacts free cash flow, however, with an opposite sign. In the years 2014 and 2017, when CapEx was high, free cash flow experienced a dip. Clearly, CapEx was the trigger for the lower cash flow and the conversion rate which reached 29%. In this time span, 2013 to 2017, the cash flow from operations was constantly strong and underpinned the strong generation of financial firing power, which reached over 200 million CHF annually in this time span. Free cash flow, including proceeds from disposal, amounted to 106 million CHF and was used to repay borrowings and to pay out a dividend. The equity ratio is 71.6%, is still strong and solid, even so, all past intangibles have been offset. Net cash improved to 35 million CHF. In spite of record CapEx and the substantial dividend, SFS remained debt-free. The financial flexibility to act at any time on external and organic opportunities and projects is secured by existing net cash, unused credit facilities, and free cash flow generated year by year. One of our internal KPIs is the return on capital employed. The EBITA is measured on the average capital employed in fixed assets and in the net working capital. This development of the ROCE is shown with the blue curve. The pre-tax return reached a very attractive level of 25.9%. I would like to mention that the segment Engineered Components in which the CapEx has been accelerated, achieved an outstanding ROCE performance of 31.7%. The red graph shows the development of the return on invested capital after income taxes. The invested capital comprises the equity plus the goodwill offset minus net cash. The ROIC gave a return of 9.8% after taxes. This is substantially above the weighted average cost of capital of around 6%, and as such, the company has again generated economic value. Consistency in the payout to the shareholders is important to SFS. The board will propose at the AGM a payout of 1.90 CHF for each registered share. This represents a total distribution out of the statutory capital reserves of 71 million CHF. The increase is 8.6 year on year. The substantial increase can easily be argued with in view of the robust earnings, a net income of 159 million CHF, and the positive outlook for the future business activity. The payout ratio measured at cash net income remains stable at 37%. With the conversion to Swiss GAAP FER, cash net income and net income will almost equalize from 2000 and onwards. Summing it all up, SFS Group looks back to a successful and dynamic year 2017. Top line grew by 13.7%, of which 7.4% was organic growth. The bottom line has been strongly influenced by the new accounting standard, Swiss GAAP FER, and hinges a bit the comparison year on year. However, a good benchmark is the adjusted EBITA. The improvement on the Swiss GAAP FER was 10.7% year on year, and under IFRS it would have been 12.5%. Keeping in mind that one-off impacts have burdened the result is a good improvement. The financing of the group with 71.6% equity is solid. SFS remains debt-free. The operational capital employed gave an attractive return of 25.9% pre-tax. With this solid and healthy bunch of KPIs, SFS is well prepared to tackle the near future. With this, I hand over to Jens to comment on the outlook and development of the three segments. Welcome back. I am happy to continue with the headlines of the Engineered Components segment, where strong sales growth has been achieved in 2017. To be precise, the strong sales growth of 20.5% to CHF 925.8 million was driven by, firstly, dynamic growth of the automotive and electronic divisions, fueled by ramp-up of new projects won over the previous two to three years. Secondly, the first time full-year consolidation of Tegra Medical. The strong project wins certainly drive spending on CapEx and advance outlays that impacted profitability in the short term. Nevertheless, as expected, the EBITDA margin still remained on a high level with 19.8%, improved the agility and performance capacity of the segment Engineered Components. The key messages of the division automotive underline the electrification of cars as a confirmed growth driver. High growth momentum has been achieved and sustained thanks to the ramp-up of new projects. Vehicle electrification and autonomous driving initiatives strongly support innovation activities and the corresponding growth. Significant project wins in the reporting year are therefore expected to fuel future growth and will require additional and substantial CapEx in the coming year. This both for already existing products as well as new projects for next-generation products. For 2018, we clearly expect the positive development to continue. The key messages of the division electronics follow along the same characteristics as we just have heard with the division automotive. The division electronics is back on the growth track. Strong sales growth in both semesters versus prior year has been achieved due to, but not exclusively, the positive sales development in a declining hard disk drive environment, which again proved the strong position