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Letter from the CEO

Dear Shareholders

2017 was a year of significant progress and profitable growth for Oerlikon, in which all our Segments contributed to our strong performance. Our strategy execution gained solid traction as world economies and most of our end markets strengthened with expanding global trade and growing confidence, which led to more investments in capital goods, machinery and services. The increase in demand for our technology resulted in a substantial increase in our 2017 orders and sales.

In 2017, Oerlikon’s orders increased by 24.5 % to CHF 3.0 billion (FY2016: CHF 2 413 million), while Group sales improved by 22.1 % to CHF 2 847 million (FY2016: CHF 2 331 million). At constant exchange rates, Group sales in 2017 was CHF 2 829 million. Group EBITDA was higher at CHF 415 million, corresponding to an improved operating profitability margin of 14.6 %, even taking into account and absorbing our significant investments for the ramp-up of our additive manufacturing (AM) business.

The net income for 2017 amounted to CHF 152 million and earnings per share was CHF 0.44. Compared to 2016, where the net income was positively impacted by the divestment of the Vacuum Segment and stood at CHF 388 million, the net result was around 60 % lower. Excluding the divestment, the 2017 result from continuing operations improved by 78.0 % year-on-year to CHF 146 million. With an equity ratio of 45 %, the Group’s financial position remained strong in 2017. The net cash position at the end of the year amounted to CHF 499 million and cash flow from operating activities before changes in net current assets was CHF 405 million. The Group’s return on capital employed (ROCE) was at 8.2 %. In December 2017, we exercised the optional one-year extension of our five-year unsecured syndicated credit facility of CHF 600 million. In doing so, we maintain a strong financial base to further invest in our core strategic businesses and new technologies, such as AM, and to support our future growth.

Strengthening technology leadership

In 2017, we continued to invest in our growth. Two key areas of focus in that respect are innovation and R&D. We further strengthened our technology leadership through targeted acquisitions that enhanced our portfolio in the field of advanced materials, surface technologies and materials processing. By acquiring Scoperta and Primateria, as well as the assets of Recentis Advanced Materials, DiaPac and Diamond Recovery Services (DRS), we gained strong complementary expertise for materials software development, materials manufacturing and processing, application and recovery/recycling. Additionally, we benefited from an expansion of market access in the oil & gas, metal matrix composites and US powdered metals industries. The acquisition of Scoperta, for instance, gives us the ability to develop materials in a fraction of the time as compared to conventional methods. DiaPac provides us with high performing metal powders, wear-resistant surface coatings and cemented carbides for use in oil & gas, mining, construction, agricultural and manufacturing operations. DRS adds hard materials and environmentally complementary recovery services that are applied across a broad spectrum of applications.

Finally, Recentis Advanced Materials from Canada en ables us to manufacture materials at high temperatures and purity, opening up new applications in key markets such as oil & gas, mining, steel, power generation and aviation. The acquired companies and technologies provide us with important know-how to more effectively address needs from customers and in promising markets.

The continuous efforts to develop our technologies have resulted in a leading metal- and ceramic-based materials portfolio, as well as a highly comprehensive portfolio of surface technologies. In 2017, we filed 91 patents and invested 4 % of our total sales in R&D. With Dr. Helmut Rudigier joining the Executive Committee as Group Chief Technology Officer (CTO), we ensure that innovation and R&D remain of highest importance in the future development of the company.

Continued growth in surface solutions

The Surface Solutions Segment continued to be the main revenue and income generator for the Group, and delivered strong results in 2017. The double-digit top-line growth and an EBITDA margin of 20.0 % was attributed to both organic growth in strong end markets, such as automotive, aerospace, general industries and tooling, and targeted acquisitions that strengthened our competitiveness. In addition, we expanded our partnership network. The main focus here was on building up a powerful AM network that closely collaborates in order to advance the industrialization of AM. Partners who joined forces with Oerlikon in 2017 included the Technical University of Munich in Germany and the Skolkovo Institute of Science and Technology in Russia. Additionally, a five-year collaboration agreement was signed with GE Additive, whereby GE will provide additive machines and services to Oerlikon, while Oerlikon becomes a preferred AM component manufacturer and materials supplier to GE Additive and its affiliated companies. Furthermore, GE and Oerlikon agreed to collaborate on research and development of additive machines and materials. To discuss and interact with leading experts in AM, Oerlikon hosted the 1st Munich Technology Conference on AM, where over 600 participants and more than 30 top speakers from industry, academia and governments came together to discuss key trends and developments in AM and its industrialization.

