Schlatter Industries : Semester Report 2023

Schlatter increases net sales and earnings in the first half of 2023

Demand for Schlatter products normalized in the first half of 2023. In particular, demand for reinforcing mesh production systems and weaving machinery for the paper industry dropped following a period of market overheating. By contrast, after-sales volumes remained at a high level, while the number of industrial mesh production systems and rail welding systems sold increased. The order backlog as at 30 June 2023 was almost unchanged from the end of the previous year despite a significant increase in net sales. Our suppliers' delivery problems have eased in some areas, but the resulting backlogs continued to weigh on productivity. Prices of sourced materials did not rise as fast but are still holding back earnings, while further appreciation of the Swiss franc put further pressure on earnings. Net sales were 31% higher than in the comparable prior-year period and the operating profit (EBIT) was also higher at CHF 3.7 million (first half of 2022: CHF 2.9 million). The Schlatter Group ended the first half of the year with a high order backlog, which will safeguard capacity utilization beyond the current financial year. Pleasingly, the second half of 2023 started with brisk project enquiries but their realization is dependent on macroeconomic developments and thus entails uncertainty. The Schlatter Group expects earnings in the second half of the year to be on the same scale as in the first half.

In the first half of 2023, the Schlatter Group posted order intake of CHF 62.4 million, which was lower than in the comparable period of the previous year (first half of 2022: CHF 94.6 million). The high order intake in the previous year was mainly due to overheating of the markets for reinforcing mesh production systems and greatly exceeded the Schlatter Group's capacity. In the first half of the current financial year, the Schlatter Group recorded a 31% rise in net sales to CHF 67.4 million (first half of 2022: CHF 51.3 million).

At CHF 84.4 million, the order backlog as at 30 June 2023 was close to the level at year-end 2022 (31 December 2022: CHF 89.4 million). Operating profit (EBIT) for the first half of 2023 totalled CHF 3.7 million (EBIT margin: 5.4%), compared with CHF 2.9 million (EBIT margin: 5.7%) in the first half of 2022. For the first half of the year, the Schlatter Group is reporting a positive net result of CHF 3.3 million (first half of 2022: CHF 2.0 million).

The operating cash flow is CHF 1.3 million (first half of 2022: CHF 2.3 million). Consolidated equity increased from CHF 31.3 million to CHF 34.1 million, which corresponds to an equity ratio of 38.9%.

Markets

Welding equipment markets

Reinforcing mesh production systems

Rising interest rates, higher production and energy costs and the downturn in global construction activity weakened demand for reinforcing mesh production systems. Moreover, capacity was increased in previous periods and now exceeds current requirements.

In the first half of 2023, orders for reinforcing mesh production systems were lower than in the comparable period of the previous year, as anticipated because the markets overheated in the prior-year period, leading to consolidation of capacity and lower order intake.

The markets for reinforcing mesh production systems are not expected to pick up in the second half of 2023 and will remain at a similar level to the first half.

Industrial mesh production systems

Europe and North America are among the most important markets for industrial mesh. Demand was pleasing in the first half of the year and order intake increased. The American market in particular was more satisfactory than had been expected. Demand for end-to-end solutions in areas such as cable carriers and warehouse storage grating also held up.

In the US market, the trend to repatriation of products previously produced in China continued. Reasons for this are steeper import tariffs, higher transport costs, and the more rapid availability of locally produced goods. At the same time, it is evident that Chinese industrial mesh producers are increasingly relocating production to South-East Asia, which could provide positive impetus for Schlatter's industrial mesh business.

Modernization

Modernization of industrial and reinforcing mesh production systems is an important part of our business. Many customers prefer to modernize existing installations rather than purchase new systems. Demand for upgrades and retrofits therefore remains high, which is also a contribution to sustainability.

Rail welding

Order intake in the rail welding product area was pleasing in the first half of 2023 and picked up considerably compared with 2021 and 2022. Business was predominantly outside Europe and there is further potential in the emerging markets.

Schlatter also offers upgrades and modernization solutions in the rail welding business area. These account for a significant proportion of its work in both stationary and mobile rail welding machinery.

Weaving machine markets

Overall, market conditions for the weaving segment developed satisfactorily in the first half of 2023.

Weaving machinery for the paper industry

The high order intake in the previous periods was dominated by the Chinese market and exceeded Schlatter's capacity. As a result, delivery times had to be extended. Our customers are continuing to operate at high levels of capacity utilization, so sales of spare parts remained high.

The boom triggered by local Chinese customers in previous periods has come to an end. It can be assumed that the upcoming deliveries will result in overcapacity on the Chinese market, initiating a consolidation phase. However, we expect this to be offset to some extent by western markets.

Demand for paper for writing, newspapers and magazines is continuing to decline, but production for brown paper and sanitary paper is growing steadily. The growing trend away from plastic also offers potential for paper consumption.