of the division electronics with their customer base. Besides, the position as a preferred development, manufacturing, and supply partner was underpinned with major product launches, not just in the HDD end market, but also in the applications of mobile and smart home devices. The strong project pipeline triggered the division electronics to invest into the new Chinese site and plant in the Nantong province, which will be available to start operation early in 2019. In general, for 2018, we expect a continued positive development. The division industrial achieved in the year 2017 a stable sales trend. This stable sales trend development routes back to, on one side, good sales momentum in electrical engineering, control engineering, and sensorics applications. On the other side, a flat development in its aircraft activities caused by temporary inventory effects in the customer supply chain for the still in ramp-up situated A350 project. Nevertheless, the attractive project pipeline of the division industrial indicates for future growth in 2018 similarly, but maybe not as dynamic like with the previously two mentioned divisions. We are coming now to the key messages of the new medical division, where we experienced overall a smooth integration process in 2017. First time, the medical division has been fully consolidated in the fiscal year 2017. The integration of Tegra Medical has been viewed positively by customers and employees on both the Tegra and SFS side. Unfortunately, the characteristics of the current projects in ramp-up, as well as inventory effects with a number of top 10 customers, led to a flat sales development in the first full year under the SFS umbrella. Still, production capacities at two of the four operating sites, which are Costa Rica and the Dartmouth, U.S.A. sites, could be expanded and sales increased considerably with sophisticated metal plastic combination components. A healthy project pipeline makes us optimistic that also the division medical will support the SFS Group with dynamic top and bottom-line growth in 2018. We are approaching now the headlines of the Fastening Systems segment where the market positions could be further strengthened in 2017. Attractive sales growth of 8% to CHF 384 million resulted based on a good market environment and additionally gained market share, thanks to new product introductions. Projects to improve productivity had in the past year elements of additional costs, which in the short term impacted the profitability negatively. After all, we clearly expect completion of these substantial value chain adjustments by end of 2018, as well as enjoying thereafter the full benefit of the improvements made. Due to the foregoing projects mentioned, the EBITA margin declined to 7.7% in 2017. Looking in detail on the progress with the division construction. The division construction has seen market share gains thanks to innovative products, besides key markets like Germany and the U.S. showing a strong momentum. Market share gains were fueled by innovative solutions, joined by positive momentum from improved product offerings through Ncase in the growing rain screen application and HECO in the timber construction market. Production optimization projects are progressing well, considering the much higher than expected sales pace and will be concluded by end of 2018. A continued positive development of the construction division is expected in 2018. The riveting division has seen, in 2017, increased demand from the automotive sector, which they serve with innovative setting tools and engineered blind rivet and blind rivet nut fasteners. The positive sales development is, to a large degree, driven by good demand from automotive customers. In the previous year, newly gained applications and customer orders supported the continued growth momentum as expected. Besides, still benefiting from trends like electrification of assembly lines and 100% quality control at the point of fastener installation. Numerous projects to sharpen the existing production profiles have been initiated and step by step implemented. Unfortunately, challenges in the consolidation of two U.S. operations caused considerable harm and production shortages, which negatively impacted the financial performance of the division. For 2018, market-based, but also internal improvement indications are sound, and we expect a continued solid top-line development and considerable bottom-line improvements. Continuing with the headlines of the Distribution & Logistics segment, which, like in the previous years, consistently moved forward in broadening its customer base through new project and supply share allocation gains in its strategically chosen Swiss focus market. Solid sales growth with 3.2% year-over-year and well above the Swiss GDP has been achieved through the realization of new projects won in the previous year, and a dynamic momentum in the business units, tools, and Fastening Systems. EBITA halted on a like-for-like basis at 6.9%, compared with 7.2% in the previous year. Book