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Ladies and gentlemen, good morning or good afternoon. Welcome to the dormakaba Holding AG Half Year Results 2019-2020 Conference Call and Live Webcast.I'm Sarah, the Chorus Call operator. [Operator Instructions] And the conference is being recorded. [Operator Instructions] The conference must not be recorded for publication or broadcast.I would like to remind you that the conference call does include forward-looking statements, which are subject to risks and uncertainties. Listeners and readers are, therefore, strongly encouraged to refer to the disclaimer, which is part of today's media release.At this time, it's my pleasure to hand over to Mr. Riet Cadonau, CEO. Please go ahead, sir.
Good afternoon, ladies and gentlemen. Welcome to our today's presentation on our half-year results. I will start the presentation with some overall comments on the half year results, followed by our CFO, Bernd Brinker, who will talk about the financials in more detail. Afterwards, we'll be able -- available for your questions.Our first half of financial year in brief. We generated sales of CHF 1.385 billion. Currency translation had an impact of minus 2.1% and the effect from acquisitions and divestments were at plus 0.5%. We achieved organic sales growth of 0.8%. EBITDA declined to CHF 214.1 million and was affected by some extraordinary nonrecurring costs. These extraordinary one-off costs make up around 0.5 percentage points. This leads to an EBITDA margin of 15.5%. This is slightly below the level of the second half of financial year '18/'19, which was 15.8%. And net profit stood at CHF 119.4 million.Now I'd like to give you more insight into the performance of our 5 segments. Let me start with the segment Access Solutions Americas. After 2 consecutive financial years without organic growth, the segment returned to organic growth of plus 1.4%. EBITDA margin was at 20.9%, which is still on a high level. Growth was driven by Door Hardware, mainly Door Closers, Safe Locks, Interior Glass Systems and the Lodging Systems business in North America. Latin America contributed to growth as well, driven by an improvement in Mexico.The challenges with the technical systems and infrastructure at Mesker, our business is hollow metal doors, continued to affect both the top line and profitability in the first half of the financial year '19/'20. While the technical issues have since been resolved, performance will be affected until the end of this financial year as our business continues to regain customer trust.The segment benefited from the acquisition of Alvarado Manufacturing, which was acquired last July and has been accretive to EBITDA margin and earnings per share from day 1.Over the past 4 years, AS Americas has been working on the optimization of its production footprint by consolidating various smaller locations into major production hubs. Since 2016, the segment has closed 8 production sites and will continue to optimize, which will lead to a higher efficiency. The segment expects further organic growth in the second half of financial year '19/'20. Door Hardware, Safe Locks and Interior Glass Systems continue to benefit from their momentum, and Lodging Systems sees increased new construction and retrofit demand. In addition, Mesker is expected to further improve.Our next segment is Access Solutions APAC, Asia Pacific. Organic sales growth was slightly below prior year with minus 0.3%, which is better than the relevant competition. The EBITDA margin is at 15.2%, which is 0.4 percentage points lower, but due to effective cost management, still on a good level. We saw continued strong growth in China with double-digit organic growth rates in the first half year. This is despite a significant slowdown in Hong Kong due to political tensions.Growth was reported mainly in the Product Clusters Safe Locks, Electronic Access & Data, Services, and particularly, for Entrance Systems, so the revolving doors and automatic sliding doors.Wah Yuet's OEM business for the U.S. market was impacted by the ongoing trade conflict between China and U.S. The business has initiated countermeasures such as starting to shift capacity to Chinese domestic customers and in-sourcing of production. While we saw sales increase in the Pacific region, Southeast Asia still felt the effects of a weaker construction market.In India, growth was impacted by delays in project business. However, we expect stronger growth during our second half year when these projects are going to be executed.In principle, the business will be well positioned for further improvement of performance in our second half year. However, we expect COVID-19 to have a negative impact, which cannot be quantified as of today. We already experienced a negative impact on the China domestic business and probably also on our supply chain. Mitigation of that situation has our full management attention. We are continuously assessing the situation and its overall impacts and taking the necessary measures.I'm going to the next slide with Access Solutions DACH, Germany, Austria, Switzerland. The segment reports organic sales growth of 0.7%. It experienced good growth in Austria, and particularly, in Switzerland. Despite stable demand and a good order book, sales growth in Germany was slightly negative mainly due to delays in the project business.The EBITDA margin was at 16.9%, which is below previous year's level. We had positive effects from higher sales prices, post-merger integration synergies and cost efficiencies, but negative effect of labor cost inflation and lower volume outweighed, and therefore, impacted the profitability