Engineered Components

Solid performance

Weak demand in various markets left a mark on the results in the Engineered Components segment. Thanks to project ramp-ups, performance was significantly increased in the second semester.

Key figures Engineered Components

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 Engineered Components 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.

Generally speaking, the overall flat sales development compared to 2018 can be traced to weak market demand. SFS either defended or strengthened its position with customers in every market segment. Its continued strong competitive position is also reflected in the substantial new projects and the healthy project pipeline.

Better profitability achieved in the second half

Margins were pressured in the first half by demand- induced fluctuations in capacity utilization rates and sales mix effects (arising from differences in divisional growth rates and earnings contributions). To protect its margins, a sweeping package of measures was drawn up and implemented at several of the segment’s operating locations. Shorter work times (by reducing overtime) in Switzerland and job cuts in the UK, Germany, China and India were among the measures taken. New employees were hired and investments in plant and equipment were made selectively to ensure the smooth realization of new projects. 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%).

Extraordinary relocation costs of CHF 17.1 million were incurred in 2019 in connection with the new factory site in Nantong. Thanks to the swift and smooth execution of the relocation, these costs were less than budgeted and there will be no further negative impact on costs in the financial year 2020.

Reported EBIT for the EC segment amounted to CHF 147.0 million.

Performance in China clearly strengthened

The commissioning of the new production platform in Nantong (China) marked a strategic milestone for SFS. Nantong is now home to SFS Group’s second-largest site. The four former sites operated by the Electronics division in the Greater Shanghai Region have now been consolidated at a single site. This has the added advantage that SFS can now offer all of its core technologies from the same site. Furthermore, the new set-up creates attractive new business development prospects, in particular for the Electronics and Automotive divisions.

Both the relocation to and the commissioning of the new site, which is about an hour’s drive from the old sites, were smoothly executed and completed in record time. Within just a few weeks, more than 1,000 employees and just as many machines were transferred to the new location, all the while meeting customer needs and processing their orders: a stunning organizational achievement. Three of the four old sites were completely transferred to Nantong in 2019. The few remaining manufacturing units at the fourth site will be relocated to Nantong during the first three months of 2020.

Shortly after relocation, new projects for customers served by the Electronics division were smoothly scaled up, which similarly reflects the local organization’s excellent execution capabilities.

The regular capacity at the new factory is about 75% utilized with the current project backlog, which is in line with the original planning. The new production platform has sufficient space to accommodate future growth. The attractiveness of the new site and the range of manufacturing services it offers are highlighted by the new projects it has already been able to win. In addition to the Electronics division, the Automotive division has also acquired its first new projects. Initial sales will be expected in 2021. Intensive collaboration with all other SFS Group sites is in progress to ensure the successful transfer of technology know-how.

Capital expenditure at the Engineered Components segment amounted to CHF 94.1 million during the period under review (previous year CHF 116.3 million). Major capex drivers were new production systems to realize new projects in the Automotive, Electronics and Medical divisions. The significant year-on-year decline in capital expenditure is attributed to the construction of the new site in Nantong and the investments required to set up initial manufacturing capacity for key projects at the Electronics and Automotive divisions during the financial year 2018.

Automotive division

Robustly positioned in a challenging environment

Global demand for new cars was weak in 2019, but stabilized at a low level as the year progressed. Germany and India reported sharp drops in demand. Besides a general downturn in economic activity and simmering trade tensions, the competing vehicle propulsion systems may have created some uncertainty and led some buyers to hold off on their purchases. SFS continues to profit from its strong competitive position and its focus on meeting needs associated with safety, efficiency and comfort trends. In addition, ongoing developments in the field of (semi-)autonomous driving have created interesting business opportunities. Currently only about 20% of SFS sales with the automotive industry are related to applications for combustion engines. The strong growth of recent years and the healthy project pipeline are attributable to applications that are required regardless of the propulsion system used. Therefore, the growing number of cars with electric powertrains do not pose any particular risk to the future growth of SFS’s Automotive division.

Momentum increased as the year progressed

After the expected weak start to the first half of the year, the Automotive division benefited from the scale-up of new projects and a stabilization in demand during the second half. The value of SFS parts per vehicle continued to increase. In local currency, annual sales decreased by –1.1%, compared to an estimated worldwide market decline of approx. –5 to –6%

Future growth buoyed by project wins

SFS’s sharp competitive edge was evident on the one hand in the supplier awards it received, and on the other hand in the new key projects it acquired. Project wins for electric brake systems and sensor housings were particularly pleasing, as were the projects acquired at the new site in Nantong (China) for local delivery to customers.

