Earnings Call: H2 2018

Mar 8, 2019

Morning, and welcome to the presentation of the SFS 2018 full year results. Today's speakers are Rolf Frei, CFO, and myself, Jens Breu, CEO of the SFS Group. The agenda over the next minutes will cover the positioning of the SFS Group, the key takeaways of the year 2018, the development by segment, the development of the key financials, the guidance for 2019, as well as the opportunity for Q&A before closing. The positioning of the SFS Group. SFS is a reliable companion throughout the day, from early in the morning to late at night, seven days a week. Not many people realize that because our precision components and mechanical fastening systems are embedded in the quality products of our customers, but they often perform critical functions. Even though the cost of SFS components embedded often account for less than 1% of the total product cost. Our aim, as stated, is inventing success together and stands for the close collaboration with fellow customers, colleagues, and our suppliers. It is only through this close collaboration that we can explore and push back the boundaries of what's technically feasible. The key megatrends that SFS is strategically focusing and basing its further growth on are utilizing the digital revolution, profiting from economic globalization, participating in the evolving consumption, use constraints in resources as spaces for further innovation, taking advantage of demographic change, especially in China and India. I start now with the key takeaways for the full year 2018, which can be best characterized as solid business performance. In the fiscal year 2018, sales increased by 6.5% to CHF 1.739 billion, fueled by broadly based organic growth of 5% in the core business, whereas the fastening systems segment showed the strongest development. Did we still experience an unexpected and temporary decline in sales in Q4 2018, which created a limitation to the dynamic development of the top and bottom line. Nevertheless, operating profit rose by 4.2% on a like-to-like basis to CHF 243 million, which corresponds to an EBIT margin of 14%. Profitability was burdened by mix effect and the soft Q4 sales. CapEx reached a level of 8.6% of net sales to a substantial degree, driven by establishing the new production platform in Nantong, China, and the setup of substantial production capacity for acquired growth projects, mainly with division automotive and electronics. Continuing with the development by segment. I will start with the headlines of the engineered component segment, where all four divisions contributed to the growth development. The achieved sales increase of 4.4% led to a top line sales of CHF 967 million. A growth as such was mainly fueled by ramp-up of new projects. An attractive profitability of 18.2% EBIT margin was achieved, however, burdened in the first half of 2018 by increased raw material costs and high advanced outlays for the two mega projects within the division automotive, ball screw drive for power brake and electronics components for new power adapter. A positive margin trend could be achieved in the second half of the year. After higher raw material costs were passed on to customers and the two projects, as mentioned, finally left the engineering stage and entered into the stage of initial serial production. The unexpected drop in demand in Q4 2018, as well, mainly in automotive and electronics, put then unfortunately an early stop to the further recovery of the EBIT margin on the last mile before closing the fiscal year of 2018. Continued high level of CapEx at CHF 116.3 million or 12% of segment sales, with spending CHF 30 million alone for the new production platform in Nanchang, China, further characterized the past year. The key message of division Automotive continued above market growth further underlines the just mentioned development of the entire segment. Growth was fueled by the launch and ramp-up of innovative customer projects and achieved on a like-to-like basis 4% organic growth. Whereas the global light vehicle production output stagnated at 94.7 million cars or a decline of -0.5%. The trends towards autonomous driving and electrification of cars proved to be a further reliable innovation and growth driver. The unexpected drop in demand in Q4 2018 also affected the performance of the Automotive division. Nevertheless, we are still expecting a solid growth development in 2019, despite the softer start into Q1, due to further ramp-ups of innovative customer projects. The strong position as engineering partner resulted also in 2018 in new and significant project wins with an annual sales potential of slightly over CHF 80 million or 21% of divisional sales. Which represents an increase over 23% compared to previous year. The key messages of division Electronics follows along the same characteristics as we just have heard with division Automotive. Because the division Electronics achieved a further penetration of a new application with the new power adapter program for an important customer. Besides the new application win, only modest sales growth of 1.5% was achieved as expected and envisioned for the year 2018 due to the titanium insert decline of -4%, FX and scope shifts of -0.6%, resulting in a still respectable organic growth of 6.1% in the core business. With that, the Electronics division further proved its strong competitive position in mobile devices, hard disk drive, and lifestyle electronics by increasing sales and wallet share. For instance, in the declining market environment of hard disk drive. Despite significant progress was achieved in lifestyle electronics by further increasing sales for smartwatch applications. The successful entry into the new application of power adapter based on SFS cold forming expertise, offering hence significant growth potential for 2019 and 2020. The construction of the new manufacturing platform in Nanchang, China, nearing completion as per the original schedule. The new factory will be hosting all SFS core technologies, and it will be serving a strategic hub also for the Automotive division. The strategy by having two divisions utilizing the same infrastructure efficiently could already be proven by winning a substantial new automotive order for the site of Nanchang. All in all, we expect positive development in 2019 and look forward to the new electronic devices launched by our customers in the current year with SFS content inside. The division Industrial achieved in the year 2018 the same like in the previous year, and namely, stable sales trend and strong project pipeline. This stable sales development routes back to the mixed development by business units. Besides the successful acquisition of new growth projects, the division experienced the still sluggish development in aircraft business due to lower demand of Airbus A380, flatter ramp-up and inventory effect of Airbus A350. For 2019, we are expecting a positive trend fueled by the ramp-up of new projects and stronger momentum in aircraft business, as well as a continued declining and finally phasing out of the current 3 million CHF sales of A380 business over the next two years. We are coming now to the key messages of our still new MedTech division, where in 2018, the management team achieved accelerated growth dynamics. The growth momentum continuously improved over the course of 2018. Like with the previous three divisions, in the MedTech division, the development is driven by launching new customer projects. The manufacturing platform close to the MedTech clusters in the U.S. and Costa Rica proved to be a clear advantage for acquiring new programs. For 2019, we expect continued positive top-line