Management report

Important progress achieved

SFS Group coped well with the challenges of the financial year 2019 thanks on the one hand to strong innovation power – true to its claim of “Inventing success together” – and on the other hand to its balanced target market portfolio. Sales grew by 2.5% to CHF 1,781.4 million. The adjusted EBIT margin of 13.4% exceeded the guidance. Full-year results were driven by a significant improvement during the second half.

Dear shareholders

SFS Group’s financial year 2019 was marked by considerable challenges, such as weak demand from customers in the automotive and electronics markets. Over the course of the year this weakness spread to related market segments, while trade conflicts and political tension put an additional strain on business. Against this backdrop, we can affirm that the SFS Group coped well with the financial year 2019. That was clearly reflected in the significant improvement of its performance during the second half of the year. SFS profited from its presence across a balanced range of different markets and from its clear focus on customer needs and innovation trends. The company is well positioned and successfully defended its competitive position. This was evident in the ramp-up of major projects, in particular during the second half. Thanks to these projects, SFS returned to organic growth as expected. Sales in the second half were 3.5% above the figure of the prior-year period. Organic growth accounted for 1.1% of that growth. Organic sales growth in the first half of 2019 was still negative at –2.4%.

Consolidated third party sales for the full financial year of 2019 amounted to CHF 1,781.4 million. This corresponds to an increase of 2.5% from the previous financial year. Changes in the scope of consolidation had a positive effect of 4.4% on sales growth. Foreign currency translation had a negative effect of –1.3%. Organic sales growth for the full year was slightly negative at –0.6%.

Share of sales from Americas region significantly increased

SFS Group’s targeted markets are geographically broadly based. Sales in Asia, Europe and Switzerland were slightly lower, pressured on the one hand by negative currency effects and on the other hand by decreasing momentum. The sharp increase in sales from the Americas region is attributable to the acquisition of Triangle Fastener Corporation (TFC) and to the organic growth of successful products and services for the construction industry and, in particular, the medical device industry. Total sales in the Americas rose by 25.0% (organic 5.0%) and accounted for 21.6% of consolidated sales.

Heinrich Spoerry
Chairman of the Board of Directors

Medical device and construction industries sharply higher

This development is also evident in the sales mix by end markets. Sales generated with the medical device industry grew by 16.8% from the prior year and accounted for 7.5% of share of sales for the financial year 2019. Consolidation effects lifted sales with the construction industry by 14.9% from 2018. Accounting for 29.6% of total sales (previous year: 26.5%), the construction industry is currently the largest end market for SFS in terms of sales. The slight decrease in share of sales with the automotive and electronics industries is also attributable to the above developments. However, the respective market shares and share of sales with key customers in these industries remained stable year-on-year.

Second-half operating profit improved

With an adjusted EBIT margin of 14.2%, SFS Group managed to significantly improve its operating performance in the second half. Compared to the first-half EBIT margin, this represented an increase of 160 basis points. Higher profitability was fueled by sales growth in the Engineered Components segment, by measures taken to strengthen profitability, and by positive seasonal effects.

Adjusted operating profit amounted to CHF 239.1 million (previous year: CHF 243.1 million). The corresponding adjusted EBIT margin of 13.4% is better than the guidance given at mid-year 2019.

Reported operating profit amounted to CHF 236.3 million. The difference to the adjusted figure is attributed to non-recurring effects. There was a positive effect from the sale of real estate in the Distribution & Logistics segment. On the negative side, costs were incurred in the Engineered Components segment in connection with the relocation to the new site in Nantong (China). Thanks to the very quick and smooth move to the new site, the actual costs incurred were significantly lower than budgeted. The net effect of the aforementioned extraordinary items on operating profit was CHF –2.8 million.

Consolidated net profit was positively impacted by a one-term effect of CHF 17.2 million arising from the recognition of deferred tax assets. The expected significant improvement in the operating results of the North American activities led to the use of tax-loss carry-forwards and the amortization of goodwill for tax purposes. A change in Swiss tax rates also had a positive effect on net income. Group net profit of CHF 206.5 million (previous year: CHF 193.9 million) corresponds to 11.6% of Group net sales.

