Management report

Opportunities seized

In 2022, the SFS Group generated sales of CHF 2,746.1 million in a market environment characterized by geopolitical and macroeconomic events. All end markets and regions contributed to the strong growth of 45.1%, which was driven both organically and by the consolidation of Hoffmann. SFS boosted its operating profit (EBIT) by 9.5% to CHF 330.3 million, which corresponds to an EBIT margin of 12.1%. Adjusted for one-off effects related to the acquisition, the EBIT margin amounts to 12.9%.
Thomas Oetterli
Dear shareholders,

The SFS Group looks back on a year characterized by geopolitical and macroeconomic events. With the acquisition of Hoffmann, SFS seized the extraordinary strategic opportunity to secure an internationally strong position in the attractive area of quality tools. Employees’ motivation to exchange ideas and jointly implement growth potential is both impressive and an inspiration. The considerable uncertainties and high volatility attributable to the war in Ukraine, sustained disruption in supply chains, further waves of COVID-19 as well as sharply rising energy costs, interest rates and inflation were constant companions during the entire reporting period. Our high delivery capability gave us a strong competitive edge again this year. Thanks to local production sites, largely regional and therefore robust supply chains, an impressive product range as well as our employees’ enormous commitment, we have managed to maintain our ability to deliver to customers with just a few exceptions. We again managed to gain market share in several business areas.

SFS generated good organic growth of overall 9.1% in most end markets and regions throughout 2022 as a whole, achieving sales of CHF 2,746.1 million. That corresponds to a strong year-over-year increase of 45.1%. Consolidation effects that mainly arose as a result of the inclusion of Hoffmann as per May 1, 2022, accounted for 37.9% of the growth surge. Currency effects negatively impacted sales by –1.9%.

Jens Breu, CEO

Profitability significantly impacted by mix effects
Hoffmann’s consolidation significantly impacted profitability in different ways: Whereas operating profit (EBIT) saw a substantial increase, the business model in the Distribution & Logistics segment comes with a lower EBIT margin that, in turn, reduces the Group’s consolidated EBIT margin. The volatile and occasionally lower utilization of capacities weighed on profit in the Engineered Components segment. All in all, this resulted in an operating profit (EBIT) of CHF 330.3 million and an EBIT margin of 12.1% of net sales (PY 15.9%). The reported result is weighed down by increased material expenses of CHF 22.9 million due to acquisition effects. Accounted for these acquisition effects, the adjusted EBIT margin amounts to 12.9%. At CHF 270.6 million (PY CHF 248.0 million), net income corresponds to 9.9% of net sales. An operating free cash flow of CHF 116.9 million (PY CHF 203.1 million) was achieved during the financial year.

The realization of earnings per share (EPS) of CHF 6.95 (PY CHF 6.51) clearly corroborates the financial attractiveness of the transaction with Hoffmann, especially in light of the negative impact of acquisition effects. The equity ratio rose by 3.9 percentage points to 50.6% compared with the closing date of the Half-Year Report.

The year at a glance
January – The creation of authorized capital to partially finance the Hoffmann transaction was decided at the Extraordinary General Meeting.

February – The war in Ukraine causes a great deal of suffering. As the conflict continues, the economic impact becomes clearer. Developments in the area of sustainability – such as a more conscious use of energy and raw materials or a change in how energy is produced – are gaining speed.

March – The US Federal Reserve decides to raise the key interest rates a first time to fight inflation. Additional rounds of increases follow in North America and Europe over the course of the year.

April – Thomas Oetterli is elected by the Annual General Meeting to succeed Heinrich Spoerry as Chairman of the Board of Directors and Peter Bauschatz is elected as a Board member.

May –The transaction with Hoffmann is concluded and Martin Reichenecker joins the Group Executive Board. At the same time, SFS successfully places two bonds with maturities of three and five years.

June –The International Management Conference – the management team’s yearly meeting – is held at Hoffmann in its newly built LogisticCity in Nuremberg, Germany.