Solid course of business expected

Looking ahead to the financial year 2020, the Automotive division expects demand to remain weak. Thanks to the realization of new projects, the division expects a stable development.

Future growth in the Automotive division will be driven by projects such as the electric parking brake (EPB).

Electronics division

Challenges well navigated

The last year was in many aspects a special and challenging year for the Electronics division. Overall, it overcame every challenge very well and defended and even strengthened its competitive position in some areas of activity.

New applications develop promisingly

The first half of the year was characterized by weak demand in most application areas. Demand for hard disk drive products (HDD) was particularly weak and did not show a recovery in the second half. New projects for mobile phone components displayed good growth momentum. Products for lifestyle electronics devices (e.g. smart watches) also sold well. The production ramp-up of components for power adapters contributed to growth, too. In these projects the division demonstrated the high level of competence it has built up in cold forming, and thus creating opportunities to win additional projects. Despite the positive developments in the areas of mobile phones and lifestyle electronics, overall divisional sales declined slightly due to the steady fall in sales in the HDD business.

SFS core technologies united under one roof

On the operational front, besides management's swift reaction to weak demand at the beginning of the year, the successful relocation and start-up of the new production platform in Nantong (CN) is worthy of note (see section “Performance in China clearly strengthened”). The new site, where for the first time, all of SFS’s core technologies will be offered under one roof, strengthens the overall offering of the Electronics division, which operates and sells its products under the brand name Unisteel.

Options for switching production locations created

Initial projects from customers that are planning to transfer some of their assembly activities from China to other Asian countries were received by the sites in Malaysia and India.

Moderately positive developments forecast

The division’s outlook for 2020 is cautiously optimistic. While the increase in production activity at the new site in Nantong and the realization of new projects will have a positive impact on sales, uncertainty related to the trade tensions between the US and China could have a negative impact on the course of business.

The wide range of services offered by the Electronics division now also includes cold forming.

Industrial division

Aircraft back on the growth track

The various business units in the Industrial division that are focused on strategic niche markets showed mixed business trends.

Aircraft, the largest business unit, sustained its positive development from the first half, as had been forecast. Its major sales driver is the Airbus A350 program. On the other hand, sales were negatively impacted by the commencement of the phase-out of A380 production.

Market success achieved with plastic injection molding technology

Particularly strong growth was achieved with solutions incorporating plastic injection molding technology or combining plastic injection molding technology and metal cold forming. These solutions have primarily been used in the fields of digitalization and in medication dispensing devices.

Site expanded to realize new projects

The entire division performed very well in acquiring new projects that create a solid platform for future growth. Most of these projects are characterized by a very high level of complexity, which attests to SFS’s positioning as a value engineering specialist. In view of the full project pipeline at Stamm AG (Switzerland), the Groups’ specialist in micromolding technology, its site will be significantly expanded by 2021. This will create the capacity that is needed to realize the many new projects and the corresponding ramp-up of production activities. Although the general business environment is still volatile, the division expects a flat development in 2020 thanks to its current project pipeline.

Medical division

Strong growth momentum maintained

The Medical division successfully continued its growth momentum. Sales growth was broadly based across the production sites and targeted application areas. In particular Tegra Medical’s accomplishments in the areas of neurology, minimally invasive surgery and orthopedics stand out. Besides the scaling up of projects, the Medical division was successful in acquiring new projects. These projects will help to continue to fuel its future growth.

Closeness to the customer a competitive advantage

In addition to its extensive application and technology expertise, the Medical division benefits from its proximity to key customers. With its four production locations, the division has a presence in major medtech clusters in the US and Costa Rica. Thanks to its standardized manufacturing platforms, it was able to meet the safety standards of its customers, most of which have dual-sourcing strategies. Tegra Medical was able to meet this requirement by providing parallel supply chains from its plants in Franklin (USA) and Costa Rica. Customers benefit on the one hand from a robust value chain and on the other hand from the more efficient processes that arise when working with only one supplier.

Profitability steadily improved

Profitability improved year on year. Margins have been pressured by the strong growth momentum and high initial outlays in connection with the scaling up of numerous projects. Vigorous efforts to achieve a higher level of automation and general productivity gains will lead to a further improvement in profitability going forward.

Positive development expected

Due to the strong project pipeline, the Medical division expects the good growth momentum to continue in 2020.

The positive growth development in the Medical division was broadly based in terms of production locations and fields of application.

The new production plattform in Nantong (CN) unites for the first time all core technologies under one roof.