SFS realizes slight growth in a challenging environment

News – 19 July 2019

SFS was confronted with a challenging business environment during the first half of 2019 yet managed to defend its strong position and sharp competitive edge. Group sales increased 1.4% versus the first half of the previous year due to positive consolidation effects. Changes in the scope of consolidation included the acquisition of Triangle Fastener Corporation (TFC), a transaction that significantly enlarged SFS’s market presence and customer base in the US construction sector. Operating profit was impacted by mix effects and capacity utilization fluctuations and led to an adjusted EBIT margin of 12.6%.

With its clear focus on customer needs and innovation trends, SFS is attractively positioned and the wide variety of end markets it addresses gives it a sturdy footing. Nonetheless, SFS was confronted with a challenging business environment during the first half of 2019. Besides the general slowdown in economic growth, a further escalation in trade tensions left a mark on markets around the globe.

Consolidated sales for the first half of 2019 amounted to CHF 867.8 million. This corresponds to an increase of 1.4% from the first half of the previous year. On a like-for-like basis, sales declined 2.4%. Changes in the scope of consolidation contributed 4.6% to sales growth and currency effects had a negative impact of –0.8%. Besides the first-time consolidation of HECO, sales of TFC have been consolidated since 1 April 2019 as well.

Konzernumsatz 1H 2019_EN
Development of consolidated sales

Earnings marked by mix effects and fluctuations in capacity utilization
The sales mix effects arising from the divergent growth and EBIT contributions left a mark on Group earnings. Diminished productivity caused by demand-driven fluctuations in capacity utilization rates also burdened earnings. SFS generated an adjusted EBIT of CHF 109.2 million. This corresponds to an adjusted EBIT margin of 12.6% (PY 13.6%, adjusted). To maintain and increase profitability, far-reaching action plans were implemented.

Earnings for the period under review were impacted by the expected one-time effects. On the positive side, there was the book gain on the sale of real estate in Switzerland. On the negative side, non-recurring costs related to the relocation to the new site in Nantong (China) were incurred. The approximate net effect of these two extraordinary items was a negative CHF 3.7 million. Reported EBIT for the period amounted to CHF 105.5 million.

SFS Group generated a net profit of CHF 88.6 million in the first half of 2019 (PY CHF 88.9 million). This result was positively impacted by recent tax reforms in Switzerland, which practically compensated for the negative one-time effect (net) at Group profit level.

Investments made to realize new projects
SFS invested CHF 56.4 million or the equivalent of 6.5% of sales in plant and equipment during the period under review. The realization of new projects was the main driver of this investment activity. SFS expects a slight increase in investment activity in the second half and full-year capital expenditure is projected to amount for 6–7% of net sales.

Engineered Components: Challenging markets and attractive new projects
Sales trends in the Engineered Components segment were distinguished by the challenging situation in the Automotive and Electronics markets. The decline is attributable to the generally lower market demand for customer products and a strong base effect. That said, SFS’s standing with its customers has not changed and remains as solid as before. This was clearly reflected by the attractive new projects SFS acquired over the reporting period. Sales in the Industrial division were slightly lower, despite the anticipated trend reversal in the Aircraft business. The Medical division was able to maintain and even increase its dynamic growth momentum. Against the background described above, the Engineered Components segment delivered sales of CHF 454.2 million. This figure is 4.0% less than its performance in the prior-year period, whereof negative currency effects amounted to –0.4%.

The segment generated an adjusted EBIT of CHF 73.9 million, which corresponds to an adjusted EBIT margin of 16.1% (PY 17.6%). The contraction in its EBIT margin is attributed to sales mix effects and was also affected by demand-driven fluctuations in utilization rates. To offset the lower utilization rates, corrective action has been taken and will support profitability in the second half. Engineered Components expects business in the second half to be slightly stronger.

Fastening Systems: Market position in the US strengthened
The Fastening Systems segment witnessed divergent trends at its two divisions. The Construction division, which serves customers from the construction industry, benefited from the continuing stable market environment. Through the acquisition of TFC, a leading supplier of fasteners and other products, the Construction division substantially expanded its market and customer access in the US. Conversely, the Riveting division, which primarily does business with customers from the automotive industry and the European industrial sector in general, experienced a significant drop in demand amid a challenging market environment.

Segment sales nevertheless rose by 16.6% versus the previous-year period to CHF 248.3 million. Positive consolidation effects stemming from the increase in the interest in HECO and the acquisition of TFC (consolidated since 1 April 2019) fueled this growth and accounted for 20.4% of reported sales growth. Like-for-like sales showed a slight decline (–1.8%) and were impacted by a negative currency effect of –2.0%. Segment EBIT amounted to CHF 24.0 million, an increase of 15.5% versus the prior-year period. The EBIT margin matched the year-ago level of 9.4%. The Fastening Systems segment expects overall business in the second half to be stable.

Distribution & Logistics: Customer base enlarged
As in previous years, the D&L segment continued to steadily expand its customer base and organic sales increased for the period under review 0.3% compared to the previous year's high level. The divestment of the segment’s security systems business and currency effects burdened sales by –2.9%. Segment sales amounted to CHF 165.3 million. Within the segment, the development was broadly based. In particular, the tools sector and the sales channels HandwerkStadt and e-Shop showed a positive development.

The trend from the previous year was successfully sustained in the first half. Adjusted EBIT amounted to CHF 13.3 million, which corresponds to an EBIT margin of 7.9%. This represents an increase of 70 basis points from the prior-year margin. The reported EBIT margin of 10.8% was additionally influenced by the book profit from the disposal of a warehouse in Switzerland. The D&L segment expects its business trends to continue in the second half.

Slightly positive business trends expected
SFS assumes that the volatile political and economic environment and the trade tensions in particular will persist during the second half. Against this background, SFS has reviewed its assumptions and expects an uncertainly development for the relevant markets. In contrast to its initial guidance, the Group only expects a slight positive development to take place, which will be supported by the ramp-up of new projects.

SFS expects gross sales including acquisition effects to grow by 3–6% in 2019. Based on these expectations and no further headwinds from the simmering trade tensions, SFS expects its full-year adjusted EBIT margin to stand at approximately 13%. The one-time effects that burdened EBIT in first semester by CHF 3.7 million, are expected to cause a further negative effect in the magnitude of an upper single digit million amount in the second half of the year.

Link to the Half-Year Report 2019