The Rupp Report: More Details On The Business Year 2014 For Rieter

Some weeks ago, the Rupp Report informed its readers about initial financial results for the year 2013-14 from Switzerland-based Rieter Group. Last week, the company’s annual press conference took place in Winterthur,Switzerland, and here are some more details of the financial results:

Orders Received And Sales
New orders received by the Rieter Group reached the level of sales in 2014. Compared to the strong previous year, orders received decreased by 9 percent to 1146.1 million CHF (2013: 1259.4 million CHF). A large number of orders came from Asian countries, where spinning mill capacities were built up to supply the Chinese textile markets, from Turkey and the US. The positive trend in India continued throughout the year. In China, demand was subdued, as in the previous year. In the favorable market environment of the first half of the year, Rieter recorded significantly higher order intake than in the more challenging second half. The decline in the second half of the year was mainly attributable to lower orders from Turkey and China. At Spun Yarn Systems, orders received decreased in the year under review by 10 percent to 973.8 million CHF, compared to the previous year (2013: 1084.3million CHF). Textile Components almost equaled the previous year’s level, with orders of 172.3 million CHF (2013: 175.1 million CHF).
As expected, sales by Rieter developed strongly in the year under review and increased by 11 percent to 1153.4 million CHF (2013: 1035.3 million CHF). In the second half of the year, sales increased by 21 percent compared to the first half. Rieter reported the highest increase in the US, followed by Turkey, India and various Asian countries. In contrast, sales in China and Africa decreased compared to the previous year. Spun Yarn Systems increased sales by 14 percent to 981.0 million CHF (2013: 857.8 million CHF). Premium Textile Components posted sales to third parties of 172.4 million CHF (2013: 177.5 million CHF).
… Rieter also posted a significant increase in net profit to 52.9 million CHF, which was 41 percent higher than in 2013 (37.4 million CHF). The profit margin improved from 3.6 percent to 4.6 percent of sales. Net financial result of -13.7 million CHF was slightly lower than in the previous year (-7.9 million CHF).”

Medium-Term Financial Targets
Rieter has reassessed the global market environment and reviewed the company’s financial targets. With its medium-term profitability target of an EBIT return of some 10 percent of sales and a return on net assets (RONA) of some 14 percent, Rieter claims to achieve its profitability target in the medium term with sales of some 1.3 billion CHF. The yield for 2014 last year up to 7.3 percent compared to 5.8 for 2013, however, the target is 10 percent, said Rieter’s CEO Dr. Norbert Klapper.
A New Distribution Network
An important benchmark for the success of a spinning machinery manufacturer is the spindle equivalent shipment. Substantially supported by expanded capacity in Asia, Rieter delivered a record volume of some 2.33 million spindle equivalents in the year under review (1.84 million in 2013). Deliveries of extensive full compact, ring and rotor spinning system installations made a decisive contribution to this success. Rieter was able to increase this by 27 percent compared to last year. As success drivers, Klapper mentioned first of all to be a full system provider, the strong sales and distribution network around the globe, innovations and an increased production capacity after the investment program started 2012 along with ring spinning systems available in China. The Swiss also recorded an increased market share from 26 to some 30 percent.
The Target
The change in the financial policy of the Swiss National Bank had also some influences on the profit of Rieter. Nevertheless, CFO Joris Gröflin mentioned that the production costs further decreased thanks to strong activities and favors the net profit. Though, the company started a new short time program to further decrease the costs with a stop of employments in Switzerland, and some discounts on the supplier side. It is the target of Gröflin to further decrease purchases in Swiss Francs to avoid further costs. Rieter invoiced 53 percent of its sales in Swiss francs during the 2011 financial year. However, the 2014 financial year was as follows: 40 percent of sales in Swiss francs, 37 percent in euros and 23 percent in US dollars and local currencies.
More recently, Rieter has invested strongly in Chinese and Indian markets as well as expanding its capacities in the Czech Republic. Accordingly, Gröflin informed that the workforce increased by 4 percent, from 6003 up to 6225, mainly in China and the Czech Republic. To balance the volatile markets the share of part-time workers is now 19.6 percent.
Particularly proud is Joris Gröflin about the strong free cash flow (See Table 1). He claims that this was because of higher profitability and lower capital expenditure. Despite the small increase in net working capital of 9.9 million CHF and capital expenditure of 42.2 million CHF, Rieter recorded free cash flow of 49.1 million CHF as a result of the increase in earnings.
Table 1: Free cash flow

CHF million 2014     2013   
Net profit 52.9 37.4
Interest expense 10.7 14.0
Tax expense 18.4 15.1
Depreciation and amortization 40.8 35.0
+/- non-cash items/disposible gains 4.9 -12.4
+/- change in NWC and provisions -13.2 46.1
+/- interest paid/received (net) -6.2 -11.5
+/- taxes paid -18.7 -16.0
+/- capital expenditure, net -41.1 -49.5
+/- change in other financial assets 0.6 2.9
Free cash flow 49.1 61.1

Strategic Focus
During the 2012-13 period, Rieter started a large-scale strategic investment program. The group moved forward with expansion in Asia, innovation and the improvement of global business processes. The 2014 financial year showed that the extensive resources deployed had been effectively utilized. And how does Rieter sees the future? We have our clear strategic focus, said Klapper. Profitability is the big issue. We are the world’s leading supplier of short staple spinning systems, and the customers appreciate the fact that we can fine-tune every component up and down the whole production chain. After sales service is probably the key point of all activities with a perfect service. That’s why the after sales service was organized into a separate After Sales Business Group on January 1, 2015.
In his outlook, CEO Klapper mentioned certain insecurity among the customers, because some currencies such as the Indian Rupee, China’s Renminbi, the US Dollar, the Euro and the Swiss franc are in very volatile positions. On top of that China is slowing down. “However, I’m certain that China’s will be back in the near future, but not on the same level as before,” Klapper said. Reasons for that are new general conditions that are better to handle for the Chinese spinners. According to Klapper, the high cotton stocks in China have no influence on the business in Switzerland. Regarding prices in Swiss Francs, these are very much influenced by suppliers from the Euro zone.
Though, no customers that have an order in progress have cancelled it. The reason for that is that Rieter granted some low single-digit discounts. And how is Rieter defending itself against copycats? “Well, as mentioned before, we have to strengthen our after sales service and that the customers don’t even think of going elsewhere,” said Klapper. “We also offer some upgrade packages for competitive prices, which is very much appreciated by our clientele. And I’m very proud to say that we won for the first time a case against piracy of products in China.
“What we really see, and the reasons for that a very much know, is the fact that China is changing more and more to sophisticated machinery instead of less automated equipment. And the better the equipment the more one needs high-level spare parts.”
Promising 2015 (?)
Rieter closed 2014 with an order backlog of approximately 730 million CHF, demonstrating the global strength of the company and its brands. In January and February, the After Sales and Components business saw order intake on last year’s levels, as spinning mills continue to order upgrade kits, components, and wear and tear parts. Demand in the Machines & Systems business has so far been below last year’s levels. This is perceived to be the result of the currency driven uncertainties in the market and the low demand in China. The group expects sales in the first semester 2015 to be around the level of the first semester of 2014. The full year 2015 is currently expected to show lower sales volumes than 2014 due to the slower order intake at machines & systems.

March 24, 2013