Resilient orders, robust profitability and record free cash flow

Resilient order intake

Sulzer delivered a solid order intake in 2020, totaling CHF 3’414.1 million, limiting the decrease to 2.2% and 3.8% organically. Acquisitions contributed CHF 54.6 million to order intake. Currency translation effects had a negative impact on order intake of CHF 248.9 million, as the Swiss franc appreciated against all currencies Sulzer is operating in. Order intake gross margin increased to 34.0%, slightly up from 33.6% in 2019 on the back of order selectivity and pricing discipline.

Amid difficult market conditions, Sulzer delivered yet another resilient top line performance and operational profitability, while generating record free cash flow.

Jill Lee, Chief Financial Officer

Order intake in the Pumps Equipment division decreased by 4.1%. Water orders increased by 2.3%, excluding two large projects of CHF 42 million for water transport and desalination booked in 2019. Industry remained stable (–0.5%). After a strong first half-year, commercial activity in the Energy-related markets slowed in the second half as expected, leading to a year-on-year decrease of 1.9%. Order intake in Rotating Equipment Services grew by 2.5%, supported by CHF 21.9 million from the Alba acquisition and organic growth (0.6%). As an essential service provider, we saw growth across product lines and regions. However, restricted access to customer sites impacted order intake in the second half-year. Chemtech’s order intake remained on the previous year’s level (–1.1%), despite customers postponing projects and site access restrictions. The GTC acquisition contributed CHF 19.7 million. In Applicator Systems, orders rebounded in the second half-year, reducing the drop in order intake from 27.3% in the first half to 11.0% for the full year (–14.2% organically). The division was significantly impacted by the closing of stores and dental clinics. The Haselmeier acquisition contributed CHF 13.0 million.

As of December 31, 2020, the order backlog amounted to CHF 1’758.9 million (December 31, 2019: CHF 1’792.6 million). Negative currency translation effects totaled CHF 129.8 million.

Orders

Lockdowns impacting sales

Despite limited site access, temporary closures of factories and front-end outlets, sales amounted to CHF 3’319.0 million in 2020, moderately decreasing by 4.6% (–5.6% organically). Acquisitions added CHF 34.1 million, while negative currency translation effects amounted to CHF 239.0 million.

Sales in Pumps Equipment declined by 5.7%. Strong sales in Water (+3.4% organic, –0.8% currency-adjusted) and stable sales in Industry (–1.0%) did not offset a sales decline in Energy­ (–11.8%). Sales in Rotating Equipment Services remained stable, with the Alba acquisition contributing CHF 12.9 million. In Chemtech, sales declined by 4.8%. Strong execution in China could not offset the lockdown impacts elsewhere. The GTC acquisition supported with CHF 13.8 million. In Applicator Systems, sales declined by 13.4%, caused by the abrupt closure of retail stores and dental clinics in the first half of 2020, followed by a strong rebound later in the year. The newly acquired Haselmeier business contributed CHF 7.4 million.

Stable gross margin

Gross margin remained stable at 29.9% in 2020 (2019: 30.1%), despite a lower share of high-margin Applicator Systems business within the sales mix. Total gross profit decreased to CHF 993.6 million (2019: CHF 1’121.2 million), due to a lower sales volume and significant currency translation effects of CHF 68.9 million.

Operational profitability of 9.0%

Operational profit amounted to CHF 297.6 million compared with CHF 371.3 million in 2019, a decrease of 13.7%. Cost reduction measures partly mitigated the impact from lower sales volume and negative mix effect from lower sales in Applicator Systems. A hiring pause, reduction in personnel-related costs, discretionary spend and travel contributed CHF 59 million to cost savings.

Bridge from EBIT to operational profit

Operational profitability decreased to 9.0% compared with 10.0% in 2019. The divisions achieved the following profitability figures:

Calculation of ROS and operational profitability

Structural actions

Sulzer launched decisive measures to mitigate the impact of market disruptions on Energy-related business activities early in 2020. By December 2020, one-off expenses of CHF 81.0 million were recorded, comprised of CHF 55.8 million restructuring expenses, CHF 15.4 million non-operational costs and CHF 9.8 million impairments. CHF 70.7 million of the one-off expenses were attributed to the Energy-related footprint and resource adaptation, including the closure or resizing of sites in Europe and the Americas, as well as the resizing of supporting resources.

EBIT amounted to CHF 150.6 million, decreasing nominally by 37.5% compared with CHF 241.0 million in 2019. Return on sales (ROS) was 4.5% compared with 6.5% in 2019.

Financial result

Interest expenses on borrowings and lease liabilities slightly increased to CHF 21.8 million (2019: CHF 21.1 million). This is mainly due to the interest expenses on bonds issued in the second half of 2020.

Total financial expenses slightly decreased to CHF 28.1 million (2019: CHF 28.3 million), mainly as a result of fair value changes on financial assets, partially offset by lower interest and security income.