in some of the German and Asian production plants. We have already started to address the profitability issue as part of a new program. This program covers, in particular, a major German site in Ennepetal. Measures have been initiated, which include: first, strengthening of management; second, improvement of the entire supply chain, including further automatization; and third, flexibilization of production.Beside the final measures, which we currently implement as part of the post-merger integration by end of June 2020, we agreed with the work council on a further reduction of around 100 jobs, which is to be implemented in the next financial year starting July 1, 2020. By realizing the remaining post-merger synergies in Germany, we expect some support of the EBITDA margin for the second half of financial year '19/'20.Now some details on Access Solutions EMEA, Europe, Middle East and Africa. AS EMEA achieved organic sales growth of 1.4% and improved profitability with an EBITDA margin of 8.1%. Please be aware that dormakaba's margins are allocated mainly in the plants, and AS EMEA bears responsibility for only a few plants.From a Product Clusters perspective, Entrance Systems, Services and Mechanical Key Systems, cylinders, contributed the most to growth. They have strong sales to retail chains in Russia and airports, including Heathrow and Schiphol.Sales growth was driven by high single-digit growth rates in Central and Eastern Europe, where the business gained several new projects and market demand was strong. U.K. and Benelux as well as Southern Europe contributed to organic growth, and also sales in France were above previous year.Sales in Scandinavia were below previous year, particularly due to the weak performance in Norway. We restructured the business, which includes centralization of key functions, such as finance, procurement and customer care and the sales organization and the leadership have been reorganized, too.On to the last segment, Key & Wall Solutions on Slide 9. Key & Wall Solutions reports an organic sales growth of 2.8% and an increased EBITDA margin of 15.0%. The performance was driven by Movable Walls, which overcompensated the negative deviation of the Key Systems business unit.Key Systems experienced lower sales in all regions due to lower demand for key cutting machines and a weaker OEM automotive keys business globally. Fewer key replacements and a weaker automotive solutions business in the U.S. contributed to this decrease. Key Systems have initiated measures for its U.S. business to protect its margins.Movable Walls delivered very good results. The business unit had a strong double-digit sales growth, particularly in North America. We also see a continuous positive contribution from increased automatization at the production site in Ocholt, Germany. Key objective of this ongoing program is a sustainable improvement of the cost base and increase in efficiency in the European Movable Walls business.Now to the changes in the Executive Committee, which we announced in the period under review and today. As announced last November, Steve Bewick has taken over as COO for the segment AS EMEA as of January 1. Today, we announced that both Michael Kincaid, COO, AS Americas; and Jörg Lichtenberg, Chief Manufacturing Officer, will step down from their respective positions and as members of the Executive Committee as of June 30 at the latest.As new COO, AS Americas, the Board of Directors has appointed Alex Housten. He will be joining dormakaba as of April 1. After an onboarding period, Alex will assume responsibility as COO, AS Americas, and joining the Executive Committee on July 1 at the latest. With Alex Housten, we were able to attract a senior industrial executive with an outstanding track record at United Technologies UTC. Under the leadership of Alex, we expect AS Americas to accelerate profitable growth.With Jörg Lichtenberg intending to leave the company, it was decided to discontinue the CMO role. Over 4 years after the merger, the company's new operating model is well established, which allows management to reassign the CMO's respective responsibility within the organization.The above changes enable dormakaba to take the next step in corporate development and organizational setup, thereby further improving its efficiency and effectiveness. At the same time, the Executive Committee will be renewed and streamlined further. Since the merger, the number of EC members was reduced from 11 to 8.As you all know, we invest considerably in innovation. So to close my session, I would like to present an example from our innovation pipeline, the BEST Switch Core. This product brings the advantages of mobile access to a standard mechanical lock as it installs in minutes by just replacing the mechanical with a digitally controlled core or cylinder. Using the lock is easy. A user activates the system by simply touching it and using the mobile phone to unlock the door.Despite advantages on the user side, there are also benefits on the administration side. Mobile credentials reduce the risk of key or core replacement, and our device is not only opened but also administrated by the mobile phone. With this product, we are offering an easy-to-install budget solution for upgrade to digital with good potential in the U.S. retrofit market.We also provided a 2-minute long video, which will give you an idea how the product works. You can find it in the download section of this webcast or via the link we implemented in the presentation file.With this, I close my part of the session and hand over to our CFO, Bernd Brinker, for more insights in our financials. Bernd, please.
