Rieter

A leading global supplier for textile machinery and components used in short-staple fiber spinning

A leading global supplier for textile machinery and components used in short-staple fiber spinning

The global provider of components for all spinning processes

Yarns that follow fashion

Rieter offers attractive positions around the world

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08/13/2008 - Negative market cycle affects both divisions

The Rieter Group reported a considerably weaker trend of business in the first half of 2008 than in the very strong equivalent period of the previous year. The pronounced slowdown in the Asian textile machinery markets, the decline in vehicle production in North America and the massive increases in the cost of raw materials, energy and transportation had a negative impact on orders received, sales and profits in the first six months. Rieter could not escape the effects of the cyclical downturn in the textile machinery and automotive markets, which is expected to affect the global economy in general. However, Rieter was able to maintain its strong market position by virtue of its strong brand, good products, global presence and committed workforce.

 Semi-Annual Report 2008 (English/PDF/2.3 MB)

Mainly as a consequence of the steep decline in demand at the Textile Systems Division, orders received by the group were 32 % lower at 1559.3 million CHF. Sales of 1806.6 million CHF were 6 % lower than in the first half of 2007 (3 % lower on a currency-adjusted basis). The weaker trend of business in the second half of 2007 and the slump in demand in the first half of 2008 resulted in lower sales at Textile Systems. Automotive Systems posted a substantial decline in sales, due also to currency effects, primarily in North America.

The operating result before special charges amounted to 88.9 million CHF, equivalent to 5.1 % of corporate output (7.4 % in 2007). The operating result before interest and taxes (EBIT) amounted to 68.9 million CHF (135.8 million CHF in 2007). This corresponds to 4.0 % of corporate output (7.2 % in 2007). The decline in profits is due mainly to higher raw material and energy costs and a less favorable product mix, but also to lower sales and upfront expenses to establish and expand facilities in rapidly growing markets in Eastern Europe and Asia. The cost of restructuring programs already initiated was also considerably higher compared with the previous year. Net profit amounted to 40.8 million CHF, equivalent to 2.3 % of corporate output (6.1 % in 2007). In addition to the lower operating result and a decline in the net financial result, a higher tax rate also had an impact on net profit. Earnings per share were 8.89 CHF, compared with 26.40 CHF in the first half of 2007. Cash flow declined from the previous year’s very good level to 114.5 million CHF. The equity ratio on June 30, 2008, was a sound 46.0 % (51.5 % on June 30, 2007). Net liquidity amounted to 25.8 million CHF (143.8 million CHF on June 30, 2007). This was the result of lower cash flow, the dividend payment to shareholders of Rieter Holding Ltd. and not least the share repurchase program.

Investments in fixed assets increased compared with the same period of the previous year, since the establishment and expansion of facilities in Eastern Europe and Asia was continued. However, investments in high-cost countries were curtailed. The Rieter Group’s workforce totaled 15 316 on June 30, 2008 (excluding temporary personnel); the equivalent figure on June 30, 2007, was 15 062. This increase is due solely to the Automotive Division, where some 400 employees were added in low-cost countries, while personnel numbers in high-cost countries were reduced by some 200. At the Textile Division 600 temporary positions have already been eliminated compared with the previous year in response to the decline in volume.

Rieter Textile Systems: Massive decline in orders received
On the global textile machinery market, which had already been weakening since the final quarter of 2007, demand for staple fiber machinery has declined steeply, especially since March 2008. Due to the subdued business outlook, customers in Rieter’s main markets, especially Asian spinning mills, have drastically reduced or postponed capital investment. The main reasons for this are the high raw material prices and full yarn inventories, a more restrictive investment policy in China, the fading attractions of investment promotion programs in other major markets as well as higher energy costs and unfavorable exchange rates for the spinning mills. Pronounced demand cycles are typical of the textile machinery market, but the current downturn is more severe than in previous cycles, even taking industry-specific aspects into account.

Orders totaling 417.3 million CHF received by Rieter Textile Systems in the first half of 2008 were 61 % lower compared with the record figure for new orders in the same period of the previous year. Staple fiber machinery is mainly affected by this downturn. The Textile Systems Division nevertheless succeeded in maintaining its overall market share in a challenging business environment. Sales by Textile Systems were 6 % lower at 664.7 million CHF (706.2 million CHF in 2007). The decline in volumes was somewhat greater than expected, as customers postponed acceptance of products on order due to the more difficult economic situation. Textile Systems posted an operating result of 55.4 million CHF in the first six months (93.7 million CHF in 2007). This figure included a gain of 2.6 million CHF on the divestment of the pelletizing machinery business. The operating margin was therefore 8.8 % (13.0 % in 2007). In addition to the lower level of capacity utilization as a result of the decline in sales, this reduction is largely due to the less favorable product mix. The steep price rises for raw materials (steel, sheet metal, castings) and increases in the cost of transportation and energy also adversely affected the result by some 15 million CHF.

Rieter Textile Systems already initiated a number of moves in the first six months in order to reduce the negative impact on profits of the decline in volume: termination of temporary employment contracts, a halt to recruitment, reduced overtime, early retirement and short-time working at various sites. Product prices are being increased in order to offset the steep price rises for raw materials, transportation and energy. Rieter will utilize the experience gained in previous downturns to cope successfully with the economic and inflation-related challenges. Despite the cyclical downswing in the market, Rieter is convinced that the Asian textile machinery markets offer great opportunities. The expansion of manufacturing facilities in India and China is therefore being continued, although at a slower pace in line with current market trends.