development on the back of a solid project pipeline, as well as a catch-up step on the bottom line because of being now able to cover the past years' advanced layouts with additional sales revenues. Approaching now the headlines of the Fastening Systems segment, where important progress was achieved in 2018. Continued strong momentum resulted in sales growth of 13.8% year over year. Organic growth contributed with 5.6% comparable, driven by market success of innovative products and supported by good market environment. The initial consolidation of HECO in the second semester contributed another 5.8% to the segment sales development. Significant progress in profitability was also achieved with an EBIT margin of 9.8%, previous year, 7.6%. Projects to sharpen the production profiles are largely completed and provide basis for future and further productivity gains. Looking into the details on the progress with division construction, we can state that the division was able to substantially strengthen its market position, besides repeated attractive growth development, broadly based by region and product groups. The construction division successfully expanded market share, thanks to innovative product, systems, and services. Trends to higher safety, energy efficiency, and aesthetics are key triggers for innovation. Interest in HECO increased from 30% to 51% as of July 2018, which allowed for more effective exploitation of growth and synergy potential and full consolidation since 1st of July 2018. A further positive development of the division's performance is expected in 2019. On the strategic collaboration with Triangle Fastener Corporation, as initially made public during October 2018, we can state that the negotiations are at an advanced stage, and final results are expected within the next few weeks. The strategic rationale behind gain of direct access to a broad customer base through a well-established sales network in the U.S., realizing of cross-selling potentials, and the strengthening of the competitive position in the U.S. construction market. A broad market spectrum has been covered by the division riveting in 2018. The results achieved, therefore, not surprisingly. Solid growth development driven by healthy environment and good results in various application areas. A compelling competitive position to benefit from trends like electrification of assembly lines and 100% quality control. Successful product launch of the HyBird and a Flow Drilling Rivet® to fuel future growth. Successful development of operations in Nanchang, China, where the production volume for standard rivets could be doubled. Therefore, solid business trends are expected for 2019 as well. Continuing with the headlines of the distribution and logistics segment, where an accelerated growth momentum was achieved in the previous year. Attractive organic sales growth of 5.1% was achieved, excluding the sale of the security system business. Therefore, once again, well above the Swiss GDP. Primary sales drivers were the new e-commerce site, the tool business, and the distribution of construction-related products. Profitability significantly improved to an EBIT margin of 7.6% in the previous year, comparable 6.9% with our book gains from disposal of properties which occurred in 2017. For 2019, we are expecting, again, a positive development despite a more volatile economic environment. The ongoing investments into the multi-channel activities of the segment distribution and logistics clearly strengthen the overall performance of the segment. Going forward, the strategy clear and coherent with past practice. Best-in-class delivery performance must be achieved through all channels. In the past year, the segment therefore strengthened and widened its online presence through the launch of the new e-commerce website at sfs.ch, which resulted in significant growth with existing customers and led to new customer wins as well. The attractive network of retail pickup points, or Handexpedition, were expanded. The segment further fostered the attractiveness of digital logistics solutions by enhanced functionalities on mobile devices. Last but not least, strengthened its logistic capabilities by expanding the central warehouse in Reppisch, Switzerland, with total investment of CHF 11 million over the past three years. With that, I conclude the presentation of the development by segment and hand over for the development of key financials to Rolf. Ladies and gentlemen. First of all, please apologize my weak voice. It is due to a cold I just caught a few days ago. Nevertheless, I am pleased to elaborate on the development of the key financials together with additional background information. Before I do so, a side remark to the layout of our annual financial report. We picked up an upcoming trend of financial streamlining for the first time, and we are almost sure that you and all the investors will find the new layout much more reader-friendly and much more effective. Duplications are eliminated. Graphs added to highlight important issues and new relative KPI support a quick interpretation of the numbers. Now back to the numbers and the sales bridge. These are the drivers of our sales growth of 6.5% year-over-year, which is behind the guidance of 7%-9% due to a weaker foreign exchange contribution in the second half 2018, sorry. The organic growth with 80 million or 5% was pretty pronounced, dynamic, and within the guidance of 4%-6%. The titanium inserts trade activity in the engineered component segment has now almost reached its bottom sale with the remaining $4 million in that year. The maturity of the change in scope is due to the first time consolidation of the HECO Group Germany in the second half 2018. HECO, our specialist when it comes to timber work construction. Let me give you an additional insight into our monthly growth rate in the core business. Throughout the year 2018, the monthly growth was robust and steady, both as a percentage, the red line, and in absolute numbers, the gray bars. Still in the month of October, the growth rate was 8%, October 2017 compared to October 2018. Then in November and December, an unexpected decline, mainly in automotive and the electronics division, caused negative effects. Instead of an expected growth of CHF 10 million in those two months, we suffered a drop of CHF 10 million, which signifies a gap of CHF 20 million that is missing on the top line and did not add to the bottom line. Imagine 60% value added on the CHF 20 million is CHF 12 million effect on bottom line, just for the two months, November and December. The trend for the two first months to 2019 shows a stabilization. The decline against a quite strong 2018 was in both months around 2% in the core business. This minus 2% in those two months was compensated by the change in scope of HECO Group, and therefore the overall SFS Group achieved cumulative sales for January and February this year equal to the previous year, 2018. The pie chart on the left indicates a robust and balanced sales breakdown by end markets. In the construction industry, we strengthened our market position, thanks to innovative products, the first time consolidation of HECO Group. With its share of 26.5% of total sales, it competes head to head with the automotive industry. The development by region is shown on the right side of the slide. SFS has made a further step towards its strategic approach to reach a sales share of 20% each in the region, Americas, Asia, and Switzerland. The remaining 40% sales share shall be generated in Europe. This share of sales in Europe again amounts to 40% or just a little bit above. This is thanks to an above average growth