Strong order growth, improved profitability and record free cash flow

Strong order growth

Order intake increased by 8.2% compared with 2018. 6.3% organic growth and CHF 68.3 million from acquisitions drove this upsurge. Order intake gross margin increased nominally by 0.3 percentage points to 33.6%, influenced by higher order selectivity.

Sulzer achieved profitable growth along with record free cash flow in 2019.

Jill Lee, Chief Financial Officer

Order intake in Pumps Equipment increased by 8.3%, with 0.3% coming from acquisition. The strong organic growth was the result of higher orders in the water and chemicals segments which grew 16% each organically. In Rotating Equipment Services, order intake grew by 10.7%, 8.6% organically and 2.1% from acquisitions. Order intake in Chemtech grew by 12.8%, supported by strong organic growth of 6.5%. The GTC acquisition contributed CHF 38.1 million. In Applicator Systems, orders decreased by 4.3%. While the beauty segment was 14.3% below last year, APS grew in the remaining markets by 2.8%. Sulzer’s total order intake grew in Asia-Pacific and North America, as well as in Europe, the Middle East and Africa.

Currency translation effects had a negative impact on order intake of CHF 74.2 million, due to the weaker euro, British pound, Chinese renminbi and Brazilian real, partly offset by the stronger US dollar.

As of December 31, 2019, the order backlog amounted to CHF 1’792.6 million (December 31, 2018: CHF 1’786.9 million). Negative currency translation effects totaled CHF 28.6 million.

Orders

Higher sales on strong organic growth and acquisitions

Sales amounted to CHF 3’728.5 million in 2019 – an increase of 13.0%. This rise was driven by strong organic growth of 10.8% on the back of higher order backlog entering the year, the strong order intake during the year and CHF 71.8 million of acquisition-related sales. Negative currency translation effects totaled CHF 72.2 million.

Sales grew strongly in the oil and gas market at 37.8%, boosted by high order backlog. Sales to the chemical industry increased by 19.5% and by 4.7% to the water market after strong growth already in 2018. Sales to the general industries increased by 1.0%, whereas they declined by 3.3% to the power market due to a lower backlog at the beginning of the year.

Sales grew across all regions, most pronounced in the Americas.

Gross margin improvement

Gross margin increased from 29.1% in 2018 to 30.1% in 2019. Improvements in all divisions were partly offset by a negative mix effect. Total gross profit increased to CHF 1’121.2 million (2018: CHF 978.3 million), supported by higher sales volumes.

Profitability (opROSA) increased to 10.0%

Operational EBITA (opEBITA) amounted to CHF 371.3 million compared with CHF 322.5 million in 2018, an increase of 17.9%. Higher sales, savings of CHF 23 million achieved from SFP and the contribution from acquisitions more than offset the negative mix impact. OpEBITA increased organically by 15.9% compared with 2018.

Operating expenses excluding amortization, impairments on tangible and intangible assets, restructuring expenses and other non-operational items increased by 10.4%, partly influenced by the acquisition-related cost additions. Set in relation to sales, operating expenses decreased in comparison to the previous year.

Bridge from EBIT to opEBITA

Operational ROSA (opROSA) increased to 10.0%, up from  9.6% in 2018. The divisions achieved the following profitability figures (opROSA):

ROS and opROSA calculation

Non-operational costs impacted operating income (EBIT)

Plans to consolidate two production facilities in Germany have led to an expense of CHF 27.8 million, consisting of both restructuring provisions and non-operational costs. In the last year of the SFP program, Sulzer has continued to streamline its organizational setup. SFP-related non-operational expenses were CHF 23.0 million and SFP-related restructuring expenses were CHF 2.0 million. Overall, with the SFP program the company achieved cumulative savings of CHF 253 million.

EBIT amounted to CHF 241.0 million, an increase of 34.2% compared with CHF 183.8 million in 2018. Return on sales (ROS) was 6.5% compared with 5.5% in 2018.

