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UPDATE 3-Sulzer H1 core income slips, trims forecast

(Adds company executives comment, updates share price)

By Nieck Ammerlaan

ZURICH, Aug 27 (Reuters) - Sulzer reported on Tuesday a lower first half profit and the Swiss industrial engineering group scaled back forecasts for 2002 due to continued weak demand, causing its shares to slide.

Blaming tough end-markets, particularly in the U.S. power supply sector, and rising price pressures, Sulzer said it did not expect its four core divisions to match full-year 2001 operating income of 119 million Swiss francs ($78.9 million).

First-half operating income from continuing businesses before one-off gains, which analysts see as a key measure of underlying profitability, fell 26 percent to 31 million francs.

Sulzer expected full-year sales in 2002 to be roughly in line with last year's 1.97 billion francs after a flat first half, scrapping already cautious company forecasts for higher sales and operating earnings.

The Multex Global Estimates consensus forecast before the first-half report was for full-year sales of 2.05 billion, earnings before interest and taxes of 136 million and net profit of 84 million.

Sulzer shares were down 4.9 percent at 265 francs at 1410 GMT in a generally firmer Swiss market.

The stock has lost 18 percent in the past 12 months amid concern about the impact of a soft dollar and a sluggish world economy on earnings at the group, which has just completed a major streamlining to reduce its sensitivity to cyclical swings.

FIRST-HALF MIXED BAG

Analysts said the first-half figures were mixed, with expectations already dampened last month when the firm posted only stable first-half new orders.

"Net profit was above our expectations and at the core EBITA level three of the four divisions are flat to better, with the exception of Metco (surface coating)," said analyst Maria Ivek at Bank Vontobel, who has a "buy" rating on the stock.

She noted tough markets meant that margins were unlikely to improve at the largest division, pumps, before 2003 and not in the second half as originally expected.

"If management had not refocused on four divisions, the situation would have been worse today," Ivek said, adding that now that that reorganisation was over, management should have more time to focus on sales growth and lifting earnings.

The overhaul left Sulzer with surface coating technology and services division Metco, turbomachinery services, pumps and related services and chemical process business Chemtech -- all areas seen as stable and profitable growth markets.

CEO Fred Kindle said Sulzer was stepping up cost-cutting efforts while markets stayed tough with the loss of 50 jobs at Metco. The Metco restructuring would cost a single-digit million franc sum, he said.

But Sulzer's targets of sales of three billion francs and an EBITA operation margin of nine percent by 2005 were still valid and achievable despite the apparent lack of an imminent upturn in its markets, he said.

"Even if there is only zero percent (sales) growth in 2002, that just means there has to be five to six percent in the remaining years (till 2005). It should be feasible," he said.

Net sales were 939 million in the first half, equalling the 2001 level. Sulzer did not publish an EBITA margin.

CAUTIOUS ON ACQUISITIONS

Kindle said Sulzer was still looking into acquisitions, but it was "more prudent on prices and integration (efforts)." Earnings before interest, taxes and amortisation (EBITA) from continuing businesses -- stripping out gains from the sale of non-core businesses, but including gains from real estate sales -- rose to 57 million francs from 53 million.

Net profit fell to 42 million francs from 120 million francs in the same period last year, reflecting the absence of one-off divestment gains which had boosted 2001 earnings.

Analysts had expected net profit to drop to 26-33 million, while EBITA profit was seen stable in a range of 55-61 million.

This year's and last year's numbers were not comparable due to the sale of non-core businesses, completed this year, and the disposal of non-essential real estate, which continues.

Sulzer expected a "respectable" full-year profit after a two million franc profit in 2001, when provisions for the cost of U.S. litigation by spun-off unit Centerpulse hit results.

"Net income will very much depend on the amount of real estate we will be able to sell," Chief Financial Officer Bruno Allmendinger told the analyst conference.

Medical devices unit Centerpulse , the former Sulzer Medica, reached a $1.25 billion out-of-court class settlement of lawsuits over faulty hip and knee implants, of which Sulzer's share amounted to $50 million, paid in July.