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Chairman and CEO Letter

Chairman and CEO Letter

Dear Shareholders

2019 was a challenging year for Oerlikon and many of the industries we serve. Nevertheless, we were able to deliver a good overall performance in the challenging market environment. Our results confirm that we have the right strategy and business model.

Since we assumed leadership of the company some five years ago, we have successfully transformed Oerlikon from an industrial conglomerate with diverse businesses to a focused company holding leading positions in key markets and applications. We have also strengthened our business fundamentals and capabilities – from investing in R&D and innovation, so as to develop cutting-edge technologies for customers, to strengthening governance, increasing efficiency and building effective processes. Today, we have a strong business and financial foundation and an excellent team of employees to support Oerlikon’s growth in the medium and long term – making Oerlikon an attractive company and a good long-term investment.

2019 was the year in which we
completed the strategic transformation
of our portfolio to two
key businesses.

Prof. Dr. Michael Süss
Chairman of the Board of Directors

We are of the opinion that shareholders should share in our successes. In 2018, our dividend payout was increased to CHF 0.35 per share. In 2019, we matched that dividend and added an extraordinary dividend payout of CHF 0.65 per share, which stemmed from proceeds from the sale of the drive systems business. This year, the Board of Directors is proposing again a dividend payout of CHF 1.00, comprising an ordinary dividend of CHF 0.35 per share and an extraordinary dividend of CHF 0.65 per share. As we expand Oerlikon’s position as a leading powerhouse in surface solutions and advanced materials, we will continue to grow Oerlikon organically and through targeted acquisitions. We will acquire only at the right price, at the right time and for the right value. In the absence of attractive opportunities, we view our dividend payout as an efficient use of our current cash and capital. This will not impact our future ability to acquire companies that add value to our portfolio and strengthen our market position.

2019 Financial Performance

We delivered a robust performance in 2019 in a challenging market environment. Customers took a more cautious stance toward investment, impacting orders. Group order intake amounted to CHF 2.6 billion, a decrease of 5.2% over 2018 (2018: CHF 2.7 billion). Group sales of CHF 2.6 billion were at around the same level as in the prior year, which was a record year for us (2018: CHF 2.6 billion). Organically, we slightly improved sales. Group EBITDA was lower at CHF 366 million, corresponding to a margin of 14.1% (2018 EBITDA margin: 15.6%). This is attributed to higher operating expenses related to investments in our businesses and to exceptional expenses of CHF 25 million related to restructuring. Excluding these exceptional items, the EBITDA margin was at 15.1%. Compared to 2018, results from continuing operations were lower by 36.4% at CHF 110 million (2018: CHF 173 million). Net result for 2019 decreased by 126.9% to CHF -66 million (2018: CHF 245 million), due to the reclassification of CHF 284 million related to the sale of the drive systems business. Consequently, earnings per share were CHF -0.21. With an equity ratio of 48%, the Group’s financial position remained strong in 2019. The Group’s return on capital employed (ROCE) was 7.0%. Our net cash position at the end of the year amounted to CHF 333 million.

Continued Strong Strategy Execution

In 2019, we completed the divestiture of our drive systems business to Dana Inc. Additions to our portfolio included the acquisition of TeroLab Surface GmbH in Germany, AMT AG in Switzerland and D-Coat GmbH in Germany, all three to strengthen our surface solution offerings. TeroLab expands our portfolio of thermal spray coating services for industries such as agriculture, steel, automotive and machine OEMs. AMT extends our product and service offerings for thermal spray applications and turnkey solutions, while D-Coat widens our thin-film coating portfolio, particularly for cutting tools used in the aerospace and automotive industries.

Serving Customers Locally

Serving our customers in close proximity to their operations is an integral component of our surface solutions business. Oerlikon now has 182 sites in 37 countries. In 2019, we established a number of new centers in various regions to assist customers in finding the desired technological solutions. In Europe, we opened a center in Sweden to shorten delivery times and help our customers reduce their carbon footprint. In the USA, two new customer centers were opened – one in St. Louis, Missouri, where we provide services for cutting and forming tools to customers in the aerospace, automotive and general industries, and a production and development facility in Huntersville, North Carolina, near Charlotte, for our additive manufacturing business. In Mexico, we opened a center to serve OEMs and tier-one suppliers from the automotive industry and mold makers in the metal forming and plastics processing industries. In Asia, a technology center in Shanghai was inaugurated to provide additive manufacturing services.

