Sulzer key figures

Financial performance in 2015³⁾

Order intake was CHF 2.9 billion (2014: CHF 3.2 billion). It decreased by 3.7% from the previous year. Order intake of the Pumps Equipment division fell by 6.7%. Strong growth in the power market and moderate growth in the water market were more than neutralized by a sharp decline of orders in the oil and gas market. In the Rotating Equipment Services division, order intake weakened by 0.9%, mainly because of lower market-based demand in the oil and gas industry and regional demand in Europe. Order intake in the Chemtech division grew by 1.4%. Large orders booked in the Tower Field Services business unit in the Middle East counterbalanced the negative effect of the severe market downturn in China.

Order intake in the oil and gas market decreased significantly, mostly because of fewer equipment orders. Oil companies further cut their capital investments, particularly during the oil price decline in the second part of the year. In the power market, order intake rose strongly, mainly in Pumps Equipment and Rotating Equipment Services.

Order intake dwindled in Asia-Pacific (especially in China) and in the Americas (in particular, in Brazil and Mexico). It increased in Europe, Middle East, and Africa (EMEA), mainly driven by large orders recorded by Chemtech.

Order intake gross margin increased slightly by 0.3 percentage points to 33.8%, supported by an increased share of higher-margin aftermarket business and SFP procurement savings.

The currency translation effect amounted to a negative CHF 148.9 million affected by the weaker Brazilian real, Russian ruble, and euro, as well as the stronger US dollar. Acquisitions contributed CHF 36.2 million in 2015.

Sales were CHF 3.0 billion (2014: CHF 3.2 billion), a decrease of 3.2%. The lower sales volumes, lower gross margin, and currency effects negatively affected operational EBITA, which amounted to CHF 254.1 million (2014: CHF 302.9 million). Savings from the SFP program partially offset this decline. As a result, Sulzer has narrowed the profitability gap to its top-tier competitors by approximately 200 basis points⁴.

Free cash flow came to CHF 155.8 million compared with CHF 98.0 million reported in the prior year. Excluding a positive 25.4 million effect related to the Sulzer Metco divestiture in 2014, free cash flow improved by CHF 83.2 million on a continuing-operations basis.

The net income attributable to shareholders of Sulzer Ltd was CHF 73.9 million (2014: CHF 275.0 million). This resulted in basic earnings per share of CHF 2.17 (2014: CHF 8.09).

Significant market headwinds

Since the beginning of 2015, Sulzer has faced increasing headwinds, particularly in the oil and gas markets. Oil prices are widely expected to remain low, driving Sulzer’s oil and gas customers to cut their capital and operating costs further. In addition, regional developments, such as the economic slowdowns in China and Brazil negatively affected Sulzer’s business performance. The company also felt the impact of the reduced operating hours for gas turbines in Europe on its service revenue and asset use. These adverse market conditions make deepening and accelerating the SFP program a priority.

Unleashing Sulzer’s full potential

One year ago, Sulzer introduced the Sulzer Full Potential (SFP) program, which aims to complete Sulzer’s transformation into a market-oriented, globally operating, and integrated company. The SFP program aims to achieve steady total annual savings of approximately CHF 200 million from 2018 onwards. These savings will allow the company to both mitigate the current market headwinds and to close the profitability gap to its top-tier competitors. The program got off to a good start in 2015.

Renova supports Sulzer’s strategy

Renova, Sulzer’s anchor shareholder, has increased its stake to 63.42% of all Sulzer shares. Renova has confirmed its long-term commitment to the company and that it will maintain a balanced approach to governance. It has clearly stated that it is supportive of Sulzer’s strategic focus and that it will continue to work closely with Sulzer's Board and its management to carry out the SFP program successfully.

Outlook for 2016

Sulzer has a balanced business mix, with half of its business outside the oil and gas market and with its aftermarket business accounting for half of its sales. However, the company expects continued low oil prices and high volatility throughout 2016 and beyond, resulting in diminished demand and increased price pressure from its oil and gas customers. Given these market headwinds, Sulzer is increasing and accelerating cost savings from its ongoing SFP program. The company expects cost savings from the SFP program to be in the range of CHF 60 to 80 million in 2016 and steady total annual cost savings of approximately CHF 200 million from 2018 onwards.

For the full year 2016, order intake and sales are expected to decline by 5 to 10%, adjusted for currency effects. Supported by the cost savings from the SFP program, the company expects opEBITA margins of approximately 8% (opEBITA in percent of sales).

Proposals by the Board of Directors at the Annual General Meeting

Special dividend of CHF 14.60 proposed

The Board of Directors will propose an ordinary dividend of CHF 3.50 (2014: CHF 3.50) per share at the Annual General Meeting on April 7, 2016. This represents a 3.7% dividend yield. Sulzer’s management and board have full confidence in the company’s strong free cash flow generation and the success of the ongoing SFP program. The company aims to keep sufficient headroom for value accretive M&A activities in the near term. However, it remains committed to optimizing its currently inefficient capital structure in the present interest rate environment. As such, Sulzer has decided to return a significant part of its excess cash to shareholders. The Board of Directors will therefore propose a one-time special dividend of CHF 14.60 per share at the Annual General Meeting.

After the special dividend, Sulzer will continue to have a net cash position and one of the strongest balance sheets in its industry, allowing it to pursue all strategic options.