rate. The three factors, organic growth, change in scope, and currency impact contributed each with around one third to the attractive growth of 9.6% in Europe. The region Americas performed equally well during 2018 with an organic growth of 9.2% year-on-year, and it reaches now 17.7% of total sales. The adjusted EBIT increased 4.2%. This represents an EBIT margin of 14%, which is slightly less than the year ago margin and our guidance. Until end of October, we were on track to make up the lost EBIT basically caused by raw material price increases and high outlays in the first half year. Due to the unexpected decline in November and December, I just explained before, however, in contrast to our internal projections, we were short in sales with CHF 20 million and short in EBIT with CHF 12 million. Nevertheless, the second half year performance was better with an EBIT margin of 14.4% against 13.6% in the first half. It's also noteworthy to mention our strong record on our profitability development throughout a business cycle of a company. This 12-year cycle comprises a severe financial economic crisis in 2008 and 2009, two strong appreciations of the Swiss franc, 2011, 2015, but also some disposals such as the steel service business in 2010, 2011, as well as substantial acquisitions of Unisteel Tegra Medical. During this 12-year period, SFS progressed the EBIT to EBITDA range from then 17%-19% to the now higher level of 19% to above 20%. We constantly measure the share of Swiss francs expenses against the total group operating expenses. For the second time, the percent share reached our strategic target of 40%. The driver for this trend are the strategic goals to relocate labor-intensive products and processes to foreign SFS sites as well as to pursue international acquisitions. The Swiss sites are important technology and innovation flagships. Their excellent productivity levels, knowhow, and passion are decisive for the SFS Group. The number of employees in Switzerland remains stable at just below 2,500 heads. The development of our net working capital at the year-end was again stable. It varies in a narrow range of 30%-31% of net sales. The cash cycle has slightly improved by lowering two days to 111 days. Our capital expenditures shows two consecutive years of record spending. 2018 with $149 million or 8.6% of net sales. If there is a time lag between investing and fully operating the capacity, these investments will clearly support future growth in the two to three years to come. The cash out for property, plant, and equipment was triggered by capacity needs to fuel existing, but also new projects as well as the construction of our new China Nantong site. The CapEx share of Asia has through that significantly increased 36% of total CapEx. In Switzerland, we also spent the same 36% of CapEx share. Engineered components segment lives up to its claim to be a development and innovation partner, and this leads to an attractive EBITDA margin well above 20%, but also to the need of high CapEx. You see the share of total CapEx of engineered component segments amount to 78% of total CapEx. We consider the normalized CapEx level for the SFS Group as a whole in the range of 6%-7% of net sales, in which we schedule to come back in 2019. As a result of the high CapEx in the last two years, the conversion rate of EBITDA into free cash flow suffered a drop below our internal benchmark of 40%-50%. Nevertheless, the cash out of operations was strong and increased by 16% to CHF 263 million. We expect this to continue. Together with a slightly lower CapEx rate, conversion rate should move back into the range indicated. The equity ratio is 74%, remains strong and solid, and is part of the SFS DNA. Net cash improved to $59 million. Despite the record in CapEx and a substantial dividend payout, SFS remains debt-free. The financial flexibility to exploit external and organic opportunities and projects is secured through existing net cash, unused credit limits, and fresh free cash flow generated year by year. One of our internal KPI is the return on average capital employed. The adjusted EBIT is measured on net average capital employed, and this is a pre-tax return, and it varies in an attractive range of 20%-25%. The red graph shows the development of the after-tax return measured at equity before the goodwill offset. Tax return again moved sideways just below 10%. It is not yet up to our own ambition. However, it's above our cost of capital and as such we achieved economic value added. Consistency in the payout to the shareholder is important for SFS. The board will propose to the AGM a payout of CHF 2 for each registered share. For the last time, we were able to distribute part of the dividend from the statutory capital reserve. The total dividend distribution amounts to CHF 75 million and represents an increase of 5.3%. With the 38.7% payout ratio, SFS stays at the low end of its target range of 35%-50% payout. Summing it all up, SFS Group looks back to a solid business year. Top line grew by 6.5%. The adjusted EBIT fell slightly short previous year and the guidance. Reason are the unexpected sales decline November, December and the mix change in the segment. The financing of the group is 74.4, equity is outstanding. Record high CapEx of the last two years will support growth in the years to come. The operational capital employed gave an attractive return pre-tax of above 20%. With this solid, healthy bunch of KPIs, SFS is well prepared to tackle the near future. With this, I hand over back to Jens to comment on the guidance. Thank you. In 2019, we expect the market environment to be volatile in view of the trade tensions between the U.S. and China and the perceived slowdown in global economic activity. Thanks to our healthy project pipeline, we expect robust sales growth of 3%-5% in 2019 despite a challenging environment. In view of the uncertain economic development, we expect an adjusted EBIT margin within the range of 13%-15% in the fiscal year 2019. Expenditures related to the commissioning of the new manufacturing platform in Nanchang will result in one-off costs in the low double-digit millions in 2019. Conversely, accounting book gains on the disposal of property are likely to be recognized in the current year. These combined one-time effects are likely to burden reported EBIT in 2019 with a high single digit to low double-digit million amount. Lastly, a big thank you goes to all SFS employees of the Group. It is thanks to them that 2018 was another successful year for the SFS Group. Employees throughout the company demonstrated high levels of competence, creativity, and dedication, and delivered outstanding results. Thank you. We are approaching the end of the active presentation of the full year 2018 results, and I am now happy to be available for your questions. First, we take the questions from participants here in the room before we take questions from participants joining us by web meeting first, and then second on conference call. So thank you for your attention, and we are ready for questions. The microphone is also available here. Thank you. Tobias Vornos from MainFirst. Speaking about your guidance, in the past you have shown for the top line always the single components. Could you give us an indication what you expect here for organic growth for the trading activities, for currency, and especially for scope? Maybe also already a small positive impact from Triangle in there, and if you would acquire Triangle, what would this mean for revenues on an annual basis? That is on the top line. Coming to the EBIT margin. Am I getting it right that the 13%-15% is excluding the real estate