Sulzer: Increased dividend of CHF 3.50 proposed: Profitability Increased Before Goodwill Impairment Donnerstag, 12. Februar 2015 - 07:01

• Order intake was CHF 3.2 billion. On an adjusted1 basis, this is 0.6% less than in 2013. Sales were CHF 3.2 billion, which is 0.7% more than in 2013 on an adjusted1 basis.
• Operating income before restructuring and goodwill impairment (EBITR) was  CHF 282 million. This is a slight increase of 1.9% from 2013 on an adjusted1 basis. The goodwill impairment of CHF 340 million in the Water business unit was made to align prior expectation with actual performance and outlook. It reduced the operating income to a negative CHF 69 million. Return on sales before goodwill impairment increased to 8.4% from 8.1% the year before.
• Strategy was confirmed with a road map for operational improvement measures defined in the Sulzer Full Potential Program.
• For the full year 2015, order intake (adjusted for currency effects) is expected to decrease slightly. Sales (adjusted for currency effects) are predicted to be flat. To further increase transparency, Sulzer is introducing operational EBITA (earnings before interest, taxes, and amortization adjusted for non-operational effects) as a new performance indicator. Operational EBITA is forecast to be flat. From 2017 onwards, Sulzer aims to improve profitability (measured on operational ROSA) by four to six percentage points.
• The Board of Directors will propose an ordinary dividend increase to  CHF 3.50 (from CHF 3.20) at the Annual General Meeting on April 1, 2015.

Sulzer key figures

Financial performance in 2014

Order intake was CHF 3.2 billion (2013: CHF 3.2 billion). Adjusted for currency effects and acquisitions, this is 0.6% less than in 2013. The service business was strong, resulting in an adjusted1 growth of 4.8% for the Rotating Equipment Services division. The decrease in the company’s order intake was mainly driven by the power, water, and the general industry. Despite higher capital discipline of major oil companies, demand in the oil and gas market improved. The Pumps Equipment division reported an adjusted1 decrease in order intake of 1.2%. Chemtech could not sustain the level of the previous year. Order intake decreased on an adjusted1 basis by 3.2%, mainly because of fewer large projects in the Mass Transfer and Process Technology business units. The Americas region reported strong order intake. Asia-Pacific weakened in 2014 compared with 2013, while the activity in Europe, Middle East, and Africa (EMEA) remained fairly stable.

The currency translation effect amounted to a negative CHF 89.9 million. The weakening of the Brazilian real, the Russian ruble, and the US dollar had an adverse effect, while the strengthening of the British pound positively influenced the nominal order intake. The effect from acquisitions and divestitures contributed CHF 19.3 million in 2014, mainly from the Grayson acquisition in the Rotating Equipment Services division (CHF 11.2 million), ASCOM and ProLabNL (CHF 18.6 million) in the Chemtech division, and the divestiture of Innotec in Chemtech (CHF –12.4 million).

Sales were CHF 3.2 billion (2013: CHF 3.3 billion), which is a slight increase of 0.7% on an adjusted1basis from the previous year. The goodwill impairment in the Water business unit of CHF 340 million reduced the operating income to a negative CHF 69 million. It resulted from the change of estimated future growth and profitability assumptions in order to bring them in line with expected market developments. Return on sales before goodwill impairment (ROS) increased to 8.4% (2013: 8.1%). Return on capital employed before impairment on goodwill (ROCE) was 13.0% (2013: 12.6%).

The free cash flow (FCF) of CHF 98.0 million is 55% lower in 2014 than the CHF 218.7 million generated in the previous year. The main reason for the decline was the increase in net working capital.

The net income in 2014 increased by 17.7% to CHF 278.1 million (2013: CHF 236.2 million) because of the net income from the Sulzer Metco divestiture, which was successfully closed in June 2014. Proceeds from the divestiture increased the cash positions by CHF 870.4 million (post-tax). This results in basic earnings per share (EPS) of CHF 8.09 (2013: CHF 6.89) which is 17.4% higher than in the previous year.

In 2014, Sulzer again achieved a healthy level of 45% of sales in the service business (2013: 44%). In addition, Sulzer offers technologies—for instance, through Chemtech’s acquisition of ASCOM and ProLabNL—that support its customers in reducing their investment and operational costs significantly. The share of sales of 42% (2013: 42%) in emerging markets attests to Sulzer’s comprehensive global footprint in both the equipment and the service businesses. 

Volatility in the oil and gas market

With a share of sales of 54% in the oil and gas market (2013: 51%), Sulzer’s exposure in this market has increased. In addition to the higher capital discipline of oil and gas companies, the recent oil price development does not help favorable investment decisions in the short term. Nevertheless, the absolute level of investments is still expected to remain high. “Oil price volatility limits our top-line visibility. We expect a short-term headwind in oil and gas but believe the market will recover towards the end of our mid-term period,” says CEO Klaus Stahlmann.