Jens Breu
CEO

Number of employees increased slightly

SFS Group employed a workforce of 10,571 full-time equivalents at the end of 2019 (previous year: 10,231). More than half of the increase in the headcount stems from the acquisition of TFC. New jobs were created at the Electronics and Medical divisions in connection with the realization of growth projects. Capacity adjustments at the Automotive and Riveting divisions led to a slight decline in the headcount at both divisions.

Engineered Components (EC)
Solid performance in a challenging year

Demand from customers in the automotive and electronics industries had already shown signs of weakening in late 2018 and this weakness subsequently spread to other market segments in 2019. As the year progressed, demand in most markets stabilized at lower levels compared to the previous year. The Medical division displayed a convincing performance throughout the year driven by its stable growth momentum. Total sales for the EC segment amounted to CHF 957.1 million in 2019 (previous year: CHF 967.0 million). Taking the negative currency translation effect of –1.2% into account, there was a slight organic growth of 0.2%. Compared to the first semester, sales in this segment rose by 10.7% in the second half of the year. The significant growth was broadly based and supported by the seasonal ramp-up of various projects and a recovery in the electronics sector.

Margins were pressured in the first half by demand-induced fluctuations in capacity utilization rates and sales mix effects. To protect its margins, a sweeping package of measures was drawn up and implemented at several of the segment’s operating locations. Implementation of these measures and improved capacity utilization rates – due to the successful ramp-up of key projects in the Automotive and Electronics divisions – strengthened segment profitability in the second half of the year. Compared to the first half, the adjusted EBIT margin increased by 170 basis points to 17.8%. In the financial year 2019, the segment generated an adjusted operating profit of CHF 164.1 million, which corresponds to an adjusted EBIT margin of 17.0% (previous year: 18.2%).

The Medical division’s accomplishments in the areas of neurology, minimally invasive surgery and orthopedics stand out.

Fastening Systems (FS)
Market position strengthened

The two divisions that make up the FS segment experienced clearly divergent developments during the period under review. The Construction division, which sells its products to customers in the construction industry, profited from a stable market environment. Its market position in the US market was significantly strengthened through the acquisition of TFC. The Riveting division, by contrast, had to contend with a difficult market environment. It experienced a sharp downturn in sales as it has considerable direct and indirect exposure to the German and the UK automotive industry. Total segment sales amounted to CHF 498.3 million (previous year: CHF 437.1 million), which corresponds to an increase of 14.0% compared to the previous financial year. Changes in the scope of consolidation in the Construction division accounted for 18.5% of the segment’s sales growth. In organic terms, sales growth was slightly negative at –2.1%. Foreign-currency translation had a negative impact of –2.4%.

The operating profit in 2019 was CHF 47.1 million, which corresponds to an increase of 6.7% compared to the previous year. The EBIT margin for the whole year was 9.2% (previous year: 9.8%). The diverging development of the divisions was also evident at the level of profitability.

Distribution & Logistics (D&L)
Profitability improved

The D&L segment generated sales of CHF 326.0 million in the period under review (previous year: CHF 334.5 million), a slight decline of –2.5% from the prior-year figure. Changes in scope of consolidation and foreign currency translation had a negative effect on sales of –1.7%. Although positive organic growth of 0.3% was realized in the first half, it turned slightly negative in the second half. This is attributed to the generally observed downturn in demand in the course of the year, in particular from our industrial customers.

The trend of rising profitability already observed in the previous financial year was successfully maintained despite the more challenging economic environment. D&L segment generated adjusted operating profit (EBIT) of CHF 26.2 million, which corresponds to an EBIT margin of 7.9% (previous year: 7.6%). Compared to the previous financial year, profitability was thus increased, on a comparable basis, by 30 basis points.

Due to book gains on the disposal of two properties, reported EBIT amounted to CHF 40.5 million.

Increasing focus on sustainability

Sustainability is important to us and has been part of SFS’ DNA from the very beginning. It is an important aspect of our daily work. In order to report more actively and extensively on sustainability at SFS, this topic will be given a disclosure platform of its own. SFS will publish its first stand-alone sustainability report at the end of May 2020. Therefore, the section on sustainability is no longer part of our annual report as of the financial year 2019.

