SFS defends its profitability despite a difficult second quarter

News – 21 July 2020

The first half of the year was impacted by the COVID-19 pandemic, which had a clearly negative effect on the course of business in the second quarter. Amid this extraordinary situation, management’s focus was on employee health and safety, temporary production capacity adjustments, strict cost management in order to defend profitability, and continued innovation activities. Sales for the period benefited from the Group's well-balanced exposure to different end markets and regions, and organic growth in some divisions. Gross sales amounted to CHF 773.7 million. This corresponds to a decline of –10.8% compared to the prior-year period. Despite this decline in first-half year sales, SFS achieved a robust EBITDA margin of 15.5% and an EBIT margin of 9.2%.

After slightly positive organic growth in the first quarter, the course of business at SFS Group was, as expected, materially impacted in the second quarter by the repercussions of the COVID-19 pandemic. Strict measures were taken early on to protect employee health, to ensure the company’s ability to fulfill customer orders, and to reduce the impact of lower capacity utilization rates on profitability.

Strongly divergent developments in end markets

While the Electronics and Medical divisions increased their sales compared to the prior-year period, demand from customers in the automotive industry and other industrial sectors weakened, in some cases considerably. The well-balanced range of activities across different end markets and regions helped to offset the impact of the COVID-19 pandemic on SFS’ sales. Sales for the first-half year amounted to CHF 773.7 million. This corresponds to a decline of –10.8% compared to the prior-year period. Changes in the scope of consolidation had a positive effect of 3.4% on reported sales. The currency effect was –3.8%.

Influencing factors in CHF million Growth
Gross sales 1st half 2019 867.8
Currency impact –33.0 –3.8%
Change in scope* 29.5 3.4%
Organic growth –90.6 –10.4%
Gross sales 1st half 2020 773.7 –10.8%

*First-time consolidation of Triangle Fastener Corporation, Inc (TFC, as of 1.4.2019), MBE Moderne Befestigungselemente GmbH (MBE, as of 1.1.2020), Truelove & Maclean, Inc (T&M, as of 1.4.2020)

Development by end market
in CHF million 1st half 2019
share
1st half 2020
share
Growth Organic growth
Automotive sector 224.0
25.8%
149.8
19.4%

–33.%

–30.6%
Construction sector 260.5
30.0%
256.0
33.1%

–1.7%

–6.5%
Electro and electronics 134.3
15.5%
137.5
17.8%

2.4%

7.0%
Medical device industry 65.3
7.5%
66.8
8.6%

2.2%

5.9%
Other sectors 183.7
21.2%
163.6
21.1%

–10.9%

–10.0%

Thanks to extensive measures robust profitability defended

The downturn in demand beginning in the second quarter and the ensuing decline in capacity utilization rates had a material impact on profitability. Thanks to its fundamentally good margins and the early and resolute implementation of countermeasures, SFS was able to generate solid operating profits amid this extraordinary situation. EBIT amounted to CHF 71.0 million, which corresponds to an EBIT margin of 9.2% (prior-year period, adjusted: 12.6%), and the EBITDA margin came in at 15.5% (prior-year period: 17.6%). Group net income amounted to CHF 53.9 million.

SFS is in a very sound financial situation with a high equity ratio of 72.7% and has ample liquidity, which benefits its sustainable corporate development.

Investments made to realize growth projects

Capital expenditure focused on innovation projects and production capacity to implement growth projects. Capital expenditure for the first-half year amounted to CHF 56.6 million, which corresponds to 7.3% of sales (prior-year period: 6.5%). In order to continue to implement customer projects and the associated growth in the Industrial and Medical divisions, SFS is investing in significant site expansions in Switzerland and the US. This increased the investment rate by 230 basis points.

Engineered Components Segment (EC) – Divisional performance varied

The various end markets targeted by the EC segment showed clearly divergent developments. Demand in the Electronics and Medical divisions was less affected than the other divisions and both achieved positive sales growth. The Automotive and Industrial divisions were confronted with major customers’ temporary plant shutdowns and in some cases with sharply lower order inflows. Total segment sales amounted to CHF 380.1 million, which corresponds to a decline of –16.3% versus the prior-year period. Consolidation effects had a positive effect of 1.3% on sales, while the currency translation effect lowered reported sales by –4.1%. The EC segment's positioning in its target markets remains solid, as reflected in the ongoing commitment of its customers to growth projects. Against this background, the EC segment generated an EBIT of CHF 35.1 million, which corresponds to an EBIT margin of 9.1% (prior-year period, adjusted: 16.1%).

Fastening Systems Segment (FS) – Continued expansion of market reach

Investments to expand the segment's reach, namely the acquisition of Triangle Fastener Corporation, Inc (TFC) and MBE Moderne Befestigungselemente GmbH (MBE), had a positive effect on the segment’s results. The restrictions imposed on the construction industry to limit the spread of the pandemic were comparatively less drastic than on the key markets addressed by the Riveting division. Therefore, the resulting decline in demand was clearly greater in magnitude in the Riveting division, than in the Construction division. Segment sales for the first half of 2020 amounted to CHF 234.0 million, which corresponds to a decline of –5.8% versus the prior-year period. Changes in the scope of consolidation had a positive effect of 9.5% on reported sales. The currency effect was –5.3%. The EBIT margin of 9.5% was slightly higher than the 9.4% margin reported for the prior-year period.

Distribution & Logistics Segment (D&L) – Positive development in a difficult environment achieved

The D&L segment profited in the first half from its balanced positioning in terms of customer segments and product categories. Sales of construction and personal protective equipment products showed the most positive trends. The segment's multi-channel sales approach proved to be an important strategic cornerstone. Sales through its online shop was a valuable alternative to the segment's other sales channels during the lockdown period. Segment sales of CHF 159.6 million were –3.4% below the figure from the first half of 2019. Currency translation had a negative effect of 0.8% on reported sales. First-half EBIT of CHF 14.5 million and the corresponding EBIT margin of 8.9% exceeded the prior-year figures (prior-year period, adjusted: 7.9%).

Slight improvement in demand expected in the second half year

Due to the unclear further course of the COVID-19 pandemic and the still volatile political and economic environment, it is difficult to assess further business development. SFS expects slightly higher sales in the second half of the year, with an approximately comparable EBIT margin for the first half of 2020. This assessment is based on currently available in-formation and the assumption that no second massive global wave of COVID-19 pandemic further affects economic development.

Management will continue to focus on protecting the health of employees, ensuring the company’s supply capabilities, keeping costs under control and pushing innovation projects forward.