Segment report – Engineered Components

A challenging year

The impact of the COVID-19 pandemic posed significant challenges for the divisions in the Engineered Components segment. After a distinct decline in sales in the first half of the year, demand in most of the markets addressed turned positive in the second half of the year.

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Significant sales increase in the second half of the year achieved
With its strong focus on industrial applications, particularly in the automotive industry, the Engineered Components segment was significantly impacted by the pandemic. After a solid start in the first quarter, the effects of the pandemic became very noticeable in the second quarter. Demand collapsed due to the shutdown of important customers’ factories and other restrictions in several business areas. Recovery began in July and gained momentum during the second half of the year, particularly in automotive-related areas. Segment sales increased sharply by 36.3% in the second half of the year compared with the first half of the year.

Sales in the second half of the year, and in particular in the fourth quarter, were supported by a positive development in the electronics industry. This development was driven by successful product launches of key customers. The Electronics division once again demonstrated its impressive ability to ramp up operations quickly and efficiently, as it had done in the wake of the lockdown imposed by Chinese officials after the New Year celebrations.

Key figures Engineered Components in CHF million
	2020	+/- PY	2019	2018
Third party sales Sales growth comparable	898.3	–6.1% –4.0%	957.1	967.0
Net sales	910.4	–5.6%	964.2	972.5
EBITDA As a % of net sales	210.8 23.2	0.3%	210.1 21.8	234.8 24.1
Operating profit (EBIT) As a % of net sales	141.2 15.5	–3.9%	147.0 15.2	176.6 18.2
Operating profit (EBIT) adjusted¹ As a % of net sales	141.2 15.5	–14.0%	164.1 17.0	176.6 18.2
Average capital employed	720.5	2.9%	700.4	652.1
Investments	83.1	–11.7%	94.1	116.3
Employees (FTE)	7,293	2.0%	7,153	6,977
ROCE (%) ²	19.6		23.4	27.1

¹2019 adjusted for relocation costs Nantong (China) CHF 17.1 million
²EBIT adjusted in % of average capital employed

Segmentbericht_Tegra_packaging_600px — With its increased focus on the medical device industry SFS is attractively positioned for the future.

Organic sales growth at the Medical division supported the segment’s development throughout the year. The pandemic’s negative impact on the course of business – e.g. stemming from the postponement of elective procedures – was offset by general market growth and the launch of new products.

After the steep decline in business activity in industrial niche markets during the second quarter, a recovery was observed in several areas during the second half of the year. However, the overall recovery was clearly less distinct than in the automotive-related areas. The situation remains particularly challenging in the aircraft industry due to the restrictions caused by the COVID-19 pandemic.

In the financial year 2020, SFS generated sales of CHF 898.3 million in the EC segment, which corresponds to a –6.1% decrease in sales compared with the previous year. The clearly negative currency effect of –4.7% was partially offset by the positive consolidation effect of 2.6% after the acquisition of T&M.

Profitability benefited from clearly higher capacity utilization in the second half of the year
The partial sharp declines in demand observed during the second quarter and resulting in reduced capacity utilization put the profitability of the EC segment under considerable strain. The effect was much more visible in this segment since the depth of added value of its products is significantly higher than in the other two segments. The negative effects were mitigated by the measures implemented early on to temporary reduce capacity and strictly manage costs. Nevertheless, the operating profit halved during the first half of the year compared with the previous year and the EBIT margin dropped to 9.1%. Through avoidance of structural measures, jobs were saved and the organization was in a position to quickly resume normal operations and demonstrate its reliability as a supplier during the subsequent recovery in business activity.

Segmentbericht_2_1920px — Since summer, the demand began to recover significantly, which was particularly noticeable in the automotive-related areas.

The recovery began surprisingly quickly in automotive-related areas and the Electronics division also experienced good demand from customers. As a result, capacity utilization steadily improved during the second half of the year and the temporary capacity reduction measures had to be applied only selectively and to a much lesser extent. The operating profit margin more than doubled to 20.2% in the second half of the year. This resulted in an EBIT margin of 15.5% for the full year (previous year: 17.0%, adjusted).

Success Story: Expansion of the medtech production platform

Basis for future growth strengthened
SFS continued to invest in capacity expansion and growth projects during the COVID-19 pandemic, strengthening the basis of its future competitiveness. Capital expenditure in the EC segment amounted to CHF 83.1 million in 2020 (previous year: 94.1 million).