gains from disposals of properties of CHF 7.3 million closed the gap to their reported EBITA margin of 9.1%. Profitability suffered short-term due to the rapidly increased purchasing costs after the swift appreciation of the euro in the third quarter of 2017. These higher purchasing costs could subsequently only be passed on to customers with a delay. Product portfolio and online sales channels were in the reported year further developed by, first, extensive measures to improve product range and operating performance. Second, enhancing the product line strategically with a comprehensive personal protective equipment range. Third, offering multiple state-of-the-art sales channels as differentiator, for instance, through the launch of a new online shop. We are coming now to the outlook and guidance for 2018. As indicated on the key messages slides of each of the seven divisions, for 2018, we expect continued solid growth of 5%-7%, as well as a further improvement of the EBIT margin, which should result mainly from improvements in the sales mix towards the Engineered Components segment and the launch of innovative products. Assuming unchanged economic conditions and no major changes in the main currencies used, our focus in 2018 financial year will be on strengthening our position with existing customers and on the selective expansion of our customer base. We also intend to exploit new application areas, launch significant new projects, and extract greater synergies from the transformational projects currently underway at the SFS Group. Projects aimed at sharpening our production profile in the Fastening Systems segment should also be completed by end of this year. With that, we are at the end of the active presentation of the full year 2017 results, and happy to be now available for your questions. First, we take the questions from participants in the room. Maria Sonnholz from MainFirst. Three ones. First, on potential transaction benefits on the back of the weaker Swiss franc. Could you speak a bit about the hedging policy? Are you, to a certain extent, hedged in 2018, and if so, at which rate? Secondly, on these temporary issues, seems like they have burdened the margins by around 60-80 basis points. Could you give us a split here between Fastening Systems and D&L, and is it fair to assume that you're going to recover maximum half of these temporaries in 2018? The third one on the Swiss competition, your friendly competition came up with new activities in the 3D printing business. Do you see it as a risk or a chance for your specific business? Well, maybe the first question on the hedging policy. Basically, we are exposed here in Switzerland towards the euro, as our production sites do export basically 90%, 95% of what they produce, and mainly to the European, which means the euro currency sectors. On the other hand, we have the Swiss franc expenses. The gap in between what comes in in euro and what goes out in Swiss francs is around €90 million on a yearly basis. That is our net exposure we have here in Switzerland. Actually, we do follow a very consistent hedging policy, looking forward 12, 18 months and doing kind of a layering concept. Every month, we hedge a certain portion. For 2018, we are basically at 90% hedged at a rate of roughly 110. Our main target really is to be safe, have a net in there so it does not go below. Remember 2015, we had quite unpopular measures to take with our workforce when the exchange rate was temporarily at 1.1. Primary strategy is to have a safe situation at a certain level. We are hedged already into 2019, hedge ratio probably 40% to 50%, and there, the hedge ratio for those 40% to 50% is above 116. Then go to question number two about upfront cost and one-time cost we had experienced. Here we have to differentiate on segment-by-segment basis first. When we start with the segment Engineered Components, there we probably estimated of having a one-time effect of close to CHF 8 million. Here, these were new initiatives. Usually, we have these costs year on year because we work year on year on improving and developing and designing the next generation design. Since we have here a complete new product line, which we established with one of our electronics customers, we had upfront engineering cost, which was not there before. In future years, we would expect that those become part of the normal engineering and maintenance engineering cost of that specific new segment of business we are developing. The one-time cost in segment Fastening Systems is probably around CHF 10 million altogether. Some of them originated in riveting, some in construction. Here, we clearly expect that we could, in the year 2018, improve by around CHF 6 million. That's the plan for the year. Last but not least, Distribution & Logistics. Here, we had the sharp increase in purchasing costs. Usually, when those are more staggered and not as sharp and not as steep as like we have experienced it, there's usually enough time to pass it on to the customer. Since that was quite in the short