Sulzer Core Divisions with Stronger Operating Earnings Power
Amid an economically challenging climate, Sulzer recorded sales of CHF 1826 million in 2003. Adjusted , sales decreased by 3% compared to the previous year (–6% in nominal terms). Net income and operating income before goodwill amortization (EBITA) stand at CHF 41 million and CHF 89 million respectively.
As expected, both of these figures are lower than in 2002, due to exceptional charges of CHF 23 million at Sulzer Pumps and the unusual high gains from divestitures in the previous year. By contrast, the core divisions increased their earnings power. Under exclusion of special charges their operating income increased by 10% to CHF 107 million.
First Signs of an Economic Recovery
In 2003, orders received totaled CHF 1908 million, which corresponds to an increase of 4% (0% in nominal terms). At CHF 1826 million (2002: CHF 1946 million), sales fell by 6% in nominal terms but only by 3% in adjusted terms, as a result of difficult market conditions. The higher level of order backlog at the end of 2003 (+14% to CHF 675 million vs. CHF 592 million in 2002) augurs well for sales growth in 2004.
Net Income and Operating Income Lower than in the Previous Year Due to Special Factors
Exceptionally high contributions from real estate disposals and the divestiture of Sulzer Burckhardt had a very positive impact on the result in 2002, while one-off restructuring costs of CHF 23 million depress the result for 2003. Accordingly, at CHF 62 million, the Corporation's operating income (EBIT) is down against the previous year. (2002: CHF 136 million). Net income therefore fell to CHF 41 million (2002: CHF 83 million).
Core Divisions' Operating Income Records a 10% Increase Excluding Exceptional Items
Operating income before goodwill amortization (EBITA) for the core divisions amounts to CHF 84 million (2002: CHF 97 million). When adjusted for the one-off restructuring costs of CHF 23 million at Sulzer Pumps, operating income before goodwill amortization stands at CHF 107 million, which corresponds to an increase of 10%. Sulzer Pumps and Sulzer Chemtech improved their operating income considerably.
Individual Results for the Core Divisions
Sulzer Metco, a provider of surface coating technologies and services, faced extremely difficult market conditions, particularly the aviation and the energy segment lagged simultaneously. At CHF 423 million (2002: CHF 430 million), order intake remained stable overall, thanks to an upswing in business during the fourth quarter; sales, however, fell to CHF 424 million (2002: CHF 465 million) and were thus 10% down from the previous year in adjusted terms. The return on sales (EBITA/sales) dropped from 5.4% to 4%, this decline was caused by insufficient capacity utilization and sustained price pressure. Capacities were reduced accordingly. Sulzer Metco anticipates a slight recovery this year in its core markets and expects to better match expectations in terms of growth and profitability.
In terms of volume, Sulzer Turbomachinery Services matched its previous year figure, despite major challenges in the North American market. Power utilities frequently postponed maintenance jobs, and the increased activity of OEMs intensified the competition in this segment. Nevertheless, orders for CHF 197 million (2002: CHF 193 million) and sales of CHF 200 million (2002: CHF 194 million) were booked. In adjusted terms, this corresponds to a slight decline of 1% in order intake, while sales remain unchanged. The return on sales (EBITA/sales) is 9.5% (2002: 11.3%), which is a good performance, in view of the market situation in 2003. Sulzer Turbomachinery Services expects a moderate improvement of performance in 2004.
Sulzer Pumps, the largest Sulzer division, reports an increase in orders received and a reduction in sales compared to the previous year. Order intake increased nominally by 1%, (7% in adjusted terms) to CHF 951 million (2002: CHF 942 million). Sales declined to CHF 870 million (2002: CHF 934 million), due in particular to exchange-rate factors. In local currencies, the decrease is 2%. The far-reaching restructuring launched in 2003 had a one-time impact on the return on sales (2.9% vs. 4.1% in the previous year); adjusted for this special factor, the return on sales improved significantly to 5.5%, clearly above the previous year's figure. Part of this rise can be attributed to the initial success of the restructuring program. Sulzer Pumps aims to steadily increase its operating margin to at least 8% by 2006.
Sulzer Chemtech, a major global provider of components and services for separation columns and static mixing, recorded a good development in 2003 and improved virtually all of its key operating figures. At CHF 312 million, orders received are 4%, (adjusted: 8%) up over the previous year (CHF 299 million). Sales rose to CHF 307 (2002: CHF 290 million), which corresponds to growth of 9% in adjusted terms. The return on sales (EBITA/sales) improved substantially to an attractive 7.5% (2002: 4.1%). Sulzer Chemtech looks with confidence onto the current business development and expects to improve its results further in 2004.
Sulzer Hexis has achieved major technological progress with the "HXS 1000 Premiere“ pre-series unit. The service life of the fuel cell stack and the reliability of the entire system have been improved. The development of the near-series product will benefit from these results and will be optimized with regards to lower cost, size, and weight. Build-up costs that are charged to the operating income were contained at CHF 16 million in 2003 (2002: CHF 15 million) without slowing down the development activities. The objective in 2004 is to prove the functioning of several pilot systems under close-to-real operating conditions, in order to plan thereafter the further steps toward commercialization.
