Earnings Call: H2 2020

Mar 5, 2021

Ladies and gentlemen, welcome to the presentation of full year results 2020 conference call and live webcast. I am Moira, the conference call operator. I would like to remind you that all participants will be in listen-only mode, and the conference is being recorded. The presentation will be followed by a Q&A session. You can register for questions at any time by pressing star and one on your telephone. Webcast viewers may submit their questions or comments in writing via the relative field. For operator assistance, please press star and zero. The conference must not be recorded for publication or broadcast. At this time, it is my pleasure to hand over to Mr. Jens Breu, Chief Executive Officer. Please go ahead, sir. Thank you, operator. Good morning and welcome to the presentation on our full year 2020 results. Today's speakers are Rolf Frei, CFO, and myself, Jens Breu, CEO of the SFS Group. The agenda for the presentation of the full year 2020 results covers the key takeaways of the year 2020, the development by segment, the development of key financials, the outlook for 2021, as well as the opportunity for Q&A before closing. I start now with the key takeaways for 2020, which can be summarized as well-positioned in a challenging environment. Full year 2020 got strongly impacted by COVID-19 pandemic, turning attention to employee safety, as well as balancing supply capacities and cost management and continued innovation activities. Driven by distinct recovering demand, mainly in engineered components segment in the second half of the year, full year 2020 sales amounted to CHF 1.704 billion, which represents an organic decline of -3.2% versus prior year. SFS's resilient profitability got proven again over the cycle with the achieved profit margin of 13.3% matching prior year level, triggered by improved capacity utilization during second half of the year, flexible employees supporting temporary adaption of cost structure, positive mix effects driven by electronics end market. Besides, the year has also seen continued investments into growth projects, in particular in automotive, medical, D&L electronics, providing growth in sales and profitability in the years to come. Last but not least, the publication of our first standalone sustainability report according to GRI, is further strengthening the integration of sustainable business practices into the corporate strategy and the constantly fine-tuned business model. 2020, or the year of COVID-19, has been more than just managing a crisis or pandemic. Actually, it has been a year of truth, where the COVID-19 pandemic put the effectiveness of our defined strategy, and with that, our strategic core pillars to the test. At this point in time, we can conclude the strategic alignment has proven to be robust and correct for SFS, because through our local-for-local approach, the short and robust supply chains helped to perform exceptionally well throughout the year. Thanks to our balanced focus on different end markets, regions, and sales channels, SFS successfully cushioned the consequences of the decline in demand. Owed to our good profitability and solid balance sheet, SFS had the means and the ability to pursue its long-term strategy and carry out strategic investments even in such a crisis. The focused technologies and standardized machine park allowed us to reduce risk and maximize flexibility. The focus on relevant megatrends continued to provide us also in 2020 with a solid and healthy pipeline of new development orders and bookings. in 2020, we increased the focus on sustainability and defined the key elements to improve our sustainable development going forward. Under the key element management attention, we periodically report on progress and tie the portion of management remuneration to the relevant ESG KPIs. The mentioned ESG core KPIs are derived from the materiality analysis and include economic performance, occupational health and safety, training and education, emission reductions, and socioeconomic compliance. With the next sustainability report, we will see a CO2 roadmap, which will define the further envisioned CO2 emission reduction, the increase in share of renewable energy, as well as measurable targets and improvement initiatives. In summary, in 2021, we will see a continued focus on the set goals, the implementation of the measures as defined in the CO2 roadmap, and an update of the materiality analysis. Also, in the day-to-day business, SFS is creating sustainable benefits, as evidenced in this best practice example. Through its value engineering, SFS is strongly contributing and supporting customers in the journey for a better and more sustainable future. For instance, in the field of integrated braking systems, these efforts helped to produce increased safety levels by achieving a roughly 50% reduction in time to lock of the braking pads, and through that, much shorter braking distance, a resource optimization through an expanded range of energy recuperation modes, and better performance through a roughly 30% weight reduction. Continuing with the development by segment. Where I will start with the headlines of the engineered component segment, in which an extremely challenging and demanding year could be observed due to COVID-19 having a significant impact on demand, resulting in a first half 2020 reported sales decline of -16.3% year-on-year. The corresponding rebound in the second half, with a sales increase of 36.3% versus first half, was mainly driven by the recovery in automotive-related areas and organic growth in electronics and medical. The improved capacity utilization in second half and the early initiated cost control measures improved profitability strongly. Thanks to these efforts, an EBIT margin in the second half of 20.2% was achieved. Besides all the COVID-19 related challenges, our focus was also set on moving forward according to plan with strategic initiatives like establishing the global manufacturing platform for the medical device business and the site expansion projects at Industrial Switzerland and Medical U.S. The key messages of the automotive division, strong recovery in the second half of the year brings to light the high volatility in demand, characterized by a Q2 automotive end market sales of -58% versus prior year Q2, and shortly after in the second half, the return to organic growth in some months versus prior year. Other highlights of the year include establishment of a deep drawing platform in North America by acquisition of Truelove & Maclean, project initiation for ramp-up in Nantong, China, scheduled for first half 2021. The building expansion project for electric brake systems production in Heerbrugg, Switzerland, started. Continued impact innovation trends and new product bookings evidenced. Looking out for 2021, we expect continued growth in demand as well as the division to outgrow the market. The key message of the electronics division is that the Nantong, China, site was fully loaded in the second half of the year, which can be seen as the key highlight and achievement, not just for the division electronics, but also for the entire SFS Group in the past business year. Results from lifestyle electronics and smartphone business in second half 2020 also confirm the strong capabilities in product