Sulzer Ltd

Ladies and gentlemen, welcome to the SUSUS H1 Results 2023 Conference Call and Lab webcast. I am Alice, the Chorus Call Operator. I would like to remind you that all participants will be in listen-only mode and the conference is being recorded. The presentation will be followed by a Q&A session. You can register for questions at any time by pressing star and 1 on your telephone. For operator assistance, please press star and 0. The conference must not be recorded for publication or broadcast. At this time, it's my pleasure to hand over to Domenico Truncellito, Group Head, External Communications. Please go ahead, sir.

Good morning, ladies and gentlemen. Thank you very much for being with us today, and welcome to SULZA's H1 results call, which we are hosting as a live webcast. You can find the media report and the presentation on our website. As mentioned, at the end of the presentation, you'll have the opportunity to ask questions. To do that, please call the number that was on your invitation or on the press release. With me today is Susan Thoma, our executive chairwoman, and Thomas Zickler, our CFO. Without further delay, I'd like to hand over to Suzanne. Please.

thank you very much domenico ladies and gentlemen welcome to our mid-year results presentation thank you very much for being with us and for your interest in our company we are able today to communicate good half-year results. You see it here on the slide in a summary. We continue a robust, a good performance in all our businesses. We see continued increase in growth in all divisions and we see a substantial increase in sales, which is also due to a better performance in sales execution during this first semester of 2023. Also, you will see substantial increase in our profit. That has several reasons. One is due to our improved execution, our first signs of improving in operational performance. We see a strong cash improvement. We have put a lot of effort on cash management in the last six months, which you can see in increased receivables. I mean, increased collection of the receivables and also more customer advances for large projects. As a result of all of this, we are able to increase our full-year guidance, which I will speak about after Thomas Zickler, our CFO, has given you more details in our figures. So, ladies and gentlemen, we are happy to report 24.1% increase in orders, 15.4% increase in sales and an improving operational profitability up to 10.1%. Finally, I would like to note that our new businesses, which are strictly in the renewables area, have continued to grow and start to be a significant part of our business. Now I hand over to Thomas. Thomas, please go ahead.

Thank you very much, Susan. And also a wonderful good morning from my side. As already mentioned by Susan, we have had a really solid H1. And hold on. Sorry for this. We have had a really solid H1, where you can see that our order intake rose by 24.1% to just close to 2 billion in the first six months of this year. We had here a strong momentum across all our end markets. We also have achieved by higher volumes a higher order intake gross margin of 20 basis points to now 33% for the first six months of this year. And this despite, and you will hear later about this, that we have a higher share of energy orders which normally come with a lower margin in. We also have on the sales side a plus of 15.4% compared to H1 last year. This is based on a solid order backlog execution. When we talk about sales and you see the nominal numbers in Swiss franc, You don't expect that we were hit by an FX impact on the sales side of 106 million and on the order intake we would have been 136 million higher than you can see here in the Swiss franc nominal number. When we talk about operational profitability for the group, you see that our profitability has increased by 110 basis points. This was mainly because of higher volumes and margins and a better mix. Now let me come to the divisions. First is flow equipment. We have here a rise in order intake, in sales, and in profitability. We have on order intake a plus of 25.1%, up to 825 million. We have here energy up, with 84% water more or less flat and industry the same. In industry, we have seen a consolidation at a high level, especially in the pulp and paper business. When it comes to sales, you see that we are 14.1% higher and this is on a strong growth in water. In water, we are 19.5% better than in H1 last year and in industry, we are 18.4% better than in last year. In energy, we are only 4.7% better. This is because of the lead times in the energy business, which is normally between six and 18 months. And you will see then the impact of the higher order intake from energy coming in by late this year, but mostly in 2024. Talking about operational profitability, you see here that in flow equipment, the operational profitability rose by 170 basis points or to a profitability of 7.0%. This is because of a strict cost discipline and many operational improvements also based on a higher utilization of our existing capacities. Let's go to the services division. In the services division, the main message is that we have a pickup in growth across the board. So you see orders up 22.1% to 663 million. We have double-digit growth in EMEA and in Americas, in Americas with 34% and in EMEA with 14%, sorry. We also have in APAC a slight decrease but this is mainly due to a large order which we received in H1 last year and this year in the first six months we were not able to compensate for this large order which we have received last year but otherwise the business in APAC is running well. Coming to sales, on sales you see that we have 11.3% plus compared to last year, up to 558 million. This is driven by all regions and with growth rates between 10 and 12%. The operational profitability in services went up by 90 basis points to 14.2%. and this is based on the increased volumes and a better mix on the products and services. Let's come to our star, to Chemtech, our division where we have growth across all the businesses and also a continued focus on the renewables. We have on the order side an order intake plus of 25.3% to the first time in the first six months of above half a billion to 505 million Swiss francs. We also have a continued very strong growth in our renewables business. You see it on the slide with plus 79%. This is in absolute numbers nowadays 89 million or 17.6% of the order intake of Chemtech. And this compares with 15.4% which we saw by end of last year from the renewables. On the sales side, we have 24.3% plus to 381 million, and this is based on the solid order backlog execution and the orders which we had as of end of last year. The profitability is up by 180 basis points, so almost two percentage points, sorry, two percentage. This is because of pricing discipline in key markets and our product mix. now going to the overall result of this good movement in all the divisions we have the profitability up in all divisions and also the volumes and we have seen the effects of our operational improvements across the board With this, you see that our EBIT this year for the first six months is adding up to 151 million. And when you remember, last year we had in the first six months the one-offs for Russia and Poland, which amounted for EBIT of 133 million, which we had to write off. And if you take this one time impact out of last year's EBIT for the first six months, which we have done in the gray bar, which you see on the EBIT with 107 million, you see that by our operations and our improvements and our volume grow on the sales side, we have improved EBIT by 41.6%. When we do the same comparison for net income, excluding the impacts for Russia and Poland, you see that net income has even increased further to 48.6%. This additional increase is mainly because of additional impacts on our effective tax rate where we achieved some tax savings and also a changed interest rate situation where we had smaller impacts from positive interests on our net income. Now coming to my last slide, talking about free cash flow. You see that our free cash flow is significantly up compared to last year. We have created a free cash flow of 107 million in the first six months of this year compared to minus 78 million last year. This is a free cash flow change compared to last year of plus 185 million. This is caused mainly by our higher profitability, our operational improvements, our strong cash conversion on higher net income and also our improved collections on receivables as well as down payments from our higher order intake. With this, I would like to hand back to Susan to then start with the new guidance.