disposal, which I would also classify as one-off, but also the ramp-up costs in China, which you could also say is a kind of operational normal business? Is this assumption right? Why are you not mentioning the 50% midterm target anymore? Is it out of reach for the time being? Let us start with top line, the guidance 3%-5%. It is a quite volatile environment right now, certain insecurities, so it is not easy. If a guidance, you have seen where we started for the first two months. The 3%-5% is the overall growth of the Group. It is not easy or it is not basically possible to do an estimation on FX. Always assume it is plus/minus zero. We know that we have, for the first half, the first time, the HECO group, and then from July onwards, it will be included with HECO. That change in scope will add probably again, say, 1% on growth. The reminder then would be the organic growth, which we currently anticipate in this market environment. Maybe on the adjusted EBIT margin side, why adjusted? Why is it not a normal transfer of operations from A to B? I think here we have to keep in mind that we have strict regulations to follow in China. In China, when a factory is moved out from one specific jurisdiction to the next one, a new legal entity needs to be opened, and then also clearly defined social contributions have to be made to the employees leaving the company for good, and even to employees who just moving from one legal entity to the next new legal entity. This is why this has an extraordinary one time special correction to it. In general, as you see with the top line and bottom line guidance, we are still optimistic on the top line due to many projects, new projects in the pipeline. We clearly expect that we can outperform the, I would say, in general, the end markets where we are active. On the bottom line, we are fairly cautious because, A, the volatile environment. We have seen that maybe a softer November and December will leave its mark. We may be driving throughout the year, and then all of a sudden, a swift adjustment comes in in November and December, but we cannot adjust as quickly within one or two months left within the year. Secondly, we mentioned we have ramp ups. Every ramp up is an opportunity, but also has some risks associated with it. Thirdly, we also have quite high value added, high profitability in our Swiss operations. When times become more uncertain, the Swiss franc tends to increase in value and our sales revenues are in euros and cost in Swiss franc. That is one other reason why we guide more conservatively on the EBIT adjusted. You are right. The EBIT adjusted is after the add back of these two, the net effect of the two one-time effects, right. That would come then as a separate item. No, not them. That is the two effects. The move of the Nantong, which is negative, and the positive effect, the potential book gains of disposal of properties. That one. Oh, hello. Marta Bruska from Berenberg. I have a couple. I start maybe with following up on the question of the colleague here from MainFirst. I think he also asked about the EBIT margin target of 15%, if this is still on the table. I also had this one on the list as well as with the 4%-5% organic growth target, which were given as a midterm, probably the last time in 2016. Are we still having those targets? When they will be updated? Then secondly, maybe on the first or on the sales trends for January and February. You mentioned that this minus 2% would be more close to zero when accounting for the HECO acquisition. On the core business, though, how much it is in total? Even with assuming that this would be still around zero for the second half of 2019, that would imply a growth rate of around 6%, which is close to what you achieved in 2017 in the booming end market environment. If you could give us a little bit more color where the strong acceleration should come from. Good. Going back to the question on the EBIT margin. We have not changed our midterm guidance. Overall, we still envision the EBIT margin of 15% as a feasible objective to go for and to shoot for, and also the midterm guidance on organic growth of plus/minus 5%-7%. Also, there, no change to it. We clearly see 2019 as probably a softer year, a softer start, a year of adjustment in many industries, as we probably have seen in November and December, but we are still optimistic for the year as a whole overall based on the midterm guidance. Okay, and the second question. In January, February, I presented you the minus 2% in the core business growth. Basically, it's kind of a continuation what we have seen in November, December. Not as strong as it was in December, of course. This was compensated basically by the HECO first time consolidation. Remember, it's 2% for the full year, but it's 2% in the first half year because it was already consolidated last year from July to December. That is right now an effect of 2% in the two first months. Basically, we are on track or on the same level of sales as we have been in January, February 2018. We expect a weak first quarter and are, on the other side, also more optimistic that business will pick up from quarter 2 onwards, certainly into quarter 3, and hopefully also with the success of the product of our customers, especially in electronics. Then we see a similar trend as in the past, that second half year, normally, seasonally is much better than the first half. That leads to our overall estimation of an overall growth of 3%-5% right now. Of course, we can probably be more precise once we see the first six months into the year and then have a basis and an understanding what's going to happen in the market. Okay, maybe I rephrase the question a little bit. Your non-core business in the first two months, did it grow or decline? Minus 2%. But the non-core, would you consider? You could say that the overall, if you exclude the change in scope, right? Like for like was minus 2%, plus then the add back or the first time consolidation of OCO. The titanium inserts? That is more or less in the same level, and it is almost to zero with this 4 million last time in 2018, and most probably it will move along. There will probably always be a base amount, but it is so small on the total sales so that we would not consider it any longer. Okay, thank you. Following up on the margin, so the 15% is still on the table, but we are seeing the trend, especially in your most profitable division, engineers components on the EBITDA level, which is more comparable than EBIT change because of the change of the reporting standards. When we look at the EBITDA for 2016, it was around 28%, and it declined to 26% in 2017 and to 24% in 2018. I expect it declined farther in 2019 already than accounting, of course, with one of probably even more so. What was driving this decline, and why do you think it should pick up again? As we have communicated and informed over the last two years, we have substantial projects in the pipeline which created and caused advanced outlays we have in this segment. In 2017, we also communicated a number of one-time cost and for 2018 as well. When I go back to my notes, I say in 2017, we had one-time effects of 6 million to 8 million CHF. In 2018, probably 7.5 million CHF, which were costs associated with these new projects and new investments. These are complete new product lines which do not fall back on existing infrastructure to start with, and due to that, also cause this additional, I would say, pressure on the profitability. Going forward, we clearly expect the profitability will increase again. Besides that, we have also to mention that we have a new division on board, which also on average reduced the profitability