Robust performance amid pandemic

If not otherwise indicated, changes from the previous year are based on currency-adjusted figures.

Solid order momentum in Pumps Equipment and Rotating Equipment Services

Despite the pandemic, Sulzer continued to deliver order growth in the first half of 2020. Order intake totaled CHF 1’840.5 million, an increase of 1.7% compared with the same period last year. Organic order intake remained stable (–0.6%), while acquisitions added CHF 42.3 million. Order intake gross margin declined to 33.3% due to a mix impact from a lower relative share of orders from Applicator Systems.

For the first half year of 2020, Sulzer showed resilience in orders and free cash flow generation. Despite an extensive impact from the pandemic, we mitigated the reduction in sales and profitability with swift actions and cost-out measures.

Jill Lee, Chief Financial Officer

Order intake in the Pumps Equipment division increased strongly by 6.0%. Order activity in the Middle East more than offset a decline in the Industry segment of 6.3% which was hit by a COVID-19-related softening of market. Water orders saw an increase of 2.5% in the first half of 2020, excluding the high basis for comparison in the first half of 2019 due to two large projects of CHF 42 million for water transport and desalination. Order intake in Rotating Equipment Services grew by 10.2%, of which 3.9% stemmed from the Alba acquisition. Chemtech’s order intake was 3.2% lower than in the first half of 2019, due to customers postponing projects and a high basis for comparison in the first half of 2019. Acquisitions contributed CHF 29.6 million, of which GTC was CHF 20.1 million. Applicator Systems saw an abrupt drop in order intake of 27.3% as beauty stores and dental practices were forced to temporarily stop operations.

Currency translation effects had a negative impact on order intake amounting to CHF 125.8 million, due to the strengthening of the Swiss franc against other currencies.

As of June 30, 2020, order backlog increased by CHF 153.6 million to CHF 1’946.2 million from CHF 1’792.6 million on December 31, 2019. Negative currency translation effects totaled CHF 115.8 million.

Orders

Lockdowns impacting sales

Sales amounted to CHF 1’598.5 million – a decrease of 3.9%. Compared with 2019, acquisitions added CHF 27.1 million, while negative currency translation effects reduced sales by CHF 106.8 million.

Customer confinement measures such as limited site access and temporary closures of factories and front-end outlets impacted sales. Pumps Equipment’s sales declined by 4.4%. Higher sales in the Water segment could not offset the decrease in Energy and Industry. Sales in Rotating Equipment Services grew by 1.3%, supported by the Alba acquisition. In Chemtech, sales remained stable, despite a significant COVID-19 impact including the six-week lockdown of the Indian factory from the end of March until the beginning of May. In Applicator Systems, sales declined by 21.0%, caused by the abrupt closure of retail stores and dental clinics globally.

Lower volume and mix impacting gross margin

Gross margin remained stable at 29.8% compared with 30.0% in the same period last year, despite a higher relative share of Energy business within Pumps Equipment and a lower share of Applicator Systems business within the sales mix. Total gross profit decreased to CHF 476.0 million (first half of 2019: CHF 532.0 million) as a result.

Operational return on sales of 7.5%

Operational EBITA (opEBITA) amounted to CHF 120.2 million compared with CHF 161.5 million in the first half of 2019, a decrease of 20.5%. Lower gross margin and under-absorption arising from the decline in sales volume, as well as the unfavorable mix effect from lower share of Applicator Systems, were partially offset by savings from cost reduction measures of CHF 21 million.

Operating expenses excluding amortization, impairments on tangible and intangible assets, restructuring expenses, and other non-operational items decreased by CHF 21.7 million year-on-year. Lower organic Selling and G&A expenses were partially offset by operational expenses of the acquired companies.

Bridge from EBIT to opEBITA (January 1 – June 30)

Operational EBITA margin (opROSA) decreased to 7.5% compared with 9.1% in the first half year of 2019.

ROS and opROSA calculation (January 1 – June 30)

Structural actions

As announced earlier this year, Sulzer has initiated decisive measures to mitigate the impact of market disruptions on Energy-related business activities caused by the pandemic. Up to June 2020, one-off expenses of CHF 52.6 million were recorded, comprised of CHF 42.0 million restructuring expenses, CHF 6.4 million non-operational costs and CHF 4.2 million impairments. These mainly relate to the closure or resizing of sites in Europe and the USA, as well as the resizing of supporting resources.