ramp-ups. The position in smartphone accessories was further strengthened. As mentioned, a high capacity utilization at the Nantong, China, site was achieved, with the infrastructure now being fully loaded. Again, further reduced demand at our Malaysian site for HDD components could be partially compensated by demand from electronics customers with supply chains outside China and the newly set-up medical business. For full year 2021, we expect a flat development based on further HDD business decline and a strong base effect in mobile devices and lifestyle electronics. The industrial division observed a varying recovery from COVID-19 depending on the niche market, because COVID-19 pandemic impacted individual business units to different degrees. For instance, the industrial appliance niche achieved the prior year impacted by home improvement trends. Hardware components performed just slightly below prior year, impacted and limited by the construction market development. Off-highway, most positively driven by the Indian agriculture market. Looking out, we expect the demand to further improve during the course of fiscal year 2021. This after a probably subdued start in the first half. The aircraft business is expected to remain challenging with no recovery in sight due to still strongly reduced demand. In the medical division, the growth track. The business impact of COVID-19 pandemic was overcompensated by underlying market growth and ramp-up of new projects. The buildup of the envisioned global manufacturing platform had its start and includes SFS sites in Europe and Asia with the clear aim to implement a local for local strategy, supported by the rollout of the Tegra Medical brand globally, aiming to participate globally at the dynamic growth rate of MedTech market demand. In Franklin, U.S., the first production units moved into the new fully-owned location. For 2021, the positive development is expected to continue. In the fastening system segment, a further improved performance in a difficult environment can be reported, owed to a less pronounced impact of COVID-19 on the construction market and scope effects limiting the decline of segment sales to -1.7% year-over-year. A strong recovery at the riveting division on the fourth quarter, driven by demand from automotive customers. Further investments into expansion of market reach with the acquisition of MDE. The continued efforts over the years into efficiency increases, improved capacity utilization in the second half of 2020, and cost control measures supported profitability strongly, hence an EBIT margin in the second half of 14.1%. Looking into the details of the Construction division, we can state that the division benefited from stable demand. After a decline in demand in Q2, business picked up in the second half and showed the usual positive seasonality. Business with systems manufacturers and distributors, but during the COVID-19 related lockdown phase affected the most, while demand with installers and builders increased. Besides, for the division, important innovation trends remain stable and can be confirmed as efficient installation processes, health and safety at work, energy-efficient building envelopes. In 2021, the Construction division expects a flat development due to considerable uncertainty caused by the COVID-19 pandemic. The Riveting division convinced through improved performance. After a significant decline in demand during the first half year, the recovery was driven by automotive-related areas, mainly in Q4. The temporary adjustments in production capacity, together with structural measures taken during the previous year, supported profitability. Demand for setting tools remained strong. Going forward, continued focus lies on innovative solutions with clear added customer value, like improved battery capacity or access to the new CAS battery platform. The return to organic growth in full-year 2021 is expected, thanks to the ongoing market recovery. In the Distribution and Logistics segment, a stable development was achieved thanks to balanced market activities. This year, with limited impact of COVID-19 on sales due to strong demand in the areas of building materials and personal protective equipment, weaker demand from the industrial customer base. The multi-channel approach was particularly beneficial, coping with the limitations caused by the pandemic. Continued focus was also set on the development of the business with internationally established D&L customers. At the end, an all-time high adjusted EBIT margin of 8.9% was achieved, supported by early-initiated cost measures. A continued improvement of demand through the course of the year 2021 is expected. With that, I conclude the presentation on the development by segments and hand over to Rolf Frei for the development of the key financials. Good morning, and welcome everyone. Rolf Frei, CFO speaking. The financial year 2020 was quite a challenge. The lockdown in various countries around the world, mainly in Q2 2020, resulted in a massive lower and customer-driven demand. Many of our customers shut their operations and did not accept any incoming shipments, at least in Q2. The situation improved from September onwards. This all impacted the development of our key financial numbers substantially. The following slide shall help to better understand and to receive financial transparency in such a crisis. The first slide shows the influencing factors of the sales development. The like-for-like growth, including M&A transactions, a measurement consistent with our guidance, resulted in a slight decline of minus 0.2% year-on-year. Contrary to the first six months, we had an organic growth contribution of 3.7% in the second half. Together with the M&A impact of plus 2.7%, we developed stronger than expected, with 6.4% year-on-year, compared to a minus 7% in the first half of 2020. Last time we saw a similar negative currency impact was back in 2015. You remember the Swiss National Bank suspended at that time, the currency peg to the euro. Then sales suffered with minus 5.1%. Now it is a minus 4.1%. Out of this, the foreign exchange impact, translating the EBIT from foreign currencies into Swiss franc, was CHF 9 million or half a percent on net sales. The strong growth in electronics lifted its sales share to 20.9%, a plus of 210 basis points. A similar increase, namely 240 basis points, is reached in Asia. As electronics dominates the Asian sales share with 80%, a tight correlation is given between these two numbers. Due to the dramatic sales decline in the period April through August in the automotive end market, its sales share was falling back to 21.6%, a drop of 280 basis points. The region hurt most was Europe, with a decline of 360 basis points to a new sales share of 35.4%. This was mainly driven by two end markets, the automotive and the aircraft. Meanwhile, we are still close to our strategic regional sales shares, with 40% in Europe and 20% in the other geographies. The direction fits, even so, there are always small variances. We face a weak global economy in our end markets since late 2018. As a result, the management decided on a hiring freeze already in October 2018. You see the financial year 2019 came out with a flat sales development quarter by quarter. In Q2 2020, the COVID-19 pandemic struck us hard within