Impact of the stronger Swiss franc

With its strong global footprint and over 150 service and production facilities around the world, Sulzer manufactures largely in the region for the region served and is therefore naturally hedged. Aside from the currency translation effect, the impact of currency shifts is limited.

Market orientation of the divisions

Last year, Sulzer prepared to transform its largest division into a new market-oriented setup. Since the beginning of 2015, Pumps Equipment has been set up according to the market segments oil and gas, power, and water. Sulzer expects a direct benefit from this new operational structure in all business units and for customers around the world. It will not only further optimize competitiveness but also improve quality and delivery times. From this year on, the company will also manage the factories globally and will invest in organic growth as well as in external growth.

CEO Klaus Stahlmann emphasizes, „We need to go to market as one company and install single channels to market where appropriate. Our customers expect a one-stop shop for products and services. We are taking advantage of divisional synergies and are now able to offer services for all kinds of rotating equipment to our customers.“

The Chemtech division was already market-oriented. It continues to provide its customers with outstanding solutions for static equipment, such as separating and mixing solutions, including tower field services.

The Sulzer Full Potential Program and midterm profitability improvement guidance3

Sulzer introduced a strategic program that frames its transformational journey to become one focused, market-oriented, globally operating company. CEO Klaus Stahlmann outlines, “With this program, called Sulzer Full Potential, we have an integrated approach with three pillars: strategy, operating model, and operational excellence. We have identified measures to reduce our complexity, maximize our synergies, and improve our efficiency. We want to create an organization capable of adapting quickly to changing market conditions and capable of supporting our aim to grow profitably.”

Operational excellence is pivotal for improving the company’s profitability. Examples of the initiatives are: 

• General and administrative: Harmonize processes and introduce shared services. The IT infrastructure will be further enhanced and the standardization of applications will be strengthened.
• Selling: Optimize routes to market in water, e.g., move to a distributor model in certain countries, further increase cross-selling in rotating equipment services, and improve sales effectiveness.
• Manufacturing: Sulzer will improve its footprint, increase site productivity, and reduce product complexity.
• Procurement: The highly fragmented supplier base will be simplified, and a shift to best-cost regions is planned.
• Service: Low-performance service branches have been identified and prioritized for further improvement. Sulzer wants to realize spare parts growth by optimizing parts manufacturing and sourcing. Price calculation and methodology will be unified.
• Complexity: The complexity at all levels of the organization will be further reduced, processes will be standardized, and the product complexity reduced.

From 2017 onwards, Sulzer aims to improve profitability (measured on operational ROSA) by four to six percentage points.4

Outlook for 2015

The markets are becoming increasingly volatile because of current developments in oil prices, regional conflicts, and geopolitical developments. The low oil price could influence Sulzer’s business negatively. However, the company’s business mix is balanced through its 45% service share as well as through its exposure to other markets, regions, and across customer segments. Activity in the power market is forecast to remain stable, and the general industry is expected to increase slightly. The water market is projected to increase slightly.

For the full year 2015, order intake, adjusted for currency effects, is expected to decrease slightly. Sales (adjusted for currency effects and operational EBITA (earnings before interest, taxes, and amortization adjusted for non-operational effects) are forecast to be flat.

Results in detail

Pumps Equipment: stable sales

Order intake was CHF 1.7 billion, a slight decrease of 1.2% from the previous year on an adjusted1 basis. While the power market showed some growth and the oil and gas as well as the general industry were flat, the order intake in the water market was impacted by lower demand in 2014. Especially the demand in the engineered water business decreased significantly because of challenging market conditions in South Africa, Spain, and Brazil. Sales were CHF 1.8 billion, 0.6% less than in the previous year on an adjusted1 basis. Excluding the CHF 340 million goodwill impairment in the water business, the operating income before restructuring and impairment on goodwill was CHF 141 million. The return on sales before restructuring and impairment on goodwill was 8.0%.

For the full year 2015 and adjusted for currency effects, Pumps Equipment expects a slight decrease in orders from the oil and gas market because of the impact of falling oil prices. Demand in the power market and the general industry is forecast to be stable, while the water market is expected to grow slightly. Activity in Europe, the Middle East, and Africa as well as in the Asia-Pacific region is projected to be flat. The division expects a decrease in orders from the Americas against the previous year.

