REVIEW OF THE FISCAL YEAR SYSTEMS DIVISION

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Figures

in CHF mn 2016  2017  2018  Change 2017/2018
Order intake 280.6   319.8  428.0 33.8% 
Sales 367.2 384.4 375.4 –2.3%
Gross profit 36.5 27.2 30.5 12.1%
in % of sales 9.9% 7.1% 8.1%
Operating income (EBIT) –1.5 –9.0 –8.7
in % of sales –0.4% –2.3% –2.3%
Headcount as per end of fiscal year (full-time equivalents) 1’446 1’425 1’506 5.7%

Financial performance

All-time high order intake
Full-year order intake at the Systems Division reached an all-time high of CHF 428.0 mn, which represents a 33.8% increase year-on-year. This pleasing growth was largely driven by robust market demand, as well as by Burckhardt Compression’s leading position in all key applications in the petrochemical, refinery and maritime market segments. Divisional sales of CHF 375.4 mn were slightly lower (–2.3%) than in the previous year. The resulting gross profit was up by 12.1% year-on-year but still unsatisfactory at CHF 30.5 mn, which corresponds to a gross profit margin of 8.1% (previous year: 7.1%). Gross profit was diminished by additional costs related to the ramp-up of the LNGM business, while further progress was made in reducing other cost items. More action plans aimed at improving profitability were devised within the scope of the “Pulling Systems Together” program. The division’s full-year operating loss of CHF –8.7 mn was slightly less than in the previous fiscal year (CHF –9.0 mn).

Markets

Burckhardt Compression offers compressor system solutions for the following application areas:
– Upstream oil & gas
– Gas transport and storage
– Refinery
– Petrochemical/chemical industry
– Industrial gases
Burckhardt Compression performed well during the past fiscal year in the face of unrelenting competitive pressure. In China, for example, we won contracts to supply compressors for three LDPE production lines, which comes on the heels of several other large orders placed by Chinese customers in the previous fiscal year. This represents a renewed strengthening of the division’s already strong market position in this segment.

Order intake at the Systems Division topped the year-ago figure by 34% and set an all-time high.

Upstream oil & gas
Overdue investments in upstream production were observed during the year under review after several years of suppressed capex caused by low prices for oil and natural gas. This is the only application area targeted by Burckhardt Compression that is impacted by crude oil prices.

Gas transport and storage
The LNG (liquefied natural gas) market clearly gained momentum in 2018 after showing signs of a tepid recovery in the previous fiscal year. The number of new LNG tankers under construction showed pleasing growth and reflects increasing global demand for greener and more cost-effective sources of energy. Operators of both container and cruise ships must comply with increasingly strict environmental regulations; for example, sulfur dioxide and nitrogen oxide emissions will be capped at significantly lower levels beginning in 2020. Technology that enables different types of vessels to be equipped with environmentally cleaner propulsion systems will further develop in the market. Burckhardt Compression introduced more solutions in the year under review to address market demand and won its first order to equip a cruise ship with compressors. A framework agreement was also signed with an important Korean shipyard for large-scale LNG tankers, and Burckhardt Compression is proud to occupy a leading position in this attractive market. New orders for LNG terminals in China were another highlight of the fiscal year and will create significant growth opportunities in years to come.

Refinery
Business momentum in this segment remained positive during the period under review, buoyed by the double-digit growth of the underlying global market volume. Growth has been quality-driven as all classes of fossil fuels must now be virtually sulfur-free in all major world markets. Looking ahead, the two large markets of China and India are expected to generate further quantitative growth. These positive trends in the refinery market have also been driven by the long-term strategies being pursued in major countries to increase domestic value creation, thereby reducing their dependency on imported refinery products. Our compressor business is benefiting from these efforts. Burckhardt Compression received major orders for process gas compressors from customers in the Middle East and, for the first time ever, the US. We also note that Shenyang Yuanda Compressor claims a significant share of the refinery market in China.

Petrochemical and chemical industry
Business in this segment was pleasing. Burckhardt Compression’s Laby compressors for low-pressure PCI applications sold well, particularly in China, Southeast Asia, the Middle East and the USA. Orders to supply compressors for three LDPE production lines in China were received. Growing global demand for plastic products represents a long-term growth driver for the petrochemical and chemical industries. The petrochemical industry is adding production capacity at a fast clip due to the strong demand and government policies to increase domestic value creation.