of the segment. That is the division MedTech, which also has to be considered when we analyze the profitability over the last three years. Okay, I struggle a little bit to reconcile that new projects and the new product lines with the flattening growth profile. If you invested in the new projects, shouldn't that increase or accelerate the growth while we actually see deceleration? Absolutely, and that is why I also made my comments ingoing or incoming said, first off, we had this unusual drop in November, December, probably in the market, which affected mainly existing business and not the new business. The new business usually is more resistant towards downturns in the market. Secondly, we have clearly outperformed the automotive market by around 4.5 percentage points. Thirdly, we have also to keep in mind that, especially for one of our large customers, this is the year of the S model, and the year of the S model tends to be weaker in usually most cases. From that perspective, I think we can say division electronics performed as expected. It is a softer year. It is a year of transition to a year with a new model, but also a year with the new power adapter. We would expect 2019 to pick up and cover for these costs, for these expenses we had over the last two, three years in development. On the automotive side, we have seen that the new program introductions increased sales by 4% organically, and we have seen that the market decreased by 0.5% negative. Over here we have seen a benefit of the investment of these new programs. But we also need to keep in mind that in 2019 and 2020, the project which caused this material reduction of profitability are just ramping up as we speak. This has been a longer phase of investment, and this is not uncommon with new technology. As soon as it is established, implemented on the customer side and on our side, then usually the cycles get shorter in innovation because the basic capability is there. Okay, thank you. You don't see it as a problem that these projects will be ramping up in the softening end market environment with some of the key players relocating their production capacities out of China, for instance. What happens in case the end market demand is a little bit softer even than expected? I think overall here, we have to take this question apart in two pieces. First off, innovation is always helpful because it pulls you ahead. In a down cycle, innovative products still find buyers in the market. Usually they are more resistant against downturns. It's always good to stay with innovations because the existing commodity business is usually the one which is affected and usually pulls the performance down. It's good to invest, it's good to be ahead. It's the opportunity also to perform better than peers in the same industry. The second question of the site of Nanchang and the electronics business in general, I think here we have to keep in mind that our value from, say, average cost of a smartphone, manufacturing cost, bill of material, total cost, is probably between $80 to $160. Our value content is usually around $1. These are strategic precision components which need economies of scale to be produced efficiently. Whenever a customer intends to relocate assembly value added from one site to another site, and strategically reorganizes the portfolio of assembly locations, usually the fastening parts come last, if they come at all. Today it is quite common that precision components are manufactured at maybe one or two locations globally and are then distributed from there to the assembly sites. Because the advantage of combining them and gaining economies of scale is to a higher degree and level than localizing it. If you would take apart the economies of scale, there would not be a benefit. In short, we see the customers reorganizing themselves, that they consider, shall we assemble in Vietnam, in Indonesia, in China or in India? And we can support them as well. We can support them out of China, we can support them out of Malaysia, and we can support them out of India. The production equipment is standardized and also flexible and feasible to move. In case such shifts are happening in reality, which we have not seen yet, up to now it is only discussion. We can add, instead of adding new capacity in China, we just add new capacity in Malaysia, or we add new capacity in India. It is not a shutdown scenario and transfer scenario. It is a question, where do we add new capacity? Secondly, as also mentioned, we have to keep in mind that Nantong, the new site, is also a site for automotive where we just have won additional programs for the market in China, which falls back on same and similar capabilities as we use for the electronics division. Strategically going forward, we are making sure we are balancing our capabilities and capacities in the region to reflect also changes in assembly by our customers. Well, with the automotive passenger vehicle sales in China dropping by 17% in January, I see it a little bit as a risky backup plan, but I leave maybe the discussion open for other participants and come back with additional questions. That's a good point, but here we have to also keep in mind that our market share in China is very low. Here we talk about replacing existing volumes we don't own today. These are volumes of competitors which we would replace over the next 3 or 4 years. This is completely fresh sales. Thank you. Armin Rechberger from ZKB. I'm interested in the ramp of Nanchang. Are there further costs to be expected next year, I mean, 2020? Or will it be fully ramped up in 2019 already? The Triangle Fastener Corporation acquisition, if I calculate per workforce and sales, I get up to a figure of $70 million-$100 million sales per year. Is that the range which you could say, "Yes, that's okay," or is it less or more? Then Triangle Fastener Corporation, you would Put it in your division construction or not distribution and logistics, as they are only in Switzerland, active. Yes. Markets, January, February, you mentioned 2% down for the core business. How did, especially automotive and China, develop in these 2 months? CapEx 2019, how much? Yes, one more. Airbus A380, you mentioned CHF 3 million sales with this type of airplane, but I think the stronger or more business you do with the A320. The question is that a major chunk of the air business you do, the CHF 3 million, or is it just negligible? Good. Thank you. The question was Nanchang, right? On the move, the cost. We anticipate the majority or almost all of these costs will be covered in 2019. There's still part of the factory to be moved in 2020, but the moving cost or the relocation cost, so to speak, will be provisioned in 2019. You will see the effect in P&L, almost everything in 2019. I wrote down TFC, that's still a project, still in negotiation. We expect decisions to come in a couple of weeks, few weeks. I was not sure what calculation you did, but if I do a calculation, sales per head, it's in the range of $350,000-$400,000. It's a trading business. It would strengthen our position in the U.S., the division construction considerably, adding a new customer base with similar products, and we would have quite some synergies. But as I said, it is still a project, it is in negotiation, but we believe in a couple of weeks, we will have final decisions and we will inform accordingly. And according to the internet, they have about 200 heads. 