weeks, with a steep and unexpected decline of 21% year-on-year. The hardest downturn suffered the industry, with organic sales down 58% in Q2. Came in a little bit later, but was sharp and reduced sales in the second half 2020 by 70% year-on-year. COVID-19 left its mark on the profitability in the first six months, with an EBIT margin of just 9.2%. The backdrop, of course, was a result of the insufficient capacity utilization due to the lower customer demand. From September onwards, the recovery in our end markets gained on dynamic, and cumulated in December 2020 in the best monthly sales, with an organic growth of 14.5% or CHF 18 million more sales year-on-year. Demand from customers and capacity utilization turned upside down in comparison to the first half 2020, and resulted in a record EBIT margin of 16.8%. However, if we fade out the still needed cost measures that reduce the personnel expenses, the EBIT margin would have been at 14.9% for the second half 2020. In this time of extremely high volatility in demand, the words flexibility and mobility became key, both for the company and the employees. SFS adjusted capacity, implemented cost-saving programs, and made use of short-term government support programs, such as short work weeks now in Switzerland. This helped significantly to reduce expenses temporarily, and especially in Q2 and Q4 2020, on a much lower pace in Q4. These worldwide programs helped to refrain from structural layoffs and to keep the expertise and the knowhow of our employees, who also waived part of their salary. In total, these measures reduced personnel expenses fast, but for short-term only by CHF 39 million. By the way, focus was also given to other defensive measures like reducing net working capital, postponing CapEx, and further increasing credit lines. Well, credit lines just in case and to be on the safe side, you never know. In the last 13 years, we saw economic crisis as well as Swiss franc reevaluations coming and going. In this critical situation, it was crucial to take fast but thoughtful decisions to implement balanced measures for customers, employees, and company, and at the same time, to continue and even push innovation efforts forward. When we look at the EBITDA margin development for more than one decade, this was well managed throughout the cycle and resulted in a strong and very robust track record. The net working capital developed very stable at 30% of net sales or 111 working days. These are reasonable levels for the end markets SFS is in. Notwithstanding that some CapEx project in these uncertain times have been delayed, total spending reached 6.1% on net sales, or CHF 104 million. The business model of engineered components is capital intensive and claims, again, 80% of total capital spending to support mainly future growth and innovation. This segment earned a good return on capital employed, ROCE, of 19.6%. Within this segment, the CapEx focus was on automotive and medical. Especially the growing medical business required, due to growth, new infrastructure, which consumed 25% of all CapEx that was invested on a group level. This, of course, the share of CapEx for America from 13% to 29%. in 2021, we anticipate an overall CapEx spending again in the range of 6%-7%. 2020 shows very strong free cash flow of CHF 192 million. The increase of CHF 31 million was achieved with higher cash inflow from the operations and lower cash outflow for CapEx. We can see the financing power of SFS Group even has proven to be resilient. This financial year, the conversion ratio of EBITDA reached a very strong 58.7%. Net cash at year-end cumulated at CHF 144 million. The more than doubling against the previous year was supported by the higher free cash flow and the substantially lower cash outflow for M&A transactions, but also the reduced dividend payout. SFS Group's balance sheet remains healthy and solid. The equity amounts to CHF 1.3 billion, and the ratio stood well above 70%. ROCE still showed an attractive return of 19.9%. However, just at the low end of our target. In our business model, the return of capital correlates very much with the EBIT margin rather than with the steady capital turnover. This is true for ROCE and ROIC and comes obviously when you are comparing the development of the first six months with the second six months. The vast difference in both returns between first H and 2H is remarkable and strongly influenced by the EBIT margin. The main driver to improve profitability will be higher sales, will be better capacity utilization, and also will be enhanced productivity. Also, assuming that COVID-19 most probably will phase out latest end of 2021 and demand comes back through improved customer sentiment, one can expect that then the low point is behind us. In the next few years to come, we expect effective tax rate to fluctuate in an average around 17.5% on earnings before tax. This is due to the fact of lower Swiss tax rates, which was voted for and put in place from 2020 onwards. Consistency in the payout to the shareholder is important for SFS Group. However, in the first wave of COVID-19 pandemic, the dividend was reduced by 10%, and this as a sign of solidarity with the company, the employee, and the community. In view of the robust earnings, the solid balance sheet, and the cautiously optimistic outlook, the board will propose to the AGM an unchanged payout of 180 for each registered share. As such, the payout ratio stays at the low end of its target range of 35%-50% on net income. Let me summarize the financial key indicators for 2020 with just a single statement. The robust profitability, together with a strong funding, was maintained even and again in a difficult economic environment. In my opinion, this was triggered by an attempt determined and down-to-earth management style, as well as a very balanced positioning by regions, end markets, and sales channels. With that, I close the financial update. It was also my last presentation as CFO. After many years of intensive work, I will soon hand over the CFO position and reduce my workload beginning of May. The interaction with most of you since the IPO was fruitful and fact-based discussions. Both sides were sometimes challenged, but could learn from each other. This exchange of ideas gave me new insights and learnings, which I never would like to miss. Thank you for all your support and your input. Now back to Jens, who will further explain on the guidance and the key priorities in the months to come. Welcome back, and thank you, Rolf, as I continue with the outlook for 2021. The guidance for full year 2021, in short, return to organic growth and profitability on prior year level. In the current financial year, our attention will remain focused on protecting the health of our employees and managing the effects of the COVID-19 pandemic. Investments in the selective expansion of our production capacity and those implementation of growth projects will continue. In February 2021, for example, construction began on an additional production hall at the Heerbrugg site in Switzerland to realize growth projects, one in the automotive division. Another strategic priority is the expansion of our global production platform for medical device applications. For the financial year 2021, SFS expects to return to organic growth and to achieve