July – Completion of the new production facility at the site in Heerbrugg, Switzerland, where precision components and assemblies for electric brake systems are to be manufactured for the automotive industry.

August – Work begins to expand the local production platform in Nantong, China.

September – Successful partial rollout of S/4HANA, the new ERP system.

October – Stakeholder dialog initiated regarding key sustainability topics.

November – The COVID-19 pandemic continues to have regional impacts on supply chains and call-offs at SFS, as in the business with customers from the electronics industry.

December – The capacities of the new production facility in Heerbrugg are already fully reserved for the next few years.

Thomas Oetterli’s impression of the year 2022

Engineered Components (EC)
In the Engineered Components (EC) segment, 2022 was a year shaped by regional events and occasionally high volatility. While good growth was supported largely by applications from the Electronics and Industrial divisions in the first half year, applications from the Automotive and Industrial divisions were the main contributors in the second half of the year. The Medical division performed positively over the course of the financial year, although unevenly in the different areas of application. The segment generated CHF 1,028.2 million in sales, which corresponds to sales growth of 5.4% over the previous year. Foreign currency effects only had minor impacts of –1.1%.

The uneven, fluctuating utilization of production capacities in individual areas of the segment caused by bottlenecks in customers’ supply chains had a major impact on profitability. Earnings were also negatively impacted by across-the-board cost increases as specifically long-term contracts with customers meant that those increases could only be passed on with a delay. This resulted in operating profit (EBIT) of CHF 146.2 million, which corresponds to an EBIT margin of 14.1%. Year-over-year, the EBIT margin declined by 3.0 percentage points.

Fastening Systems (FS)
For around two years, an impressive product range has helped the Fastening Systems segment and specifically the Construction division to consistently take advantage of the exceptional demand situation in the construction industry and achieve record results – which continued in the second half of 2022. Contrary to expectations, interest rate hikes and rising inflation prompted customers in the construction industry only isolated to delay or halt projects. High availability of material and robust, reliable supply chains were crucial competitive advantages again in the year under review. CHF 644.9 million in sales were generated, which corresponds to another impressive 12.2% increase over the prior-year period. In organic terms, this resulted in a sales increase of 15.6%. Currency effects negatively impacted sales by –4.0%.

Persistently high capacity utilization, efficient processes as well as prudent cost and price management have enabled the segment to seize opportunities from the dynamic market environment. The EBIT margin for the period under review amounts to 17.7%, which corresponds to an increase of 30 basis points over the previous year.

Distribution & Logistics (D&L)
Based on an attractive product range and thanks to good material availability, the Distribution & Logistics (D&L) segment took advantage of the positive market environment again in 2022 to generate stable growth. All three regions North America, Europe and Asia contributed to these results – the with regard to sales smallest region North America experiencing the strongest growth. The segment generated sales of CHF 1,073.0 million. This corresponds to a year-on-year growth surge of 212.8%, which was mainly driven by consolidation effects of 208.1% that arose as a result of the inclusion of Hoffmann as per May 1, 2022. Organic growth, on a like-for-like basis, amounts to 5.3%. Foreign currency effects amounted to –0.6%.

Thanks to good sales growth, prudent cost and price management as well as the consolidation of Hoffmann, the segment generated adjusted operating profit (EBIT) of CHF 102.2 million in the year under review, which corresponds to an increase of 213.5%. Development of the adjusted EBIT margin of 9.6% was stable over the course of the year. The reported result is weighed down by increased material expenses of CHF 22.9 million due to acquisition effects.

A project team comprised of employees from all affected business areas was assembled to carefully examine all areas of potential synergies connected to the collaboration with Hoffmann and prioritize the realization of that potential. The so determined synergy and growth potential will be prioritized for realization in the next few years.