Based on these very good developments in our company and also in the markets that we are serving, we are able to improve our full year guidance. You see the summary here. We are now guiding for order intake growth between 10 and 14%. That is, of course, organic, and it is also adjusted for FX. We are guiding for a sales increase growth of up between 11% and 13%, again, organic and ethics adjusted. And we are striving to have an operational profitability of around 11%. So these are good developments in our company, which are based on interesting developments in our markets and also the results of our efforts to improve our operations and to improve our business excellence. So if we look at the strategic perspective, very high level in our company, we can say that our strategic development has two major pillars at this point in time. Pillar number one is to realize the growth potential that we see in our current market and going forward in adjacent markets. Our company is active in markets which are really relevant for the future. One point is energy security. which is of importance, as we all know, but also energy efficiency, sustainability in the sense of reducing our ecological footprint as a society and in our customer industries, and in general the trend to tighter regulations when it comes to purity expectations or effluent reductions or water consumption. So we see a situation where both our new products and technologies but also our established products and technologies can grow due to the size of our markets and the shifts in the markets that we can observe. The second pillar, and this is an important element of the strategy, is business and operational excellence throughout our value chain. There is still a lot of potential in Sulzer for improvement, both on the side of our margin, on our commercial side, and on the way we handle our operations, and we manage our cash. We have made nice progress, but we still have quite a long way to go. We do have tailwinds, not least because of our strong Sulzer brand that is known around the globe, and that is seen as a guarantee or at least an expectation for high quality and a solid way of managing the business. This helps us in these rather turbulent times in our markets that are undergoing transformation. Of course, it is very important in our duty that we can uphold the meaning of this Sulzer brand that is giving us such good advantages in our markets. So let's have just a short, a closer look. Many things I have already mentioned. As I said, we have attractive long-term strategic growth perspectives in the markets that we are present because the markets are large, or at least a certain size, and they are growing and they are transforming. And the transformation in those markets, which you can put under the A headline of becoming more sustainable or reducing the ecological footprint or living up to increasing or tightening regulations is going in our directions. Our divisions do have multiple leadership positions in their markets. Normally not over the entire market, but in defined segments of the markets. And that is what we want to concentrate on. These markets are still large for a company like Solcer. And we clearly see that we have opportunities in our core business and in adjacencies in markets that have a relation to our core business but are an extension. You will hear more of that later in the year. Based on all that and a fundamental, a fundament for realizing this rather good potential that we have from the market size, from the markets is our operational and our business excellence. We have to focus really on value creation. We have continued this, started this in the last six months and on customer satisfaction. Customers want good quality and normally they want it fast and without complications. It is necessary that we can further reduce our networking capital to implement our strategy and to finance our strategy. And as I have mentioned, it is also about protecting our brand that is such a great asset for us in the global market. Our base is that the company should be resilient and that we do take risks, but these risks will be reasonable risks, risks that we can take without jeopardizing the company. It's another fundamental block of our strategy going forward. So I come to the end also of my part of the presentation. The takeaway for you are we do have continued strong growth in all businesses, and the markets that we are serving are undergoing a transformation, and that transformation leads to a higher potential normally for our company. We see margin expansion in all divisions, notably in flow equipment, which has a 7% margin, which is, I believe, a very long time ago that we had such a high margin. But we also see margin expansion in chemtech. Solta is well positioned in interesting and relevant markets, and these markets are undergoing a transformation that is kind of going in our direction in the area of energy, of sustainability, of ecological footprint reduction, water management, increasing purity expectation, tightening regulations across the globe. We do see robust growth in new markets like bio-based polymers or recycling. Bio-based polymers have been around for a very long time. So it has been doing research on it for a long time and we do now see up take in this area with concrete and large customer orders. We also have a very interesting carbon capture technology that has been developed in the past in Sulzer that we continue to develop now and we do see large orders coming in slowly but clearly taking up and being implemented in the markets. Last but not least, or rather a fundament of what we are doing is operational and commercial excellence. We still have quite some way to do there, but we had a good start in the first half of this year and we will continue our efforts also in this area as a base for the implementation of our future strategy. Last but not least, we do have a strong balance sheet, which is a base for profitable growth and also reflects that we want to be a resilient company. Thank you very much for your attention. We now have the opportunity for questions. I am asking in the direction of the session management, if there are any questions.

