A year ago, as we prepared to publish our 2019 business results, like many others we hoped that the COVID-19 crisis that China was already experiencing would not impact the rest of the world. As the months since then have so dramatically illustrated, the COVID-19 crisis continues and the aftershocks are being felt across all industries. Through this period, the critical issue for Sulzer has been to keep our people safe, while keeping our operations running.
How was Sulzer affected by the COVID-19 crisis?
The global spread of COVID-19 and the numerous countermeasures restricted the global economy and led to a highly volatile and uncertain business environment. Companies faced a decline in demand for products and services, order cancellations, a standstill of business activities, logistical bottlenecks, a lack of supplier goods and challenges in supply chain and sales channels.
Naturally, COVID-19 also had a massive impact on Sulzer’s business. For example, through the closing of beauty stores and dental practices and the slump in the oil and gas industry. Furthermore, we had to face a highly volatile order situation as decisions on larger projects were postponed.
Nonetheless, Sulzer proved very resilient and delivered robust results in this adverse market environment. Thanks to a strong performance in 2019 and a good first quarter 2020, we were able to pay and even increase dividend payments related to 2019, despite the economic circumstances. We also honored agreed salary rises for all employees. Sulzer made significant progress in its working capital management despite the logistics disruptions generated by the pandemic, leading to a record free cash flow of CHF 272 million, our highest level in years. Furthermore, we improved or maintained the profitability of three out of our four divisions through a combination of flawless execution and strong cost actions. Only Applicator Systems, with the effective suspension of dental procedures worldwide in the second quarter, temporarily dipped. Through the extraordinary efforts of team members around the world, Sulzer ended the most complicated year on record with orders and sales down by less than 5%1), and an operational profitability of 9.0% – at the top of its guidance. This bodes well for 2021.
How did Sulzer manage the crisis?
To maintain Sulzer’s stability and reliability for employees and customers throughout the COVID-19 crisis and beyond, we swiftly introduced a COVID-19 committee dedicated to the pandemic response, implemented a resilience program and took action to further prepare Sulzer for the future.
Recognizing the need to anticipate and respond rapidly to a dynamic situation, we put the dedicated COVID-19 committee in place in March 2020. The committee has led our efforts, steering open and regular communications with our employees, establishing a common focus on safety measures across our 180 locations – amidst fluctuating and at times unclear public health guidance.
Preparing for the challenges that lay ahead, we initiated a resilience program aimed at controlling our cost base to better reflect this unique situation. The program was built around three pillars: measures to protect jobs, measures to adapt to market conditions and measures to support the new normal. Significantly, this program has met its objective while limiting the impact on existing jobs in our company. We achieved this by implementing a global hiring freeze, addressing accrued paid time off, reducing travel and related expenses, delayering our leadership structure and reducing headcount in support functions based out of our Swiss headquarters – primarily by managing attrition. These measures have helped us secure CHF 59 million in 2020, thus meeting the cost reduction target.
Besides the resilience program, our teams took swift action to ensure business continuity for our customers while implementing cost measures. This also helped mitigate the impact of lower sales volumes, temporary factory closures and supply chain disruptions, resulting in an operational profit of CHF 297.6 million and an operational profitability of 9.0%.
Despite the challenging circumstances back in March 2020, we chose to honor the agreed salary rises for all employees and performance bonus payments, as well as dividend payments related to 2019. While we moved to freeze the base salaries for the Executive Committee, there were no additional adjustments to compensation in 2020.
To prepare for the future, we launched structural actions to make our energy-related businesses leaner, in anticipation of adverse conditions in the oil and gas market which we expect to continue well into 2021. Further, we doubled down on investments that prepare us for the future – in additive manufacturing, data platforms, remote systems and digital production methods that will make us faster and more flexible.
What remuneration related measures has the Nomination and Remuneration Committee (NRC) taken, and why?
1. Compensation levels: We froze Executive Committee compensation levels for 2020 and 2021
Even though Sulzer has proven very resilient so far, the economic environment remains challenging. Therefore, as in 2020, there will be no increase in base salaries, target STI (short-term incentives) levels or regular LTI grant amounts in 2021 for the Executive Committee.
2. Short-term incentive plan 2020: We adjusted the actual operational profit to adequately reflect the performance and effort of all our employees
Aiming to stay the course for the year ahead, the NRC did not adjust financial targets for 2020 in February – keeping the budget unchanged and leaving the option to review the consolidated impact of COVID-19 at year-end to make appropriate adjustments. This review was completed in December 2020 and the Board decided to keep the operational operating net cash flow (operational ONCF) and sales targets unchanged. Reflecting the severe challenges stemming from COVID-19, the profitability target was revised to consider COVID-19 effects. To be precise, the COVID-19 impact on our operational profit is estimated at roughly CHF 105 million. The NRC decided on a 30% relief of the calculated COVID-19 impact on actual operational profit. This benefits the nearly 5’000 employees who participate in our performance bonus plan this year and recognizes the extraordinary efforts we have made as a company. In the case of the Executive Committee, the adjustment results in an increase in the financial performance of 13% – from 100% (pre-adjustment) to 113% (post-adjustment).
3. Long-term incentive plan 2020: We postponed the performance share units grant date in 2020 to allow for a more stable economic environment
The COVID-19 crisis hit the markets at the end of February with a steep downwards progression until almost the end of March, with a slight initial recovery at the very end of March. At that time, it was impossible to assess the further course of the crisis. In line with the flexibility provided for by the performance share plan regulation, the NRC therefore decided to postpone the grant, initially planned in April, by two months and to use this delay to assess the performance share plan validity and other possible vehicles for long-term incentives, namely restricted share units. The assessment was made by an independent advisor and led to the conclusion that even if some companies were switching back to restricted share units, the overall market practice and proxy’s recommendations were confirming performance shares as a preferred vehicle for long-term incentive. Therefore, the performance share plan remained unchanged in its structure and the grant was issued on June 1, 2020, following the Board decision on May 25.
This shift of the performance share units grant date in 2020 was a one-time adjustment to reflect the extraordinary circumstances of an unprecedented crisis. Apart from the postponed grant date for the performance share units in 2020, there were no further measures taken. The performance period remains unchanged. This is also the case for running performance share tranches from previous years. With the 2018 performance share plan vesting on December 31, 2020, the COVID-19 impacts on Sulzer’s performance are fully reflected in the Executive Committee’s long-term compensation which accounts for the largest share of Executive Committee’s variable compensation.
1) Adjusted for currency effects.