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Report | April 2016

Oerlikon performs well in difficult market environment

Jürg Fedier, CFO of the Oerlikon Group says: “In 2015, we defined a strategic roadmap to develop Oerlikon into a more focused company, building on our unique competencies, technologies and positions in surface solutions, advanced materials, components engineering and manufacturing technology. We also completed important steps such as the sale of the Advanced Technologies Segment and the announced divestment of the Vacuum Segment.” “Our balance sheet is strong and allows for targeted investments in organic and inorganic growth. We delivered strong operating profitability in a difficult economic environment. The Surface Solutions Segment continued to perform well, achieving organic growth and solid profitability despite demanding market conditions. As we saw, the markets weakened further in the second half of 2015, and we promptly took decisive actions to mitigate the increasingly adverse headwinds, protect our profitability, and set the path for Oerlikon to sustainably grow over the medium to long term. In 2016, we will continue to focus on improving our flexibility, protecting our profitability and strengthening our technology position.”

Group review

At constant exchange rates, the Group order intake increased by 1.6 per cent and sales came in at around prior year’s level. Currency impact on top-line was around 6 per cent. Including currency impacts, order intake was lower by 4.2 per cent (CHF 2,537 million) and sales by 5.5 per cent (CHF 2,671 million). The ratio of the service revenues to total Group sales increased to 33.6 per cent.

In 2015, the Surface Solutions Segment generated 46 per cent of Group sales, the Manmade Fibers Segment 30 per cent, and the Drive Systems Segment 24 per cent. Regionally, Europe accounted for the largest proportion of Group sales, with 38.3 per cent (CHF 1,023 million), reflecting a 2.4 per cent increase compared to 2014.

Asia followed with 37.7 per cent (CHF 1,007 million), representing a reduction of 10.7 per cent versus 2014, and North America contributed 19.5 per cent (CHF 520 million), a decline of 5.8 per cent compared to 2014. Sales in other regions accounted for 4.5 per cent (CHF 121 million).

In November 2015, Oerlikon announced that it would be focusing on attractive growth markets in surface solutions and advanced materials – businesses in which the Group has invaluable and well-established competitive advantages in terms of technologies, expertise and customer relationships. The Surface Solutions business will be strengthened and expanded, and Oerlikon aims to use its strong balance sheet to fund organic and inorganic growth into new materials, technologies, services, industries and markets. One promising area is metal-based additive manufacturing (AM). The Group is also aligning the Manmade Fibers and Drive Systems businesses with current market dynamics. The Manmade Fibers Segment will build on its leading technology position, while adapting its operating model to near-term market realities. The Drive Systems Segment will focus on selected growth markets and reorganise to allow for future value-creating options. The measures initiated at the Manmade Fibers and Drive Systems Segments will significantly lower these segments’ break-even sales levels, and together with Group-wide operational excellence measures, gross savings of up to CHF 100 million are expected.

Strong underlying operating profitability

Despite lower sales, Oerlikon was able to achieve a strong normalised EBITDA margin of 16.9 per cent (CHF 450 million), excluding restructuring costs. Including the one-off restructuring impacts, EBITDA stood at CHF 338 million, correlating to an EBITDA margin of 12.7 per cent (2014 restated EBITDA: CHF 475 million, margin: 16.8 per cent). EBIT for 2015, due to the restructuring and impairment charges, was minus CHF 306 million (2014 restated EBIT: CHF 323 million). Excluding impairments, restructuring costs, amortisation of acquired intangibles (from Metco, net of tax) and results from discontinued operations, the normalised net result was at CHF 207 million in 2015, which reflects an underlying earnings per share of CHF 0.61. Following the inclusions of all the above-mentioned charges, reported net result for 2015 was minus CHF 418 million, and earnings per share were minus CHF 1.24.

Cash flow from operating activities before changes in net current assets remained strong at CHF 393 million. Excluding the restructuring and impairment effects, the Group’s normalised return on capital employed (ROCE) amounted to 11.1 per cent.

Strong balance sheet maintained

In 2015, Oerlikon maintained a strong financial position. The Oerlikon Group had equity (attributable to shareholders of the parent) of CHF 1,554 million, representing an equity ratio of 38 per cent (2014: 44 per cent). The YoY decrease in the total balance sheet and equity primarily reflected the goodwill impairment related to the Drive Systems Segment. Net cash at the end of the year amounted to CHF 79 million (2014: CHF 114 million).