an EBIT margin in the range of the previous year. This implies a substantial improvement in 2021 and a makeup of 39 million CHF of personnel cost measures as seen in 2020. In reality, the guidance indicates a lift of the EBIT margin from 10.9% without the personnel cost measures to a roughly 13%+ EBIT margin. This outlook is based on the assumption of an ongoing recovery in the global economy and no further global COVID-19 infections leading to a deterioration of the economic conditions. On the operational side, we continue to focus on specific priorities tailored to be most relevant and beneficial to reach maximum performance for the end markets and customers we serve. These are strengthening innovation, especially in the mega trends of demography, digitization, and autonomous driving. Investments in future growth particular in medical, automotive, and electronics. The already mentioned continuation with preventive measures to protect employee health and safety, the further balancing of the production capacity with demand while ensuring supply capabilities, and costs are under control. The integration of sustainable thinking and acting holistically in the business model and corporate strategy. After 40 years of successful service and strong loyalty to SFS, in 2021, the handover of the CFO position from Rolf Frei to Volker Dostmann will take place. In the spirit of good corporate governance and to facilitate a timely succession process, Volker Dostmann will take over the CFO position right after General Assembly as of April 2021. Volker is ideally qualified for this position, having held several positions as CFO during his more than 20 years of experience in the industrial sector. Besides the warm welcome in the SFS family, we wish him much joy and success in his new role. Rolf joined SFS in 1981 as our long-standing CFO and head of corporate services. He has not just closed with the 2020 presentation, his 40th annual report, but also strongly helped to shape the company's overall development significantly. After handing over the CFO function, Rolf will continue to support the company in selected strategic projects, like for instance, the international rollout of our new ERP system, SAP S/4HANA, until his ordinary retirement in 2023. The board of directors and the group executive board thank Rolf for his many years of success and his strong loyalty to the SFS Group. Over the course of the years, Rolf made himself a strong reputation as an exceptional performer with his great expertise, his tireless efforts, his consistent focus on customer needs, and his fine personal nature. Thank you, Rolf. Thanks. With that, we are approaching the end of the active presentation of the full year 2020 results and are now ready for your questions. The first question is from Jörn Iffert from UBS. Please go ahead. Yes. Hello, Jens, and hello, Rolf. If I may quickly start, Rolf, many thanks for all your support. All the best for your future, and we will miss you. But before you leave, to help me a little bit, please. Maybe starting with the first question on the outlook. You are not specifying your organic sales growth target, which is very fair, but can you help us to understand, is this outlook a little more cautious for the second half due to macro uncertainties? Or are you already seeing in January and February, which were relatively normal months last year, already some moderation in some end markets or some challenges coming up? The second question would be please, on your consumer electronics segment going forward. You are losing some revenues in HDD. I think also that technology change on power chargers and earphones are hurting you a little bit. What can you do to really find sustainable medium-term growth here? Do you have a new project pipeline with new and existing customers for new products? Some more clarity would be very helpful here. The last question is structure. I think you have quite high exposure to the commercial sector. Given the COVID-19 environment and this, yeah, potentially fewer projects in the commercial sector going forward, is this a structural concern to you and how could you offset this? Thanks a lot. Yeah. Thank you, Jörn, for your questions. First, on the outlook. The outlook is by intention, conservative. I think we have seen many surprises during the COVID-19 crisis, which we managed very well overall as a group. We also believe we have not seen everything at this point in time, and especially also the new mutations of the virus, for instance, could also maybe pose some surprises we all just don't know at this point in time. Certainly, overall, we also believe that the second half of the year will be probably much more dynamic and then more driving. Again, we do not know. The coronavirus as it looks right now, certainly everyone is looking forward to vaccination activities, but we also don't know how effective those will be and how fast they will progress. Will it be on time or will we see delays, especially in the Western world, where most of our customers and consumers sit? Due to that consideration, we leave it open, the guidance. With leaving it open, we leave it open also maybe to a potential better for performance overall. As the year 2020 has taught us, it's probably better to start a little bit more conservative into the year, and then later on throughout the year, get a little bit more firm with the guidance going forward, and rather correct it up than down. That's maybe on the first question. The second question on consumer electronics. Certainly HDD, as we have experienced last year, the total market declined by -17%. Our revenues declined by roughly around -10%. We expect that this will continue for the next probably 2 to 3 years. We have seen an extraordinary year in terms of smartphone demand. We attribute it also to the 5G standard, for instance, and also to successful products which came to the market. Overall, we are confident about our contribution we can make with our important customers and look forward to also a good further development of the electronics division. Opportunities in terms of future growth are also seen as shown in the presentation. For instance, on VR and AR technologies, we could also make substantial progress in 2020 and achieve a middle single-digit million revenue intake in the year because of these new applications. We also would expect that this trend will continue, and we see also growth opportunities in those technologies. Last but not least, the third question on the construction market. As you indicate rightfully, there are probably less industrial buildings which need to be built. On the other hand, we still see that there's a trend for home improvement and for renovation activities, which needs the same products and solutions we have available for our customers. Overall, we have not seen that the workforce got minimized on the customer side. That means that the construction companies reduced the number of employees they have. They maybe just shift them from new buildings more to renovation. Due to that, we give a guidance which is flat for the year. I would expect that maybe in the year 2022 and 2023, we see a recovery also on the industrial construction side. Okay. Many thanks for this. The next question is from Alessandro Foletti from Octavian. Please go ahead. Yes. Good morning. Thank you for taking my question. Also from my side, Rolf, all the best for the future. I hope we can still meet in person before you go completely in retirement. Anyway, I have two questions basically. On the margin indication for 2021 and on CapEx. Maybe on the margin first. If I look at your slide 23, you have given the adjusted margin for the second half of the year, excluding the support from government, was 14.9%. I have calculated that in the same calculation in H1, it was around 6%. So I see the two bars there, 6% and 14.9% for 2020. Besides that, I see the two bars for 2019, which were 12 point something and 14.2%. How can you get to the same margin of 2020, which was, by the way, the same margin of 2019, with your sales growing probably more than 2019? 