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.