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. During this assessment, the relevant risks are systematically classified according to the likelihood of occurrence and the severity of the potential consequences.

During the year under review, potential risks and action to contain these risks were again discussed. This year’s risk assessment focused on cybersecurity risks, investment-related risks associated with major projects, risks associated with acquired companies, warranty risks arising from product recalls, company exposure to the global economic environment, compliance and currency-related risks. Other important themes were revised customs duties and tariffs, restrictions in the movement of goods and geopolitical risks.

R&D activities intensified, investments leveled out in the normal range

SFS Group’s mission is to create added value for its customers by providing them with innovative products and solutions. To accomplish this goal, SFS Group invests considerable resources in the ongoing development of its core technologies, the launch of new products and systems, and continuous process improvements. Its objective is to fully grasp the customer’s perspective and identify ways to optimize overall cost. Working closely with our customers, we are often able to enhance the efficiency of their value chains and “invent” mutual success – true to our value proposition of “Inventing success together.” Expenditure on research and development amounted to CHF 44.4 million in the financial year 2019 (previous year CHF 37.9 million) and was expensed in full to the income statement for the period. Thanks to these investments, in the future the SFS Group will improve its operating performance.

Expenditure on property, plant and equipment for the period amounted to CHF 116.7 million (previous year CHF 149.1 million), which corresponds to 6.6% of net sales. Most of these investments went to realize production lines for growth projects, mainly in the Automotive and Electronics divisions. The decline in capital expenditure from 2018 is attributed to the completion of the production platform in Nantong and the execution of important large projects in the Automotive and Electronics divisions.

Composition of Group Executive Board modified and expanded

The Board of Directors made a decision to strengthen the company’s management structures and integrate Corporate Services, which includes Human Resources, Business Development and Marketing & Communications, directly into the Group Executive Board. Claude Stadler, Head of Corporate Services, has therefore been a member of SFS Group’s Group Executive Board since 1 January 2019.

Effective 1 July 2019, the Board of Directors appointed Urs Langenauer, Head of the Riveting division, as member of the Group Executive Board. He assumed responsibility for the division from Thomas Bamberger. The Board of Directors and the Group Executive Board thank Mr. Bamberger for his many years of service at the Riveting division.

Effective 1 January 2020, Iso Raunjak assumed responsibility as announced for the Distribution & Logistics segment from Josef Zünd, who will retire in March 2020 after a successful 49-year career at SFS. The Board of Directors and Group Executive Board thank Josef Zünd for his valued service to SFS Group over so many years.

Payout to shareholders

In view of the robust earnings, the very solid balance sheet and the guardedly optimistic outlook for future business activity, the Board of Directors will propose a dividend of CHF 2.10 per share (previous year: CHF 2.00) at the pending Annual General Meeting.

Outlook for the 2020 financial year

Looking ahead to the 2020 financial year, we expect subdued demand in key markets, such as the automotive industry. We also expect the political and economic environment to remain volatile. Thanks to its strong market position and attractive project pipeline, SFS expects sales growth of 0–2% in local currencies and including changes in the scope of consolidation. Amid this challenging environment, we expect the EBIT margin for the 2020 financial year to range between 12–14%. This forecast is based on the assumption that there will be no significant deterioration in the economic conditions.

It is still too early to provide an accurate assessment of the full impact of the ongoing outbreak of the COVID-19 virus.

Due to a shift in SFS’s sales mix and a downturn in global economic activity, we have set a new comparable mid-term sales growth target of 3–6%. Our mid-term EBIT margin target is 13–16%.

Thank you

We would like to take this opportunity to thank all employees at SFS Group. Without their great dedication, expertise and innovation skills, SFS would not be able to do the good work it does.

We also thank all our customers and our business partners: Our collaborative partnerships and mutual trust provide a sound basis for development of solutions that generate lasting value.

We thank our shareholders for their trust and loyal support, which enhances the stability of our company.

Heinrich Spoerry
Chairman of the Board of Directors

                      Jens Breu
CEO