term, we had a negative impact of around CHF 4 million. Coming to the third question on the question of 3D printing. On our side, we clearly stick to our business model in Distribution & Logistics, which means we are a supply partner for C parts to the Swiss industrial and professional trade customers. We will certainly not enter today or tomorrow in some sort of machine trading or machine selling activities. Also, one could see 3D printing as maybe an opportunity in the Engineered Components segment, for instance, as a supplier or as a manufacturer using that technology. But also there, today, we see still too many disadvantages. We see that the technology is not yet there ready to be used in our specific end markets. And third, we especially believe there will be some consolidation on the technology and the machine supplier side. We believe for us, it's not the right time yet to step into that technology more than with just doing some prototypes as of today. Next question. This is Thomas Baumann. If nobody has questions, I always have questions. First of all, you said hard disk sales went up against the declining market. I personally, I consider these sales as risky, in inverted commas, because it's a technology which will fade. Can you give us an indication how big that was in 2017? That's the first one. The second, to the titanium inserts, if I remember right, you still generated CHF 15.1 million sales here. And I think you wrote somewhere that the phase-out has completed. So can we assume that this CHF 15.1 million will not occur in the current business year anymore? Then maybe the third financial questions. The difference between reported EBITA and adjusted EBITA is CHF 4.1 million. And you mentioned that at the Distribution & Logistics, you had a book gain of CHF 7.3 million. So I suppose that's part of it. Then I saw in the cash flow statement, you also have a government grant of CHF 4 point something. So if you could help us with the bridge, that would be really helpful and maybe also indicate in which divisions these one-offs have occurred. Thank you. Okay. May I start with the question towards HDD. Today, we see sales are in the HDD area, an environment of around CHF 80 million to CHF 90 million, and we have seen growth of around 8% year on year in 2017. The hard disk drive, certainly due to technological changes, we see a step-by-step decline, probably 5%-7%, maybe in other years, 7%-9% decline. On the other hand, there are still new developments going on because the technology will still be needed in future, for instance, for server farms. The competing technology is solid state drive, and the disadvantage with solid state drive is in case there's an error with that specific application, all data is lost. So that means there still needs to be a backup solution, which is then usually based on the technology of a hard disk drive. Also today, there are also developments going on with helium type hard disk drive solutions, which increase speed, which increases access, which decreases cost and makes HDD, again, more competitive compared to the previous versions which were utilized. Nevertheless, even with the helium solution, this means the number of hard disk drives built in future will decline because the capacity usually increases more than probably the market demand increases on data storage. We are clearly aware that HDD will step-by-step will be reducing itself, and that is also built into the business plan of this organization. Titanium insert. Yeah. The titanium insert, here we have to take a look at the slide. We still had some sales in the- CHF 15 million 15 million CHF in titanium inserts, down from 21 million CHF. Since we still support the previous versions, the iPhone, for instance, 8 or the iPhone 6 and the iPhone SE, for instance, all those phones still have titanium inserts in there. We expect probably to stay around a number of 10, 12, maybe 8 million CHF in titanium insert sales. The significance this product line used to have with us is gone, and that is also probably why we will not report in future anymore on the titanium insert sales. Okay, and the third question, the difference between reported EBIT and adjusted EBIT, the 4.1 million CHF. Good question. One issue has been explained, the 7.3 million CHF book gain in the segment Distribution & Logistics. That is one effect, and then there is a second, a negative effect of 3.2 million CHF, and that basically goes back to the year 2001 when we acquired Construction Fasteners in the U.S. At that time, they had a pension plan, and that plan was frozen at the year 2001. Unfortunately, even though it is a frozen plan, there are still persons in there, deferred pensioners, and we have decided last year to liquidate that plan. The liquidation cost was the 3.2 million CHF to close it after 17 years, and it is reported in the segment corporate others. The- The government grant was not considered a one-off. Exactly. The government grant, that is CHF 3.2 million you find in the cash flow statement, basically has