Thank you very much, Riet. A warm welcome, and good afternoon to all participants in the call and in the web session. We achieved organic sales growth of 0.8% in the first half of the 2019/'20 financial year. Overall, however, sales were down by 0.8%. Currency translation effect caused by the increasingly strong Swiss franc pushed the headline figure down by 2.1%, while the positive net effect of M&A was 0.5%. EBITDA went down by 4% to reach CHF 214.1 million, giving an EBITDA margin of 15.5%. Net profit was 5.8% lower than in the equivalent period of the previous year at CHF 119.4 million. This reflects lower operating profit, higher expenses from the financial result and an improved income tax rate.Let's move to the next slide, which is about sales development. The upper right part of the slide shows the drivers behind the change in sales compared with the previous year. The greater strength of the Swiss franc against some of our key currencies led to a negative currency translation effect of CHF 28.4 million. You can see the main currencies and the way they changed against the Swiss franc in the box at the bottom right. You will notice that the Swiss franc became stronger, in some cases, significantly so against all our important currencies apart from the Indian rupee. This appreciation took a toll on our figures.We achieved a CHF 10.5 million organic increase in sales. The AS Americas, AS EMEA and Key & Wall Solutions segments deserve particular mention here as they accounted for most of this rise. Overall, our organic growth came to 0.8%.M&A transactions accounted for a net CHF 7.1 million increase in sales. This includes 2 transactions in the U.S., the acquisition of Alvarado in July 2019 and the divestment of part of our Door Hardware Service business in December 2018. Our sales performance was negatively affected by both internal and external factors.Let's start with internal factors. Internally, our U.S. manual door business, which is Mesker, continued to suffer from the late consequences of the problematic migration to new ERP platform, from the associated delivery issues, and as a result, from customer dissatisfaction. Our Scandinavian business also underperformed the previous year owing to internal difficulties and lower market share, especially in Norway.Externally, the main issues were the continued trade dispute between the U.S. and China, the weak economic environment in Southeast Asia and Australia and the economic impact of political tensions in Hong Kong. All of these factors just mentioned did influence our financial performance already in H2 of last financial year and were part of our guidance. Only the Hong Kong impact has started in the current financial year and was not known at the time of our guidance at the beginning of the current financial year. Overall, sales for the first half of 2019/'20 financial year came to just under CHF 1.4 billion.Next slide is about EBITDA development. The internal and external factors just mentioned has influences on sales, undermined profitability, too. AS DACH result was also affected, in particular, by lower volume. Outside of operating business, there were extraordinary and nonrecurring costs of CHF 7 million during the period under review, which took 50 basis points off the EBITDA margin. This was more than enough to offset efficiency gains and remaining cost synergies from the merger.Currency translation effects reduced EBITDA by CHF 3.9 million, while acquisitions and disposals resulted in a net increase of CHF 5.5 million. The acquisition of Alvarado in the U.S. deserves particular mention here as it had a very positive impact on earnings and has performed very well so far.Let's turn now to the income statement. The gross margin, to start with, is more or less stable at 42.5%. The 3% rise in sales and marketing costs reflects our investments in market development. At the same time, we were able to trim our general admin costs by more than 4%, thanks to our rigid cost management measures.Spending on R&D appears at first sight to have gone down slightly. However, it should be noted that we capitalize some R&D projects. If we adjust for the expenditure involved, the R&D ratio rises to 4.0%, which is slightly higher than the previous year and in line with our guidance of 4% to 5% of sales.The net financial result was affected by 3 factors in particular: first, the acquisition of Alvarado in the U.S. generated interest expenses during the period under review for the