We will now begin the question and answer session. Anyone who wishes to ask a question or make a comment may press star and one on the touchtone telephone. You will hear a tone to confirm that you have entered the queue. If you wish to remove yourself from the question queue, you may press star and two. Participants are requested to choose only answers while asking a question. Anyone who has a question or a comment may press star and one at this time. Our first question comes from the line of Patrick Revise with UBS. Please go ahead.

Thank you and good morning, everyone. I have two, maybe three questions. The first one is on non-operation items, especially in flow and the services division. Can you add some color on where these were coming from and should we expect more of that in the second half of the year?

Maybe let me answer this question first. So when we come to non-operational items for flow, here we have just a couple of hundred thousand this year. And these are basically kind of adjustments related to capacity and personal adjustments. But this has nothing to do with maybe what you have in mind with restructuring. It's just optimization of the capacity.

Your second question?

Okay.

Or maybe a follow-up on the first question?

Yeah, no, just as a follow-up, yes. I mean, I see here for flow, non-operational items of minus 5 million. And then for services, I see plus 14 million in the bridge area.

the segment information for the divisions this this is what we can do offline because this is something this is out of the cash flow statement isn't it it's a segment information footnote three in the in the segment information here where you bridge down from operating uh ebit r to ebit I'm very sorry. I come back to you related to this question because currently... We can follow up.

It's fine. That's good. We can follow up on that. Yes, of course. Good. And then the second question. Services. Very strong growth in the first half of the year. And I'm just wondering to what extent is this, to a certain extent, still pent-up demand? Yes. that is now being worked down from delayed maintenance or repair work? Or should we assume that we are reaching new run rates here for the services division?

It's more the latter one. We are reaching here more run rates because the demand is basically coming from more retrofits and repair work. Yes, parts of it was delayed last year because of the high energy prices. You know this. And then they let everything run through. But it's really a new run rate, which we see in the services business, which also reflects then in the end the higher volume and the higher sales.

Retrofits are a good example of what I was mentioning about the tighter regulations. With retrofits, you can extend the lifetime of existing equipment, including enable this equipment to reach the higher regulations regarding effluent and so on. So we do see a certain transition in the service business towards this type of business, which of course helps the development in the service division.

