– Business review – Financial review

Order growth and increased operational profitability

Note: If not otherwise indicated, changes from the previous year are based on organic figures (adjusted for currencies and acquisitions).

Order intake increased by 9.1%. In a difficult environment, sales saw a slight increase of 1.8%. While the Russia exit and Poland closure impacted Sulzer’s bottom line, our operational profitability was unaffected, reaching 10.0%. Free cash flow, impacted by global supply chain challenges, amounted to CHF 58.3 million.

Continued strong growth in order intake

Compared with 2021, order intake was driven by organic growth of 9.1% to CHF 3’425.4 million. The net impact from acquisitions at Group level amounted to only CHF 1.9 million.

Currency translation effects had a negative impact on order intake of CHF 33.6 million. Order intake gross margin¹ increased nominally by 0.4 percentage points to 33.5%.

This solid set of results is evidence of Sulzer’s resilience in a market environment characterized by geopolitical tensions and uncertainties. The demand for our technologies also demonstrates that we are well positioned in markets fundamental to our society such as energy security and the transition to renewables, which we will continue to build on in the coming years.”

Thomas ZicklerChief Financial Officer

In the Flow Equipment division, order intake grew in all segments, leading to an overall increase of 8.9%. Double-digit growth in orders was recorded in Energy (11.0%) and Industry (12.8%). The Water segment continues to grow and increased its orders by 4.4%. Order intake in the Services division grew by 1.6% despite the impact from the exit from Russia, which caused a drop in Europe, the Middle East and Africa (EMEA) of 6.5%. This was more than offset by a strong performance in the Americas (11.1%) and solid order intake in Asia-Pacific (2.4%).

Order intake in the Chemtech division increased by 22.5%, with strong commercial momentum in all regions reflecting rebounds in the Americas, Europe, India and the Middle East. The Renewables segment within the Chemtech division grew strongly by 37.8%.

As of December 31, 2022, the order backlog amounted to CHF 1’844.7 million (December 31, 2021: CHF 1’724.1 million).

1) Order intake gross margin is defined as the expected gross profit of order intake divided by order intake.

Order intake

Sales growth in difficult environment

Sales increased by 1.8% compared to 2021, reaching CHF 3’179.9 million. Net impact from divestitures was CHF 5.9 million and negative currency translation effects amounted to CHF 26.0 million. This solid result was achieved despite continuing supply chain restrictions and multiple Covid-related factory lockdowns in China.

Sales in the Flow Equipment division declined by 3.4%, mainly due to a low order backlog in Energy at the beginning of the year. Sales in Industry (+0.5%) and Water (+0.7%) were stable. Services achieved overall year-on-year sales growth of 0.7%. A strong performance in the Americas (8.5% growth) more than offset the Russia-related decline in EMEA (6.0%). Sales in Asia‑Pacific were stable (0.5%). In Chemtech, sales were up by 14.8% thanks to high order intake, strong execution and rigorous efforts to overcome Covid-related lockdowns in China.

Russia exit and Poland closure

As announced in H1 2022, the exit from the Russian market and the closure of our Polish entities were initially recorded in Sulzer’s midyear results with the recognition of impairments and other write‑downs of assets in all affected businesses, and the classification as assets held for sale for the Russian entities. In February 2023, Sulzer signed an agreement to sell its business in Russia to a local third party. The transaction is subject to regulatory approvals by the Russian government subcommission for control over foreign investments and the Federal antimonopoly service (FAS). As of December 31, 2022, the total impact on net income from the closures amounted to CHF 133.7 million.

While a number of income statement KPIs and balance sheet positions are impacted, the write-offs are excluded from operational profit, which therefore provides a fair view of Sulzer’s operational performance. The impact of write-offs was partially mitigated by CHF 21.0 million of net financial income (shown below EBIT) mostly arising from foreign exchange movements on unhedged intercompany loans to Russia. Additionally, backlog adjustments of CHF 28.0 million associated with the exit from Russia were booked in the period up to December 31, 2022.

Gross profit margin 

Reported gross profit margin amounted to 29.5% (2021: 30.0%), mainly affected by inventory write-offs in Russia. When excluding these extraordinary impacts, gross profit margins increased in all divisions. Overall gross profit declined by CHF 7.3 million to CHF 939.6 million (2021: CHF 946.9 million).

Increase in operational profitability

Operational profit – which excludes the impacts of exiting Russia and Poland – amounted to CHF 317.6 million compared to CHF 293.3 million by the end of 2021, an increase of 8.6%. Higher volumes, generally higher margins and continued spending discipline led to a year-on-year increase in operational profitability of 70 basis points to 10.0% (2021: 9.3%).

Whereas operational profitability remained stable in the Services division, both Flow Equipment and Chemtech improved year on year:

Bridge from operational profit to EBIT

EBIT impacted by Russia and Poland exits

Expenses impacting EBIT and related to the exit from Russia and closures in Poland amounted to CHF 147.3 million, representing the vast majority of a total of CHF 167.4 million in one-off expenses recorded in 2022 (2021: CHF 21.4 million). Accordingly, EBIT amounted to CHF 111.4 million compared to CHF 221.8 million in 2021. Return on sales (ROS) was 3.5% compared to 7.0% by December 31, 2021.

Calculation of return on sales (ROS) and operational profitability

Financial result

Total net financial expenses amounted to CHF 1.6 million, compared with net financial expenses of CHF 21.7 million in 2021. Net interest expenses increased from CHF 15.3 million by December 31, 2021, to CHF 17.6 million for the same period in 2022. Fair value changes on financial assets and liabilities had a positive impact of CHF 24.0 million (CHF 1.3 million in 2021). Currency exchange losses amounted to CHF 6.6 million (CHF 6.0 million in 2021), including a positive foreign exchange effect of CHF 21.0 million arising from unhedged intercompany loans to Russian entities prior to their classification as held for sale. Other financial expenses amounted to CHF 1.5 million (CHF 1.6 million in 2021).