Sharp increase in headcount
The SFS Group had 13,282 employees (FTE) at the end of 2022 (PY 10,509). The strong year-over-year growth is attributable to the inclusion of Hoffmann, which had 3,082 employees at year-end. On a like-for-like basis, the headcount declined slightly by –2.9%

Investments in future growth continued
SFS focuses on innovation trends that once again proved robust in the 2022 financial year. The segments’ strong competitive edge enabled important new project acquisitions and product volume allocation gains, which in turn lay the foundation for future growth. With respect to the manufacturing of precision components and assemblies for electric brake systems for the automotive industry, for example, SFS has managed to secure several large orders from leading Tier-1 suppliers since 2021. As a result, the production capacities of the new facility at the Heerbrugg site were already fully reserved for the next few years by the end of 2022 – much sooner than planned.

Growth-related expenditure on property, plant, equipment, hardware and software amounted to CHF 171.0 million (PY CHF 121.4 million) in the period under review. This was driven by the construction and equipment of the new Heerbrugg production facility for the Automotive division, the start of work to expand the production platform in Nantong, progress made in the switch to S/4HANA (the new-generation ERP system) as well as a strong commitment to cybersecurity.

Expenditure on research and development amounted to CHF 53.1 million (PY CHF 45.6 million) and was charged in full to the income statement for the period.

SFS has around 13,500 employees (FTE), who are mainly spread across the regions of North America, Europe and Asia.

New topics added under sustainable developmentt
The financial year just ended saw important progress made on the path toward a more sustainable development. Contributing factors included the updated materiality analysis in accordance with the new guidelines of the Global Reporting Initiative (GRI) 2021 and the resultant new topics and corresponding objectives. SFS focuses on the following content in its 2022 Sustainability Report planned for publication in late May 2023:

  • Energy & emissions
  • Sustainable solutions
  • Employee promotion & engagement
  • Procurement
  • Occupational health and safety

The inclusion of Hoffmann is also proceeding very well in the area of sustainability, meaning that it will already be possible to present the first non-financial indicators in the 2022 Sustainability Report.

Renewable energy and energy autonomy are topics that have been driving SFS for some time already. The Electronics division installed large-scale photovoltaic modules that are expected to produce around 6 GWh of electricity per year at the sites in Malaysia and Nantong. Plans to set up the company’s own wind turbine on the grounds of the production facility at Heerbrugg became more concrete with the erection of a wind measurement mast.

Potential risks evaluated
The Group Executive Board and the Board of Directors regularly assess the main business risks to which SFS Group is exposed. A comprehensive risk assessment is conducted at least once a year in which the relevant risks are systematically classified according to the likelihood of occurrence and the severity of the potential consequences. Potential risks and actions to contain these risks were examined once again during the year under review. The review focused on ensuring the energy supply, how to deal with higher energy and raw material prices, data breaches and business interruptions due to cyberattacks, warranty risks arising from product recalls, geopolitical instabilities, company exposure to the global economic environment as well as compliance risks and currency-related risks.

Capital increase to partially finance the purchase price of Hoffmann
To partially finance the Hoffmann SE transaction, a portion of the purchase price was paid in the form of 1,400,000 new shares and 200,000 existing shares on the day of closing. The share capital of SFS Group AG now amounts to CHF 3,890,000 and is divided into 38,900,000 registered shares with a nominal value of CHF 0.10 each.

In connection with the share capital increase, the premium on the issuance of shares of around CHF 169 million took the form of a statutory capital reserve. This means that in the next few years, a portion of the dividends can be distributed to private individuals resident in Switzerland free of withholding and income tax.

On May 18, 2022, two fixed-rate bonds with terms of three (CHF 250 million) and five years (CHF 150 million) were successfully placed; the settlement date was June 8, 2022. The coupon rates for the two bonds are 1.00% and 1.45% respectively. The proceeds of the placement are being used to refinance the Hoffmann transaction. In advance of this placement, SFS received a good rating (BBB+) from Zürcher Kantonalbank and Credit Suisse (outlook “stable”). The borrowing at attractive rates reduces the weighted average cost of capital (WACC).

