Sulzer: Sales Slightly Increased and Order Intake Decreased on an Adjusted Basis

Order intake, sales, and operating income before restructuring on an adjusted basis are expected to be slightly above last year’s level.

Performance in the first half of the year

After a strong start into the year, order intake decreased moderately by 3.7% on an adjusted basis. The decrease was affected by the lower demand in the second quarter of the year compared with a very strong second quarter in the previous year. It was further impacted by the delay of some projects for Pumps Equipment in the Americas and Europe. Sulzer expects these projects to materialize in the second half of 2014. Reduced orders in the process technology business and a lowered demand in the mass transfer technology business also influenced the order intake. Measures such as performance improvement programs are ongoing. The negative currency translation effect was CHF 92 million or 5.3%.

Demand in the oil and gas market was good. Activity in the power market was low. Demand in the water market and the general industry was mixed. Order intake in the Americas, particularly in North America, was comparatively stronger than in Asia-Pacific or in Europe, while the Middle East was strong too. Compared with the first half of the previous year, adjusted sales increased by 1.2%. Operating income for the divisions improved by 5.9% on an adjusted basis. Operating income for total Sulzer decreased on an adjusted basis by 5.5%. Return on sales for the divisions increased slightly to 7.2%. Profitability for total Sulzer decreased slightly to 6.7% due to the positive impact from the reduction of real estate provisions in 2013. Net income attributable to Sulzer shareholders amounted to CHF 483.5 million, mainly due to the divestiture of Metco. Basic earnings per share (EPS) increased to CHF 14.23 compared with CHF 2.92 for the first half of 2013. The free cash flow, consisting of cash flow from operating activity as well as capital expenditures, was negative at CHF 40.1 million (2013: CHF +51.2 million).

Transforming Sulzer into a more customer-focused and market-oriented company and becoming a leading equipment and service provider

At the beginning of this year, Sulzer combined the service offering of the pumps division with that of the service division to become a leading service provider for rotating equipment in its key markets and an even more customer-focused company. Sulzer is transforming its biggest division Pumps Equipment from a regional to a global, market-oriented organization. By the beginning of 2015, Pumps Equipment will be organized in three business units: an Oil and Gas unit, a Power unit, and a Water unit, to better support customers’ needs.

CEO Klaus Stahlmann outlines: “We adapted our operational structure to become one integrated company and streamlined our portfolio by selling Metco. Now almost 80% of the company’s sales are in our key markets, which are Oil and Gas, Power, and Water.” Sulzer intends to use the funds generated from the divestment for targeted acquisitions and further investments towards organic growth in these pivotal markets.

In February, Sulzer signed an agreement to acquire a 75% stake in Saudi Pump Factory. The new Sulzer pump factory will be the first complete manufacturing facility in Saudi Arabia for a global centrifugal pump manufacturer that serves one of the largest oil and gas markets worldwide. In March 2014, Sulzer signed a joint venture agreement with China Huadian Corporation for the servicing of gas turbines including field service, component repair, and delivery of new capital parts. With this partnership, Sulzer has a strong foundation for securing business in China’s rapidly developing power market. In June, Sulzer acquired Grayson Armature in Houston, TX, USA. This acquisition greatly enhances Sulzer’s service competencies and turns the company into one of the largest independent providers of electromechanical services in the important US Gulf Coast region.

Outlook

Based on present knowledge and excluding major changes in the general economic conditions, activity levels for parts of the oil and gas market are expected to remain solid, in particular in the Americas. Activity in the power industry and in the general industry is forecast to continue at similar levels. Based on positive developments in selected regions, especially the Americas, some recovery is expected for the water market. The Americas, particularly North America, and the Asia-Pacific region are expected to be the growth drivers.

Sulzer confirms its guidance for the full year on an adjusted basis and anticipates a stronger second half of 2014. CEO Klaus Stahlmann says: “Order intake, sales, and operating income before restructuring on an adjusted basis are expected to be slightly above last year’s level.”