During 2015, Oerlikon extended the maturity of its syndicated credit facility to June 2017 at reduced interest rate, reflecting both the favourable interest rate environment and the Group’s improved risk profile. This enhanced the Group’s debt maturity profile and capital position, thereby increasing Oerlikon’s financial flexibility. This strong financial foundation allows Oerlikon to further develop its portfolio in line with its strategic roadmap for achieving long-term profitable growth.

Improved productivity and market presence

To support Group’s profitability, comprehensive initiatives in operational excellence and cost savings were carried out in 2015, focused on manufacturing and supply chain management. In manufacturing, the Group saw notable productivity improvements and 97.9 per cent on-time delivery. In supply chain management, pooling of purchases, upgrading skills and streamlining processes via electronic platforms resulted in mid-double-digit millions of gross savings in Swiss francs. In 2015, the Group also held its first Global Health & Safety Day, reinforced its safety measures and further reduced the Group’s global Lost Time Accident Frequency Rate by 32 per cent.

In 2015, Oerlikon continued to strengthen its market presence in key regions. The Surface Solutions Segment opened its first service centre offering both Oerlikon Balzers and Oerlikon Metco technologies in Guelph, Canada, its first Europe-based automotive competence centre in Slovakia, a new sales office in Dubai and an AM centre in Westbury, USA. The Manmade Fibers Segment opened a new service centre in Dalton, USA and a new technology centre in Chemnitz, Germany. The Drive Systems Segment inaugurated its third plant in India and appointed distributors as partners in Argentina, Chile, Colombia and Peru to further develop its South American business. With the improved proximity and services to customers, the Group increased the ratio of service revenues to total Group sales to 33.6 per cent at the end of 2015.

Continued strong commitment to R&DOerlikon continued to demonstrate its strong commitment to R&D in 2015 and invested around 4 per cent (CHF 103 million) of Group sales in R&D. A total of 86 new patents were filed in 2015.

Q4 performance

For Q4 2015, the Oerlikon Group reported an order intake of CHF 597 million (Q4 2014 restated: CHF 711 million) and sales of CHF 657 million (Q4 2014 restated: CHF 774 million). The reduction in order intake and sales was primarily attributed to the market trough in the Manmade Fibers business and the strong downturn in the agricultural and oil and gas sectors in Drive Systems business. Normalised EBITDA, excluding restructuring costs, was at CHF 97 million, corresponding to a margin of 14.8 per cent. EBITDA including restructuring costs was minus CHF 15 million and margin was minus 2.2 per cent (2014 restated EBITDA: CHF 124 million, margin: 16.1 per cent). Normalised EBIT, excluding impairments and restructuring costs, was CHF 54 million (Q4 2014 normalised and restated: CHF 82 million). EBIT, including impairments and restructuring costs, was minus CHF 534 million (2014 restated EBIT: CHF 80 million).

Dividend

Returning value and capital to shareholders through annual dividend payments is important to Oerlikon. Accordingly, the BODs will be recommending to shareholders a payout of CHF 0.30 per share at the 2016 Annual General Meeting of Shareholders (AGM), taking place on April 5, 2016.

2016 outlook

Oerlikon’s markets are fundamentally supported by medium- and long-term drivers such as globalisation, mobility, energy and urbanisation. Backed by these drivers, the Group is convinced that its key markets will recover and grow. However, the Group expects 2016, and also 2017, to remain challenging. With the strategic direction set and the decisive actions initiated, Oerlikon believes it will be able to partially offset some of the adverse short-term market impacts. With a clear focus on continuing to protect the company’s solid profitability, Oerlikon expects to deliver order intake and sales between CHF 2.3 billion and CHF 2.5 billion and an EBITDA margin in the mid-teens for the full year 2016.

Surface Solutions Segment

In 2015, the Surface Solutions Segment achieved strong profitable growth and successfully advanced its business. At constant exchange rates, order intake increased by 34.7 per cent to CHF 1,300 million (2014: CHF 965 million), and sales increased by 33.1 per cent to CHF 1,295 million (2014: CHF 973 million). The growth in sales and order intake was attributable to the inclusion of Metco for the full year of 2015, but also to some organic growth. EBITDA for the Surface Solutions Segment increased to CHF 264 million (2014: CHF 183 million), yielding an EBITDA margin of 21.4 per cent (2014: 18.8 per cent). EBIT was CHF 157 million, with an EBIT margin of 12.7 per cent (2014: CHF 98 million and margin of 10.0 per cent).

“The Surface Solutions Segment developed well in 2015. It successfully integrated Metco, delivered strong profitability as well as organic growth, resulting in an above-market performance despite the difficult market conditions,” noted Fedier. The segment continues to address attractive markets with solid structural growth drivers such as the increasing demand for lighter and more durable materials that can deliver better performance. In 2015, the segment entered the new, adjacent market of additive manufacturing, set up a dedicated business unit, launched its first set of additive manufacturing materials, and printed a first set of components in 3D to demonstrate its capabilities in additive manufacturing.