It Takes Collaboration to Succeed

Success in advancing technology requires partnerships. We actively pursue them in R&D because we believe that combining our strengths will bring results that would otherwise be unobtainable. In 2019, we entered into a partnership with Safran, the French National Centre for Scientific Research, and the University of Limoges, to create a joint research laboratory, PROTHEIS, and a technology platform, SAFIR, in Limoges. The focus is on developing enhanced surface treatment solutions for aerospace applications – in particular, to make lighter and longer-lasting REACH-compliant products that are capable of reducing noise and nitrogen oxide emissions.

Given the challenging market
environment, we did well in sustaining
our 2019 performance at
around the same level as in 2018.

Dr. Roland Fischer Chief
Executive Officer

We are also cooperating with the Fraunhofer Institute in Munich to significantly shorten the development time for designs of automotive sensors. Together with the University of California in San Diego, USA, we are working on R&D projects to use big data, machine learning and artificial intelligence for advanced material development.

Partnerships are critical to the success of additive manufacturing. Together with the Technical University of Munich, GE Additive and Linde, we have created an additive manufacturing cluster in Bavaria, Germany. The initiative aims to accelerate the broader use of additive manufacturing in industries through R&D initiatives. With MT Aerospace, we are working on accelerating the use of additive parts in the aerospace and defense industries. We are also working with United Launch Alliance to manufacture a number of flight components and with Siemens to use their digital enterprise solutions to help accelerate the industrialization of additive manufacturing.

Innovating to Maintain Our Technology Leadership

In the highly competitive global environment in which we operate, we are constantly developing new and better technologies and services to meet customers’ needs. Some of these are jointly developed with customers.

In 2019, we invested 4.9% of our revenue (CHF 127 million) in R&D and filed 100 new patents. We launched a new BALIMED portfolio of coatings for medical and surgical tools and equipment to provide low-friction, wear resistance, anti-glare and biocompatibility. BALIQ AUROS was developed to provide extreme wear resistance for threading tools. BALIQ CARBOS was added to the portfolio for high-performance vehicles, where coatings need to withstand extreme contact pressures and fast sliding velocities. We also further developed our RotaPlasma system for SUMEBore, enabling it to handle the large-scale serial production of cylinder bores used in auto engines, which led to us securing a deal with a major German automobile manufacturer.

Our Manmade Fibers Segment introduced four innovative industrial designs in 2019, some combined with digital solutions. For instance, the eAFK Evo texturing system offers significantly higher production speeds, greater productivity and consistently high product quality, along with lower energy consumption and simpler operation. Also making its debut was our BCF S8 Tricolor system that allows the production of more than 200 000 different color shades, superior spinning speed, 99% system efficiency and potential energy savings of up to 5%.

As part of our investments in our structural growth, we are establishing competence centers to concentrate knowledge and expertise in certain industries or processes. We have established a CVD (chemical vapor deposition) center in Schopfheim, Germany, and are currently building a new competence center in Bisingen, Germany, for our ePD technology: an environmentally sustainable coating applied to high-end plastics to give them a chrome-like appearance and special functions. Similarly, we are establishing an oil & gas industry competence center in Houston, Texas, USA, which takes advantage of capabilities obtained in earlier acquisitions. We expect these centers to allow us to pursue advances in technologies while providing superior services to our customers.

Growth in our additive manufacturing business has been slower than expected as the adoption of new technologies requires time. At this point in time, the business is developing less dynamically than expected and we have underutilized capacity, which is impacting the top line and EBITDA margin of our surface solutions business. We are making structural adjustments in the business to adapt to this reality. This technology is the third pillar of our business growth – the other two being our core surface solutions and manmade fibers business. We believe additive manufacturing will play a key role in the next generation of industrial applications. Additive manufacturing has the potential to change manufacturing as we know it, and we are uniquely positioned to provide additive capabilities to industries due to our extensive knowledge of materials and our post-processing expertise.

Leveraging the Power of Digitalization

Digitalization is key to Oerlikon’s success, and we continue to pursue and launch digitalization and artificial intelligence initiatives. In 2019, we opened the Oerlikon Digital Hub in Munich, Germany, to accelerate the company’s digital transformation. This hub is the focal point of our digital projects and initiatives. A group of talented and creative employees are dedicated to evaluating, analyzing and providing project management and implementation expertise to our teams worldwide.

