| Above-average volume growth
In a largely positive market environment, the Corporation recorded a 15% year-on-year rise in orders received (adjusted1: +14%), to CHF 2,198 million. Sales advanced by 13% to CHF 2,067 million (adjusted1: +12%).
Core divisions drive income higher
Operating income (EBITA) rose by 56% to CHF 139 million (prior year: CHF 89 million). The core divisions played a central role in this result, increasing their contribution from CHF 84 million (excluding restructuring costs at Sulzer Pumps: CHF 107 million) to CHF 130 million. The sharp rise in income is primarily attributable to operational improvements at Sulzer Pumps and Sulzer Chemtech, which more than compensated the unsatisfactory Sulzer Metco result.
Net income 78% above prior-year figure
Improvements in operating business also led to a higher net income, up 78% from CHF 41 million to CHF 73 million. Earnings per share rose to CHF 21,03 from CHF 11,77 in the prior year.
Results for the core divisions in detail
Sulzer Pumps achieved high growth in 2004, breaking through the one billion Swiss franc barrier for the first time in its history in terms of orders received (CHF 1,073 million, prior year: CHF 951 million; +13%, adjusted1: 12%) and sales (CHF 1,002 million, prior year: CHF 870 million; +15%, adjusted1: 15%). Operating income (EBITA) rose from CHF 25 million (CHF 48 million before restructuring costs) to CHF 64 million, while return on sales (ROS; EBITA/sales) advanced to 6.4%. These increases are attributable to the good business environment and the effects of operational improvements. As the pumping lines Johnston, Paco, and Crown in the US were not acquired until late 2004, they had little impact on the results for the year.
Sulzer Metco posted sales of CHF 521 million and received orders totaling CHF 534 million in 2004, exceeding the half billion Swiss franc mark for the first time in both instances. The growth rates were 23% and 26% respectively (adjusted1: +14% and +16%). Demand from the aerospace industry picked up slightly, but the industrial gas turbine business remained at a low level. Operating income (EBITA) only recovered slightly, from CHF 17 million in the previous year to CHF 19 million, resulting in a return on sales (ROS) of 3.6%. This unsatisfying result was mainly attributable to the one-off balance sheet corrections published in October 2004, the depreciation of the US dollar, and effects from the application of purchase accounting rules for the new acquisitions.
Sulzer Chemtech enjoyed another year of good business performance in 2004. The robust Asian market and strong demand for static mixers led to a high volume of orders received, up 11% to CHF 346 million (adjusted1: +14%) despite negative currency effects and weak European markets. Sales advanced by 2% to CHF 313 million (adjusted1: +5%). Sulzer Chemtech posted an increase in operating income (EBITA) of 30% year-on-year to CHF 30 million, and a return on sales (ROS) of 9.6%.
For Sulzer Turbo Services, the year was marked by increased competition, the weak US dollar, and continuing political insecurity in the Middle East and South-East Asia. Thanks to a few large contracts, orders received climbed sharply to CHF 226 million (+15% compared to the prior year, adjusted1: +20%), making for a substantially higher order backlog. Sales advanced by 7% to CHF 213 million (adjusted1: +11%). Operating income (EBITA) stood at CHF 17 million (prior year: CHF 19 million) with a return on sales (ROS) of 8%, reflecting tough competition in the market as well as investment in the in-house production of replacement parts.
Sulzer Hexis achieved important technical milestones in system design during 2004. These are a key prerequisite for series production and market introduction, and will support the associated selection of potential partners. As in the previous year, the division recorded an operating loss of CHF 16 million.
Other activities (reported as 'Other'), which are primarily influenced by real estate transactions, generated an operating income of CHF 25 million, including a special item. It is slightly above the figure of CHF 21 million for the previous year.
Outlook
The divisions are currently well positioned, but growth and results will largely depend on how the global markets will perform. Sulzer expects slower sales growth and a further increase in operating income. With the expectation of a higher operating income of the core divisions, a lower income of 'Other', and the elimination of annual amortization of goodwill, Sulzer expects to post a significant improvement in net income in 2005 overall.
Dividend
At the annual general meeting on April 15, 2005, the board of directors will propose a dividend of CHF 9 (prior year: CHF 6). Upon approval, the date of the dividend payment is April 21, 2005.
Board of Directors: Re-election
At the forthcoming annual general meeting, the board members Leonardo Vannotti and Thor Håkstad stand for re-election.
A summary of the key figures can be found on pages 4 and 5 of this media release. A more detailed explanation of Sulzer's annual results is contained in the excerpt of the Report by the Chairman of the Board and the CEO on page 6 and following.