2019, you had CHF 1.78 billion. You are likely to go above CHF 1.8 billion this year. You should be at least higher than 2019. That is my first question. That is first question, right? All in one. Yes. Sorry for that. Made quite some calculations, Alessandro. Thank you. You are right, the 16.8% is, of course, supported by these reduced personnel expenses, and as we indicated, it would come down to 14.9%. Of course, a similar impact as you have calculated for 1H 2020. But if you look at the full year 2020 compared to 2019, we are on the same level, more or less, with the 13.3%. What shall I say? We believe we can keep this level for the year 2021. Of course, we will need some growth on organic side, on the sales side, and we need to keep our expenses on a good level. That means also we have to improve productivity, and to take the right measures. That is what I would say. I mean, the year is still very young. It is two months is over. We are in the phase of this reporting for February. We have not done yet, but we are quite confident that the guidance we have given is robust, and we believe in it, and we can achieve it. Maybe Jens, you have Okay, maybe a follow-up. something. What must happen for. Sorry. Yes, please continue, Alessandro. Gives us some more time to think. I just wonder what must happen for you not to reach that number. Jens also mentioned the CHF 39 million, I called it a temporarily cost reduction. That will not happen in the same pace. You have seen in Q2, it was tremendously high with 23. It was then cut in half in Q3 to 11, and then again half, 5 million, in Q4. These cost measures, as we can see in the first quarter 2021, they more or less, let's call it run out. There is still the one or the other division in Switzerland which works on short weeks, and that will support a little bit, but I would believe it is below the level of the CHF 5 million we have seen in Q4 2020. So there is a little bit of support from that side. But all in all, we have to make up first CHF 39 million cost reduction, which was on a temporary basis available only. Through that, we had not to make structural layoffs, and we could keep our employees, could keep the expertise, the know-how, and so on. Coming back to your question, Alessandro, what needs to happen that we do not achieve this guidance? I think there are two driving factors. First, I would say the national banks would need to change direction and stop with the expanding monetary policy, which would have an indirect impact on consumer sentiment. Secondly, also, I would say, in the countries in which we are active, governments would need to also step back from the short work week offerings they give from the governmental support they give to companies to temporarily park labor costs with them. I think those two are the driving elements on the market side, the expansiveness of the national banks. But also on the governmental and the social side, giving support, giving a hand to the companies so that they don't sit on a high level of personnel costs. All right. Thank you. What I understand is that you really do not see the normalization yet around now, but also not really coming very soon. I mean, this is your view, basically. Exactly. We expect the normalization in the second half of the year. But again, we also see that the coronavirus has a lot of mutations. There may be surprises; there may not be surprises. I think we have seen in 2020, as soon as the restrictions are lifted, everyone is joining the bus, and the bus goes forward with full speed. Right. Thank you very much. Maybe on CapEx, my second question, make it easier. You mentioned 6%-7% of sales. Can you tell me first where you stand with the construction in Switzerland? Then maybe, you mentioned the big expenditure in the U.S. How far are you there? Is it sort of going back to normal in the U.S., i.e., in the medical division? We can say in Switzerland, we just broke ground in February, so we just started the building construction, and it should be finished in summer of 2023, when we will have additional machines coming in for new customer projects. So that is on schedule. But then 2022 and 2023. In North America, we had this acquisition opportunity of an industrial building premises of around CHF 20 million, including improvements, and that is fully completed. That has been fully completed and part of CapEx in 2020. Right. Going forward after 2021 then, is this the 6%-7% the level you will maintain, or is there a chance that you may go below- As long as we see a good innovation pipeline coming in our direction, we certainly see the 6%-7% as a valid one, and 80% of it is in engineered components. Guiding a 6%-7% CapEx means we have quite a few projects in the pipeline for engineered components. All right. Thank you very much. The next question is from Marta Bruska from Berenberg. Please go ahead. Hello. Good morning. Thank you for taking my question. Also, my warm goodbye to Mr. Frei, and all the best for the retirement. I hope you have a good and joyful time. I would like to ask two questions mainly. Firstly, I've seen on your presentation, page 12, one of the key messages for electronics division is that the Nantong site is fully loaded already. I must say, it really comes to me as a surprise, because back in 2018, on your Capital Market Day, you stated that the Nantong facility would bring a capacity increase of 30% to 35%. At the moment, your 2020 electronic sales are only 4% above the 2018 levels. At full capacity, back looking at sales in 2018, I would expect the electronics to grow to CHF 450 million in sales. Can you explain, please, a little bit what happened with the pricing or how much of sales to other end markets you have currently in Nantong? Then I will have one question regarding margins, please. Yes. Thank you for the question on Nantong. You're right. We said in mainland China, we'll be able to increase capacity by around 30%, and there we were roughly just below CHF 200 million at that point in time in sales. This is what we achieved in China itself. But please also keep in mind that we have a Malaysian operations which had now since 2018, continues a year-by-year revenue reduction. Nantong, the +30%, is for that site. But then once again, there's a Malaysian site which needs to be considered as well. Total electronics then increased sales for the last two years. Is that correct, then, to assume that you are not really benefiting from this relocation of the supply chains as seen by other companies with your Malaysian site, that there is not any