reduced or will reduce the CapEx. Instead of the CHF 132.8 million, you will find in the cash flow statement, CHF 136 million something, and then if you reduce this government grant, which was given for a specific capital expenditure project, we offset the two, so it is not in P&L. Next question. Yes, maybe ladies first. Thank you. Marta Brzózka from BZ WBK. I have a couple of questions to try to quantify a little bit more. We just had a discussion about the EBITA expectations for the next year with the one-off costs coming, or some of them staying a little bit. To quantify your guidance for the next year, is it reasonable to expect something between 14.6% and 14.8% EBITA margin? Then the second question, given the increased CapEx, how much of increase in depreciation do you expect in the years going forward? Finally, CapEx in 2018 to remain on a high level, does it mean 8%-8.5% of the sales or even higher? Thank you. Yeah. Okay, I will try to start with CapEx and depreciation. Even so, depreciation, you maybe should help me and repeat that one again. CapEx, I mentioned in my presentation that 2018 will stay on a high level. Means we have this project under construction in China. Total project is, we have announced that CHF 30 million, CHF 35 million and only a minor portion has been spent in previous years. So that will have an impact. Also the growth projects will have. So, I would say you could expect at least a similar percentage of net sales for 2018, eight-ish. Now, the amortization, I will just go into my. Does that relate to 2017 or? No, to depreciation going forward. Going forward. Well, I would not expect a major change there. Just go quickly to the P&L statement, the income statement. In between. Yeah. In between, let me answer the other question. Yeah. Well, I can just. You see 2016, 2017, both numbers were in the range of CHF 84 million. Of course, there is new additional CapEx that will add new amortization. On the other hand, other equipment will fall out of amortization or depreciation. I would expect the number between CHF 80 million and CHF 90 million. Okay. Good. I answer question number one on the EBIT guidance. Certainly for 2018, we expect an improvement, and we plan an improvement, and also budgeted an improvement, but we will have to see what the year will bring. We expect 2018, quite a dynamic year in terms of cost increases. We have seen shortages in labor. We see salary costs going up. We see raw material costs increasing. We see import duties being increased or at least announced to be increased. In general, that will lead to an environment of increasing cost. Certainly, most of the cost we can forward to customers. Question will be how fast cost will increase and how fast can we roll it over to customers. From that perspective, I would say it would be fair to expect that in this year we probably improve from 14.3% to a number slightly above that. That would be probably a fair and conservative assumption. Still, when we go back to the public offering of the SFS share, we said we are on our way towards 15% EBIT margin, which is still in the back of our heads to be achieved, but we will also have to see what are the specific dynamics of the specific year. We will know more by end of the year. Yes, there you go. Yep. Armin Rechberger from ZKB. Will there be an influence because of the lower taxes in the U.S. as you have some businesses there? How do you see the situation with the import taxes on steel and aluminum? Do you expect some influences there? The last question, you mentioned some problems regarding inventories or something with the Airbus client. What exactly happened there? What was it, the last question? I forgot. Okay. Maybe I will start with the first answer on taxes. It gives you a little bit time. Even though it is an important market in the U.S., we will most probably stay on an effective tax rate, which is currently at more or less precise 20%, and I would not expect a big influence out of the U.S. reduced tax rate. Most probably, it will stay for the total group in the same range of 20% or also for 2018. It depends always a little bit in what jurisdiction, what country, the profit is earned, and there is still various different tax rates in these countries. It is always a mixture, and as I said, we expect to stay around 20% tax rate. Good. Then I may answer on the ramp-up of the A350, which has been one of the main growth drivers in the industrial division. As we know, supply chain management in the aerospace industry is not comparable to the discipline like we have seen, for instance, in automotive end markets. It is quite often the effect that with new introductions, inventories are increased, and then when later on output issues happening on the level of the OEM, that the number of planes is not being able to be assembled and delivered on time as expected. Then usually the effect is felt in a much larger way down at the component supplier. That is what we have experienced. For 2017, we had a flat year in our A350 ramp-up and had also to reduce