Consequently, EBIT amounted to CHF 36.0 million, a decrease of 58.3% compared with CHF 98.9 million in the first half of 2019. Return on sales (ROS) was 2.3% compared with 5.6% in the first half of 2019.

Stable financial expenses

Total financial expenses amounted to CHF 12.3 million, compared with CHF 12.0 million in the first half of 2019.

Higher effective tax rate

Income tax expenses decreased to CHF 6.7 million (2019: CHF 19.6 million) mainly due to lower pre-tax income. The effective tax rate for the first half of 2020 increased to 28.4% compared with 22.8% in the first half of 2019. The effective income tax rate used for 2020 was impacted by restructuring expenses related to closed facilities with no corresponding tax effects.

Lower core net income

Net income decreased to CHF 16.8 million compared with CHF 66.5 million in the previous year. Core net income, which excludes restructuring expenses, amortization, impairments, non-operational items and the tax-adjusted effects of non-operational items, totaled CHF 81.5 million, compared with CHF 114.7 million in the first half of 2019. Basic earnings per share decreased from CHF 1.92 in the first half of 2019 to CHF 0.45 in the first half of 2020, primarily due to lower profit.

Bridge from net income to core net income

Key balance sheet positions

Total assets as of June 30, 2020, amounted to CHF 4’760.6 million, which is a nominal decrease of CHF 348.8 million from December 31, 2019. Non-current assets decreased nominally by CHF 69.3 million to CHF 2’102.7 million, because of lower goodwill (CHF 21.7 million), lower other intangible assets (CHF 36.7 million) and lower property, plant and equipment (CHF 7.0 million). Current assets decreased nominally by CHF 279.6 million through reductions on inventories (CHF 27.4 million), current financial assets (CHF 52.7 million), trade accounts receivables (CHF 87.1 million) and supplier advances (CHF 5.8 million), influenced by reduced sales. Cash and cash equivalents decreased by CHF 78.2 million.

Total liabilities nominally decreased by CHF 107.3 million to CHF 3’408.2 million as of June 30, 2020. The main reasons were a decrease in trade accounts payable (CHF 99.1 million) due to lower sales of transactional business, as well as contract liabilities (CHF 32.5 million) due to lower sales of project business.

Equity decreased nominally by CHF 241.5 million to CHF 1’352.4 million. This was mainly driven by dividend distribution (CHF 136.1 million), currency translation effects (CHF 91.1 million) and the remeasurement of the defined benefit obligation (CHF 21.0 million). These were only partly offset by net income (CHF 16.8 million).

Better working capital improving free cash flow

Free cash flow amounted to CHF 36.8 million in the first half of 2020, a significant improvement compared to CHF –7.8 million reported in the same period last year. Better net working capital management and lower net current assets contributed to this positive development.

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

Cash flow from investing activities totaled CHF –17.3 million compared with CHF –85.0 million in the first half of 2019. In the first half of 2020, cash flow from investing activities was influenced by CHF 49.7 million from net change in financial assets, CHF –54.3 million for purchases of property, plant and equipment and CHF –12.0 million related to investment in subsidiaries and associates. In the first half of 2019, cash flow from investing activities was driven by CHF –33.7 million for the acquisition of GTC and CHF –51.7 million for purchases of property, plant and equipment.

Cash flow from financing activities totaled CHF –120.6 million compared with CHF –110.8 million in the first half of 2019. In 2020, dividend payments amounted to CHF 92.6 million, compared with CHF 77.5 million in 2019. The net change in cash since January 1, 2020, amounted to CHF –78.2 million, including exchange losses on cash and cash equivalents of CHF 32.1 million.

Outlook for 2020

The current business environment is characterized by high uncertainty, driven by COVID-19 and its economic fallout. Having initiated ambitious cost measures to mitigate the impacts of the pandemic, and based on our high order backlog, we are optimistic that we will continue to perform well. We expect the opEBITA margin (opROSA) to be at 8.5–9.0% for the full year 2020, and to return to around pre-pandemic levels for the full year 2021.

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 the Sulzer Annual Report 2019.