In addition to substantial investment projects for applications in the field of electric brake systems, infrastructure projects were important drivers. In order to realize growth projects in the Medical division, work was started to expand the sites in Hallau (Switzerland) and Franklin, US.

Automotive_Brake_Systems_angepass_1920pxt

Success Story: Electronic solutions improve safety

To further realize growth projects in the Automotive division, construction of an additional production hall in Heerbrugg (Switzerland) began in early 2021.

Furthermore, the new platform in Nantong (China) performed well over the past year and the projected efficiency gains were realized. After the successful consolidation of the Electronics division’s factories in China, other SFS divisions have made increasing use of the local resources and processes. The comprehensive range of production technologies offered by the new site in Nantong has attracted considerable interest from existing and potential customers. A key driver is the need for further localisation in component manufacturing, which SFS can meet with its “local-for-local” strategy. In the Automotive division, acquired projects are proceeding according to plan and the first ramp-ups are scheduled for the first half of 2021. In addition, the Nantong platform will become a key advantage for the D&L segment and the Medical division on which to serve local customers.

Strong recovery in the second half of the year
The weak demand from the automotive industry from the previous year continued into 2020 and the first global wave of the COVID-19 pandemic depressed demand even more. Large customers had to shut down their factories during the lockdown, which led to a massive decline in demand throughout the supply chain during the months of April and May. The collapse in the end market led to a 58% decline in second quarter sales compared with the previous year period. The intensive use of temporary capacity reduction

In spite of the steep fall in business, structural measures and thus job cuts were largely avoided. This enabled the organization to quickly resume normal operations during the subsequent recovery. The recovery began in July and steadily gained momentum during the second half of the year. The resulting improvement in capacity utilization had a positive impact on profitability. instruments helped to mitigate the negative effects.

The lockdown caused a temporary delay in the award of new customer projects. Ongoing innovation projects continued to be executed and the innovation trends increased efficiency, greater comfort and improved safety and, from a higher perspective, autonomous driving technology, which is leading to increasing electrification of vehicles, have proved to be robust. They form the basis for future growth. SFS’s competitive position remains unchanged.

With the acquisition of Truelove & Maclean (T&M) in spring, SFS continued to complement its existing development and production platform in North America with the addition of the manufacturing process of deep drawing. Despite the difficult market environment due to the COVID-19 pandemic, T&M achieved solid profitability. T&M’s integration into the global production platform and the SFS family is proceeding according to plan and initial new orders from customers in North America were already won.

Outlook 2021
In 2021, the course of business will remain subject to considerable uncertainty, with gradual improvements in parallel to the COVID-19 pandemic subsiding. After a subdued development in the first half of the year, the Automotive division expects demand to improve during the course of the year. Thanks to its current project pipeline, the division is confident to continue to outgrow the market.

New production building

To realize projects in the field of electric braking systems
Investment volume CHF 25–30 million
Creates around 100 new jobs at the site in Heerbrugg (Switzerland)
An additional production area of 9,400 m² and a storage area of 2,800 m²
The new building is consistently geared towards sustainability, efficiency and the conservation of resources.
Commissioning planned for mid-2022

Affected by continued strong demand
Due to its presence in China and other Asian countries, and the decision by Chinese officials to keep factories closed after the celebrations of the Chinese New Year, the Electronics division was the first division at SFS to be severely affected by the pandemic. When factories were allowed to reopen, the organization profited from its ability for fast and efficient ramp-ups and was quickly able to restore its full supply capability. Due to the rapid ramp-up and the good customer demand for lifestyle electronics, smartphones and accessories, the impact of the lost production time was quickly offset. Despite the operating restrictions, the division achieved organic growth in the first quarter.

The division managed to stay on a growth track throughout the period under review. In the second half of the year, it once again benefited from successful product launches by its key customers in the product categories that had already served as growth drivers during the first half of the year. In these product ramp-ups, too, the division demonstrated its strength and reliability and benefited from temporarily higher allocations. It also profited from expanded product penetration, which resulted in a higher share of wallet. Thanks to its high level of expertise in cold forming and CNC machining, the Electronics division, which markets its products under the Unisteel brand, has established a strong position in particular in the accessories segment (power adapters, earbuds, smart watches).