our sourcing to our suppliers. In 2018, we expect now that the ramp-up will continue on the OEM level for the next two to three years. With that, these inventory effects will be eliminated probably towards mid of the year. So no change in our allocation, no change with our standing with the customer. The OEM. import duty question on the North America, specifically the U.S. We have one manufacturing plant for automotive applications in North America. Sales probably roughly importing goods and local goods being manufactured around CHF 60 million-CHF 70 million. There certainly, we will find out within the next few weeks whether the raw material we source in Europe and South Korea, whether those will be impacted, those carbon steel we import will be impacted by these taxes. If so, then usually that will be forwarded to the customers as well. These are all automotive components where we are not free to switch sources within a short time. Usually, changes need to be announced to customers and take 12 to 18 months to switch from one source to the other source. Most likely, we will see a price increase towards the customer within 30 to 60 days after the raw material prices become effective. My other question came into my mind again. Your biggest client, usually you disclose your biggest client, above 10% of your sales. This year, I did not see that disclosure made, so there was no client above this- Exactly threshold rate, 10%. Yeah. There is no customer above the 10% threshold, but I would say it is even disclosed in note 20 somewhere. I will find out for you. It is in the segment information, I guess. Page 78, on the bottom. During the reporting period, no customer exceeded the reportable threshold of 10% of third-party sales. Yeah, still below. Okay. Another question came into my mind. I am sorry. Project ramp-ups you mentioned. Sometimes you show us a table with all your important projects, your two-step finger follower and so on, the electric brake and so on. Can you put a little bit light on these projects, this important ramp-up, how they do, what how were your successes, some stories there? Mm-hmm. I think here we can relate back to the CapEx, that most of the CapEx is in Engineered Components in 2017, and probably in 2018, we will see the same characteristics. Maybe Engineered Components will increase a little bit further from 60%, maybe towards 70% CapEx as it looks like for two main applications. One is the automotive application, where we still see new and fresh demand, additional demand for electric parking brakes, as well as electronic driving brakes. These are still the two main product lines which keep the momentum going on the automotive side. Around that are also smaller new project wins like parking sensors, like housings for cameras, all you need around the trend towards autonomous driving. That is still, as mentioned in the presentation, this fuels the growth in the automotive division. Mainly in Europe today, but also with some projects in China and some smaller projects in North America, which become valid in 2019. So the visibility on automotive side is quite good. We have projects, we have more new projects, and those will be ramping up 2018, 2019, and some of them will reach its full potential in 2020. As we also mentioned in the presentation, some of the CapEx will take three years to fully be utilized in its capacity. The second main area of CapEx and growth is then the electronics division. Here we have announced in early in 2017, the new site in the Nantong province, north of Shanghai. Also there we have substantial new projects in the pipeline, which will have a soft ramp-up probably in 2018, and then probably a harder ramp-up in 2019, and should contribute nicely to sales growth in 2019. So automotive and electronics. I mean, my question was more about your budget. Are they ahead of budget? Are there some success stories, or are there some projects behind your expectation? The projects overall are on track with electronics and automotive. Usually, where we see delays is mainly in the medical environment. This is very typical. The medical environment is very typical. We usually say slumpy and bumpy. That means it can come, it can be delayed. We have some medical business also still in the industrial division. Also there, we have seen a slow year, and we just have heard in the medical division there, we also had a flat year due to delay in those project ramp-ups. The POs are placed, but usually those POs are not specific when exactly the ramp-up is happening. At large, I would say the larger CapEx commitments we have go in automotive and electronics, probably by 60%, 70%, 75% in that direction. The remaining projects and CapEx spending goes then into medical Fastening Systems, Distribution & Logistics. Okay. There. Two questions. Maybe. Thanks. Just a question to your end market. Speaking about the mobile phone market, obviously, some business is fading and the Chinese are gaining market share. I think it's difficult to get into business with the Chinese, but