200 heads, yes. That is true. On the sales development for January, February, we can say that in automotive, we are probably around 5% below the pace we had in previous year to date. And in the electronics, we have around -10% to previous year to date, roughly. As a rough indication. And I think automotive, we have understood that the year 2018 has been a driving one, that many uncertainties led our customers to probably schedule ahead. And we have seen a phase of inventory and WIP adjustments in November, December, and January, and expect now a normalization of the demand, because the actual demand is clearly lower than what is produced on the level of cars overall to be distributed to the different geographies. On the electronic side, I already mentioned, it is the S version. The S version is a soft version usually, and we expect in April then a pickup of demand due to the ramp-up of new programs. Then also in June, starting with the pre-build for the next models coming in the third quarter. Both elements we probably have seen and projected and budgeted for the year as being soft during the first quarter this year. On the CapEx side, I think that question is answered on automotive and electronics. On the CapEx side, as Rolf mentioned, 6%-7% is the objective for the year. We do not foresee major changes there. Do not expect major short-term new projects coming in at this point in time. To the question of the A380. The A380, the 3 million annual sales, which we currently have, will phase out over the next two years. The A380 is still living in another year more, so we probably expect the last year, no more sales because of inventory, which will need to be utilized and used up. This used to be three times more. At the peak of the A380, this used to be three times more higher in sales, and came down now year by year. We see the opportunities mainly with the ramp-up of the A350. Then we also see opportunities in the midterm, probably five years out with the A320 because there is a cabin interior design change where we also expect we can add some value overall. The A320, besides that, we have not much value in there today, not to the degree like with the A350 or 380. Good. More questions? Michael Foeth, Bank Vontobel. I would have just two questions. I think most of it was anyway answered. Just to clarify with this engineering components project, these very large ones where you also seen an impact on the margin that you mentioned. So you expect no more of these large projects and therefore, a pickup in margins? Did I correctly understood this? Then, maybe with these one-offs that you expect this year, is it coming more in the first half? Do you have any timeline? Do you expect to sell the property in the first half of the year or in the second? First on the automotive project, we had pre-production runs, small volume runs with the ball screw drive system, for the last two years and now see the major ramp-up in 2019 and 2020. We expect now first time earning a margin. Before, costs were higher than the sales receipts we get because of the dynamic of such a ramp-up. Not unusual in the first one, two, sometimes three years, depending on the program. At first, you spend money before you make money on that side. So 2019, we should see an increase in profitability, which then should be visible overall within division automotive, as long as the market, which is soft now, then later on picks up in the year. We should certainly see overall an improvement in 2019 in automotive. Besides that, certainly, our strategy has always been what has been invented once should be and shall be multiplied. Also here we expect not within the next two years, but probably, within the range of 2020 and beyond, to have an opportunity to maybe add more volumes to the same. Below, we have existing ball screw drive systems for the parking brake applications. Those we have informed about the last two, three years, substantially. Some of those lines are still in ramp-up. We should also see their improvements of margins due to process control being better year by year and such. On the electronic side, with this large power adapter project, same. Up to now, we have only seen expenses, more or less, more expenses than sales proceeds. Also here we should see starting in April, we should see now a positive effect coming in our direction. The volumes will increase. Engineering issues have been solved. Agreements have been made on high cosmetic aspects. So we should also see there an improvement of profitability. So overall, 2019 has on that side of the business, quite a few upsides ready for us. Can I just maybe make a follow-up question to that? Okay. It just seems that it is kind of a typical part of your business that you win a project, you ramp up for two, three years, you do not see any sales, then it starts to be profitable. So is there going to be another project in 2020 where you have this basically the similar effect, which will have again a margin dilutive impact? So it just seems it is a typical kind of a cycle that you are seeing, or was it kind of extraordinary what you have seen in the last two years? Actually, it has been very extraordinary, those two product lines, because of the scope, the size of the business opportunity we have had. It both together have an opportunity of mid-range to upper range, double-digit million in sales over the next two years. These are the largest projects we have seen. Such large projects we have not seen in the group in previous history. We have seen smaller, which are then more easier to digest. Also, the uniqueness of the processes and design here challenged us quite a bit, and that is why we had quite a lot of upfront engineering expenses to cover. That is an unusual case. It is not happening many times, that you have such opportunities for complete new product lines. That is why we entered them. We see also the opportunity to multiply later on. The capability for the power adapter, for instance, the basic capabilities we put now in place in Nanchang is the same capability we will use for that one automotive order I have mentioned we have won for China. The next and following projects should be able and capable of falling back of existing equipment and with that have a much flatter cost, development early in life. The one-off cost for the relocation to Nanchang, it has, I would say, basically three different components. The first one was mentioned, the legal requirement to pay a certain amount to each person, whether it stays or moves or leaves the company. We are these days in the process of informing the people of the relocation. I would assume that probably that portion will come due soon, so probably in the first half. That is my assumption. The second portion or component is that we expect that 70% of the employees, roughly 70% of 1,400, will take the opportunity and the chance and will go with us to Nanchang. For those employees, we will offer a retention amount, an incentive to stay with us, bring the knowledge and know-how over. We believe the 70% is a fair estimation, but it is an estimation. That portion would be paid out after first year and after second year. So to incentivize them to stay, get the money, but stay for two years at least. We will make a provision for that one. But the cash out probably will be then, I would guess, 2020, early 2020, early 2021. But we will make a provision for what we promised them. The third component, there is various costs which we have, in a way, doubled. For example, we have the new Nanchang factory was built for altogether, for the whole investment cycle, just above $40 million U.S. We start to amortize, to depreciate. So we have the depreciation cost. At the same time, we are still the rental fees in the four locations where we are currently. As soon as everything is moved and give notice to these locations, currently rented premises, those costs will fall away and, probably