first time; second, majority of our financial debt is in the U.S. The decline in interest rates and the -- reduced our interest expenses; third, the previous year included a book gain from the sale of the minority stake in ISEO.The income tax rate improved slightly from the previous year 25.5%, down to 24%. Overall, net profit fell by CHF 7.3 million or 5.8% to CHF 119.4 million.Now let's move to the next page, which is about cash flow. There was a pleasing increase in operating cash flow during the period under review. In particular, we improved significantly in terms of net working capital management. And how did we use this cash? First of all, we invested around CHF 140 million in expanding our business portfolio, which means in acquisitions. As announced, we also invested heavily in our existing business again. This included consolidating and developing our worldwide locations at an investment of more than CHF 50 million during the period under review. This CapEx is equivalent to 3.6% of sales compared with 3.2% in the previous year.The very low prior year figure for cash flow from investment activities of only minus CHF 4.8 million looks rather low and needs explanation. It was compensated or influenced to a large extent by the proceeds from the sale of our minority stake in ISEO.We improved our overall operating cash flow margin significantly from 7.5% in the previous year to 10% during the period under review.Next slide is about net debt. Our net debt increased by around CHF 70 million, 7-0, during the period under review. This rise was due to the payment of dividends for the full financial year 2018/'19 totaling CHF 125.5 million and to the acquisition of Alvarado, which taken together, exceeded the operating cash flow in the first half of the current financial year. This increased our leverage, i.e., ratio of net debt-to-EBITDA from 1.7x the previous year to now 2.0x.The core of our funding rests on the 2 bonds issued totaling CHF 680 million that we placed in October 2017 that puts our financing on a very solid long-term footing. With regard to the impact of our financing on interest expense, it should be noted that we use most of the debt to finance our U.S. acquisitions and activities, so we have to swap funds denominated in low interest environment Swiss francs to the U.S. dollar, which is more expensive in terms of interest rates.We have scope to increase our debt still further if we want to make any additional investments in acquisitions and growth in order to play an active part in consolidation of our industry. We have further financial room to -- for maneuver up to a leverage of 2.5x. We could even push the ratio higher on a temporary basis.With that, my final page is about guidance and business outlook for the current financial year 2019/'20. The market environment in the major regions of North America, Europe and Asia has become even more demanding and challenging than at the start of the financial year. We believe there will be a good market environment in North America and a challenging one in Latin America, and mainly, a moderate market environment in Europe and a moderate market environment in Asia. However, this assessment is overlaid by the implications of COVID-19. There are already clear strains in domestic China in February. The effects in other parts of the world are still unclear, but are a matter of concern.We also regard current political conditions and growth indicators as volatile and uncertain. This uncertainty will continue into the second half of our financial year. We expect COVID-19 to have no sizable negative impact on our markets and our earnings performance in the second half of our financial year. It is impossible to predict the extent of this negative influence on globally network supply chains and economic growth.Under these conditions, we no longer expect to see higher organic sales growth and a higher EBITDA margin for the 2019/'20 financial year as a whole. We now believe that both figures, organic growth rate and EBITDA margin, will be somewhat lower than in the previous year.Given the challenging nature of the environment, we will be reviewing our medium-term goals in the coming months. We will continue to invest substantial amounts in innovation and in our digital transformation because we believe this is vital for our long-term competitiveness and for sustained profitable growth.Thank you very much for your attention so far. And with that, I'll hand back to the moderator.