increase in sales, but the decline in sales? Did I get that correctly? There's only minor shift from supply chains out of China. Only a few customers elected this option, and this is what we can offer with Malaysia. Overall, we certainly, over the last three years, had a decline in sales revenue in our Malaysian site. Okay, thank you. Is there nothing coming yet in terms of sales from automotive on the Nantong site, just fully focuses on electronics there? Is that correct? In 2021, we will have the first product ramp up in Nantong for automotive business. That's probably in the neighborhood of 2 million-4 million CHF or USD in sales, roughly. Then we have one additional programs for the years to come, which also are probably in the same neighborhood in terms of revenue annually. Okay, so you will have to expand this capacity further than if it's already fully loaded or? Exactly, yes. In terms of building premises within the next two years, we have to expand the facility. What sort of additional CapEx will that drive? At this point, we are in calculation, but we would expect that the facility itself will be expanded by roughly 50%. What else we can say, the first cash out will only be in 2022 for that potential expansion. Okay, thank you. Then with regard to the margins, did I get that correctly, that 39 million CHF of cost reduction you have seen in 2020 related to personal expenses is not to be repeated in 2021? That is correct. 39 million CHF for the full year. Okay, perfect. Your margin would be around 10% EBIT, with extraordinary help for 2020. What we said is that the 39 million CHF is a temporarily cost reduction we have seen in 2020, and will most probably, certainly not come back again in 2021. We have to make up first, and that needs to be covered then with additional, let's say, margin and others to come up with the 13% margin again in 2021. Thank you. That's very helpful. Thank you. The next question is from Bernd Pomrehn from Vontobel. Please go ahead. Yes. Good morning, gentlemen. Thank you for taking my question. Last year, you again achieved a very strong free cash flow, thereby further strengthening your balance sheet and reaching a net cash position of almost CHF 150 million. Your growth strategy includes an inorganic element. Do you currently see reasonably valued M&A opportunities? Should we expect something? Obviously, equity markets have done pretty well. Valuations have increased. How do you feel about inorganic growth in the next one to two years? If you had a wish list, which region or which of your businesses would you like to see stronger? Thank you. Mm-hmm. Thank you for the question. Certainly M&A is a strong part of our DNA and has historically always been. We are always, probably any point in time in discussions, we usually have very few selective opportunities. But certainly as you indicated, right now it's harder to find good targets. Probably we have to turn upside down more stones and look under to find a good target. When we talk about which divisions and which geographies we would like to set our focus on, then we can certainly say in the division construction, we have a good track record. Usually small, private can bolt on easily to their business model. That will probably continue on the construction side. But then also on the medical side, we are certainly looking out for opportunities. On the industrial side, probably less in the center of attention. On the automotive side, truly only once in a while when we have maybe a new technology we can dock onto the automotive platform. Also once in a while in Switzerland, distribution and logistics, we see an opportunity to further consolidate in the Swiss distribution and logistics market. In terms of geography focus, it's not truly set the focus. I would say it's just more likely in Europe and U.S. to find targets. In China, due to our heavy focus on electronics and our heavy focus on automotive, we see more organic growth there, since we can still bring a lot of new technologies to those markets and the positions in the market are not yet occupied. Probably we'll see less of activities in China and Southeast Asia. Very helpful indeed. Thank you very much. Ladies and gentlemen, that was the last question from the phone. Then we continue with questions from the chat. The first question is from Tobias Fahrenholz from Stifel, and we go question by question. We start with, could you give some flavor for the start into 2021? What kind of organic growth rate do you roughly expect for the first quarter of the year? Will it be somewhere within the 3%-6% guidance range? First off, our expectation for the first quarter is, and probably even part of the second quarter, that it is a rate of flat development, probably a little bit bumpy up and down depending on the COVID-19 restrictions we see here and there. Second half of the year, we expect truly going back to organic growth and probably see a little bit of strong organic growth pattern in the second half of the year to potentially move into our midterm guidance of 3%-6% organic growth, which we usually aim for or envision. First half of the year, probably a little bit bumpy, flat, some ups, some downs. When we take a look out into the market, we see automotive has recovered well on a high level, plus minus performing as per expectation. On the industrial side, we also see good activity, not many restrictions in the market yet. On the medical side, that is probably a little bit slower due to still elective procedures being pushed out. In electronics, we still see that there was a slight shift of demand going into the first quarter from last year, because COVID-19 did not allow for an early ramp up. Of the electronic companies for their very seasonal business, some of the demand I think have shifted into 2021. On the construction side, hard to tell. It is the low season, but probably also flat development on the riveting side. Certainly also a recovery of automotive. In Switzerland, distribution and logistics also probably a rather flattish development is what we expect in the first quarter. Overall, as we already mentioned, we are still doing some short work weeks at this point in time. That will certainly be a contribution to the EBIT margin overall. But once again, the story made in the second half of the year when we should see a higher seasonality, when we should see in third and fourth quarter, a much better utilization of our manufacturing plants. Yeah. If we move to that basically second question, the CHF 39 million. As I said before, I would expect in the first quarter that number for this governmental solidarity from the employees is probably below the CHF 5 million in the first quarter. There will be still little bit available. Then you ask about the flavor by segments, by the three segments. I do not have the numbers ready with me, but give you an indication, probably distribution and logistics and fastening systems, probably more or less in the same region of CHF 6 million-CHF 8 million, both them. That would mean, and leave around the mid-CHF 20 million number for engineered components. That would then add up together to the CHF 39 million. Then the third question is on raw material. Unlike many other industrials, raw materials currently seem to be less critical at SFS. Could you indicate how much top-line pricing