even here and there, we have to bring those locations back to the original status, right? So there is also potentially some cost considered, all them together, that are the three main components. First portion, I would guess first come in the first half, and the other two I will see probably partly first half, certainly the remainder in the second half. We can be more precise mid-year. Yeah. Great. Exactly. There is some plans to focus certain businesses, which would mean that the currently used assets would not be used anymore and could be sold. There we are in negotiations, potential buyers, and it depends how that moves forward. Could be first half, could be just after and fall into the second half. We can't say more there currently. But there is valid reasons to believe that that will happen certainly this year. Thank you for taking my questions. Can I ask two fast one for Rolf and one and fast and a long one for Jens. The two fast one for Rolf first. You mentioned CapEx 6%-7% in 2019. Do you have already a view on what may be the level afterwards? We believe it probably, most probably, in the midterm, in this range, 6%-7%. All right. Back to normalized level, say. Okay. From this perspective, from today's perspective. Yes. Right. There was, in the past, I think, a target for the cash to cash cycle that was below the 111 where we are now. The cash to cash cycle, I remember we have discussed a few times, I think also the IPO time, but afterwards there was a target for that number, 111, to be below that trending towards, if I am not mistaken, 105 and maybe even low. What can you comment about this? Because it has been very stable at 111. Very stable, and I would rather say we are probably on a normal level if we say 30%-31% on sales, which then turns into this 110, but probably a little bit more, 112, 15 days. You have seen on the slide, I showed also the outstanding accounts receivable somewhere in the 67, 68 days. That is one component, of course. Then you have permanent pressure from your customers to extend that one. We have to fight against it and hopefully we will be successful there. The other big portion comes from the inventory and the reminder is accounts payable, where we are the ones which pay quite fast to take advantage of cash discount. I would say 110-112, 15, that is probably a level we have to foresee also for the future. Okay, thank you. The first one, the fast one for you, Jens. You mentioned the EUR 7 million, more or less, that it cost you to ramp up this project last year and the year before, more or less. How do you measure that? Is this number really a precise one that you can calculate easily? It is an estimation. It is an estimation. We can certainly. I said in engineered components in 2017, it was 6-8, and in 2018, we estimated around 7.5. There are some certainly known amounts which can easily keep track of. The rest is usually efforts in engineering and production to produce samples, to produce initial serial production, that it's probably a little bit harder to segregate what is normal production and what is now accountable for these projects, because sometimes they run right next to each other. It's an estimation. One is staff, and I remember when we talked to the division, there is in the project phase where you do not gain any sales, 200 person working on the project. So they can identify by the number of persons working for that project. The second component is the tool. They build up their own capacity, but also had to buy in certain tools within the group. So you add their bills and again, people to measure it. But at the end of the day, it's an assumption and measurement. Yeah. All right, and then my last one. When Angela Merkel a few weeks ago spoke about the U.S.-Europe trade war, she looked to me pretty worried. If the import duties for German cars go up, are you worried as well? Should you be? What can you do if these Armageddon-like scenarios of 50% loss of volume imports to the U.S. really would verify? I think the first question is probably a day-filling question, what will happen and what will not happen. I believe next year see election process starting. My personal view is Mr. Trump will need good news, and he will need to project that he has brought an improvement to the country. So personally, I don't think that he will set for another conflict. He will rather make it appear towards the outside, "I made a better deal. That's what it is, and let's go back to normal." That's probably the assumption we took to also plan for the year. After not achieving success with North Korea, there needs to be a victory and the European Union has made clear that they would also impose union and strict tariffs. So I personally don't think it goes that way, but we'll see, we'll find out. Many surprises are possible. Overall, when there are tariffs in place, we have to keep in mind what are the underlying requirements in the automotive sector. So short term, there will not be any shifts in value add because the components, the product are specified in. The customer cannot easily change due to regulations, cannot change suppliers, cannot change sources. So I would not expect that market share will be lost and gained due to us or other competitors, for instance. It will probably be more a shift of what kind of cars will be bought by the local population. What cars will be bought in the U.S., and then probably more cars will be bought or will be more affordable, which have more local or higher local content. Even though that's very challenging. The U.S., a lot of cars have European content, no matter how, whether these are American brands or European brands or Japanese brands, for instance. I would rather see that the tariffs will impact the profitability short term because someone will need to pay. The customer will probably still buy a car, maybe fewer cars will be bought. Then the products will still need to be shipped to the U.S. to be assembled, or the components will need to be shipped to the U.S. to be assembled. That cost short term is usually pushed to the supplier, and then later on in the negotiations, pushed back to the customer. That is the most likely event path, that we will probably see a softening of demand, general demand, but we will also probably see impact on importing components and importing raw material to the U.S. Besides that short term, I would not expect a major shift in where value add is happening overall. I think most companies will just say, let us wait for the election because after the election, change may come soon around. It is probably less costly than changing, shutting down, or moving plants. Thanks a lot. Four very quick questions, please. The first one is, when we have followed the smartphones, have you already used the prototypes to tear down and to see what is the content of screws inside? What is your conclusion? Number two, please. What is the revenue line incrementally on the new product launches you will see in 2019? Are we speaking about EUR 10 million, EUR 20 million, EUR 30 million? So independent on macro. Third question, what is your capacity churn? When you, for example, have now the ramp up of capacity for the power chargers. If this is, for example, lost Is this capacity then shut down, or can you use it for any other product? So what is your capacity churn in general? Last question, have you already got from your customers indications that Q2 should improve versus Q1 on average? We'll take question one, three, and four. Number two, we have to ask back what exactly the question is, that we can precisely answer it. First off, yes, we are always buying customer products, tear them apart and take a look what