Financial result

Interest expenses on borrowings and lease liabilities increased to CHF 21.1 million (2018: CHF 15.4 million). This is mainly due to the interest expenses on bonds issued in the second half of 2018 and interest expenses on lease liabilities resulting from the first-time application of IFRS 16 “Leasesˮ.

Total financial expenses increased to CHF 28.3 million (2018: CHF 18.9 million), mainly as a result of higher interest expenses and fair value changes on financial assets at fair value through profit and loss.

Lower effective tax rate

Income tax expenses increased to CHF 55.1 million (2018: CHF 49.2 million) due to higher pre-tax income. The effective tax rate declined from 29.7% in 2018 to 25.9% in 2019. Adjusted for effects of reorganization expenses in Germany and prior year tax base adjustments in Mexico and Russia, the normalized tax rate remained stable at 23.1%.

Higher core net income

In 2019, net income amounted to CHF 157.7 million compared with CHF 116.5 million in the previous year. Core net income excluding the tax-adjusted effects of non-operational items totaled CHF 257.8 million compared with CHF 223.0 million in 2018. Basic earnings per share increased from CHF 3.56 in 2018 to CHF 4.52 in 2019.

Bridge from net income to core net income

Improved balance sheet efficiency

Total assets as of December 31, 2019 amounted to CHF 5’109.5 million, which is a nominal increase of CHF 211.2 million from 2018. Higher business volume and acquisitions contributed to the increase. The main driver, however, was the introduction of the new accounting standard IFRS 16 “Leasesˮ.

Non-current assets increased by CHF 114.3 million to CHF 2’172.0 million mainly due to the addition of leased assets following the introduction of IFRS 16 (CHF 112.6 million). Current assets increased nominally by CHF 96.9 million. Better net working capital management contributed to an inventory reduction of CHF 84.0 million. Contract assets grew by CHF 150.1 million and trade account receivables by CHF 23.6 million from higher sales. Cash and cash equivalents decreased by CHF 59.7 million, while current financial assets increased by CHF 57.5 million.

Total liabilities nominally increased by CHF 258.3 million to CHF 3’515.6 million as of December 31, 2019. The main reasons were the addition of lease liabilities due to IFRS 16 (CHF 109.7), an increase in contract liabilities (CHF 88.4 million) due to higher sales of project business, as well as an increase on the outstanding dividend payments to Tiwel Holding Ltd by CHF 38.1 million.

Equity decreased nominally by CHF 47.1 million to CHF 1’593.9 million. This was mainly driven by dividend distribution (CHF 119.2 million), currency translation effects (CHF 63.9 million) and the remeasurement of the defined benefit obligation (CHF 24.8 million). These were partly offset by net income (CHF 157.7 million).

Net debt increased from CHF 239.0 million in 2018 to CHF 346.9 million in 2019, mainly due to the adoption of the new accounting standard IFRS 16 “Leasesˮ (CHF 109.7 million). Net debt to EBITDA on December 31, 2019, corresponded to 0.84 including IFRS 16 impact and 0.63 excluding IFRS 16 impact (0.73 per December 31, 2018). Increased EBITDA contributed to a like-for-like improvement of 10 points in the net debt to EBITDA ratio compared with 2018.

Record free cash flow

Cash flow from operating activities amounted to CHF 319.6 million, compared with CHF 260.8 million in 2018. This increase was mainly due to the higher net income and a CHF 34.0 million impact due to the adoption of IFRS 16 “Leasesˮ, partly offset by increased interest payments. Inventory reduction contributed CHF 82.8 million to cash flow. Despite higher sales, overall net working capital remained stable. Free cash flow amounted to CHF 213.4 million compared with CHF 181.3 million in the prior year. This was driven by the higher cash flow from operating activities, partly offset by higher capital expenditure.

