Sales and new orders at record high; profitability remains a challenge.

The Group continues to achieve robust growth. However, operational challenges in individual areas are reducing income. The strong rise in order intake shows that RUAG is well-prepared for the upcoming unbundling....

Dear shareholder,
customers and readers,

RUAG’s financial key figures for 2018 paint a fragmented picture, with record sales of CHF 1,998 million (+2.2 %) and record order intake of CHF 2,221 million (+13.3 %) set against EBIT of CHF 106 million (–10.8 %) and profitability of 5.3 % (6.1 % in 2017). Free cash flow saw positive development, rising from CHF –59 million to CHF 94 million.

There was also an increase in the net financial position, from CHF 77 million to CHF 134 million. The Board of Directors proposes a dividend payment to the Confederation of CHF 30 million (2017: CHF 40 million).

The decline in EBIT is mainly attributable to the operational challenges within the Aerostructures division, relating to both general capacity increases and the expansion of its site in Hungary. Expenditure of just under CHF 5 million for the preparation of the unbundling process, charges of CHF 7 million streamlining the Ammotec division’s portfolio and the CHF 4 million cost of closing down the maintenance facilities for civil aircraft in Bern-Belp also had an impact.

Measures and programmes aimed at increasing profitability were further intensified in the year under review, both on the manufacturing side and in the support areas. Cost-saving programmes were expanded, hiring freezes imposed and the Bern-Belp site closed down. The ongoing, sustainable optimisation of profitability will remain in focus in future.

Four out of the five divisions – Aerostructures, Ammotec, Defence and Space – contributed to the growth in sales. Only the Aviation division registered a slight decline. The largest increases were achieved in the area of ammunition for armed forces and law enforcement agencies, and in aerostructures with the single-aisle programme for Airbus.

The civilian segment once again accounted for 56 % of sales in the year under review, and the share of business coming from outside Switzerland remained at 62 %. The DDPS clearly remains RUAG’smost important customer, accounting for 30 % of its sales (2017: 31 %). At end-2018, the number of full-time positions had fallen to 9,127 (2017: 9,189).

Developments within the divisions

The results from the individual divisions also paint a mixed picture. Aside from one-time effects, Space and Ammotec were able to achieve or even exceed targets. In the space business, the downturn in Europe was offset by an expansion in activities in the US market. There, the Space division arrived at a major milestone, with its site in Decatur, Alabama, manufacturing its first payload fairing to be used in space. This will make its first flight in 2020 with an Atlas-V rocket on a mission for the US government. The new US plant will then have in place all the qualifications required for production.

The Ammotec division succeeded in more than offsetting the declining global market in the Hunting & Sports segment with strong growth in the Armed Forces & Law Enforcement segment. Alongside higher orders from the DDPS, the division profited more than most from the increases in the defence budgets of the European NATO countries. Within the Ammotec division’s generally very successful Armed Forces & Law Enforcement business, the new orders for the Austrian Armed Forces were a notable milestone.

Compared with a challenging 2017, the Defence division managed to achieve a striking gain in the year under review. All three of its business units contributed to this. Among the new orders acquired by the division, two contracts with the Swiss Armed Forces stand out. The upgrade to the broadband transmission system (BTS) of the Swiss Armed Forces will be into the double-digit millions by the time the project is completed in 2021. The project to develop and manufacture a total of 14 container-based disinfection and sterilisation systems is set to run until 2022. Both of these contracts were won against competition from other organisations.

The results of the Aerostructures and Aviation divisions remained below expectations. For the Aviation division, the domestic market did see some pleasing development, with the five-year service-level agreement and the various upgrade programmes for the Swiss Air Force. The division also acquired a future-oriented contract at the end of the year: by mid-2022, it will have completely overhauled eight of the Swiss Air Force’s Cougar transport helicopters. However, the Business Aviation and Dornier 228 units continued to face enduring challenges, with the Business Aviation unit having to close its Bern-Belp site due to insufficient capacity utilisation and expiring maintenance contracts from local airline company SkyWork. At the bottom line, the division saw a decline in both sales and EBIT.

The Aerostructures division’s result was dictated primarily by the increase in the production rate in the Airbus single-aisle programme. On the one hand this led to a significant increase in sales; but on the other, due to the required capacity expansion and the additional costs to scale up series production it also resulted in substantially negative EBIT. Positive factors for the division’s future development were the transfer of work packages to Eger in Hungary – completed at the end of the year – and the entry into service of the new surface treatment facility in Emmen, which in future will also be seeking to acquire external orders as a service provider. In order to secure the division’s long-term profitability, extensive measures aimed at reducing costs and enhancing productivity were initiated at all three Aerostructures locations: Emmen (Switzerland), Oberpfaffenhofen (Germany) and Eger (Hungary).

