Sulzer Ltd

Welcome to our mid-year results presentations. With me I have our CFO Thomas Zickler. We are very happy to report to you a good H1 2024. our results are encouraging also in the light of the economic development around the world. You see that in 2024 we have recorded a very good order intake growth and that is particularly remarkable because in the first half 2023 we had an exceptionally high order intake growth. So the baseline with which we had to compare was quite ambitious. Also, we see good sales development. And the interesting thing there is the sales development is good in all three regions, as is the order intake in all three regions and in all three divisions. When we look at our profitability, we have increased our profitability up 130 basis points compared to the first half year of 2023. Also there, an additional comment that is of importance. Of course, with our strategy 2028 and all the measures that we are taking to execute our strategy, we also have additional costs, which are also one-off costs. But we record them all as operational costs and not as non-ops. Nevertheless, our profitability increased. This is also the case because we were able to increase our gross margin by 140 basis points. That has two main reasons. We are learning better to price our products and services rather than cost plus. We are looking from customer and market and are then giving the right price point. And on the other hand, of course, also our efficiency improvement, particularly operational excellence in production has a positive influence. So this is the summary of our half year results. And now we go into somewhat more detail with Thomas.

Thank you very much, Susan. Let me start. with an overview of order intake and sales. So you see that in H1 this year we grew by almost 9% when we talk about order intake and in comparison to H1 last year where we grew 24% it is really a very solid result. What you have to also know and understand this time, like in the past, again, we were hit since we are reporting in Swiss francs from a negative FX impact in order intake as well as sales. So in both cases, our nominal values would have been in local currencies round about 4% higher. So this is for order intake round about 90 million. And for sales round about 70 million. What is also very important to understand when we compare our order backlog which was round about 2 billion at end of last year we reach now an order backlog with 2.4 billion which is round about 450 million higher than the backlog which we had by end of last year. When we talk about performance in order intake and sales, I can really proudly say that the performance in order intake and sales is really coming from all the divisions. We have strong growth momentum in all the three divisions and this counts really for both for order intake and for sales. And let me just focus on order intake because you know that it's a forward-looking message when we talk about order intake margins. You see that we have achieved the order intake increase even by increasing our order intake margin by again 1.2 percentage points. Let's go into operational profit and return on capital employed. So what I want to stress here is really continued profitable growth. If you would see that we had in H1 2022 9% operational profitability, then in H2 2023 10.1%. And then in H2 2024, again, an increase of 130 basis points to 11.4%. I think this is showing really a great track record over the last years from 9% to now 11.4%. When we talk about profitability, Susan already mentioned it, our gross margin really went up by 140 basis points compared to H1 last year, and we stand currently at 33.7% gross margin. Let me give you a short update on our return on capital employed. When you remember what we presented at our Capital Markets Day as well as in the media conference in February, we presented for last year a return on capital employed of 17.7%. Why is it lower now and why is it stable? because here on our assets since the swiss franc since beginning of the year was a bit weaker compared to most other currencies our assets have increased in value because of the re-measurement at the weaker swiss franc exchange rate And with more assets, the relationship went a bit down. And since we had more increase on the asset side, then we could compensate to a higher EBIT. We have now the situation that the overall number is a bit lower. And we have from H1 2023 to H1 2024 a stable situation when it comes to return on capital employed. Now let me go in the divisions. Flow division is the first one. So flow is really a story of growth and excellence. And you see excellence, you see the operational profitability has gone up 250 basis points from 7% to 9.5%. And also here, I give you the number from H1 2022. Remember, in H1 2022, we were at 5.3%. And when we talk about this, what are the reasons for this profitability increase? It's really operational excellence in our plants, in our flow organization. It's a strict cost discipline and also the focus on pricing, which enabled us to show this very strong performance over the last three years. When we talk about order intake, I also want to remind you that order intake this year is 6.3% plus. However, last year in H1, maybe some of you remember, we were 25.1% plus. What happened? So on the order intake side, this year we have water in industrial BU. where we grew almost 11%. And in energy, in industry, we have a growth rate of, I say, only 1.3%. But let me give you the background to the only 1.3%. Last year in H1, we grew in energy by 84.3%. So I think it's a very big achievement. from our colleagues in energy and infrastructure that they ended the H1 with a plus number in the percentage comparison to last year with plus 84%. When you look at the sales, you see sales 11% plus. Last year in H1, we were 14% plus. We have sales mainly coming from the energy BU, because last year we got all the big energy orders in. They are working now on execution. In energy and infrastructure, we have a plus of 32% in our sales compared to H1 2023. Now let's go to services. Services, they continued now really to grow double digit in both order intake and sales. When you look at order intake, you see that they are growing by 12.6% after they have grown last year by 22% in H1. And even at the year end, it was still close to 20%. What we have here on the order side, we have a really strong growth momentum, especially coming from the Americas and from APAC. When we look on the sales side, you see that on the sales side, we have 12% and we are even stronger on the sales side than we were in H1 one year ago, where we were at 11%. On the sales side, I can say very, very proudly that all the regions contributed to this accelerated growth on the sales side. Now let me talk about the profitability. You see that the profitability in services has not increased. It's the only division where we have no increase this year at the half year. Why? Because we had a lot of investments to meet really our growing demand. And what does it mean? We have invested in OPEX. in people to support the geographic extension and also to prepare us for the future growth which we have basically worked out in our ambition 2028 so in short words it is investment in the future into future growth of the profitability in services Then let me talk about Chemtech. Chemtech, for me, the headline is really that we have orders above 500 million in H1. This is really a great result. However, we have also in Chemtech The second biggest profitability increase, and you see it on the slide, of 150 basis points. We are now coming in Chemtech closer to our services division. Services division, you remember, was 14.2%. Now we are in Chemtech 13.2%. So Chemtech is also quite a success story when it comes to profitability. You see here also the first impacts of our measures, which we have taken and implemented from our Ambition 2028 strategy. As a comparison, in H1 2022, we were in services at 9.9%. when you look at the sales side we have the 7.2 percent and the 7.2 percent you have to set here in relation to a very strong h1 last year with 24.3 percent let me go to our EBIT and net income. So it's clear with the higher sales, higher gross margins, that the operational profit is really driving the higher EBIT and the higher net income. You see on the EBIT that we are around about 20% higher than we were in H1 last year. When you look at the EBIT, you see that it's not only the better margins, we also have achieved the increase by many of Sulzer Excellence improvements. When we look at both numbers, EBIT and net income, you see the last bullet point on the right side that for both we have only minor one-off items in 2022 in the first half year again as we had in the last year. Then let me come to my last slide, free cash flow and increased net working capital. So free cash flow, it is a bit lower, but it's still a solid free cash flow. We have a positive operating net cash flow in all our divisions. Why is it lower? It's lower because we have compared to last year and a higher net working capital. We have increased our higher net working. We have increased our net working capital. And we also had higher tax payments and also a higher capex, so that you have some numbers in mind. Higher capex, around about 16 million, and higher tax, 5 million. So this is around 21 million alone coming from this. Also, when you look at the networking capitals on an H1 to H1 comparison, you see this, that when you compare just H123 with H124, that in relative terms to sales, we are even better than we were last year in H1. So with this, I will hand back to Susan. And yeah, Susan, go on.