still, perhaps you have some ideas. Do you think it is possible? Or the Korean producers, that's to the mobile phone end market. It's all about end markets, I'm asking. The other end market is riveting, which there is competing technologies like bonding, whatever. It looks like an old technology, riveting, but still, you seem to be doing fine. Can you tell us how the trends are, how you're doing, and what turnover you do in riveting? Thirdly, about autonomous driving, which is obviously a growth area. Here again, could you tell us, if possible, what percentage or how much turnover you generate there and how you judge the end market to develop and your business? Okay. So maybe first start with question on the electronic side. Yes, our main customer had a flat year in terms of number of smartphones produced and shipped, was around 215 million. What drove growth on our side was mainly the increase in allocation with our main customer on one hand, but then all the new project wins in smart home applications for here. For instance, Google is one of our new customers we were able to win over the last two years, and we have seen the Google Home application ramping up and contributing nicely to the sales development on the electronic side. When we talk about the Chinese players, we have also some value added with Huawei. We have also some small value added with OPPO and Vivo. But clearly they have a differentiated approach to the market. Their products are clearly different than the one from our main customer, so the value content is usually much lower. Our growth, our drive we have seen in 2017 was mainly due to our main customer and some new applications. On the Korean potential side, no substantial progress there. I think, for us as a Chinese operating entity, it's probably difficult, almost impossible to get the foot into the door there. Our strategy is clear to work with our main customer plus some Chinese OEMs. When we then talk about the riveting sales increase we have seen, we have seen in Fastening Systems, probably one-third of the Fastening Systems sales goes into riveting. There, that one-third, probably by half, has seen demand due to automotive demand. That means these are usually applications around the chassis of a car where some sort of a piece, a metal or plastic needs to be fixed to the chassis of the car. There you usually still use riveting technology because it is fast, because it is easy, because it is durable, and there we do not see a trend that this will be changing. Besides that, Gesipa, the division riveting, is still a small player in the market. The market is huge. There we have enough opportunities to differentiate ourselves and gain market share. Then the question on autonomous driving. It is difficult to make a clear and hard line what is autonomous and what not. We have a strategic segment we call braking, and in that specific segment, braking, we enjoy, as we just have heard, the major increase in sales, and that is probably around 25% of our automotive sales, roughly. Within braking, you cannot quantify. When you do the numbers, you will see the percentage of all automotive sales of the total group and out of that amount, around 25% is in the braking segment, roughly. That doesn't go all to autonomous driving. That goes into application towards autonomous driving. It's not exclusively because some components go into ABS and ESP, which has been already there, but it's needed for autonomous driving, so it's hard to make a clear line. Also, when we talk about camera housings or when we talk about sensors you have in the bumper, for instance, those have been there before, but will be needed in future even more for autonomous driving. So it's a mix. It's growing of existing product lines, which help this trend, plus adding in and phasing in complete new product lines, which further enable the trend towards autonomous driving. How much did this grow in 2017, this segment? I haven't looked it up. Over the years, usually, the division automotive has seen a growth of around 8.3% over the last five years, and we would expect that to continue. Just this area of braking. The braking area, it's probably double. Mm-hmm. Okay. Thanks. Probably double. Two additional questions from my side. Fastening Systems, you mentioned you are sharpening the profile. Can you elaborate a little bit more what you do there? Then, I am sorry when I am ignorant, but Google Home product, what is it? What do they produce, and what do you deliver there in this product? When we first talk about sharpening of the production profiles, there we go back to the year 2015, where we had increase of the Swiss franc, and at that time, we decided to relocate substantial value added from our Heerbrugg site to plants and sites which are situated outside, which are situated in the European Union as well as Turkey. That is probably 50% of the changes we see at the moment, being that these product lines will be situated in France, Germany, Romania to a part, and Turkey. We will cease the production of construction