Due to technological developments, sales of components for hard disk drives continued to decline as expected. The impact of the negative trend was reduced by business with components for High Capacity Enterprise Drives. These products are used in data centres and thus benefit greatly from the trend toward cloud computing and the growth of streaming services. Due to the more demanding requirements and product design, the value take of these application is higher than that of other HDD applications, which partially compensates for the overall decline in the HDD market. In the medium term, the freed-up production capacity at the factory for HDD components in Malaysia as the market continues to shrink will be used by other business areas; for example, components for medical device customers in the region or customer projects moving from China to countries in Southeast Asia as a result of the simmering US-China trade conflict. Thanks to its global production platform (with a site in India), SFS is in a good position to meet the needs of those customers that are shifting production out of China.

The site in Nantong (China) performed well in the reporting year and a high capacity utilization was achieved, meeting expectations for the new location. The site is of high importance for the Electronics division and for the business activities of other divisions, in particular the Automotive division.

Outlook 2021
Amid the economic uncertainties, the expected decline in the HDD business and a strong base effect in the second half of the year, the Electronics division expects a flat development in 2021.

The new site in Nantong (China) has proved its worth and the anticipated efficiency gains have been realized.

Slow recovery in the second half
The Industrial division focuses on various niche markets. These were affected to differing degrees by the weak demand caused by COVID-19. After the sharp decline in demand in some areas during the second quarter, the situation in several markets stabilised from the middle of the year. The strong recovery observed in the automotive-related businesses areas was, however, not seen in most of the segments addressed by the division. Therefore, sales and operating results at the end of the year were only slightly better compared with the first half. Demand for plastic components for various industrial and medical applications remained relatively stable. In other industrial application areas, in particular in Aircraft, sales were sharply lower compared with the prior-year period. The future development in the Aircraft business is likely to remain challenging as projected demand for passenger air transportation has been revised sharply downwards and capacity has been reduced across the entire supply chain.

The expansion of the site in Hallau (micro-injection molding of components for applications in the pharmaceutical and healthcare sectors) that began at the beginning of the year is progressing as scheduled in every respect. The planned completion and commissioning of the new site is scheduled to take place in summer 2021.

Under the new strategy for the Medical division and the resulting organisational adjustments, the Micro Plastics business unit (micro-injection molding of components for applications in the pharmaceutical and healthcare sectors, produced in Hallau, Switzerland), parts of the Industrial Plastics business unit (injection moulding of components for applications in the dental sector, produced in Altstätten, Switzerland) and the Medical Components business unit (primarily titanium orthopaedic screws, produced in Heerbrugg, Switzerland) will gradually be aligned under the Tegra Medical brand.

Outlook 2021
The course of business will remain subject to considerable uncertainty in 2021, with gradual improvements in parallel to the COVID-19 pandemic subsiding. The Industrial division expects demand to improve during the course of the year, after a subdued development in the first half. Thanks to its current project pipeline, the division has confidence in its development, although demand in the aircraft industry is expected to remain weak.

Growth track continued
The negative consequences of the COVID-19 pandemic were less pronounced and of shorter duration for the Medical division compared with the EC segment’s other application areas. The decline in demand was largely attributable to the postponement of elective procedures, as seen in many countries as a direct consequence of the pandemic. Due to its product mix, the production site in Hernando (US) was affected the most. The impact of the reduced demand was more than offset by the general growth trend in this market and the ramp-up of new projects. The positive development extended across the different application areas.

Tegra Medical’s headquarters in Franklin (US) has reached the limits of its capacity due to the growth over the past several years. To ensure the division’s long-term development at the strategically important hub for the life sciences and medial device industries in Boston, the division purchased a large property and building in the immediate vicinity of its current site. The expansion project proceeded as planned and the first production units were moved to the new location during the period under review.

Outlook 2021
The Medical division expects a continuation of the positive development in the year 2021. The implementation of the “Medical device strategy” and the build up of the global manufacturing platform will be a key priority.

“Medical device strategy”
SFS is expanding its successful strategy of leveraging a global production platform to its medical devices business. By making use of additional sites within SFS Group’s global production platform, customers across North America, Europe and Asia will be served locally under the Tegra Medical brand. The company uses local site expansions in Hallau (Switzerland) and in Franklin (US) as a basis for expansion. As part of the restructuring and focused alignment of the Medical division, Walter Kobler, a long-standing member of the Group Executive Board of SFS Group and Head of the Industrial division, has additionally assumed management responsibility for the Medical division since 1 January 2021.