Swiss engineering firm Sulzer has announced that its currency-adjusted order intake and sales decreased by 2% in 2016, while the number of orders processed in the power, water, general industry markets increased.
Order intake gross margin remained broadly stable, while operational profitability declined but remained well within Sulzer’s guidance. Free cash flow generation was very robust.
Sulzer Full Potential (SFP) programme savings of CHF 88 million helped to partially offset the impact of severe market headwinds on profitability.
Free cash flow improved markedly to CHF 201 million. For the full year 2017, including acquisitions signed in 2016 and adjusted for currency effects, order intake is expected to grow by 5% to 8% and sales to grow by 3% to 5%.
Sulzer expects operational earnings before interests, taxes, and amortisation (opEBITA) margin at around 8.5% (opEBITA in percent of sales).
The board of directors will propose an unchanged ordinary dividend of CHF 3.50 per share at the Annual General Meeting on 6 April 2017.
Sulzer CEO Greg Poux-Guillaume said, "We did well in a challenging year. Overall, we beat our guidance on all of the key performance indicators: we fulfilled our promises.
"There is still a lot to do, but we are heading in the right direction."
Financial performance in 2016
Decrease in order intake
Overall order intake decreased by 2.0% from 2015 (nominal: – 3.4%). The effect of acquisitions amounted to CHF 110.7 million and currency translation effects to a negative CHF 40.9 million.
Order intake gross margin remained broadly stable due to the increased share of higher-margin aftermarket business offsetting margin erosion in the oil and gas market.
The order backlog decreased to CHF 1 439.1 million (31 December 2015: CHF 1 510.7 million).
Order intake in the oil and gas market decreased significantly. The industry continued to cut costs and capital investments as expected, while oil prices began to recover during the year.
Order intake grew strongly in the power and in the general industry markets. The latter was supported by the consolidation of Geka and PC Cox.
Order levels decreased in the Americas and in Europe, the Middle East, and Africa (EMEA) due to the oil and gas market downturn and, in Europe, due to the weaker performance of the electromechanical business. Order intake significantly increased in the Asia-Pacific, mainly supported by China, which recovered from the very low order levels last year.
Lower sales impacted operational EBITA
Sales amounted to CHF 2 876.7 million, a decline of 2.0% (nominal: -3.2%). Negative currency translation effects totaled CHF 34.5 million and the effect of acquisitions came to CHF 90.6 million.
In 2016, strong growth in the power market and the effect from acquisitions were offset primarily by the significant sales decline in the oil and gas market. Sales in the water market were also below the prior-year level, mainly due to a low-starting backlog and timing of projects.
Sales increased in the EMEA, while the Americas and Asia-Pacific regions were down from the previous year. Consequently, the share of sales in emerging markets slid from 40% in 2015 down to 38% in 2016.
Operational EBITA (opEBITA) totalled CHF 238.9 million compared with CHF 254.1 million in 2015, a decrease of 4.4% (nominal: – 6.0%). Savings from the SFP programme helped partially offset the lower sales volume and the negative pricing impact.
Operational ROSA (opROSA) decreased to 8.3% compared with 8.6% in 2015. Lower core net income, strong free cash flow.
In 2016, net income amounted to CHF 60.1 million compared with CHF 75.0 million in the previous year. Core net income excluding the tax-adjusted effects of non-operational items totaled CHF 153.8 million compared with CHF 175.0 million in 2015.
Basic earnings per share decreased from CHF 2.17 in 2015 to CHF 1.73 in 2016.
Free cash flow amounted to CHF 200.5 million compared with CHF 155.8 million reported in the prior year.
This was mainly driven by dynamic net working capital management, but also by lower tax payments and the fact that a substantial portion of restructuring expenses recorded in 2016 will only be paid out in 2017.
Organizational changes
In 2016, Sulzer acquired Geka, headquartered in Bechhofen, Germany. Geka produces applicator devices for the cosmetics industry and has an emerging business in healthcare.
Further, Sulzer took over PC Cox Group Ltd, a leading manufacturer of industrial dispensers headquartered in Newbury, UK. The combination of the business unit Sulzer Mixpac Systems, Geka, and PC Cox is being reported as the new division Applicator Systems as of 1 January 2017.
Moreover, the company prepared for the transfer of the spare parts business from the Pumps Equipment division to the Rotating Equipment Services division.
The integration will be carried out in 2017 and will allow customers to benefit from a single access point for services and parts.
Outlook for 2017
Sulzer expects that the oil and gas market, which accounted for approximately half of its revenue before recent acquisitions, will remain challenging in 2017 and that pricing pressure will persist throughout the year.
Early signs of an impending recovery of oil CAPEX should only translate into a commercial rebound for Sulzer in 2018. Sulzer’s other businesses are expected to grow slightly in 2017.
This is projected to lead to a broadly stable organic order level for the company relative to 2016, supplemented by additional volume from newly acquired businesses.
Sulzer expects its SFP program to deliver incremental cost savings in 2017 in the range of CHF 40 to 60 million. The company confirms its overall target of CHF 200 million from 2018 onwards.
Proposals by the Board of Directors at the Annual General Meeting
The board of directors will propose an unchanged ordinary dividend of CHF 3.50 per share (2015: CHF 3.50) at the Annual General Meeting on 6 April 2017. This represents a 3.3% dividend yield.