product in our Swiss plant. That will be finished by end of 2018. The other half of the project is the expansion, the substantial expansion of our riveting manufacturing facility in Thal, Thuringia in Germany, where we consolidate all blind rivet manufacturing we today have within Germany. Today we have two plants, and we will consolidate that into one plant and increase efficiency gains then with that. The other element is in North America. There we had two production plants, one in Mocksville, North Carolina, and one in Vivian, Louisiana. Due to the undercritical size of that Vivian plant, we relocated it into the North Carolina plant. There we had some mistakes in planning and execution of the capacity which was situated in Vivian, which has been more than a year ago now, already transferred to the Mocksville plant. Now it is a matter of increasing the efficiencies and reducing the scrap rates, and with that contributing to the improvement of the profitability in that segment Fastening Systems. That on the maybe sharpening side of the production profiles. Google Home is more or less, it is a loudspeaker. You may have heard about it. Also, there is another one, a competing one, has a name, even has a name, a female name. Alexa. Alexa, exactly. Alexa is, for instance, the competing one. Apple is also working on an own version or already has an own version. These are quite interesting applications because the value added per application is usually much higher than you would, for instance, see in a smartphone, but also the volume is lower. We have turn parts in there, stamped parts. We have fasteners in there as well, and the value content is quite nicely and over the 5, 6, or 7 billion annual amount of pieces which are manufactured, we generate quite nice revenue. For us as a Unisteel division, since we positioned that in the end market electronics, the initiative of smart home is an important one for us in future as well. Especially also since we see that quite a lot of software companies like Google, as I mentioned, they clearly seek now also access to the hardware. There we see opportunities that we can position ourself as a viable supplier when it comes down to specify and design engineered solutions within those applications. Thank you. Just one follow-up question on the top line guidance. 5%-7%, is that organic in local currencies or reported? We left it out not to be too precise, 5%-7% is organic. Secondly, we certainly expect some currency changes. We have seen that usually around 0.5, 0.6, 0.4. We will find out throughout the year, but those are within the 5%-7%. The euro is up nearly 9% for the first quarter over the first quarter of the last year. That is a significant- That is true. We have to look at the currency mix. On the other side, we have quite some sales in the U.S. dollars, where you are down at- Six 93, 94, 95 cents. Then you have the Turkish lira, and you have the pound. So it is a mixture, and I would probably see a positive contribution from currency probably in the first three to six months, which probably will be certainly lower, if not negative, in the second half of 2018, because in 2017, second half, euro was already on a good level. So throughout the year, we will see what it will be. But it is a little bit the mixture of the currencies. Is it reported in local currencies? Again? Okay, but the guidance then is reported or in local currencies? That is all in 5%-7%. Okay. In any case, that would actually imply a certain deceleration in the organic terms in local currencies from the 7.4% that you had in 2017. You mentioned also that you had some project delays in 2017. I would expect then those projects to be materialized in 2018, and therefore to see actually acceleration, not deceleration of the growth. Maybe can you please tell us what else is, except the mentioned already Airbus project, do you expect to cool down? There are many questions 2018 has ready for us. Certainly, if the momentum continues as we have seen it finish in 2017 and started in 2018, probably the guidance 5% to 7% is probably on the conservative side. We still have to keep in mind that quite a few of the cycles we are in, for instance, the construction cycle, very positive, very optimistic construction cycle, may come to a slowdown or may come to an end. That is why we probably stay on the conservative side, 5% to 7%, with the clear expectation that the growth projects in Engineered Components will continue and certainly be on the increase side and above average side. Probably in the segment Fastening Systems, we probably have the uncertainties due to the specific end markets. We could also be terribly wrong on that side and maybe come back with a 7-plus growth by end of the year, we will find out. To date, we clearly see that the year started well, but we have also to see what happens in the second half of 2018. No more questions. Also, no more questions on the website. With that, then we thank you for your attention and wish you good day and a good weekend. Thank you for coming.