Unbundling

Pivotal to RUAG’s future development is the unbundling process decided in principle upon by the Federal Council in March and June 2018. This will involve reorganising the Group into two independent companies as of 1 January 2020. From the beginning of 2019 and in line with their areas of activity, RUAG’s Aviation and Defence divisions are being integrated into two new corporate entities with the working titles “MRO Switzerland” and “MRO International”. Management of MRO Switzerland is being handed over to former CEO of RUAG Defence Andreas Berger. MRO International will be run by Felix Ammann, formerly Vice President Supply Chain for RUAG Aviation. Until the unbundling is completed, both will report to RUAG CEO Urs Breitmeier.

Moreover, the Group’s predominantly civilian and international business activities will be brought together in a second company with the working title “RUAG International”. Further specifics of the strategy will be established in 2019 after the Federal Council has made decisions on the detailed planning.

With this unbundling, however, the Swiss Federal Council is also responding to the Swiss Federal Audit Office's requirement for RUAG to prepare transparent accounts by customer group and accordingly disclose separate profit margin figures. Thus a paradigm shift is taking place: in the past two decades, the maxim was to generate synergies between civil and military third-party business on the one hand and Swiss military business on the other.

New faces and activities

Both the Board of Directors and the management of RUAG saw a number of personnel changes during 2018. There was a seamless handover between long-serving Board Chairman Hans-Peter Schwald and Dr. Remo Lütolf. In order to be able to support the unbundling as effectively as possible, Dr. Lütolf agreed to temporarily increase his workload from 30 to 50 %. Aerospace expertise on the Board of Directors will now be provided by Dr. Marie-Pierre de Bailliencourt. The Board thereby also acquires a French-language representative, and the proportion of women rises to over 30 %. An internal successor was found to lead the Aerostructures division: former Senior Vice President and Head of Programs & Sales Dirk Prehn was appointed as CEO with effect from 1 July.

In order to coordinate the diverse implementation activities associated with the unbundling and assure the smoothest possible transition to the new structures, a Project Office has been established under the direction of a Senior Vice President Transition Project. In this regard, particular emphasis is also being given to RUAG’s relationships with the various federal bodies. The position of VP Owner Relations, newly created in 2017, allowed RUAG to sustainably stabilise and enhance its links with its sole shareholder, the Swiss Confederation, in 2018.

In this process, RUAG's working relationship with the Swiss Federal Audit Office (SFAO) was also strengthened. A number of audits were successfully passed, and RUAG fully supports the SFAO's work. A media report alleged that some of the invoices which the Group had submitted to the DDPS were inflated. In the first half of 2019, RUAG will request the SFAO to undertake an additional audit in order to fully clarify this issue.

The establishment and expansion of the compliance framework were pursued very vigorously in 2018. The focus of the diverse activities in this regard was on third-party management, trade compliance and protection of personal data. Among other things, the rise in reports to the whistleblower desk created in 2016 shows that both employees and externals have confidence in RUAG’s compliance processes. Abuses and misconduct are rigorously pursued and, if necessary, sanctioned.

Outlook

Overall, RUAG expects to see stable development in 2019. The Group is anticipating growth in the aerostructures segment as well as in the ammunition business with armed forces and law enforcement agencies. However, RUAG will only be able to extract limited benefit from growing defence budgets as Switzerland is not part of any of the European programmes to develop new systems. Furthermore, only in certain cases will it be able to translate the global increase in defence budgets into sales growth. Compared with its international competitors, the company is limited by the strict Swiss export regulations and the ongoing restrictions imposed by its owner.

In its business with the Swiss Armed Forces, RUAG is expecting sales to continue stable. The various service-level agreements in place are creating a long-term foundation for further efficiency gains. These will benefit both partners. In the space business, RUAG expects to see continued growth in the US market and in the so-called ‘New Space’ applications thanks to the successful development of in-house production capacities. With this, it should be able to offset the anticipated slowdown in the European programmes.

One overarching goal for the coming years is to sustainably improve the cost base. With this in mind, the programmes targeting ongoing increases in productivity and efficiency in all business units will be pursued actively. In those business units where performance is lagging behind the targets set, RUAG will be systematically taking additional measures to reduce costs. These programmes should start to take full effect after the completion of the unbundling in 2020.

In June 2018, the Swiss Federal Council approved the unbundling concept drawn up by the Board of Directors and management of RUAG. Based on this, in the year under review a detailed plan for the implementation of this process was mapped out. The Federal Council is expected to take a decision on this in spring 2019. It will require significant resources. The overall cost is expected to be around CHF 70 million, of which around CHF 50 million will be incurred in 2019.

The Board of Directors and management are confident that RUAG is well-placed to continue mastering the technological and economic challenges it faces in the future. We look forward to being a consistently reliable, transparent and cost-effective supplier to the Swiss Armed Forces on the one hand and, on the other, to promoting the development of our civil and international business as an agile and competitive global provider – together with our shareholder, our customers, our partners and our employees. We thank you all for your loyalty and your trust, as well as for the opportunity to work with you and for your dedication.

RUAG Holding Ltd.

RUAG Holding Ltd.

sig. Dr. Remo Lütolf
Chairman of the Board of Directors

sig. Urs Breitmeier
CEO RUAG Group