impact you would expect when steel prices stay where they are? Would you see any major margin burden? What is the current metal share within your input costs? Maybe I will talk about the market dynamics on raw material, and maybe Rolf Frei will give us an indication of raw material cost in the P&L then right after. Overall, we certainly see changes out there in the source of raw materials. We see the capacities have been taken out in the market and prices start to raise. So we see a wave of price increases, coming into the direction of the manufacturers. So, what does this mean? Probably it means that we will see price increases in March, April, and May going out, especially in distribution and logistics, but also in the fastening system segment. On the engineered component side, it is a little bit more quiet because there we have longer-term contracts, usually with our raw material supplier. But also there we would expect then step-by-step slight increases on the raw material pricing side. Also there probably a little bit later in the year, also increases on the pricing side if it reaches up to that level. We see more dynamic, but on the other hand, we have early notice. Early notice is always good because then we can react and start increasing prices to the market. Yeah. If we talk about the raw material portion now, we basically look at those segments that have their own production, not on the trading division of distribution logistic. Normally in our manufacturing, the content of raw material is in the range of 20%-30% of net sales. That would mean if raw material prices increase by 5%, we have to apply the 5% on the 20%-30%. Our impact would be 1%-2%. As Jens said, we will have to cover that with price increases wherever we can with our customers. Then we continue with questions from Armin Rechberger from Zürcher Kantonalbank. The first question is regarding the electric driving brakes. In which car models are they used? Yeah, we see them in many cars. Actually, we do not know specifically all of the cars and all of the models because that is up to our customer to know that specifically. We deliver to the tier 1s, and then the tier 1s distribute it further out. But we see mainly that the higher-end cars at this point in time are equipped with these newer braking technologies. That could be, for instance, a BMW, that could be an Audi, could be a Mercedes, but also could be Toyota, which is potentially a customer and user of these new technologies. What we see, it is a global initiative. We have started our first production here in Europe a few years ago, and now we see a production ramp up next year in North America for the North American market. We also ship some components also to China, and are also in discussion with customers on setting up a manufacturing line or production line in the Nantong, China plant. Once again, it is a new stand up which will be rolled out market eventually in five to eight years from now. You will see it with every brand out there in the market and probably most cars specified in. Then we move to the second question from Armin Rechberger. Your adapter, the power adapter, is not enclosed automatically to the end product anymore. What was the influence on your sales for the adapters in comparison with the original business plan? Overall, we have seen a flat development from last year, 2019, to the year 2020, which we report. In terms of the original business plan, it's probably roughly half of where we expected that the full potential could be. Looking out further, still undecided where this will go, since this was a strategic initiative, mainly to position ourselves as a capable supplier for such components into the supply chain. We are also working on new programs, and they will take us step by step in the direction of further expanding sales competency and the components in this market. Then a final question from Armin Rechberger. The first half year development was flat. How can that be after a weak second quarter? The first half year, when we talk about flat, then we usually talk about our expectation for the year in terms of sales momentum. If we guide for the year that we will have an organic growth, then we expect the first half of the year being a flattish year. That means that we take the momentum forward as we have experienced it in the second half of the year, and then would probably see seasonally adjusted, certainly, through the first half, and then probably would see an increase in sales in the second half of the year. But it's certainly not flat in comparison to the previous year, where we had the deep drop in the second quarter of the year. We continue with a question from Andreas Wild, from Zürcher Kantonalbank. In 2021, what was the negative margin impact by the rising costs like raw materials, transportation, et cetera? I think a question we partly at least already answered, the negative impact by rising costs. We talked about steel and raw material price increases. If you break that down to our P&L, and if you assume a 5% increase, that would mean for us a cost increase of 1.5%-2%. As Jens pointed out, we'll certainly have to see where can we increase that towards our customers. Same with transportation costs. Of course, the shortage, which is there, especially when you buy in from Far East on containers, that has an impact on transportation. That is not a huge P&L cost for us. Transportation cost overall now 2% on P&L. That is also a limited factor. Of course, you will try wherever you can to push that on customers. There's currently a final question from the chat before we would move back to the phone. The question is from Patrick Frey from IHAG Private Bank. Did you see growth with screws from smartphones in the past year? What is the outlook in the smartphone business for SFS Group? Yeah, we certainly have seen that the market overall demanded more volume from us overall, but we actually do not have any further detail sometimes, where this specifically goes. Overall, certainly yes, we have seen more demand in the market because of electronics products and gadgets were in more demand due to COVID-19 also. Due to that, we have seen a more driving demand path on in the second half of the year because also the new models were received very well. So certainly, we can say in the phone business, in the smartphone or mobile device business, as we call it, we have seen, throughout the customer range we have, an increased demand. Going forward, looking out, what do we expect? I think there's uncertainty out there because we see quite a lot of tie to the COVID-19 pandemic. We have seen people being in home office, people needing to have access to the network and to digitization solutions, and there was an increased demand due to that. Whether we will see another wave of such demand in the second half of this year, is something we just don't know at this point in time. Also, the 5G standup has become more popular. We have seen many customers have brought out new devices with 5G capability. Whether we will see an additional increase in demand or interest on the consumer side with the next version, or whether this 5G adaption wave is already over is also not part of our knowledge. That's why we are a little bit conservative in our guidance going to 2021, looking out into the electronics market. The