Our digital solutions serve not only to increase productivity and efficiency in our internal processes, but also to improve our service and technologies provided to customers. For instance, in 2019, we launched an online platform, myBalzers, to enable customers to easily track orders on a real-time basis. Our manmade fibers team, which has established itself as a leader in smart factory solutions, continued to intensively develop digital solutions, including in the area of IT infrastructure for large-scale plants, and successfully installed its first solutions, such as data center in a box, in the market.

Investing in Our People

Behind all of our products is a vast amount of expertise. As a company that prides itself on its technological leadership, we are acutely aware of the importance of the people behind that technology. We are proud of the balance we have achieved in our workforce. We have more than 1 500 people who have worked more than 20 years at Oerlikon, bringing with them vast troves of experience and expertise. We also have a large contingent of employees who are at the beginning of their careers and who relate to technology in a completely different way than the previous generation. We see value in a diverse workforce, not only because it reflects the world we live in, but because we believe that teams that are diverse in experience, age, gender, culture, race and religion perform at a higher level.

Technology and digitalization served as the foundation for several HR initiatives in 2019. We used technology to successfully recruit some 1 300 new employees, and we have encouraged our employees to use social media and other communication technologies to strengthen collaboration, build our brand and connect with each other.

In 2019, the first class in our global leadership program graduated. This 18-month program was designed to identify high-potential employees and offer them advanced leadership training and the opportunity to network, build skills and expand their knowledge of Oerlikon. This is a critical investment in the long-term future of our company.

We had two major changes in senior management at Oerlikon in 2019. In October, Philipp Müller joined our senior management team and assumed the role of Chief Financial Officer on January 1, 2020, upon the retirement of long-time CFO Jürg Fedier. We sincerely thank Jürg for his significant and valuable contributions over the past 11 years. Philipp brings more than 15 years of experience in our industry and is a strategic leader and valuable addition to the senior management team. Additionally, shareholders voted at the Annual General Meeting of Shareholders in April to expand the size of the Oerlikon Board of Directors by one to seven members, four of whom are not affiliated to the major shareholder. Dr. Suzanne Thoma and Paul Adams were elected as new independent Board members.

Share Buyback Initiated in 2019

To increase the efficiency of our capital, the Board has initiated a share buyback program. Over a period of up to 36 months, we expect to repurchase shares on the open market amounting to a maximum of 10% of our share capital. Based on the closing share price on November 4, 2019, we expect to spend CHF 350 million on the buyback program, which began on November 7, 2019. We intend to use the repurchased securities to finance potential inorganic growth and to fund our global, longterm employee incentive program.

We see a bright future for Oerlikon. Our strategy is strong, and we remain committed to investing and growing our surface solutions business, including our additive manufacturing solutions, while supporting the continued robust performance of our manmade fibers business. We have strong leadership, a highly experienced global team, high-performing products and technologies, a healthy balance sheet and an in-depth understanding of customer needs. It is precisely because of these strengths that we are able to weather the inevitable ups and downs of the markets.

The geopolitical and market challenges are expected to persist and it is too early to assess the potential impacts of the coronavirus outbreak on the global economy and markets. To further strengthen Oerlikon for the future, we initiated a first productivity program in 2019 and are working on a second phase of the productivity program. The goals are to expand market reach, improve capital, operational and administrative efficiency and boost profitability in the medium term. Assuming no further adverse market or currency developments, we expect order intake and sales in 2020 to be between CHF 2.5 billion and CHF 2.6 billion and EBITDA margin before exceptional items to improve to 15.0% to 15.5%. We are expecting to invest additional CHF 25 million to CHF 35 million in the productivity program over the next 18 months. Our 2020 EBITDA margin including these expenses is expected to be between 14.0% and 14.5%. The program is expected to significantly improve the operating profitability of the surface solutions business and drive the Group’s EBITDA margin toward 16% to 18% in the medium term.

We want to personally thank our employees, our management team and our colleagues on the Board of Directors for their hard work and commitment. We are grateful to our partners and our customers for the trust they place in us. And we are thankful for the unwavering support and continued confidence of our shareholders. We cannot absolutely know what the new decade will bring, but we know what our business offers, and we look forward to continuing to deliver the best value to all our stakeholders.

March 3, 2020

Best regards

Prof. Dr. Michael Süss
Chairman of the Board of Directors

Dr. Roland Fischer
Chief Executive Officer