Pumps Equipment key figures

Rotating Equipment Services: solid increase in order intake

The order intake of Rotating Equipment Services was CHF 725 million. This is a solid increase of 4.8% from the previous year on an adjusted1 level. This healthy result is partially due to the positive effect of the service integration. Activity in the Americas was high. The Grayson Armature acquisition also contributed substantially to this region. Demand in Europe, the Middle East, and Africa slightly decreased from last year. Demand in the Asia-Pacific region decreased slightly. Sales were CHF 725 million, a 3.4% increase from last year on an adjusted1 level. The operating income before restructuring was CHF 72 million; it significantly increased by 11.8% on an adjusted1 level from the previous year. Performance improvement measures initiated in Australia in 2013 showed positive results. Substantial additional restructuring measures were launched in the UK, where several sites will be consolidated in 2015. Return on sales before restructuring was 10.0%, which is a slight increase from 2013.

For the full year 2015 and adjusted for currency effects, Rotating Equipment Services expects stable order intake from the oil and gas industry and a slight increase from the power market and the general industry. Activity in the Americas and the Asia-Pacific region is predicted to grow. In Europe, the Middle East, and Africa, demand is forecast to be flat.

Rotating Equipment Services key figures

Chemtech: double-digit profitability

In 2014, order intake was CHF 718 million. This is a slight decrease of 3.2% from the previous year on an adjusted1 basis. Compared with the high base of 2013, the order intake was impacted by fewer large projects in the mass transfer and the process technology businesses. The low demand in the process technology business—in particular for projects in the field of polymers—was partially compensated by a good order intake level in the tower field service business. Activity in the oil and gas market was good. Demand in the general industry was stable. Sales were CHF 742 million. This is a slight increase of 1.6% from the previous year on an adjusted1 basis. The operating income before restructuring was CHF 78 million, which is a moderate decline of 3.2% from 2013 on an adjusted1 basis. The lowered performance was mainly caused by reduced volume in the process technology business. Measures—such as organizational changes and short-time work as well as initiatives to drive orders and sales of this business—were initiated already in the first half of 2014 and will be ongoing in 2015. Return on sales before restructuring of 10.6%—although on a double-digit level—decreased slightly from 2013.

For the full year 2015 and adjusted for currency effects, Chemtech expects a slight decrease in orders from the oil and gas market because of the impact of falling oil prices. Demand in the general industry is forecast to increase slightly. Activity in Europe is expected to be flat; the Asia-Pacific region is projected to decrease slightly. Activity in the Americas is predicted to continue on a high level. The changed currency environment will have an impact on certain parts of Chemtech’s businesses.

Chemtech key figures

Proposals by the Board of Directors at the Annual General Meeting

Increased dividend of CHF 3.50 proposed

The Board of Directors will propose an ordinary dividend increase to CHF 3.50 (from CHF 3.20) per share at the Annual General Meeting on April 1, 2015. Going forward, the target is an ordinary dividend payout range of 40–70% of net income (up from 1/3).

Gerhard Roiss proposed as a new member of the Sulzer Board of Directors

After serving on the Board for ten years, Luciano Respini has decided to step down at the Annual General Meeting 2015. Peter Löscher, on behalf of the Sulzer Board of Directors, thanks him warmly for his valuable contributions during his tenure and wishes him all the best.

The Sulzer Board of Directors will propose Gerhard Roiss as a new member of the Board of Directors. Gerhard Roiss (62, Austrian) has many years of management experience in an international environment in the oil and gas industry. Currently, he is the Chief Executive Officer and Chairman of the Executive Board of OMV AG, the largest listed industrial company in Austria, which has sales of more than EUR 40 billion. During more than two decades, he has held a variety of leadership positions within OMV AG. Among other functions, he has led the Refining and Marketing division, the Exploration and Production division, and the Chemicals and Plastics division. Gerhard Roiss has a PhD in economics. He is Chairman of the Supervisory Board of Petrol Ofisi A.S., Istanbul, Turkey, and Chairman of the Supervisory Board of the OMV Petrom S.A., Bucharest, Romania.

In addition, the Board of Directors is proposing that Peter Löscher, Matthias Bichsel, Thomas Glanzmann, Jill Lee, Marco Musetti, and Klaus Sturany each be reelected for a one-year term of office at the Sulzer Annual General Meeting.

1 Adjusted for currency effects and acquisitions.
2 Includes continuing and discontinued operations.
3 More information about the Sulzer Full Potential Program can be found in the CEO part of the Capital Market Day presentation.
4 More information about the operational EBITA can be found in the backup section of the CFO part of the Annual Results presentation.

Annual results presentation and Capital Market Day

Sulzer will host an annual results presentation today at 9 a.m. CET at the Renaissance Zurich Tower Hotel, Switzerland.

The Capital Market Day is scheduled for today at 1 p.m. CET at the Renaissance Zurich Tower Hotel, Switzerland.

The presentation can be followed by webcast (audio slides) or by dialing-in to the conference call. To access the webcast or to dial in to the conference call, use the following links and numbers, respectively:

Key dates in 2015