The segment also continued to bring next-generation coating technologies for tools to the market, such as BALINIT® CROMA, the extremely wear-resistant thin-film coatings, INNOVENTA mega, a physical vapor deposition (PVD) system with extremely high throughputs, and BALINIT ALTENSA, the high-speed solution for productive gear cutting. Other technologies launched include new environmental barrier coatings to provide turbine engines with effective protection against vapor and environmental factors and a silver-containing antimicrobial PVD coating that provides better protection for medical components and instruments in partnership with the medical technology company, Stryker.

Manmade Fibers Segment

The Manmade Fibers Segment was exposed to major challenges in 2015, primarily caused by the speed and extent of the economic slowdown in China, the Chinese government’s review of its 13th five-year plan (2016-2020), low oil prices and sluggish global economy. The consequences impacted China’s textile sector and extended equipment overcapacity, which resulted in order postponements and weak demand.

At constant exchange rates, order intake declined by 12.3 per cent to CHF 790 million (2014: CHF 901 million), and sales was lower by 20.6 per cent to CHF 852 million (2014: CHF 1,073 million). Excluding restructuring costs, normalised EBITDA was CHF 128 million, or 16.1 per cent of sales. Including the restructuring costs, EBITDA stood at CHF 85 million in 2015, corresponding to a margin of 10.6 per cent (2014: CHF 217 million representing a margin of 20.3 per cent). Normalised EBIT in 2015 was CHF 110 million, or 13.8 per cent of sales (normalised EBIT in 2014: CHF 199 million, margin: 18.6 per cent). Including the restructuring costs, EBIT was CHF 67 million.

“In 2015, Manmade Fibers Segment saw a sharp industry downturn driven primarily by China. The segment initiated decisive operational and structural measures, which will support the lowering of its cost base substantially by the end of 2016. The measures led to restructuring costs of CHF 43 million in 2015,” stated Fedier. In 2015, the segment strengthened its technology portfolio with a new version of the Plant Operation Centre (POC), a complete software solution that manages the entire spinning and texturing production process. It also introduced RoTac3, the eco-friendly and energy-efficient component for yarn tangling, and EvoTape, which enables greater process stability in efficient tape extrusion for the production of carpets, agricultural textiles and geotextiles. New additions to the successful WINGS line of products (Winding INtegrated Godet Solution) included WINGS FDY PLUS that allows for a larger operation window and higher package weights. The Segment also reinforced its position in the polycondensation market through a joint venture with Huitong Chemical in China, creating a company that can offer comprehensive industrial solutions, from continuous polycondensation to finished end products in chemical-fibre spinning or PET bottle-grade material.

Drive Systems Segment

Four of the segment’s six key markets, namely mining, oil and gas, agriculture and construction, saw tough developments in 2015 triggered by plummeting oil and commodity prices and the slowdown in China. Decisive actions were taken to streamline its business, sharpen its focus on products, adjacent markets and customers that will drive future growth, and improve the efficiency of its operations. Reflecting these actions, restructuring costs of CHF 68 million were taken in 2015 and impairment charges of goodwill and fixed assets of CHF 476 million were recognised.

At constant exchange rates, order intake declined by 23.4 per cent to CHF 598 million (2014: CHF 781 million), and sales decreased by 13.8 per cent in 2015 to CHF 671 million (2014: CHF 779 million). Normalised EBITDA for 2015, without the restructuring effects, stood at CHF 49 million, or 7.5 per cent of sales (2014: CHF 82 million, margin of 10.5 per cent). Including restructuring costs, EBITDA was minus CHF 19 million, or minus 3.0 per cent of sales. Normalised EBIT, excluding the restructuring costs and impairment charges, was CHF 10 million, or 1.6 per cent of sales (2014 normalised EBIT: CHF 41 million, margin of 5.3 per cent). EBIT, including both the restructuring and impairment charges, was minus CHF 534 million.

“The acceleration of the weaknesses in the end markets of the Drive Systems Segment led to a non-cash goodwill impairment charge and the need to streamline its business in activities where the Segment enjoys strong technology and market positions, allowing for future value-creating options,” commented Fedier.

In 2015, the segment achieved a number of key developments. It introduced a new range of Torque Hub® drives for self-propelled agricultural sprayers and a new power transfer unit (PTU) for next-generation clutch transmissions in Mercedes AMG models. To improve manufacturing efficiency, new robotised cells were added at the plant in Rivoli, Italy and a new Mercedes assembly line was installed in the Luserna plant in Italy. In addition, the segment launched a joint research project with Surface Solutions Segment to develop new friction materials and pursue other synergies.

