Sulzer: Operating Income Increased by 28%


In the first half of 2008, Sulzer continued its successful development. In overall strong markets, the company further increased order intake, sales, operating income (EBIT), net income, and cash flow despite substantial negative currency effects.

Return on sales significantly increased to 12.9%. The outlook for the full year 2008 remains positive, with expected increases in sales and operating income compared with the prior year. Sulzer’s high-quality order backlog builds a solid base for continued resilience in the future. The midrange targets for the divisions are being raised for return on sales from above 11% to above 12% and return on capital employed from above 20% to above 25%.

Sulzer further increased order intake to CHF 2 265.9 million for the first six months of 2008, representing an adjusted1 growth of 14.9% and a nominal growth of 6.2% compared with the first half of the previous year. Sales rose to CHF 1 757.6 million—an adjusted1 increase of 14.5% (nominal +6.3%)—supported by all divisions. The weakness of all major currencies compared with the Swiss franc led to significant differences between nominal and adjusted1 growth rates, while acquisitions had only a minor effect.

Operating income before depreciation and amortization (EBITDA) increased by 20.4% to CHF 275.9 million. Operating income (EBIT)

increased by 28.2% to CHF 227.4 million. Currency effects had a very limited impact on return on sales (ROS) owing to Sulzer’s global presence, whereby sales and costs are predominantly incurred in the same currency. As a result of continued operational improvements, ROS improved significantly from 10.7% to 12.9% in the first half of 2008. Net income attributable to shareholders of Sulzer Ltd increased by 20.0% to CHF 158.2 million, resulting in basic earnings of CHF 4.70 per share. Cash flow5 generation in the first half of 2008 was substantially higher than in the same period of the previous year. Cash flow5 amounted to CHF 141.5 million compared with CHF –52.3 million in the first half of 2007.

Individual Results of the Divisions

Sulzer Pumps achieved a significant increase in order intake, sales, and operating income: The order intake was up by 30.8% on an adjusted1 basis (nominal +19.5%). Sales continued to trail order intake due to long lead time projects and the specific timing of projects in execution, with an adjusted1 increase of 15.4% (nominal +5.3%) to CHF 809.5 million. Operating income benefited from further improvements in operations and rose by 20.3% to CHF 99.1 million; return on sales improved significantly to 12.2%. Demand continued to be strong in the division’s key markets, particularly in the oil and gas and the power generation industries. The hydrocarbon processing industry also showed robust development. High capital investment by customers continued to drive large projects, such as pipeline projects in North America and power projects in China and South Africa. All regions contributed to the division’s growth, particularly the emerging regions.

Conditions are expected to remain good for the rest of the year in most key markets and regions, except for the pulp and paper industry. Driven by the strong demand for energy worldwide, the oil and gas and the power generation markets are likely to develop on a high level. The large orders received in the first half are not expected to continue at the same level. For the full year, order intake, order backlog, sales, and operating income are expected to be above 2007 levels.

Sulzer Metco’s order intake was stable, with an increase of 1.6% on an adjusted1 basis and –2.9% on a nominal basis. Sales were an adjusted1 10.1% higher (nominal +5.2%) than in the first half of the prior year. The operating income was up 3.6% to CHF 37.4 million. Return on sales was stable at 9.7% despite the increase of corporate fees by 0.5 percentage points in 2008. The automotive market developed very dynamically, the industrial and power generation markets evolved well, and the aviation industry continued to show high activity. Markets were particularly strong in Asia and Europe, while demand weakened in North and South America. Compared with the same period of the previous year, activity in consumables and the service businesses was higher, while orders for the equipment business were lower.

For the rest of the year, the power generation market is likely to remain stable, as is the demand for Sulzer’s innovative applications in the automotive industry. The prospect of expansion in emerging regions should compensate for potential effects coming from the American aviation industry.The division expects sales and operating income for the full year 2008 at a similar level as in 2007. Return on sales should remain stable, with operational improvements offsetting additional corporate fees.

Sulzer Chemtech’s order intake was –2.7% adjusted1 (nominal –9.0%), which is mainly attributable to a particularly strong first quarter in 2007, when the division received a large order for a gas-to-liquid (GTL) plant project in Qatar. Excluding this large order, the division has grown compared with the previous year. Sales rose by 13.5% on an adjusted1 basis (+6.9% nominal) to CHF 402.8 million. Operating income grew by 17.6% to CHF 68.3 million, resulting in a substantially improved return on sales of 16.9%. The key markets, namely the hydrocarbon processing industry, stabilized at a high level. Activity was particularly lively in China, India, and the Middle East, whereas the market environment in Europe slightly softened. Demand for Sulzer Mixpac Systems increased significantly in the dental market and remained on a good level in the industrial market. The tower field service unit continued to benefit from intense activity in all regions.

The outlook for the full year 2008 remains positive for all business units and regions. Order intake is unlikely to reach the strong level of 2007 due to the high base effect and the negative impact of the weak US dollar. Full-year sales and operating income are expected to significantly exceed the levels of 2007.

Due to a high base effect, the order intake of Sulzer Turbo Services showed a flat development of –0.3% adjusted1 (–10.4% nominal). Sales climbed 22.8% on an adjusted1 basis and 11.3% on a nominal basis to CHF 149.6 million. Operating income rose by 17.1% to CHF 13.7 million; return on sales reached 9.2%, a further improvement compared with the first half of the prior year. Demand in the division’s key markets continued high in the first half of 2008, especially in the Americas and Southeast Asia. For Europe, moderate growth was reported, whereas the market environment in the Middle East remained challenging.

The outlook for the rest of the year remains positive, with encouraging tendering activities that are expected to lead to solid levels of order intake, sales, and operating income.

Outlook for 2008

Based on the robust development of its main markets in the first half of 2008, Sulzer expects continued strong demand for the rest of the year, despite increasing uncertainties in the general economic environment. Growth is supported in the oil and gas market by the high oil price. High project activity in the power generation market, in particular in China, Europe, and the USA, is expected to continue. Activity in the hydrocarbon processing industry is likely to be stable at a high level. The aviation market is expected to show regional differences in growth rates. The pulp and paper market will probably remain soft, while in the automotive market, demand is expected to stay high for Sulzer’s innovative applications. The currency translation impact will remain significant.

Due to the long lead times of many large projects, Sulzer estimates that sales will continue to grow in a stable manner but will trail order intake. Full-year sales and operating income are expected to exceed 2007 levels. The high-quality order backlog builds a solid base for continued resilience in the future. Sulzer is increasing the midrange return on sales targets for two divisions: for Sulzer Pumps from above 11% to above 12% and for Sulzer Chemtech from 15% to above 16%. As a result, Sulzer is also elevating the combined divisional return on sales target from above 11% to above 12%. The combined target for return on capital employed is being increased from above 20% to above 25%.

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