Okay, I understand. Thank you. And then the last one would be on operational excellence. Can you already give us a sneak preview of how much potential you see here to improve the operational excellence and how that compares to, let's say, the mixed benefit you had. You mentioned positive mixed effects in, I think, services and Chemtech. Can you quantify that and is operational excellence on top of that going forward?

we have only the first results of our operational excellence effort. So the improvement that you see in cash comes mostly from better collections, which of course is an aspect of business excellence. I would not like to give you a number at this point in time. but it is on top of the mix impact and it is, I would say, substantial. Particularly also when it comes to capital utilization, but also cost.

Okay, good. Thank you very much.

And maybe to add to your first question, what came to my mind after reflecting your question, it can very well be that we have the last bookings out of our closure of the Portland factory, and this is then booked into flow and partly in services. But let me check and come back to you.

Okay, thank you. Thank you.

The next question comes from the line of Arben Hazanaj with Funtobel. Please go ahead.

Good morning, ladies and gentlemen. I would have one question around your order guidance. So if you look at the second half year, your higher order guidance would imply actually at the midpoint maybe flat organic growth or even slightly negative. So can you explain a bit how you are thinking about the second half year. Is this based on your pipeline or is this more an expression of caution? If you can comment on that, please.

We have had, of course, a very strong first semester when it comes to order intake, particularly also in the flow equipment division with large orders, also in Chemtech with very large orders. that we cannot expect that they will be repeated in the second semester. Then, of course, the economy is still a little bit, not exactly a question mark, but we want to be on the cautious side. And so we decided for this order intake also based on the divisional input, of course. So it's a mix of a very good H1 and a certain caution on our side.

Thank you.

Next question comes from the line of Christian Arnold with Stiefelschweiz AG. Please go ahead.

Yes, good morning. On flow equipment, I was quite surprised by your comment that you see especially high margin potential for flow equipment going forward. So looking at H1 performance, you increased your margin to 7%. I think that's a level we have seen the last time in 2015. And you were also benefiting, I think, currently from a very positive mix effect of water and industry outperforming the energy end market. And we know the energy pumps usually have lower margins than water and industry. Now, looking at your order intake, plus 84% in energy, that means that your product mix will be clearly less favorable going forward. And you still want to increase your margins over proportionate in flow equipment. So can you help me here? Thank you.

Gladly. You are absolutely right. We have an overproportional order intake in energy that these orders will be mostly executed then next year. That will give some pressure on our sales margin coming from energy. But we expect that we can correct for that with the good development in in other areas that we see coming with much higher margins. When we speak of energy, we are not speaking of PU energy alone. It is the sales that we have into the area of energy, and that is also sales that we have in the service division. It's also part of the sales that we have in Chemtech, for example, for renewable fuels that we are strongly in. So I was then speaking about the increasing importance of energy, not about the bioenergy per se, but about the market surrounding energy and energy efficiency.

You were mentioning that you have other areas with very attractive margins going forward. So what can then in 2024, which markets are you thinking of which can potentially compensate for the negative product mix?

Yeah, we see going forward an increase in water and in industry. We see clearly a strong growth in chemtech and we see also a well-growing service business. And we will go into adjacent markets, which we don't want to speak in detail now. Okay, whether they will help next year first half, that I cannot say. So it's a question of the portfolio and step-by-step portfolio shift towards higher margin. But you are right, we will have to compensate the larger sales next year in the BU Energy. We are not expecting margin deterioration for next half year. I mean, yeah, for next half year, next, H1 next year.

But yeah, talking about particularly higher margin in flow equipment. So what target do you have in mind? I mean, being now at 7%, having higher energy pumps or high importance of energy pumps in there. Do you expect margin at 8-9%?

I don't want to give a comment on the exact number now for the following reason. I mean the margin is a question of pricing. We believe that particularly in bioenergy we can do some more on pricing and it is a question of cost and we know that we can do something in the area of cost. So you will see the development coming out of these initiatives, but it is too early to publicly give a target at this point in time.

Okay, thank you very much.

You're welcome.

The next question comes from the line of Alessandro Folletti with Octavian. Please go ahead.

Yes, good morning. Thank you for taking my questions. I was wondering first on the water business, which you mentioned was in slow decline. Xylem did not publish yet Q2, but last Q1 was really very, very strong. If I'm not mistaken, they're already doing a little bit better. Can you maybe explain to me why Xylem is doing better than Sulza?