[Operator Instructions] The first question is from the line of Martin Flueckiger, Kepler Cheuvreux.
First question I have, and I guess, the follow up would be the second. The first question I have is on your Mesker business. What is it exactly that gives you confidence that you will regain trust of those customers that, it appears, you have temporarily lost? So what are the measures there with regards? That was my first question with regards to Mesker. And possibly also if you could talk a little bit about those higher freight costs that are mentioned in the report. Are these fuel-driven? Are these driven by the lack of transport or the lack of drivers? What is causing that? And what's your expectation going forward? That would be my first question.And then the second one -- sorry, the second one is on AS DACH. What was the main reason for the lower sales volumes in H1? Was it just volatility in large projects? And if it was, when do you expect to catch these volumes up again?
So thank you, Martin. This is Riet speaking. Let me start with the Mesker go-to-market activities to regain customer trust. In essence, there are the following measures that we have taken: first, we have allocated more sales resources to the Mesker business, number one; number 2, we have defined special promotion activities in order to regain customers' trust. Underlying, of course, is we regained our supply readiness and I can confirm that we have achieved that. So therefore, for the remaining months of the fiscal year is really about the 2 activities that I mentioned, reallocation of sales resources and special promotion activities. With regard to freight, I hand over to Bernd.
Yes. Martin, freight is closely correlated with the issues, which we have with the production and with our relation to customers. So it's not about higher fuel costs. It's much more about we -- usually, we have quick ship projects, and we have product available quite quick as well. Now we have -- we had issues and continue to have issues in delivering products to customers, and we had to overcome this by introducing much quicker transportation, which we did not do in the past. So therefore, we now have much higher freight costs compared to the past. Those freight costs are expected to normalize once we have, let's say, basically fixed all the issues, especially now with our customers who are still concerned about our ability to deliver according to their needs.But technically, and that's what we have mentioned earlier, technically, we have resolved all those issues. So now it's much more addressing customer needs in the markets.
With regard to AS DACH or better, the German topic when it comes to sales growth. So underlying demand and order book for Germany are still good. As I've said, sales growth in Germany was slightly negative, mainly due to delays in the project business. Project business is normally electronic access and data business in there. So volumes in Germany have already improved at the end of the first half year, so we have seen improvement in November and December. And the business expects that Germany returns to organic growth for the financial year '19/'20. And in addition to the low growth in Germany, the segment had to digest low internal demand for Door Hardware product in its plants in Singapore and China. That's the entire picture when it comes to Germany and the corresponding decline.
The next question comes from the line of Bernd Pomrehn from Vontobel.
Yes. My first question is regarding the net profit attributable to minority interests. It seems that this net profit has slightly increased historically. Always 47.8% of the net profit was attributable to minority interests. Now this ratio has increased to 48.7%. So was there any change in the ownership structure of the dormakaba Holding GmbH in Co KGaA?
Okay. Bernd, here. No, there has been no change at all. The -- let's say, the ownership structure in the KGaA is one driver of minority interests, but not the only one. We have other smaller here and there joint ventures with other third parties, and this is the driver for this small deviation. So it's obviously developing over time according to also the profits of those minority shareholdings. For example, ISEO, which is not part anymore of our groups. But to reconfirm the KGaA structure is unchanged.
Okay. Okay, good. And then the second question, please. You disclosed the acquisition price for Alvarado, and we see that you paid slightly more than 4x sales for this bolt-on acquisition. Is this the acquisition multiple we should expect also going forward because it seems somewhat higher than the historic acquisition prices you paid?
Riet speaking. Alvarado has a very attractive financial profile, which justified the investment. Alvarado had also strong growth rates, strong access to an attractive vertical and innovative technology, which we can leverage. The acquisition multiple is in line what -- with what is currently paid in the market for a company with such a profile. And up to today, we are very happy with the acquisition.
The next question is from the line of Andreas Müller from Zürcher Kantonalbank.