Axel C. Heitmann and Mikhail Lifshitz proposed as new members of the Board of Directors, representing Renova

After serving on the Board of Directors for eight years, Klaus Sturany has decided to step down at the Annual General Meeting 2016. On behalf of the Sulzer Board of Directors, Peter Löscher expresses gratitude for his valuable contributions and wishes him every success for the future.

The Sulzer Board of Directors will propose Axel C. Heitmann and Mikhail Lifshitz as new members of the Board of Directors.

Axel C. Heitmann (56), German, has broad experience on an operational leadership level. He served as CEO of the Board of Management of Lanxess AG, Germany (2004–2014). Previously, he held various leadership positions within Bayer AG. He was member of the Executive Committee of Bayer Polymers AG in China (2002–2004) and Head of the Rubber Division of Bayer AG (2001), where he was responsible for the integration into the newly formed Bayer Polymers AG. Before that, he held various management positions at Wolff Walsrode AG, PolymerLatex, and Bayer plc in the UK. Amongst other positions he has held, he served as Chairman of the Committee in Foreign Trade of the Bundesverband der Deutschen Industrie (BDI), member of the Asia-Pacific Committee of German Business (APA), and member of the Advisory Board of the NRW Bank until 2014. Axel C. Heitmann
has a PhD in organic chemistry.

Mikhail Lifshitz (52), Russian, has significant leadership and board membership experience. He has been High-Tech Assets Development Director of Renova Group (since 2009) and CEO (since 2009) as well as Chairman of the Board (since 2015) of Rotec—a company owned by Renova Group. Furthermore, he has chaired the Board of Ural Turbine Works since 2012 and has been a member of the Board of Directors of Oerlikon AG since April 2013. Previously, he was Founder and President of the Global Edge Group (2001–2009) and Marketing Director of the USSR International Economic Cooperation Association of small and medium enterprises (1991–1994). Mikhail Lifshitz holds a graduate degree in electronic engineering.

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

Divisional results in detai

Pumps Equipment: order intake decrease

Order intake decreased by 6.7% from the previous year, impacted by the significant drop in the oil and gas market demand. Many projects were postponed to 2016 and beyond or cancelled. Strong growth in the power market—driven by India and the Middle East—and in the aftermarket business (Parts, Retrofit, and Nuclear Services; PRN) partially offset this decline. Demand in the water market was stable. It was slightly higher in the general industry, driven by increased activity in the engineered water and pulp and paper segments. Order intake gross margin increased by 1.1 percentage points, supported by an improved business mix.

Sales decreased slightly by 1.6% from the previous year. Growth in the power and the general industry markets as well as in the aftermarket (PRN) business partially compensated for the low volume and project suspensions in the oil and gas market. Operational EBITA decreased by 19.4%. This drop was due to market headwinds in the oil and gas industry, adverse transactional currency effects, an internal shift of expenses, and higher internal corporate charges. Adjusted for these items, operational ROSA would have been 8.6%.

Key figures Pumps Equipment

Rotating Equipment Services: stable order intake

Order intake remained stable in 2015. While order intake in the power market improved, it was lower in the oil and gas market. General industry remained flat. The low oil price led oil companies to impose strict cost-saving measures, delay maintenance services, and continue to run their equipment for longer periods. Order intake gross margin declined by 1.3 percentage points. Although there was significant growth in Africa, overall activity in EMEA was slightly lower, mainly because of a weak European market. Therefore, Rotating Equipment Services has introduced various restructuring measures in EMEA. While demand in Asia-Pacific improved, activity in the Americas declined slightly from 2014. Higher demand in North America partially compensated for the difficult market environment in Latin America.

Sales decreased slightly by 1.9%. This figure is based on weak performance in EMEA resulting from the low oil price and an unbalanced workload due to timing of large orders. Operational EBITA increased by 8.8% in 2015, mainly driven by a stronger US domestic market, an internal shift of costs, and strict cost control measures. Operational ROSA also improved.

Key figures Rotating Equipment Services

Chemtech: order intake slightly increased

Order intake increased slightly by 1.4% compared with the previous year. Orders in the oil and gas market remained stable, mainly based on a strong order intake from the Middle East in the Tower Field Services business unit. Demand in general industry dropped, mainly because the process technology business slightly decreased. The Sulzer Mixpac Systems business unit showed slight growth despite the strong Swiss franc. Order intake gross margin declined by 0.1 percentage points.

Sales decreased by 7.8% compared with the previous year. The difficult market environment in China accounted for decreasing sales in the Separation Technology business unit. Operational EBITA dropped by 25.5%, mainly due to weak performance in China. Operational ROSA also declined but remained on a double-digit level.

Key figures Chemtech

¹⁾ Adjusted for currency effects.
²⁾ Includes continuing and discontinued operations.
³⁾ If not otherwise indicated, changes compared with the previous year are based on currency-adjusted figures.
⁴⁾ Based on Bloomberg consensus estimates as of January 28, 2016.EBIT: Operating income

ROS: Return on sales (EBIT/sales)
opEBITA: Operating income before restructuring, amortization, impairments, and non-operational items
opROSA: Return on sales before restructuring, amortization, impairments, and non-operational items (opEBITA/sales)
opROCEA: Return on capital employed (opEBITA/average capital employed)
EPS: Basic earnings per share
FCF: Free cash flow

Annual results presentation

Sulzer will host an annual results presentation today at 10 a.m. CET at the Metropol, Zurich, 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 2016