Higher effective tax rate

Income tax expenses decreased to CHF 34.6 million (2019: CHF 55.1 million) due to lower pre-tax income. The effective tax rate increased to 28.4% in 2020 compared to 25.9% in 2019. The effective income tax rate was impacted by restructuring expenses related to closed facilities with no corresponding tax effects.

Lower core net income

In 2020, net income amounted to CHF 87.2 million compared with CHF 157.7 million in the previous year. Core net income excluding the tax-adjusted effects of non-operational items totaled CHF 200.2 million compared with CHF 257.8 million in 2019. Basic earnings per share decreased from CHF 4.52 in 2019 to CHF 2.46 in 2020.

Bridge from net income to core net income

Improved balance sheet efficiency

Total assets as of December 31, 2020 amounted to CHF 5’378.7 million, which is a nominal increase of CHF 269.2 million from 2019. Higher borrowings and acquisitions contributed to the increase.

Non-current assets increased by CHF 43.9 million to CHF 2’215.9 million mainly due to higher goodwill (CHF 36.9 million), higher deferred income tax assets (CHF 20.1 million) and higher associates (CHF 10.5 million), partly offset by lower other intangible assets (CHF 29.1 million). Current assets increased nominally by CHF 225.3 million. Cash and cash equivalents increased by CHF 87.7 million and current financial assets increased by CHF 247.6 million. Better net working capital management contributed to an inventory reduction of CHF 59.8 million. Contract assets decreased by CHF 30.3 million and trade account receivables decreased by CHF 46.8 million.

Total liabilities nominally increased by CHF 446.0 million to CHF 3’961.6 million as of December 31, 2020. The main reasons were an increase in non-current borrowings (CHF 292.1 million), as well as in current borrowings by CHF 100.8 million.

Equity decreased nominally by CHF 176.7 million to CHF 1’417.2 million. This was mainly driven by dividend distribution (CHF 138.7 million, of which CHF 2.6 million for non-controlling interests) and currency translation effects (CHF 133.5 million), partly offset by net income (CHF 87.2 million) and remeasurement of the defined benefit obligation (CHF 8.0 million).

Net debt increased from CHF 346.9 million in 2019 to CHF 414.5 million in 2020, mainly due to higher borrowings. Net debt to EBITDA increased from 0.84 in 2019 to 1.26 due to the decrease in EBITDA and increase in net debt.

Record free cash flow

Cash flow from operating activities amounted to CHF 368.7 million, compared with CHF 319.6 million in 2019. Lower net income could be more than compensated with an increase of provisions (CHF 93.2 million), also driven by restructuring-related provisions, favorable changes in inventories (CHF 29.7 million) and advance payments to suppliers (CHF 19.2 million). Free cash flow amounted to CHF 272.1 million compared with CHF 213.4 million in the prior year. This was driven by the higher cash flow from operating activities and lower capital expenditure.

Bridge from cash flow from operating activities to free cash flow

Cash-out from investing activities totaled CHF 461.8 million compared with CHF 242.6 million in the prior year. Cash-out for acquisitions amounted to CHF 108.2 million compared with CHF 78.5 million in 2019. Net capital expenditure for property, plant and equipment (including disposal of assets) amounted to CHF 89.1 million, below the CHF 100.8 million in 2019. The group also increased deposits by CHF 248.1 million.

Cash flow from financing activities totaled CHF 236.5 million compared with CHF –123.2 million in 2019. This was largely due to additional borrowings in the net amount of CHF 394.0 million (2019: CHF 4.9 million). The additional bonds issued in 2020 flattened Sulzer’s bond maturity profile. Following the Sulzer dividend increase to CHF 4.00 per share, dividend payments amounted to CHF 92.6 million in 2020, compared with CHF 81.2 million in 2019. CHF 43.5 million of net dividend payments to Sulzer’s main shareholder Tiwel could still not be transferred as a result of US sanctions. Payments of lease liabilities amounted to CHF 39.2 million. Exchange losses on cash amounted to CHF 55.7 million, compared with a loss of CHF 13.5 million in 2019.

Outlook for 2021

For 2021, Sulzer expects a progressive return to pre-pandemic levels. The first half of the year at least will continue to be impacted by the pandemic, with regional lockdowns hampering business interactions. Our business most impacted by the lockdowns in 2020, Applicator Systems, should build on its strong H2 2020 rebound to return to pre-pandemic volumes by the middle of 2021. Progress with vaccination should bring an acceleration to all Sulzer businesses in the second half of the year.

Sulzer order intake in 2020 was only down 2% for the year, on the back of a strong first half where we were up almost 2%. As such, we have a robust baseline and expect orders to be up 3% to 6% in 2021 on a currency-adjusted basis. Sales were down 4.6% in 2020 and should grow by 5% to 7% on a currency-adjusted basis. Operational profitability will benefit from the rebound in Applicator Systems and a significant uplift from our structural cost-cutting measures to return to pre-pandemic levels, close to 10%.

Abbreviations

EBIT: Earnings before interest and taxes

ROS: Return on sales

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”.