Our leading global service network is built on customer proximity, and we are continuously expanding our presence in core markets and industries. In 2017, we started constructing the new materials manufacturing facility in Plymouth Township, Michigan, USA, dedicated to producing advanced materials for additive manufacturing and high-end surface coatings.

In addition, we are building an R&D and production facility for AM components in Charlotte, North Carolina, USA, and an automotive and tooling competence center in Nagoya, Japan, for a new automotive customer and to provide the latest surface solutions to the Japanese automotive industry. Other site additions in 2017 included the opening of the Technology & Innovation Center for AM in Munich, Germany, an in-house coating center at IMCO Carbide Tool’s facility in Perrysburg, Ohio, USA, and a customer center in Malaysia. The Pune India plant was also expanded and upgraded to offer the latest generation of tool coating technology.

In 2017, we also launched promising new technologies and products. The Surface Solutions Segment introduced, among others, BALIQ™ UNIQUE to provide color-coding functions for the tooling market, and BALIFOR™, the smart solution for high-performance automotive applications, as well as new coating solutions for heating devices and brake disks for electric cars. For the aerospace market, BALINIT® Turbine Pro, a coating to provide a high degree of hardness and tenacity against abrasive wear and erosion even under high thermal conditions (e.g. in aircraft turbines) was also brought to the market. In addition, Surface ONE™, Oerlikon’s latest, industry 4.0 and IIoT-ready (industrial internet of things) thermal spray coating system was launched. With Surface ONE, customers can significantly boost process efficiency and productivity thanks to the machine’s improved usability, standardized design, compact and mobile construction, and excellent safety features

Substantial increase in top-line in manmade fibers

The Manmade Fibers Segment saw substantial recovery in sales and orders in 2017 and improved the EBITDA margin. The topline improvement was largely driven by the strong recovery in the China-led filament equipment market, but also supported by increased business in staple fibers, texturing (DTY) and bulked continuous filaments systems (BCF – carpet yarn). The Segment’s improvement in operating profitability has come about as a result of its strong sales development, as well as its initiatives to improve flexibility, the quality of work, processes and customer projects, while maintaining strict cost discipline. The improvement in operating profitability was achieved despite the increased costs from ramping up production, capacities and investments in a turnaround year.

In 2017, the Segment secured a large order for building a filament spinning plant for special yarns, including polycondensation equipment technology.

We also opened a service center in India to better serve local customers’ needs, and a branch in Neumünster, Germany, focused on developing the nonwovens business globally. Building for the future, the Segment entered into a strategic partnership in 2017 with the Italian company Teknoweb Materials, in order to extend our nonwovens production systems portfolio into the attractive high-growth market for disposable nonwovens.

Improved top-line and double-digit EBITDA margin

The Drive Systems Segment successfully turned its business around in 2017 thanks to its repositioning efforts. It achieved a noteworthy and substantial increase in orders and sales, and improved its operating profitability to a double-digit EBITDA margin for the year. The results are supported by the gradual recovery in most of the Segment’s end markets. The Segment was able to gain new customers and projects in agriculture, its most important market, with new wins in Brazil and India.

Demand for our technologies also increased in construction and in transportation. In the China public transportation sector in particular, the Segment managed to gain market share and is becoming a market leader for low-floor city-bus axles in China. In automotive, the Segment introduced new technologies to reinforce its position in e-drives, such as its modular dedicated hybrid transmission systems. The Segment won in 2017 key automotive e-drive projects and is partnering with leading automotive brands in Asia on electric drive projects for passenger cars.

Deliver further profitable growth

Looking ahead, we expect the positive momentum in global economies and end markets to continue in 2018, while recognizing that certain risks remain, including political changes in the EU, uncertainty about US interests and politics, and questions about economic growth in Asia. Even so, the macroeconomic outlook is generally favorable. As our strategic initiatives bear fruit, resulting in profitable growth and allowing us to capture new opportunities for our business, we are convinced that we can build on this successful development to deliver further profitable growth in 2018. We expect order intake in 2018 to increase up to CHF 3.4 billion, sales to be around CHF 3.2 billion, and EBITDA margin, after investments, to improve to around 15 % .

In 2018, we will continue to take further steps in executing our strategic focus areas. We will work at extending our market leadership based on our unique competencies, strengthening our presence in attractive end markets and industries, pursuing technological leadership and innovation, and achieving business and operational excellence.

This will help us to strengthen the value we provide to customers and drive profitable growth.

In closing, I would like to personally thank each of our employees for their ongoing dedication and efforts; our customers for the trust they place in us to deliver value-added technologies and services, and also to thank you, our shareholders, for your continued support of Oerlikon.

March 6, 2018

Best regards
Dr. Roland Fischer
Chief Executive Officer