Schlatter expects order intake to be satisfactory in 2023, albeit considerably lower. Thanks to the continued high order backlog, good capacity utilization in the weaving segment is ensured for 2024 as well.

Technical fabrics

Under the C-Tec (contactless) brand, Schlatter has developed a new generation of machinery in the medium to high tension area which permits applications in other industrial areas as well as in the paper industry. The new generation of machinery was presented to a broader customer base for the first time at the ITMA 2023 trade show in Milan and garnered considerable interest. C-Tec positions Schlatter in a niche, which can be used to build up a new business area in the coming years.

Wire weaving

There is potential for wire weaving systems, especially in fields of application such as security grilles, sieves and mosquito screens. Schlatter expects to remain successful in the current financial year.

Spare parts and services markets

The spare parts and services business remained buoyant thanks to our customers' high capacity utilization and is still making a key contribution to the Schlatter Group's net sales. Our active after-sales strategy is geared to further growth in this area.

4 Schlatter Industries AG Half-yearreport 2023

Welding segment

Key performance indicators

Order intake: CHF 50.9 million (first half of 2022: CHF 71.7 million).

Net sales: CHF 51.5 million (first half of 2022: CHF 44.5 million).

Order backlog: CHF 61.9 million (31 December 2022: CHF 62.5 million).

Order intake in the welding segment was above expectations in the first half of the year and roughly corresponds to segment capacity. While there was a significant drop in order volume for reinforcing mesh production systems, order intake increased in the other product areas. Despite the significant sales growth, the order backlog remained high at CHF 61.9 million (31 De- cember 2022: CHF 62.5 million).

As a result of supply bottlenecks, especially for electrical and control components, there were delays in the delivery of machinery. The delivery backlog has lasted for longer than had been anticipated and will continue to have a significant impact in the second half of 2023.

Profitability is still being held back by supply chain disruption and the lack of key parts for machinery and equipment, prices rise on the procurement side and further appreciation of the Swiss franc, albeit to a lesser extent than in the previous period. Since machinery and systems manufactured over the past year were sold at fixed prices, this adversely affected margins. By contrast, economies of scale had a positive effect because of the rise in net sales.

Cold rolling and drawing lines

Schlatter has been marketing machinery for wire production (cold rolling and drawing lines) since 1 January 2022 as a further step in its positioning as an all-round solution provider with extended systems expertise in the mesh sector. Most of the teething problems have now been resolved.

Product development

Product development is focusing on extending the machinery platform for mesh welding. Numerous modules have been transferred to the new machinery platform and simultaneously upgraded for additional applications. Another of Schlatter's priorities is digitalization. For example, further important milestones were achieved in the renewal of the control platform and operating interface for mesh welding machinery.

Welding segment outlook

Given the present order backlog, good capacity utilization is ensured in the welding segment in 2023 and beyond. Delivery delays should be resolved by the final quarter of the year.

For the most part, selling prices for machines and systems are fixed, so the cost increases weigh heavily on the margin. We assume that price rises for the Schlatter product range in the fourth quarter of 2023 will have a more favourable effect on the margin. Enquiries are still brisk, corresponding roughly to our capacity, but translation into orders remains uncertain. That depends to a large extent on how the macroeconomic situation develops. Order intake for reinforcing mesh production machinery will remain weak in the second half of the year, but will be adequately offset by the industrial mesh and rail welding product areas.

Weaving segment

Key performance indicators

Order intake: CHF 11.5 million (first half of 2022: CHF 22.9 million).

Net sales: CHF 15.9 million (first half of 2022: CHF 6.8 million).

Order backlog: CHF 22.5 million (31 December 2022: CHF 26.9 million).

Capacity utilization in the weaving segment is secured until the end of 2024. Nevertheless, further orders for reinforcing mesh production systems are necessary for full capacity utilization at the Münster site, which is the centre of excellence for the weaving segment. The measures implemented at this site in the past financial year have had the desired effect on earnings and a clear return to profitability has been achieved. However, these measures are not sufficient in the medium term so costs need to be reduced further and placed on a more flexible basis. A range of measures have been defined for this.

Weaving machines for the production of paper machine clothing

One priority is to reduce the production costs of weaving machines for the paper industry and to increase their performance. Production costs are to be reduced principally through a new machinery platform. There is also considerable potential to cut costs by optimizing project execution processes and in the procurement of parts and components.

C-Tec technical textiles (contactless)

Schlatter has developed a new generation of machinery in the medium to high tension range. As well as being used in the paper industry, it is also suitable for other industrial applications. The new generation of machinery was presented to a broader customer base for the first time at the ITMA 2023 trade show in Milan and garnered considerable interest. C-Tec positions Schlatter in a niche, which can be used to build up a new business area in the next few years.