next question is from Alessandro Foletti from Octavian. Please go ahead. I have one follow-up question on the margin in the two smaller business reporting segments, fastening systems and distribution and logistics. They developed pretty well, I would say, particularly fastening systems. What is the potential of these two businesses, let's say when it starts to normalize? Can fastening system go higher than this 11 point something percent? What would be a target? Probably you remember the other road shows we did in the recent years, and we always said we intend, and it's our goal to achieve a margin of 10%-12% on EBIT for this fastening systems segment. There we are now quite close with this 11 something percentage. I would say it's certainly our goal to make that a sustainable margin and of course, over time, even increase it above the level we have indicated of 10%-12%. To add to that, the range as we have given, 10%-12%, we are probably now on the higher side in that range. Also, given the fact that during quite some time in 2020, outside sales could not visit customers. They were on short work weeks. Same also in logistics. We are probably on the higher side now of the guidance we usually give on the EBIT side. I think we said 8%-10% at that time as a margin range. Also here, we had during quite a portion of the year, people were not on the road selling products, outside sales, because of COVID restrictions. There we also had some benefits due to short work weeks. All right, thank you. Maybe a very short one. Did I get you correctly that your indication for Q1 and Q2 growth was more of a sequential indication rather than a year-over-year? Because again, Q2 was so low last year. It was the indication on the sales you mean now? On the organic sales growth? Yes. For next year, 2021? Yeah, what you just said on Q1 and Q2. Q1 and Q2. It's more of a sequentially. As marked before, we said we expect a flat year. So if you take our top line expectation for the year, you add to the current sales as we have showed it in 2020, I don't know, you add to it 2%, 1%, 3%, 4% for the year, and your increase will be happening in the second half of the year. So meaning the first half of the year will be flat when you apply the regular seasonality which we usually have in the business. So means when you look back into the numbers, usually first half of the year is lower in sales, second half of the year is higher in sales. You add to it the increase in sales we expect for the year, and this is probably the pattern for the full year in term of top line sales. Okay. I'm sorry about that, but I think it is a little bit confusing. But if I look at the second quarter last year, very, very bad, you're not going to be flat in absolute numbers year-over-year, right? Exactly. When we talk flat, then we apply this to the regular sales or top line development model which we usually have for a given year. It's not flat compared to the last year. It's flat as compared to maintaining the model we apply to 2021. Basically flat to our expectations and budget, right? But probably we'll see a growth in first half year to previous year. Right. Okay. Great. Thank you very much. The next question is from Marta Bruska from Berenberg. Please go ahead. Thank you for taking my follow-up. I am sorry, but it is indeed really confusing. Just to get it really straight, do you expect a growth in the H1 2021 year-over-year? In the first half year 2021, if we compare that now to previous year, where we had a very flat Q2 as an even a decline in Q2 2020, we would most probably see a growth, yes. But compared to our own expectations and budgets 2021- No, that is okay. Okay. That is okay. I just wanted this yes or no, because I just get too confused. Okay. First half 2021 growth. Okay, thank you. I just would like to come back to Nantong for a little. I do understand now that indeed you have two-thirds of your electronic sales coming from China, back in 2018 and about from the Malaysian plant, according to my notes. But that would still mean that you were making more than CHF 200 million out of China in 2018. So 35% capacity increase to CHF 70 million. Now, comparing that with the sales of electronics you reported today, we are still basically missing a bit. Let's just take it step by step, CHF 210 million in China through 2018. Now with additional CHF 70 million, then keeping Malaysia roughly flat, it would still be about CHF 280 million in sales today, where we are short of that by nearly CHF 6 million. Would that mean that your sales in Malaysia went down from more than CHF 100 million in 2018 to only CHF 60 million now, to 40% decline? Or were there really a significant decline in average pricing in China as well? Yeah, we usually only give indications. You have to keep in mind that we cannot go into further detail of what we actually do and make in terms of top line sales in China and Malaysia, to also confidentiality agreements we have to consider with our customers. We can only give you a rough outlook and a rough development of what we see in China and what we see in Malaysia. And since I don't see your notes specifically, I cannot charge on those notes. But overall, once again, we have seen a growth in China. And as we have mentioned, we had 30%, I think we said at that time we had around 30% spare capacity in our Chinese plant when we set it up, and this 30% have now been fully utilized. Besides that, in Malaysia, we have seen a reduction in the business activities. Can you just roughly tell us, in terms of split between now these two plants in China and Malaysia, how much the Malaysian plant accounts for the entire sales in electronics today? To stay rough and unprecise, two-thirds in China and one-third in Malaysia. It is probably a fair assumption. Okay. That is very difficult to reconcile with all our previous discussions saying that China increased by 30% and Malaysia declined slightly. I respect your choice not to clarify further. Thank you. That was the last question. There is one remaining from the chat, from Armin Rechberger, from Zürcher Kantonalbank. Because of the uncertainties of the pandemic, do you see a change of behavior of car OEMs in the willingness to develop new technologies? That is a good question. On the automotive side, which we certainly keep a high focus on, do we still see the innovation trends and the innovation activities solid developing as we have seen in the past or not? When we take a look at 2020, we have seen ongoing in development activities and efforts. When we take a look at our KPI, where we measure intake of new programs, where we usually stay around 15%, we have seen in the last year, we were 12%-13%. This mainly owed to the fact that in Q2, due to the shutdowns, there has been little activity on the engineering side between the customers and us. So overall, we consider last year as a good year in intakes and bookings of new programs and orders. Secondly, we have seen that the innovation trends, they all continued. We have not seen that specific development projects have been canceled completely. Maybe we have seen that tactically, the one or the other project was slightly moved out due to the pandemic. Overall, we charge it as intact. Since there are no more questions, we conclude the presentation, and thank you for your attention. Bye-bye.