Management report

Solid business performance

SFS Group achieved organic growth of 5.0% in its core business for 2018. The attractive sales growth was broadly based in terms of end markets and geographies. The Fastening Systems segment’s above-average performance was particularly pleasing. The projects to sharpen the production profiles of our operating sites neared completion in 2018. Operating profit reached 14.0% of net sales and stays with CHF 243.1 million 4.2% above the comparable prior-year figure.

Dear shareholders,

SFS Group achieved solid sales growth of 6.5% in the financial year 2018. Thus, it increased sales to CHF 1,739 million. Sales growth was fuelled by organic growth of 5.0% in the company’s core business. This growth reflects SFS’ strong position as a provider of customer-specific solutions in selected niche markets. Growth for the period was broadly based and the Fastening Systems segment showed the strongest development. Second-half growth was weaker than in the first half. This can be traced to a challenging comparison base – sales in the second half of 2017 was strong – and to an unexpected decline in demand during the fourth quarter, in particular from customers in the automotive and electronics industries.

Changes in the scope of consolidation contributed 0.8% to top-line growth and reflect mainly the first-time consolidation of HECO in the second half. Positive currency effects had a 1.4% impact.

Operating profit increased

Operating profit increased on a comparable basis by 4.2% to CHF 243.1 million. Profitability improved considerably during the second half (EBIT margin 14.4%) compared with the first half (EBIT margin 13.6%). The EBIT margin for the year as a whole stood at 14.0%, which is only slightly less than the comparable year-ago margin of 14.3%. This contraction is attributed primarily to sales mix effects arising, for example, from the stronger growth rates of the Fastening Systems and Distribution & Logistics segments, and the strong decline in demand during the final quarter of the year. Reported net profit grew by 21.9% to CHF 193.9 million, which corresponds to 11.2% of net sales.

Broadly based growth

SFS has established a broad, balanced presence in its various geographies and the sales mix in the individual regions showed stable trends during the period under review. The increase in Europe (+9.6%) stemmed from solid organic growth and positive consolidation and currency effects. The good performance in the Americas (+9.3%) can be traced to strong demand in the construction, industrial and medical device sectors. Sales growth in Switzerland (+3.8%) was fuelled by innovation and promising new customer wins. Due to subdued market demand in the electronics sector, sales rose 1.1% in Asia.

Sales growth supported by all segments

All segments contributed to the sales growth in the financial year 2018. The Engineered Components segment (EC) generated sales of CHF 967.0 million despite a challenging market environment. This corresponds to an increase of 4.4% versus the previous year and which was supported largely by the launch and ramp-up of new projects. After a significant improvement in the second half, the full-year EBIT margin stood at an attractive level of 18.2% (previous year 19.8%, adjusted).

Thanks to its innovative products, the Fastening Systems (FS) segment strengthened its competitive position and captured more market share. Sales grew by 13.8% year-on-year to CHF 437.1 million. The segment made considerable progress towards improving its profitability during the period under review. At 9.8% (previous year 7.6%), the segment EBIT margin for the reporting period nearly matched the mid-term target margin of 10%. SFS increased its stake in HECO to 51% to further strengthen this strategic partnership. Consequently, HECO has been consolidated by SFS Group since 1 July 2018 and contributed 5.8% to the FS segment’s sales growth.

Sales in the Distribution & Logistics (D&L) segment rose by 3.6% year-on-year to CHF 334.5 million. Organic sales growth, taking into consideration the divestment of the segment’s security systems business, amounted to 5.1%, which clearly exceeds the growth rate of Switzerland’s gross domestic product. In particular tools and hardware and the construction-related product groups displayed strong growth. Profitability improved during the year under review. EBIT rose to CHF 25.8 million, which corresponds to an EBIT margin of 7.6% (previous year 6.9%, adjusted).

Development and innovation activities intensified

Expenditure on research and development amounted to CHF 37.9 million in 2018 (previous year CHF 33.8 million) and was expensed in full in the income statement for the period. These investments in the future will improve SFS Group’s operating performance and lay the basis for further growth.

Expenditures on property, plant and equipment for the period under review amounted to CHF 149.1 million, or 8.6% of net sales. Much of that was spent on construction of the new production platform in Nantong and installation of production capacity for growth projects, particularly in the Automotive and Electronics divisions.

Shareholder payout

In view of the robust earnings, very solid balance sheet and the guardedly optimistic outlook for future business activity, the Board of Directors will propose an increase in the payout to CHF 2.00 per share (previous year: CHF 1.90) at the pending Annual General Meeting. The distribution will include the remaining capital contribution reserves (CHF 1.66 per share) and an ordinary dividend payout (CHF 0.34 per share) from retained earnings. The payout from capital contribution reserves is not subject to withholding or income tax for natural persons whose tax domicile is in Switzerland.

Outlook for financial year 2019

Our focus in 2019 will be on strengthening our position with existing customers and on the selective expansion of our customer base. We also intend to enter new application areas, launch significant new projects and extract greater synergies from the transformational projects currently under way at SFS Group. We expect the market environment in 2019 to be volatile in view of the trade tensions between the US and China and the perceived slowdown in global economic activity. Thanks to our healthy project pipeline, we expect robust sales growth of 3%–5% in 2019, despite the challenging environment. In view of the uncertain economic development, we expect the adjusted EBIT margin within the range of 13%–15% in the fiscal year 2019. Expenditures related to the commissioning of the new manufacturing platform in Nantong will result in one-off costs in the low double-digit millions in 2019. Conversely, accounting gains on the disposal of property are likely to be recognized. These one-time effects are likely to burden reported EBIT in 2019 with a high single-digit to low double-digit million amount.

In memory of Hans Huber

Hans Huber, Honorary Chairman and co-founder of SFS Group, passed away on 5 August, 2018. He was a remarkable entrepreneur and served SFS Group and its predecessor organizations from 1949 to 1999, for many of those years as CEO and Chairman of the Board of Directors. Together with his business partners, he built a successful and sound corporate group from modest beginnings, which we continue with pride in his spirit.

Thank you!

A big thank-you goes out to all employees of SFS Group. It is thanks to them that 2018 was another successful year for SFS Group. Employees throughout the company demonstrated high levels of competence, creativity and dedication, and delivered outstanding results. We thank our customers for partnering with us and for their trust in working with us to develop and produce sustainable, value-added solutions. We also thank our loyal shareholders. Their continuing support is important for the stability and sustainability of the company and is very much appreciated.

Heinrich Spoerry
Chairman of the Board of Directors
                      Jens Breu