One is, can you give an -- a status of the order intake by the end of February? I think you mentioned something in China that it was worse, of course. But how do you see the organic growth or the organic decline in China, and particularly -- and also in the rest of the world? Have you seen already, some saying, in the order intake from airports, from stadiums and so forth, which is worth to mention? That's the first question.And the second question will be, can you dissect a bit extraordinary costs, the 50 basis points, into the individual items, please?
Thank you. I'm going to start with incoming orders status, February. We indicated and continue to say that we have very good backlogs in Germany as well as in India driven by project business. So that continues to be strong. What is clearly weaker is China domestic, okay? I mean January was China's -- Chinese New Year. February was weak driven by coronavirus. And we expect March also to be weak China domestic.
Okay. Andreas, with regard to your second question, extraordinary nonrecurring costs. In the first half, we disclosed an amount of CHF 7 million, which translates into roughly 50 basis points in EBITDA margin. The main drivers for those nonrecurring extraordinary costs are projects, especially some M&A projects, and smaller restructuring here and there, which is not expected to be recurring. What it should indicate you at the same time is that we continue to work on M&A projects. But always, we are successful in executing those projects and those costs, which you have seen now are part of nonsuccessful transactions. But we, at the same time, continue to work deliberately on potential M&A transactions in our pipeline in order to grow our business not only organically but also inorganically.As I mentioned earlier, our industry is quite attractive for M&A transactions. And so therefore, we also continue to work on M&A transactions.
Okay. And then coming back to the first question. And in the rest of the world, the U.S. and so forth, in terms of order intake, large projects from, say, transport infrastructure or leisure infrastructure, do you see there anything? I mean you mentioned in the hotel business, that you've got a project which you're working on, but say, for the rest, do you -- have you seen already some hesitance to order?
We don't see hesitance with regard to orders, expect (sic) [ except ] China domestic. So it remains within that guidance of the last page shown by Bernd Brinker, where we clearly say that Americas, we expect good growth except Latin America; EMEA, largely moderate growth; and Asia Pacific, moderate growth. So that is still what we see. Again, when it comes to coronavirus, domestically, China, we see the negative impact driven by February, and we expect also a weak March, while we don't see yet the coronavirus impacting our global supply chain, and therefore, also our growth.
[Operator Instructions] The next question is from Fabian Haecki from UBS.
Can you hear me?
Yes.
Okay, good. I got a question on your midterm 2021 targets that you are currently reviewing. Is that something structurally you find out is not achievable postmerger? Or is it more a timing matter? Is it more a market matter? It seems that COVID and other operational issues are rather temporary. So can you elaborate a bit why you are in the process of reviewing this target?
So we always said that we need a good macroeconomic environment to achieve our midterm targets, which is currently, definitely not the case. And therefore, we will review, as we said, our midterm targets carefully in the forthcoming months. And despite that, we will continue to invest significantly in innovation and digital transformation, which we consider as crucial for our future competitiveness and for a sustainable, profitable growth.Now nothing fundamental has changed. I mean let's just, again, recall, dormakaba today is a global one-stop shop. Second, dormakaba made the technology leap from electronic to cloud-based. And third, dormakaba became a strong #3 in the most attractive market in our industry, which is the United States.So strategically, we are well kind of designed. Nevertheless, given the economical environment, we will, as we said, review our medium-term targets driven by the Executive Committee, and then also being discussed and challenged with the Board of Directors. So you can expect us to say more when we are going to present our full year results in September.
Okay. Then I got one follow up on one other question on, I think, at Key Systems, you have plenty Northern Italy, right? Is there any interruptions or other changes to be expected from COVID?
I confirm that we have a sizable factory in Vittorio Veneto. And so far, we don't have a business impact there. Of course, we have taken all the measures that are necessary because we have always 2 goals when it comes to coronavirus: first, to protect our employees and their families; and second, to keep up our supply chain. And that's what we did in China, with our 3 factories in China, and have also continued to do so in Vittorio Veneto. But so far, no impact.By the way, so far, none of our 16,000 employees have been really affected in the sense that somebody has the virus as of today.
[Operator Instructions] The next question is a follow up from Martin Flueckiger.