Changes in the Group Executive Board
With the closing of the Hoffmann transaction, Martin Reichenecker joined the Group Executive Board in his role as CEO of Hoffmann.

Furthermore, the Board of Directors appointed Susanne Jung as Chief Human Resources Officer (CHRO). Susanne Jung strengthens and broadens the HR organization. She joined the Group Executive Board on January 1, 2023, as she took on her new role.

In the interests of early succession planning, the Board of Directors appointed Thomas Jung as the future head of the Construction division. He will replace Arthur Blank and join the Group Executive Board on January 1, 2024.

Changes in the Board of Directors
Shareholders elected Thomas Oetterli as Chairman of the Board of Directors at the Annual General Meeting on April 27, 2022. He succeeded Heinrich Spoerry, who retired from the Board of Directors after reaching the age limit as defined in the Articles of Association. Thomas Oetterli has been a member of the SFS’s Board of Directors since 2011.

The motion to elect Peter Bauschatz was also accepted at the Annual General Meeting on April 27, 2022. Peter Bauschatz is the Chairman of the Supervisory Board of Hoffmann SE, which became a part of the SFS Group upon completion of the transaction.

30th Annual General Meeting on April 26, 2023
For the first time following a three-year interruption, the Annual General Meeting of SFS Group AG will be held with the physical presence of shareholders at Sportzentrum Aegeten in Widnau on April 26, 2023. Further information will follow together with the invitation, which will be sent out until the end of March 2023.

As part of the long-term succession plan set up by the Stadler/ Tschan family shareholders, Bettina Stadler will not stand for re-election to the Board of Directors at the 2023 Annual General Meeting. Consequently, the Board of Directors proposes that Fabian Tschan be appointed as a new member. He will ensure continuity in his capacity as a representative of the family shareholders. The Board of Directors would like to thank Bettina Stadler for her many years of service on the Board of Directors and as a member of the Audit Committee.

In view of the good earnings situation and the completed transaction with Hoffmann, the Board of Directors proposes that a dividend of CHF 2.50 per share be distributed.

Outlook for the financial year 2023
Performance will continue to be shaped by considerable uncertainty as a result of macroeconomic and geopolitical developments. Regional restrictions in supply chains will impact the course of business in individual end markets also over the course of the 2023 financial year. Safeguarding business processes, ongoing efforts to pursue forward-looking innovation projects and sharpening the Group’s customer focus take top priority in this volatile environment. We want to identify the chances and opportunities that go hand-in-hand with the current changes and seize them in a systematic way.

The targeted inclusion of Hoffmann is highly relevant from a strategic perspective. Further synergy potential is to be utilized in all areas of the business over the course of the current year and planning of long-term growth potential will be further developed. Investments in the selective expansion of production capacity and thus the implementation of ambitious growth projects will continue. Major projects during the current financial year include the expansion of the production platform in Nantong and the ramp-up of production activities in the new production facility at Heerbrugg. The focus on expanding the global production platform for medical device products and applications remains unchanged.

SFS expects in the 2023 financial year sales of CHF 3.2–3.3 billion, including the first time consolidation of Hoffmann for the full year. With this, SFS expects – before consolidation effects – sales growth along the mid-term guidance of 3–6%. For SFS Group as a whole, including Hoffmann, an EBIT margin along the mid-term guidance of 12–15% is expected. The outlook is based on the assumption that there will be no significant deterioration in the underlying economic conditions or geopolitical, energy or pandemic-related restrictions.

Thank you
A big thank-you goes to all employees of SFS Group whose motivation, commitment, expertise and enormous passion for innovation made the encouraging performance of SFS during the year under review possible.

We thank our customers and business partners for the collaborative partnership we share. The trust they place in us lays the foundation for our joint efforts to develop solutions that generate lasting added value.

We would also like to thank our shareholders for their loyality and trust in SFS. They give SFS Group stability and thus contribute to its sustainable development.

Thomas OetterliChairman of the Board of Directors
Jens BreuCEO