Rieter Automotive Systems: Difficult business environment prevents improvement in earnings
In the first half of 2008 global automobile output rose by 3 % to 37.0 million vehicles, albeit with pronounced regional variations. The emerging markets in China, Eastern Europe and South America recorded double-digit growth rates. Automobile production stagnated in the mature markets of Western Europe and Japan, while declining steeply in North America (-12 %). Rieter Automotive posted sales slightly below the previous year’s level in local currencies in the first six months; expressed in Swiss francs the figure declined by 6 % to 1 141.9 million CHF (1213.9 million CHF in 2007). Rieter reported higher sales in the commercial vehicle sector in Europe, but sales for passenger cars were flat. In North America, Automotive Systems was unable to escape the effects of the adverse market environment despite being strongly placed with the Japanese manufacturers. In the meantime these are also being affected by the downswing, although to a lesser extent than the “Detroit Three”. Rieter Automotive recorded strong growth in the emerging economies. The Automotive Systems Division maintained its overall position in this difficult market environment.

In the first half of 2008 Rieter Automotive Systems posted an operating result before special charges of 38.6 million CHF (52.1 million CHF in 2007). This corresponds to an operating margin of 3.5 % (4.4 % in 2007). Although the division is on course with the implementation of operational improvement programs in Europe and North America, the operating result did not come up to expectations. Automotive Systems had to contend primarily with massive increases in energy and material costs, which have been passed on to customers only to a limited extent to date. In terms of material costs, savings have been achieved in consumption, but higher input prices, especially for oil- and metal-based products, which in combination with the high energy costs resulted in cost increases of more than 30 million CHF, eliminated the success of these efforts. Special charges of 20 million CHF were incurred in the period under review, mainly in the context of capacity adjustments and cost-cutting action at locations in Western Europe and North America. The operating result before interest and taxes (EBIT) amounted to 18.6 million CHF (47.3 million CHF in 2007), equivalent to 1.7 % of corporate output (4.0 % in 2007). In the first six months Automotive Systems initiated the following moves to improve the cost structure: reductions in material consumption, reductions in purchasing prices and a reduction in personnel numbers employed in high-cost countries. Negotiations to obtain higher prices to compensate for the increased cost of energy and raw materials are being pursued with high priority.

Outlook and action aimed at sustained business development

Rieter assumes that the investment climate in the textile machinery industry will not improve before 2009. Due to the cyclically related low level of orders received and expectations that more customers will postpone acceptance of machines already ordered, Textile Systems foresees a steep decline in sales of some 20 % in the second half of the year compared with the first six months. Rieter Textile Systems has already set in motion adjustments to capacity in response to lower volumes and initiated other extensive measures. Despite these efforts, the operating margin before special charges will be significantly lower than in the first half. In light of the weak economic outlook in Rieter Automotive’s main markets of North America and Europe, sales at Automotive Systems in the second half of the year are expected to be some 10 % lower than in the first six months, reflecting current market trends. Additional adjustments have been initiated on the cost side in order to offset the volume effect on the operating margin before special charges.

The Rieter Group is well positioned with both divisions and acknowledged by customers as a leading supplier to the textile and automotive industries. In both fields of industrial activity it plays a significant role in shaping technological progress through its innovative thrust. For example with the new airjet spinning process or the new acoustic material Rieter Ultra Silent. Rieter has industrial experience over many years in sectors that are prone to pronounced cyclical fluctuations. Structural challenges usually emerge especially clearly during cyclical downturns. In the past Rieter has always taken advantage of these phases as opportunities to align structures with the changes in market conditions and enhance its own position.

Rieter has therefore initiated a comprehensive restructuring program that will entail capacity adjustments and a more rapid shift from traditional into emerging regions. This will result in reductions in personnel numbers at both divisions, mainly in the Western Europe and North America regions. On a current view some 15 % of the global workforce will be affected. Although part of this reduction will occur as a result of natural fluctuation and a decline in temporary employment, there may also be some redundancies among permanent employees. Specific action will be taken locally, having due regard for the information and co-determination rights of employee representatives. All activities and product segments will also be subject to review with regard to their ability to achieve sustained profits. The objective of this program is to improve the operating margin before special charges as early as 2009, create the basis for achieving the group’s financial targets (5 % sales growth, 8 % EBIT margin and 5 % profit margin) and strengthen Rieter for the next growth phase.

Rieter started to implement initial elements of the restructuring program in the first half of the year. Planning and implementation of further action will be continued systematically in the second half of 2008. On a current view the restructuring program as a whole at Textile und Automotive Systems in Western Europe and North America will entail total expenditure of some 225 million CHF. Rieter expects a substantial portion of this to be charged to the 2008 annual accounts. 20 million CHF is already included in these semi-annual financial statements. At the same time investment programs are activated aiming at the establishment and expansion of facilities in the fast growing markets of Eastern Europe and Asia. The sound financial condition of the Rieter Group will enable both the restructuring and the expansion program to be financed from internal resources. With these actions and by virtue of its strong brand, good products, global presence and committed workforce, Rieter will create the basis for profitable growth.


Important dates 2009

Publication of sales figures for the 2009 financial year
Results press conference and presentation
of the 2008 financial statements

 


January 30, 2009
March 24, 2009
 
 

Contact for financial analysts:

Urs Leinhäuser
Chief Financial Officer
T +41 52 208 79 55
F +41 52 208 70 60
 investor@rieter.com



Contact for the media

Peter Grädel
Corporate Communications
T +41 52 208 70 12
F +41 52 208 72 73
 media@rieter.com

All statements in this report which do not refer to historical facts are statements related to the future which offer no guarantee with regard to future performance; they are subject to risks and uncertainties including, but not confined to, future global economic conditions, exchange rates, legal provisions, market conditions, activities by competitors and other factors outside the company’s control.