kind of components are in there. Is it the full range as expected? We'll take a look at the design. We can also identify which ones are reaching SFS, which ones are reaching competitors, for instance. The teardowns have not brought any surprises to us of these new programs. We have seen the content we expected to see in those devices. Overall, this has been stable. So there are no major design changes visible. There's no change in practice that we would then see an increase or decrease in demand of any kind of component. Fairly stable over the last four or five years, when we keep track of the phone, fairly stable. Ramp-up capacity is usually installed short-term. That means we have not yet released all of the capacity to be built, which we need this year. This is usually done quarter by quarter. Most of the machines we will need to buy are available short-term in the market. So we have now built up the capacity for the first and for the second quarter. For the third and fourth quarter, we are still waiting and seeing the further development and then release the POs to buy the equipment and machines. Q2 on the electronic side will definitely improve. As I mentioned, we have a rather steep ramp-up ahead of us. In April we'll see, especially for the power adapter program, we'll see the demand increasing. We'll see it peaking probably towards June and July, and then going into the third quarter. So it's a build-up, it's a build-up of inventory. It's a build-up ahead of time because of, A, a new design, and B, because of two phones will be equipped with this new power adapter, and therefore, quantities will need to be built ahead of time. The phone usually is then coming in the third quarter later on. This on question number one, three, and four. I hope I was able to answer them. Number two, please can you formulate the question again? Yes. On the new product launches for power chargers and for the braking systems in automotive, what is the incremental revenues coming through in 2019 year? The incremental revenue coming ahead. As I stated earlier, we expect that both programs together are probably mid or higher double digit million range in sales. For this year we expect half. Okay. Yeah. So it's probably below mid-range. Okay. Thanks. The other we can take offline afterwards. Thank you. Okay. Thank you. Milo? Yes. This power adapter is very interesting, and we never saw a picture of it. How does it look like? What parts do you produce there? Do you have an example here? Yeah. The other question, very minor question. Your tax rate was low. For me, I expected a higher tax rate. What do you expect for the tax rate this year? We cannot talk specifically. We can talk in general. We can say in general, we have a program and it's a power adapter. We have precision components in there, which mainly goes into the connection. It's the connecting side of the power adapter. These are mechanical components here, which then differ per country. There are many different versions. There are probably around eight different versions globally. We participate in the three high volume versions of this power adapter with precision components, which go to the plug-in side of the power adapter. That's what we do. What is the difference? What is the uniqueness, you may ask. The uniqueness is the requirements. It's the aesthetic requirements which are given, but also then the requirement in the cost level to achieve that. Due to that, cold forming is very efficient. It's a powerful technology. It replaces machining CNC technology. Rather than having 300 to 400 CNC machines, it's two handfuls of cold forming machines, which produce the same amount of components. It's a total cost down scenario for the customer. This goes into the power adapter. This is very unique. It's a unique design. It's very special tailored to this specific customer. You mentioned the same or similar Machines and technology you will use in China, in Nanchang for the automotive industry. What parts are there? They all cannot be very specific, but it goes into ABS and ESP applications. It is the same machine, same equipment. It takes tool manufacturing capability, it takes cold forming capabilities, and that is a large investment. There we can use the same machine parts. The knowledge, the know-how transfer over the last two years for this power adapter project, the cost we have just talked about, the one-time cost, can now be utilized also for an automotive project. That is the logic behind it. It is a standardized machine part which can produce components for both end markets. With that, we reduce risk in the midterm and increase utilization. Question was on the tax rate. It was right, it is 17.5%, quite low, especially compared to previous years where it was around 20%. I believe the 20% is what you also can expect for your calculation, what to come in the coming years. There were some special effects in 2019, partly used loss carryforwards, not so much that one, but also a shift in the mix of where the profit was achieved. There it also had to do with these intangibles which were amortized last time, last year, 14 million. The cost was no longer there. It was now full benefit in Asia, where the tax rate, Singapore is roughly 13%, where is the tax rate, which is far below what the average is, right? There are two main effects, but more kind of special effects, I would say, and you are on a good side if you calculate this 20% going forward. Any other questions? Just a quick one follow-up from Marta Bruska again. With regards to this automotive project in China, with the synergies with electronics, do you have already the project or you hope to acquire one? We already have the project. There is a letter of intent in place. Okay, thank you. With regard to your distribution and logistics in Switzerland, a very good growth rate of 5%, but your competitor posted some 8% growth. Do you feel you are losing market share here? Or what's the difference? I think, first off, we are not knowingly losing market share. From our perspective, we have seen one customer to Bombardier. Bombardier, we have lost last year, for instance. But again, the North American competitor who had already a strong position within the Bombardier network globally, and besides that, Bombardier in Switzerland is phasing out its production anyhow. Market share lost, we don't see in a substantial way. In 2018, we have gained new customers from direct, from indirect competitors. We were able to increase also sales with the existing customers. I think the 5.1% is a result of the project wins we had also over the last two years and the good economic environment overall. I think when we talk about competitors, we have some direct competitors in Switzerland, but there we also have to see that we only overlap roughly with around a third of our business with our direct competitor, who is also listed on stock exchange. The growth, the main growth in business, we have seen plus minus a stable development because the mentioned customer, Bombardier, was served within the fastening all 5.1% for our product portfolio. A good achievement, a solid achievement, a solid year. And once again, we do not see a head-on competitor in Switzerland who is doing exactly the same as we do in a material way. Thank you so much. There are no more questions, or there seems to be no more questions. We would like to thank you for your interest, for your questions, and all the best for the day and for the weekend. Thank you for your attention. Ladies and gentlemen, the conference is now over. Thank you for choosing Chorus Call, and thank you for participating in the conference. You may now disconnect your lines. Goodbye.