I've got 2 again, if I may. Just coming back to those restructurings and efficiency improvement programs in AS Americas and AS DACH, actually Germany, as you were mentioning earlier on. Could you give us an idea of what kind of total additional cost savings we're talking about here from these new initiatives? And what is the phasing of those over the next 2 years? That would be my first question.And then the second one is on Key & Wall Solutions. My understanding is that the Key Systems was hit unsurprisingly, I guess, by weaker OEM and automotive key business, but also other factors. So what are the mitigation measures here that you're taking to protect the unit's margins?
Okay. Let me start with Germany. So as we announced, in addition -- and I'm talking now about Germany, in addition to our final activities driven by the post-merger integration program, we agreed with the work councils for a new program and we are going to cut another 100 jobs, mainly in Ennepetal in Germany. So just to make it very clear, this financial year till end of June, finalization of the PMI. As of next year, starting July 1, this additional measure with that further reduction of 100 jobs will be executed. That is important to understand. We do so in order to achieve the goals that we have defined when we merged. That is a measure to catch up in order to achieve what we promised at that time. That is with regard to Germany.With regard to Key Systems, it was mainly driven by automotive. So automotive is not really a surprise from that perspective but happened, and there, we respond with efficiency program that -- with which we target our activities in United States. That includes the factory in Rocky Mount.
Okay. And can you just provide an idea of how many millions of additional cost savings you're hoping to gain?
Also here, of course, we have, of course, per segment defined what has to be achieved in order to deliver what we once promised. So with these measures, we would like to come back on track with regard to Key Systems margin.
So just -- Martin, just to give you an indication for Key Systems, the margin for the first half, EBITDA margin is 13.6%. And it used to be -- the years before, it used to be in the area of 16.5% to 17%. So the target here is to go back to former profitability levels.
The last question comes from the line of Bernd Pomrehn, Vontobel.
One item question, please. In the last financial year, you already increased the share of the R&D expenditures, which you capitalized. You mentioned in today's call that you again increased the share of R&D expenditures, which you're capitalizing. What is the reason for that? Are these more long-term nature projects? Or what's the reason behind?
Yes, you are right. And we, indeed, we increased the number of projects, which we intend to capitalize or which we are in the process to capitalize. We have clear criteria defined to -- in order to qualify for capitalization. But at the same time, when you compare what has been expensed via the P&L, it's not a significant amount. But at the same time, we have -- if there is an R&D project in a new environment with a clear business plan and with a clear and separate addressable market, then we consider it to be qualified for R&D. But it's not our expectation that this part will significantly increase compared to the expensed R&D costs. It's only one element, which is also closely linked to the new digitization project, which we consider.
Okay. So mainly digitization really, really long-term development projects.
Yes, exactly.
The next question is a follow up from Mr. Flueckiger.
Many questions are being asked. Just a final one for me on pricing. I was just wondering what your pricing component was in organic growth, if you could give us an indication there. And also in this respect, what has been the development of material prices in H1? And what your best guess is, I presume, for H2?
Okay. Martin, with regard to pricing, in the period of last financial year, we had roughly a price increase element in the magnitude of 1.5%. This has gone down in the first half of the current financial year to roughly 1%. If you compare that 1% with the organic growth rate of 0.8%, you can also see that we lost some volume. So that is one indicator, which we discussed earlier.Second element on raw materials, we have seen, let's say, lower raw material costs over the last months. Current expectation or the expectation before COVID-19 was that we might see a slight increase for the one or the other raw material. Whether this will now be the case, this needs to -- soon to be seen, but our expectation is that the -- that we will not benefit any further from lower raw material costs.
That was the last question.
So therefore, thank you very much to everybody. Thank you for your interest. And of course, we are available for further questions via Siegfried Schwirzer. Again, have a great afternoon. Thank you, and goodbye.
Ladies and gentlemen, the conference is now over. Thank you for choosing Chorus Call, and thank you for participating in the conference. You may now disconnect your lines. Goodbye.