Industrial gases
Given the vast range of applications for industrial gases, this segment also displayed good growth. We expect that the various targeted industries will grow at least in step with global GDP growth, if not slightly faster, so demand for compressors is likewise expected to increase. The very first order for our new diaphragm compressor designed for use in the promising market of hydrogen fuel production was the highlight of the year in this segment.

Sales/distribution

In the year under review, the sales organization for new compressor systems was decentralized. Responsibility for customer relationship management and project negotiations (front sales) was transferred to the respective regions and offices for preparing and processing technical proposals and quotes (application engineering) were set up in each region. This process of decentralization is nearing completion and is already providing a payback in terms of risk management and quality assurance. Furthermore, it has enabled the Systems Division to handle the higher order flows within the required timelines in close collaboration with its customers. The two geographic regions of Southeast Asia and Eastern Europe / Central Asia were established as autonomous sales regions for new compressor systems with the corresponding sales offices in Bangkok and Winterthur. This clear delegation of responsibility gives us a stronger regional presence.

An agreement was reached with our external agents in countries where we do not employ our own sales staff to work on a project-specific basis, which will make our collaboration with externals more efficient and effective.

Infrastructure

Planning for a new manufacturing site for Shenyang Yuanda in China began during the period under review. The new site is scheduled to be operational in the autumn of 2020 and will replace the company’s current site. This relocation project can be traced to a decision by Shenyang city officials to convert the company’s current manufacturing site, which has been completely engulfed by the rapidly growing city of Shenyang, to residential use. Shenyang Yuanda Compressor signed an agreement on the terms of its factory relocation with local government officials during the period under review. The consolidation of two separate sites at the new, larger site and the redesign of business processes in conformity with the latest standards and best practices will further improve Shenyang Yuanda’s operating efficiency.

Considerable infrastructure investments were also made at various other sites last year. In India, we concluded a project to expand production capacity for mid-scale process gas compressors. Our Global Support Center in the country was also expanded and, given the increase in order inflow, the headcount in Design & Manufacturing and Contracting was increased at every manufacturing site.

“Pulling Systems Together” for positive change

A sweeping process- and cost-optimization program was initiated in the Systems Division at the end of 2016 to improve its ability to respond to sudden fluctuations in order volumes and to bring about a significant and lasting improvement in its operational excellence over the medium term. Approximately 30 separate projects are being pursued in the “Pulling Systems Together” program and they affect every unit in the division, including its design, procurement, production workflow, project management, logistics and capacity management activities.

Considerable progress was made last year and most of the projects have been completed. Besides the aforementioned expansion of the Global Support Center in India and the decentralization of the divisional sales organization, the changes made in its procurement unit during the previous year yielded further significant cost savings.

Outlook

The Systems Division expects a stable market environment in fiscal year 2019. All of its targeted application areas should benefit from this. The strong growth witnessed in the maritime business during the past fiscal year should continue in the current year. Further growth is expected in the petrochemical market given the growing consumption of plastics in China and across Southeast Asia. Demand for compressors is also expected to continue growing in the refinery segment, primarily fueled by demand for cleaner fossil fuels. In the industrial gases segment, a steady increase in overall demand is expected thanks to the wide range of consuming industries, many of which have historically grown in line with the general economy.

Our marine business should continue to grow in 2019.

The top priority of the Systems Division in the current year remains unchanged: achieving a significant improvement in its profitability while maintaining its global market leadership. Under the current Mid-Range Plan for 2018 to 2022, sales are targeted to reach CHF 340 mn in fiscal year 2022 with an EBIT margin of 0% to 5%. This sales figure has already been realized in the year under review and will further rise in 2019. The measures that have been implemented to improve every process step, including the procurement activities, have already improved the divisional profitability but the operating loss for the year was still clearly unsatisfactory. This is attributed to additional costs that were incurred to expand our presence in the LNGM business.

Figures

Order intake

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Sales

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Gross profit

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Operating income (EBIT)

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Before fiscal year 2015, no EBIT was reported at divisional level.