Well, we cannot speak for Xylem. Of course, we have in water – can you give me the water figures, please?

Yeah, I can add on this. In water, we are on order intake for the first six months more or less flat. It is industry, which is slightly 1.2% down. But in the water, we haven't seen a big desalination project, which we normally would have taken in. But we are looking much more this year for the order intake margins. And let's see if we get some in the second half of this year. For the second half of this year, talking about water, it looks much better compared to the flattish situation in H1. But again, the flattish situation related to water in H1 was mainly related to having not a bigger desalination project taken into.

Right. And what drives this much better outlook in the second half?

It's the market, plus we are also working on the one or the other desalination project, a bit smaller ones, but more attractive ones.

Right. And I have another question on the strategic review or operational review. I guess you will comment when you're ready to give more information, but can you tell me if there is any cost associated with this operational review? As far as I understand, this is sort of new information in a way that you are undergoing also in operational review.

Yeah, when we started with the strategic review in January and went into really analyzing the situation in Solser, we did realize quite clearly that we have some important potential also in what we are doing today. in terms of operational excellence and of business excellence. We are not expecting at this point in time any major restructuring costs, for example, if this is your question. We are looking at doing what we do better and more efficiently and filling our plans without having to build new ones, for example, getting better commercial terms, all of these kind of, I would almost say housekeeping things, but which are of course not done from one day to the other. But we are not at this point in time looking at major restructuring costs.

All right, thanks. That's great. I have another question and then I have a comment, if I may later on. On your balance sheet, you have 1.1 billion in cash and 1 billion of long-term debt. And I wonder if this is intentional and sort of necessary.

Here, maybe Susan, I can answer. No, actually, it's not a necessity for this. And as you have realized, in July, on July 6, we have already paid back 290 million Swiss bond, which matured. out of our cash. And this is coming from the basically prior years where we prepared for bigger M&A and we had a bit more cash on our side to be always ready for bigger M&A transactions. From the current perspective and also looking a bit into the strategy and what Susan said, it is not necessary that we have this huge amount of cash available in our balance sheet.

So if I interpret your answer properly, you might want to do acquisitions, but not things that eat up in one go, the full billion.

Well, you know, at this point of time, there is nothing that we see. If an opportunity comes, we may, but it's definitely not our focus today. We want to be resilient in the way we run our company, and that rather speaks, if at all, for smaller and stepwise acquisitions.

Thank you very much. Maybe one last thing. I wanted to ask about the non-operational items as well. So maybe please, when you deliver your answer, If you can deliver it to everybody, it would be helpful. Thank you.

Yes, I will do.

The next question comes from the line of Michael Rost with Badr Hebea. Please go ahead.

Yes, hi, good morning. Actually, I have two questions. One is just an add-on to one of the previous questions on the strategy update. I know you can't give me an exact timeline, but should we expect a strategy update this year still, number one? And number two is the search for a new CEO. Is that going or is that still on the back burner until the strategy update? Thank you.

You can expect a strategy update towards the end of this year or early next year. That's at least the plan. It depends also a bit on the results. Regarding CEO, we are not searching for a new CEO right now. We will continue with the current setup for the time being.

Thank you.

As a reminder, if you wish to register for a question, please press star and one on your telephone. Start followed by one. The next question comes from the line of Charlie Ferenbach with AWP. Please go ahead.

Hello, everybody. Good morning and thanks for taking my questions. As I've seen, I think we raised the guidance for the full year. You hear me? Yes. Can you hear me? Yeah. Okay. Sorry. You raised the guidance for the full year, but still I'd like to ask, don't you see in any markets any signs of an oncoming recession towards the end of the year? Thank you.

We do see certain small signs in our market, but nothing major. Maybe we see a little bit something in the chemical industry in Europe, which has an importance for our Chemtech division. But all in all, we're watching very closely. Of course, we all know that the industry, particularly in Europe, is in difficulties. It has so far not hit us. Maybe also because we are in projects which are aligned with changes in regulation, with sustainability, with these more structural changes in our customer industries. But of course, we are watching it very carefully, and it has also had an influence in the extent of our guidance adjustment.

Thank you. Ladies and gentlemen, there are no more questions at this time. This concludes today's conference. Thank you very much for your participation. You may now disconnect your lines. Goodbye.

Thank you very much. Goodbye.