Effective tax rate influenced by write-offs

Income tax expenses amounted to CHF 79.0 million, compared with CHF 57.2 million in 2021. The increase was driven by higher operational profit levels, as well as the write-off of tax receivables and deferred tax assets in the Russian legal entities amounting to CHF 7.4 million. The effective tax rate (ETR) increased from 28.9% (2021) to 73.8% (2022) as a result of the higher income tax expenses described above compared to a lower profit before tax due to the costs related to the exit from the Russian and Polish business.

Net income and core net income

By Dec 31, 2022, net income amounted to CHF 28.0 million, compared with CHF 140.7 million in the previous year. Basic earnings per share therefore decreased from CHF 4.10 by Dec 31, 2021, to CHF 0.85 in 2022. Core net income excluding the tax-adjusted effects of non-operational items totaled CHF 213.1 million, compared with CHF 195.3 million in 2021.

Bridge from net income from continuing operations to core net income from continuing operations

Bridge from net income from continuing operations to net income

Key balance sheet positions

Total assets as of December 31, 2022, amounted to CHF 4’620.2 million, a decrease of CHF 390.3 million from December 31, 2021. Non-current assets decreased by CHF 250.0 million to CHF 1’584.2 million, with lower defined benefit assets for the pension funds in Switzerland (CHF 134.2 million) being the main driver. This decrease was triggered in the first half of 2022 by the remeasurement of the net pension assets, with IAS 19 asset ceiling rules limiting the balance sheet recognition of the surplus funding in the Swiss plans. Additionally, lower goodwill (CHF 50.4 million, with CHF 41.8 million arising from FX impacts and CHF 8.6 million due to the write-off in Russia), lower other intangible assets (CHF 42.2 million, of which CHF 6.7 million were for impairments in Russia) and lower property, plant and equipment (CHF 33.5 million, of which CHF 16.2 million was Russia-related) were recorded.

Current assets decreased by CHF 140.2 million. Excluding the CHF 28.6 million reclassified as held for sale, cash and cash equivalents decreased by CHF 280.5 million due to lower operational cash generation, continued investment in core and new business and the repayment of a bond. Difficulties in the supply-chain led to a significant increase in inventories (CHF 46.8 million, net of CHF –31.4 million related to the Russia exit) as did trade accounts receivable (CHF 36.3 million, net of CHF –8.6 million Russia related). Contract assets also saw a CHF 56.8 million increase (net of CHF –26.8 million related to Russia), largely offset by higher contract liabilities.

Total liabilities decreased by CHF 139.6 million to CHF 3’591.5 million as of December 31, 2022. Both current and non-current borrowings were reduced (CHF 154.8 million in total). In non-current liabilities deferred income tax liabilities decreased (CHF 31.1 million), as did defined benefit obligations (CHF 57.8 million). Amongst current liabilities, the largest change was an increase in contract liabilities (CHF 57.8 million). CHF 25.4 million of liabilities were classified as held for sale. Equity decreased by CHF 250.7 million to CHF 1028.6 million. This was driven by low net income (CHF 28.0 million), the remeasurement of defined benefit obligations net of deferred tax impacts (CHF –75.5 million), dividend distribution (CHF 120.3 million) and negative currency translation differences (CHF 60.3 million).

Free cash flow impacted by global supply chain constraints

Cash flow from operating activities declined to CHF 119.2 million due to a significant increase in working capital, needed to mitigate the difficult global supply chain environment. Free cash flow amounted to CHF 58.3 million, compared with CHF 210.5 million reported in the same period of the previous year (excluding Applicator Systems Divisions at CHF 28.2 million).

Bridge from cash flow from operating activities to free cash flow

Cash flow from investing activities totaled CHF–87.8 million, compared with CHF 432.3 million in 2021, with the latter including an impact from the Applicator Systems division spin-off (CHF 344.3 million net), and also CHF 302.6 million from net changes in financial assets. Cash-out for acquisitions and divestitures amounted to CHF 21.9 million in 2022, compared to CHF 131.9 million in the previous year. For the purchase and sale of property, plant and equipment, Sulzer paid net CHF 52.2 million in 2022 (2021: CHF 70.5 million).

Cash flow from financing activities totaled CHF –285.4 million compared with CHF –382.5 million by the end of 2021. In 2022, Sulzer reduced its borrowings by a net CHF 152.5 million and dividend payments to shareholders of Sulzer Ltd. amounted to CHF 80.6 million, compared with CHF 91.9 million in 2021. The net change in cash since January 1, 2022, amounted to CHF –280.5 million, including exchange losses on cash and cash equivalents of CHF 26.4 million. CHF 28.6 million of cash is being reclassified as held for sale.

Outlook for 2023

Sulzer has started the year with a strong order backlog and expects continued growth in its markets despite ongoing uncertainties. We believe that fundamental megatrends will continue to drive strong demand for Sulzer’s technologies.

For 2023, Sulzer expects orders to increase 3 to 6%. Sales are expected to grow by 7 to 9%. Operational profitability is expected to further improve to above 10.0%.

One-off effects have impacted net income negatively in 2022. As no comparable impacts are expected for 2023, Sulzer expects net income in 2023 to be significantly higher compared to 2022.

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”

Delivering reliable energy supply from intermittent renewable sources

Business review Flow Equipment