Dr Fischer is new Group CEO

The Board of Directors of Oerlikon today announced that it has named Dr Roland Fischer as CEO of the Oerlikon Group, effective March 1, 2016. In line with the new strategic direction to build a global powerhouse in surface solutions and advanced materials, Oerlikon is mandating an experienced senior industry expert with broad expertise in the company’s key industries and markets to execute the strategy. Dr Brice Koch will leave the company. Dr Fischer previously held various senior executive positions in the energy and the aviation and aerospace business, including seven years at Siemens AG and 18 years at MTU Aero Engines AG. Most recently, he was CEO of the Power and Gas Division at Siemens AG – a business that generated EUR 13 billion of sales in 2014. Dr Fischer holds a degree in Aeronautical Engineering from the University of Stuttgart, Germany and a PhD in Aeronautical Engineering from the University of Karlsruhe, Germany.

Oerlikon’s Chairman of the Board, Prof Dr Michael Süss, said: “Fischer brings in-depth expertise in engineering, operational leadership and a remarkable track record in building and growing businesses. His strong leadership skills and extensive experience in the aviation & aerospace and energy markets will be of great value to Oerlikon as we continue to implement our strategy. The BODs is convinced that Roland brings with him the needed competence and qualities to lead the company into this important next phase. I would like to thank Koch for his important contribution. He has led the Oerlikon Group through a phase of important transformations since joining in 2014. We sincerely thank Koch for his efforts and wish him all the best for the future.”

Dr Fischer said: “Oerlikon enjoys an excellent reputation in the industry, for its engineering, innovations and customer relationships. It has exceptional technologies, leading positions in key growth markets and a promising strategy.

I look forward to leading Oerlikon into a new era and to working in a fascinating and future-oriented business.”

Change in BODs of Oerlikon

As announced on March 1, 2016, the Board of Directors (BODs) proposes that Gerhard Pegam, Prof Dr Michael Süss and Hans Ziegler are to be re-elected as members of the BODs of the Oerlikon Group. In addition, the Board nominates Dr Jean Botti, David Metzger and Alexey V Moskov as candidates for the BODs of the Oerlikon Group. Dr Botti would be an independent Director on the BODs, while Metzger and Moskov would both represent the principal shareholder Renova. The election of the new board members and of board members standing for re-election will take place at the AGM on April 5, 2016. Dr Mary Gresens, Mikhail Lifshitz and Johan Van de Steen will not be standing for re-election at the AGM.

Dr Süss, Chairman of BODs of Oerlikon, said: “On behalf of the BODs, I would like to thank Dr Mary Gresens, Mikhail Lifshitz and Johan Van de Steen for their valuable contributions to the company and wish them all the best for the future. I am pleased to announce the new nominees to the Board. Dr Botti, Metzger and Moskov all bring with them extensive know-how and experience in their respective fields and will add further expertise to the Board.”

Dr Botti (1957, French citizen) was Airbus Group’s CTO since May 2006, and will be joining Royal Philips on April 1, 2016 as its Chief Innovation and Strategy Officer. Before Airbus, Dr Botti held diverse management positions from 1997 to 2006 with Delphi. Prior to Delphi, he was with General Motors and Renault in various management positions, mostly in the area of managing chassis engineering, components, drivelines and other automotive components. He holds 31 patents, and has two Master’s degrees: one in mechanical engineering from the Institute National des Sciences Appliquees of Toulouse, France, and the other in Science Administration from the Central Michigan University, USA, and a PhD in Mechanical Engineering from the Conservatoire des Arts et Metiers, Paris, France.

Metzger (1969, Swiss and French citizen) is MD – Investments, Renova Management AG, Zurich, Switzerland. Since 2011, he held various positions at Renova, initially as CFO of Venetos, and later as Deputy MD – Strategy and M&A. Prior to Renova, Metzger worked for Good Energies, where he was investment manager for four years and during which, he also served as CFO and Board Member of several ventures. Before Good Energies, he was Senior Manager at Bain & Company, focusing on strategy and private equity. Metzger holds a Master’s degree in business economics from the University of Zurich, Switzerland, and an MBA from INSEAD, Fontainebleau, France.

Moskov (1971, Cypriot and Russian citizen) is Chairman of the Executive Board, Renova Group. In 2004, he was appointed COO of Renova Management AG, Zurich, Switzerland. Prior to Renova, he served on BODs of NGK Slavneft.

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