SHW AG reports operating profit still within target range despite lower sales forecast
July 26, 2016
Germany’s SHW AG has published its preliminary figures for the first six months of the fiscal year 2016. In the period from January to June 2016, SHW AG reported Group sales of EUR 215.3 million (previous year EUR 240.1 million). As well as the expected decline in sales in the Pumps and Engine Components business segment, sales in the Brake Discs business segment were depressed by weaker unit sales and lower scrap prices on account of reduced material surcharges, among other factors.
“We made significant progress in implementing our ‘SHW 2020’ strategy in the first half of 2016,” stated Dr Frank Boshoff, Chief Executive Officer of SHW. “We further improved our production and business processes in the Pumps and Engine Components business segment and therefore also improved our margins. However, to reflect the reticence of individual customers, we are adjusting our sales forecast for 2016 and 2017. Nevertheless, our confidence that we will return to profitable growth from 2018 onwards following these two years of consolidation strengthened. We have landed a number of major new orders both for engine oil and transmission oil pumps over the past few months. The successful development of product applications for battery-powered electric vehicles also opens up new market potential for us. This is especially true for our electric pump for cooling and lubricating. As such, we believe that we are well on the way to achieving our sales target of EUR 630 million to EUR 660 million as well as an EBITDA margin of at least 12% in 2020.”
Adjusted consolidated earnings before interest, taxes, depreciation and amortisation (adjusted EBITDA) amounted to EUR 21.8 million (previous year EUR 23.0 million). At 10.1%, the corresponding operating margin was up significantly on the prior-year figure of 9.6%.
Over the last few years, to help safeguard the future, SHW AG has invested in capacity and productivity-boosting production facilities and the establishment and expansion of international plants in North America, South America and China. As a result, depreciation increased by 15% to EUR 12.2 million. Net income for the period declined by 32% to EUR 6.5 million due to higher depreciation and the absence of one-off income (previous year EUR 9.6 million). Earnings per share came to EUR 1.02 (previous year EUR 1.53).
Higher profitability in the Pumps and Engine Components business segment
The Pumps and Engine Components business segment reported sales of EUR 170.6 million in the first six months of 2016 (previous year EUR 190.8 million). Sales in the Passenger Car division declined from EUR 159.5 million to EUR 141.8 million. The decline in sales is due in particular to the termination of a contract for camshaft phasers for diesel vehicles as part of a customer’s changeover to the urea injection system (SCR technology). The Industry segment contributed EUR 14.6 million to sales (previous year EUR 15.2 million). The Powder Metallurgy segment closed the first half of 2016 with consolidated sales of EUR 14.2 million (previous year EUR 16.1 million).
Despite the decline in sales, the Pumps and Engine Components business segment recorded improved adjusted EBITDA of EUR 18.8 million in the period under review (previous year EUR 18.2 million). The corresponding EBITDA margin increased from 9.6% to 11.0%.
The improvement in margins was mainly attributable to the successful implementation of the efficiency programmes in Powder Metallurgy at the Company’s Aalen-Wasseralfingen plant and the resulting effects on earnings in pump assembly in Bad Schussenried. “We must and will now further optimise our business processes to successively increase the earnings margin,” stated Boshoff.
The business of the foreign subsidiaries in Canada and China developed as planned in the first half of the year. The operating segment earnings were negatively impacted by the costs for the establishment and expansion of these two foreign plants, as well as to the weak Brazilian automobile market.
Capacity underutilisation partially offset by ramp-up of composite brake discs
In the Brake Discs business segment, sales declined by 9.5% to EUR 44.7 million in the first six months of the fiscal year 2016. The decrease in sales was mainly accounted for in the first quarter. In addition to the effects of lower material surcharges, this is attributable to the significant decline in sales of one-piece brake disks. This contrasts with strong growth in sales of composite brake discs.
The lower capacity utilisation was partially offset by the disciplined implementation of productivity-boosting measures and the ramp-up of composite brake discs. Adjusted EBITDA in the Brake Discs business segment therefore declined by EUR 1.3 million to EUR 3.8 million in the period under review. The corresponding EBITDA margin decreased from 10.3% to 8.4%, although the operating margin again reached 9.0% in the second quarter.
New orders in China and South America
New business developed very positively in the first half of the year. SHW secured three new contracts for transmission and engine applications in China and one in Brazil. Production is scheduled for 2018 in all cases. SHW has a broad-based customer portfolio in China – as well as Chinese and North American OEMs, customer relationships have been established with European automobile manufacturers and international joint ventures. Based on the contracts secured, SHW expects to generate annual sales in excess of EUR 100 million in China for 2020.
Product range expanded with applications for electric vehicles
SHW AG expanded its product portfolio over the past few months with solutions for battery-powered electric vehicles. The move largely reflects the increasing variety of powertrain concepts and lays the foundation for entry in the market for purely electric vehicles. The product portfolio therefore includes engine oil pumps for combustion engines as well as primary and secondary transmission oil pumps for automatic transmissions (e.g. double-stroke vane pumps, electric secondary oil pumps and electric power pack transmission oil pumps) and lubricant and cooling oil pumps for battery-powered electric vehicles.
Sales forecast for 2016 adjusted – operating profit for the year still within target range
To reflect the reticence currently shown by individual customers SHW is adjusting its sales forecast for 2016 and 2017 by around EUR 30 million each. The Company now expects Group sales of between EUR 410 million and EUR 430 million for 2016 and 2017 (previously EUR 440 million to EUR 460 million each). It is forecasting sales for 2016 of between EUR 320 million and EUR 340 million in the Pumps and Engine Components business segment (previously EUR 340 million to EUR 360 million) and sales of around EUR 90 million in the Brake Discs business segment (previous year EUR 98 million), taking into account the lower material surcharges.
Despite the reduced sales forecast, the Company continues to expect a year-on-year improvement in the operating profit margin and adjusted EBITDA at the lower end of the EUR 43 million to EUR 47 million range in 2016. In particular, this reflects the positive effects of the implementation of the efficiency-boosting measures to improve business processes in both business segments.
“Our half-yearly figures show that we are on the right path,” added Boshoff. “We are now much more efficient. And the new orders in China and Brazil are further proof that SHW offers the right product solutions for all powertrain concepts. We will stay on course and return to profitable growth in 2018.”