Results in detail

Pumps Equipment: From a regional to a market-oriented organization

Order intake moderately decreased by 5.4% on an adjusted basis compared with the first half of 2013 due to the slippage of projects in the Americas and Europe. These projects are expected to materialize in the second half of 2014. The order intake particularly increased in the Asia-Pacific region. Sales slightly increased on an adjusted basis compared with the first half of the previous year. In the Asia-Pacific region, sales were lower due to postponed shipments. In the Americas and Europe, sales were particularly strong. Adjusted operating income decreased by 2.5% and was impacted by lower sales and margins in Asia as well as lower volumes in the engineered water business. Profitability remained at similar level to the previous year.

The Pumps Equipment division is transforming itself from a regional to a market-oriented organization. By the beginning of 2015, Pumps Equipment will be organized into three business units: an Oil and Gas unit, a Power unit, and a Water unit. In February, Sulzer signed an agreement for the acquisition of a 75% stake in Saudi Pump Factory. This acquisition is in line with Sulzer’s focus on the key markets.

Activity levels for parts of the oil and gas industry are expected to remain solid, in particular in the Americas. Activity in the power industry and in the general industry is forecast to continue at similar levels. Based on positive developments in selected regions, especially the Americas, further recovery is expected for the water market. Asia-Pacific shows some growth opportunities while the rest of the world is forecast to remain at similar levels.

Rotating Equipment Services: Targeted acquisition and increased order intake

Order intake increased significantly by 8.0% on an adjusted basis compared with the first half of the previous year. The oil and gas market was strong, particularly in the Americas, and was positive for Europe, the Middle East, and Africa. The power industry remained low in Europe. Sales on an adjusted basis remained on the same level compared with the first half of the previous year. Project delays in the Americas were partly offset by increased sales in the Asia-Pacific region. The adjusted operating income increased moderately. Measures to further improve the business performance are ongoing. Profitability remained on a similar level as in the first semester of 2013.

In the first quarter of this year, Sulzer signed a joint venture agreement with China Huadian Corporation for the service of gas turbines. With this partnership, Sulzer has a strong foundation for securing business in this rapidly developing market. In June, the company acquired Grayson Armature, which is based in Houston, TX, USA. Grayson Armature adds electromechanical capabilities to the division in the important US Gulf Coast region. This acquisition supports the strategy to offer comprehensive services.

The oil and gas, power, and water markets are forecast to grow moderately. For the full year, the power market is predicted to remain at its current level. The division anticipates slow growth in the general industry. Rotating Equipment Services expects some growth in North America, driven by the shale gas boom. In Europe, continued weakness is forecast. Some growth is likely in Asia-Pacific, especially in China.

Chemtech: Decreased order intake and increased profitability

Order intake decreased by 10.0% on an adjusted basis compared with the same period of the previous year. This decrease was mainly affected by reduced orders in the process technology business—due to the delay of some large projects—and a lowered demand in the mass transfer technology business. Activity in the oil and gas downstream market remained on the previous year’s level. Demand in the general industry was stable on a high level. The Americas were strong with good orders in the tower field service business. Europe and Asia-Pacific lagged behind the same period in 2013. Adjusted sales slightly increased compared to the same period in 2013. Adjusted operating income significantly increased by 18.6% compared to the first half of 2013, driven by good contribution from the Sulzer Mixpac Systems and Mass Transfer Technology business units. Profitability significantly increased from 9.6% in the first half of 2013 to 11.2% in the same period this year, driven by continuing operational improvements in all units.

Sulzer acquired aixfotec to strengthen Chemtech’s position as a technology leader and system supplier for polymer foams and further expands its manufacturing facilities in Shanghai to benefit from the fast growing Asian market for two-component mixing and dispensing systems.

For the full year, the division anticipates that the oil and gas market will stabilize at a high level. The general industry is expected to be stable with some growth opportunities. The Americas are likely to be the growth driver. Market activity in the rest of the world is predicted to remain at the current level.