Summary of Key Figures
Corporation
in million CHF |
2004 |
2003 |
+/– % |
|
| Orders received |
2 198 |
1 908 |
15 |
|
|
Sales |
2 067 |
1 826 |
13 |
|
| Operating income before goodwill amortization (EBITA) |
139 |
89 |
56 |
|
| Operating income (EBIT) |
111 |
62 |
79 |
|
| Net income |
73 |
41 |
78 |
|
| Net income per share (in Swiss francs) |
21.03 |
11.77 |
79 |
|
| Personnel employed as of 12/31 |
9 586 |
8 999 |
7 |
|
|
|
| |
|
Excerpt from the Report by the Chairman of the Board
and the CEO
Sulzer has substantially improved its performance in 2004. The core divisions succeeded achieving profitable growth despite increased prices in raw materials, regional political turbulences, and a weak US dollar. Both operating and net income rose by over 50%, and the balance sheet ratios improved further. The Board proposes a dividend of CHF 9 per share to the Annual General Meeting of Shareholders.
Markets
An analysis of the most relevant markets for Sulzer shows a positive but differentiated pattern. The oil and gas markets continued on a high level, reflecting earlier capital spending decisions. Over time, however, the investment level may come down. The chemical processing industries remained at a high level. The pulp and paper markets performed well in the past months, especially in Asia. Sulzer benefited in the automotive sector by having highly diversified products and solutions, allowing for growth in a generally flat market. The aerospace markets have yet to find back to their pre-9/11 levels. The situation is similar in the power industry, which has not yet completely overcome the Enron collapse. Positive trends were visible for Sulzer in the mining and metals, and the food industry. It is expected that these segments will gain importance for Sulzer, even though they will represent smaller markets for us. From a regional perspective, the development in Asia, in particular in China and India, has been remarkable. Thanks to its established position in these countries, Sulzer has been able to exploit many opportunities in 2004.
Strategy
Sulzer’s declared goal is to create value. This will be achieved via a three step approach. Operational excellence first, followed by organic growth and subsequently external expansion. The current priority continues to be the delivery of operational improvements and organic growth. In line with our corporate cultural program “Our Aspirations”, all divisions have ongoing improvement programs. Most notable is the performance improvement of Sulzer Pumps. While in 2004 the steps taken started bearing fruit, achieving sustainable goals takes more time and patience. Market leadership is attractive if the corresponding investments in growth – be it organic or acquisitive – deliver a return on capital above our target rates. In the interest of our long term business strategy, we only pursue value enhancing acquisitive growth. In 2004, three significant opportunities were used to further strengthen our market positions: OSU GmbH in Germany and Ambeon in Canada; both uniquely reinforce the activity of Sulzer Metco in the area of equipment and materials. Further, Sulzer Pumps acquired the combined pump activities of Johnston, Paco, and Crown in the USA and China. These acquisitions strengthen our position in the power generation, the water and wastewater, and the hydrocarbon processing markets. Moreover, they are a valuable addition to our service presence.
Results
Favorable market conditions, in combination with gains in market share, led to higher volume growth in 2004. Orders received for the Corporation are CHF 2,198 million, 15% above the previous year (14% adjusted for acquisition and currency effects). The order backlog rose further to CHF 804 million, reflecting the good order intake during the second half of 2004. This will support 2005 sales early in the year. Net sales of the Sulzer Corporation rose to CHF 2,067 million, 13% above 2003 (adjusted 12%). It should be noted that the strong increase of the operating income (EBITA) from CHF 89 million in 2003 to CHF 139 million this year (56%) has been mainly contributed by the core divisions. Their EBITA increased significantly from CHF 84 million in 2003 to CHF 130 million in 2004. The CHF 16 million investment (operating loss) in Sulzer Hexis was in line with that of the previous year, which has to be considered low given the string of goals achieved in 2004. The contribution from “Other”, which is strongly driven by real estate transactions, achieved at CHF 25 million a result slightly over that of the prior year (CHF 21 million). Return on sales (EBITA/sales) of the core divisions rose from 5% to 6%. This increase is attributable to the improvements at Sulzer Pumps and Sulzer Chemtech, which more than compensated for the disappointing development of Sulzer Metco. Capital employed declined from CHF 1,309 million to CHF 1,303 million, opposite to the trend in sales. Return on capital employed (ROCE) consequently improved from 7% to 11%. After goodwill amortization of CHF 28 million, the operating income (EBIT) amounts to CHF 111 million, up from CHF 62 million in 2003. Net income improved from CHF 41 million by 78% to CHF 73 million. The resulting earnings per share of CHF 21 compare favorably to CHF 12 in 2003. In light of the healthy balance sheet and the good cash flow, the Sulzer Board of Directors proposes a dividend of CHF 9 per share to the Annual General Meeting of shareholders. This follows the dividend policy of a payout ratio of about one-third of net income and due consideration to continuity and liquidity. In anticipation of accounting changes, however, net income before goodwill amortization has been applied as the basis for the consideration of the dividend. In essence, this represents an increase of the payout ratio.