Bridge from cash flow from operating activities to free cash flow (FCF)

Cash-out from investing activities totaled CHF 242.6 million compared with CHF 297.4 million in the prior year. Cash-out for acquisitions amounted to CHF 78.5 million compared with CHF 217.5 million in 2018. Capital expenditure amounted to CHF 142.1 million (thereof CHF 27.2 million IFRS 16 “Leasesˮ impact), above the CHF 96.2 million in 2018. The group also invested in fixed-term deposits of CHF 57.1 million.

Cash flow from financing activities totaled CHF –123.2 million compared with CHF 669.1 million in 2018 when additional bonds were issued. In 2019, dividend payments amounted to CHF 81.2 million, compared with CHF 43.1 million in 2018. While the Sulzer dividend remained unchanged at CHF 3.50 per share, CHF 38.1 million of net dividend payments to Sulzer’s main shareholder Tiwel could still not be transferred as a result of US sanctions. Payments for leases amounted to CHF 34.0 million as a result of the adoption of IFRS 16. Exchange losses on cash amounted to CHF 13.5 million, compared with a loss of CHF 26.1 million in 2018.

Outlook 2020

Macroeconomic clouds formed on the horizon throughout 2019. Geopolitical risks have arisen with increased tensions in the Middle East and in other parts of the world. Trade wars continue to disrupt global flows, generating inefficiencies that weigh on both Sulzer and its customers. And it is too early to estimate the impact of the coronavirus, which is affecting our production in, and supply chain from, China in February 2020, and potentially beyond. 

Still, we are confident about the prospects of our businesses in 2020. We enter the year with a healthy commercial pipeline, good end market momentum and a solid backlog.

Our confidence in Sulzer’s future is reflected in the proposed dividend increase to CHF 4.00 (prior year: CHF 3.50). We expect continued growth in order intake and sales. On the back of two strong years of high single-digit organic growth and despite increasingly arbitrating for margin at the expense of volume, we still expect order intake to grow in the range of 2% to 4%, and sales to grow in the range of 1% to 3%. Our profitability should further increase, with a 2020 opEBITA margin (opROSA) of around 10.2% to 10.5%.

Impact of IFRS 16 “Leasesˮ

Sulzer has adapted its reporting to reflect the adoption of IFRS 16 “Leasesˮ. It replaced IAS 17 “Leasesˮ. IFRS 16 introduces a single lessee accounting model and requires a lessee to recognize assets and liabilities for all leases with a term of more than 12 months. A lessee is required to recognize a lease asset representing its right to use the underlying lease asset and a lease liability representing its obligation to make lease payments. Exceptions apply to leases with a term of less than 12 months and leases of low-value items.

The main impact of the new accounting standard is to bring operating leases onto the balance sheet. As a result of initially applying IFRS 16, the group recognized CHF 107.3 million of lease assets as of January 1, 2019, previously classified as operating leases. The lease liabilities increased by the same amount. As of December 31, 2019, the lease assets amounted to CHF 112.6 million and the lease liabilities totaled CHF 109.7 million. More details are provided in note 16 of the consolidated financial statements.

In 2019, IFRS 16 had a positive effect on opEBITA (CHF 2.7 million) and free cash flow (CHF 34.0 million). The difference in the profit is related to the recognition of depreciation and interest expenses, instead of operating lease expenses as part of the costs of goods sold and operating expenses. The difference in the cash flow is related to the recognition of payments for leasing as part of the financing activities, instead of cash flow from operating activities.

The information presented for 2018 has not been restated. In the consolidated financial statements (note 34), a table summarizes the impact of the new accounting standards on the financial statements.

Abbreviations

EBIT: Earnings before interest and taxes

ROS: Return on sales

opEBITA: Operational earnings before interest, taxes and amortization

opROSA: Operational return on sales adjusted

EBITDA: Earnings before interest, taxes, depreciation and amortization

FCF: Free cash flow

For the definition of the alternative performance measures, please refer to “Supplementary information”.