The decrease of order intake and net sales at Other is largely due to the discontinuation of Sulzer International's activities. The 2003 figures refer mainly to Sulzer Innotec. Once again Real Estate recorded a high operating income in the reporting year but, as expected, fewer properties were sold than in the previous year. The operating income for Other is at CHF 25 million (2002: CHF 61 million).
Outlook
Sulzer expects a positive development in order intake over the coming months. The Asian markets are likely to remain buoyant, while the North American and the European markets should recover slowly. Performance in North America will be particularly important for business progress. The high level of order backlog at the end of the year 2003 (CHF 675 million against CHF 592 million in 2002) is a good sign for future sales. In 2003, the Corporation has initiated major operational improvements, some of which have already been implemented. The core divisions expect to increase the operating income; this will impact positively the Corporation's net income.
At the annual general meeting of shareholders on April 29, 2004 the board of directors will propose a dividend of CHF 6.00.
Divisions
Sulzer Metco provides surface technology equipment, systems, materials, and services. These are used mainly in aerospace, gas turbines, automotive manufacturing, and various other strategic growth industries. Despite its leading position, Sulzer Metco continued to suffer under difficult market conditions in 2003, as in the previous year. This was due to the adverse business climate in the aerospace and industrial gas turbine industries, two of its major target markets. As a result, sales and operating income fell short of the prior year level. Although the return on sales remained positive at 4%, the figure is disappointing on the whole. Capacity adjustments were made in various sites. Since the fourth quarter, there has been a gradual increase in orders received. We are confident that in 2004, Sulzer Metco will better meet the expectations in terms of growth and profitability.
Sulzer Turbomachinery Services, our provider of maintenance and repair services for gas and steam turbines and compressors, had to overcome a comparably difficult market climate in North America. As a result of the market weakness in new machines, new equipment manufacturers (OEMs) focused increasingly on the service business, leading to considerably intensified competition. Customers continued to display reluctance with regard to power generation plant maintenance. Thanks to rapid adjustments, the effect on the result was limited. European and Asian operations developed favorably and impressive growth was recorded even in this demanding year. While sales practically stagnated at the prior year level, operating income fell slightly. However, the return on sales of almost 10% is certainly respectable in this market climate. In the current year, we expect an improvement of the most important key figures.
Under new management, Sulzer Pumps has performed the necessary change in direction. The year 2003 brought a weak market in North America, an acceptable demand in Europe, and a booming Asian region. Whereas currency adjusted sales decreased slightly (2%) to CHF 870 million, orders received rose markedly at 7%. The impact of operating measures introduced during the reporting year has already been felt, with operating income before goodwill amortization and special charges as a result of restructuring climbing to CHF 48 million (2002 CHF 38). Consequently, Sulzer Pumps increased the return on sales on this basis to 5.5% (2002 4.1%) and generated a high level of operating net cash flow. The farreaching program of improvements announced in December 2003 causes restructuring costs of CHF 23 million in 2003, but is necessary to achieve a return of 8% in 2006. We are confident that Sulzer Pumps, as the biggest division, will fulfill its role underpinning the Corporation with solid profits and cash flow.
Sulzer Hexis, our venture division, made important technical progress and retains a leading position in fuel cells for residential applications. The service life of the fuel cell stack was extended markedly as a result of various changes to design, materials, production, and systems integration. The reliability of the pre-series systems was improved significantly. The further development of the next-generation system will profit from the results of the current field tests with the “HXS 1000 Premiere” units. The new model will be smaller, lighter, and if in larger production lots, more cost-effective. Already this year, the first pilot units are to be installed in a laboratory environment and to be tested in a realistic setting. We remain confident that investment in this long-term project will prove successful for the Corporation and therefore for our shareholders.
Other Activities
The Sulzer International sales organization was disbanded last year through divestment or integration into the core divisions. Having successfully restructured itself as a market-oriented service provider of technology in 2002, a steep decline in demand led to a loss in the reporting year for Sulzer Innotec. Jobs in the affected research and development services group had to be shed. We believe that break-even operation will be reached again in 2004.
After 2002, which was characterized by large block sales, Sulzer Real Estate achieved in 2003, as expected, lower but still remarkable sales of property worth about CHF 80 million. With net proceeds of over CHF 50 million, the Real Estate unit again made an important contribution to corporate financing.
Outlook
In 2003 key operating improvements were implemented or clearly defined with the costs accounted for by means of provisions, like in the case of Sulzer Pumps. In the core divisions, we have therefore planned a clear increase in results, which should also be apparent in the net income.
There is also growing confidence for economic recovery, the most important factor in the short-term development of the Sulzer Corporation. All of our divisions will profit directly from improved momentum in Europe and, in particular, North America.
More information including Key figures and the “Excerpt of the Report by the Chairman of the Board and the CEO” can be found on Sulzer’s web site.