Divisions
Sulzer Pumps improved its performance substantially. Order intake increased by 13%. Sales improved by 15% to CHF 1,002 million. The focus on operational excellence has become visible with operating income (EBITA) growing from CHF 25 million to CHF 64 million. Return on sales (ROS) exceeded 6%, return on capital employed (ROCE) rose above 17%. For 2005, Sulzer Pumps assumes a positive development, affected however by one time integration charges for the acquired pumps activities.
Sulzer Metco strengthened its leading market position by achieving 26% growth in orders and 23% in sales (adjusted 16% and 14% respectively). The EBITA increased from CHF 17 million to CHF 19 million. The figure for 2004 includes the negative impact (CHF 9 million) of two unrelated instances of serious misconduct, which had already been reported in October 2004. As a consequence, ROS and ROCE remained at unsatisfying levels of 4%. Under its new management, Sulzer Metco has embarked on a drive for operational excellence, with the goal of improved customer satisfaction profitability.
Sulzer Chemtech continued to build on its ongoing strong operational drive. The order intake increased by 11%, sales by 2% (adjusted 14% and 5% respectively), with a strong contribution from Asia. These increases are even more respectable considering the already high market position achieved by the division in the refinery industries. EBITA amounts to CHF 30 million, and as a consequence, ROS is at 10% (prior year: 8%). Further improvements in fixed asset productivity and working capital led to an excellent ROCE of 23%. Both the technical and market position in Sulzer Chemtech’s core businesses of separation columns and static mixing are excellent and the outlook is promising.
Sulzer Turbo Services had to continue dealing with a difficult market climate. Growth in orders received was 15%, whereas sales increased 7% (adjusted 20% and 11% respectively). Original equipment manufacturers (OEM) focus increasingly on the service business, leading to intensified competition. Sulzer Turbo Services’ focus is the safeguarding of margins in this difficult climate, and, given the circumstances, it achieved a satisfactory EBITA of CHF 17 million (prior year: CHF 19 million). ROS decreased from 10% to 8%. The capital employed increased due to long-term investments in new parts manufacturing. This impacted ROCE negatively (9% in 2004, 10% in 2003).
Sulzer Hexis, our venture division, made good progress, retaining the leading position in fuel cells for single family homes. A revised next generation unit is in its testing phase. Cash expenses amounted to CHF 20 million in 2004 (prior year: CHF 19 million), the operating loss to CHF 16 million (2003: CHF 16 million). The development of the fuel cell units is far progressed, and therefore, time has come for market introduction. This requires additional industrial and financial partnerships. The respective selection should be concluded during 2005.
Sulzer Innotec, the central research and development department, has gained recognition within and outside of Sulzer for its innovation power, technical competence and special manufacturing expertise. Results were close to break-even. The returns of Sulzer Real Estate were lower than in the prior year, in a difficult market environment for commercial real estate properties. A large payment received in 2004 stemming from a fire insurance claim compensated for the decline in income from real estate. In addition to Sulzer Innotec and Real Estate, within “Other” costs of a settlement relating to the sale of discontinued operations as well as an increase in provisions for early retirements have negatively affected the result.
Outlook
In 2004, the execution of key operating improvement programs was the focus of the Corporation, as part of the culture program “Our Aspirations”. The results have been very encouraging, but this is a continuous process embedded in the daily work at Sulzer. The targets set for each division to improve their results hold good. Today the divisions are in a situation which enables them to defend their leading position in the markets and to secure these by investments. Growth and results will mainly depend on the development of the global market place. Investments by the oil and gas industry are not likely to remain at the level of 2004. The development of paper prices are expected to lead to a flattening of the market in the pulp and paper industry. In Asia, Sulzer will continue to exploit the opportunities thanks to its established position in the region. It remains to be seen whether the positive signs in the power industry translate into a sustainable recovery.
Leonardo E. Vannotti, Chairman of the board
Ulf Berg, CEO |