Thank you. Thank you, Thomas. Very good. Let's... Continue, just a quick reminder what Sulzer is actually doing. So Sulzer is present in our customers' infrastructures, both private infrastructures, semi-public infrastructures and public infrastructures. And there we sell, at the end of the day sell, we provide solutions for very specific critical steps in these infrastructures. This normally has to do with improving the efficiency of the infrastructure, which today always means saving energy. And it has also to do with reducing the environmental impact, be it because our customers have the strategy themselves to reduce the environmental impact of their installations or because the government regulation warrant it. This is what we do and these are very technical but very real very technical but they have a very real life effect for our customers and particularly we have to get it right because if we don't then our customer have a major problem that on the other hand gives us a certain pricing power we very systematically select those applications where we with our technology and our know-how can make a difference because the markets that we are serving are large and we could choose also different market segments but we want to be there where we have pricing power where what we have to offer really counts and where of course there is growth Why are we speaking about growth, structurally growing market? You have heard that before also on the Capital Market Day presentation. We do serve structurally growing markets for different reasons and we are not the only ones who are saying that this is the case. You see here this study from S&P Global and you see that wastewater, chemical, metal mining and energy power have been growing for a long time, but the growth is accelerated. And of course, that brings us back to the fact that we still have a global growing world population. We still have economies and societies coming out of poverty towards having more people in the middle classes and with that consuming more energy and more more things in general and then of course we have still the need to decarbonize as much as possible our industry and our infrastructure and to reduce environmental impact in general. And these are our markets and that is what we are doing. So we are structurally growing and yes, including oil and gas. Oil and gas is not growing as fast, of course, as it did, but it's still there for a long time. At the same time, the infrastructures in oil and gas and in general want to stay in operation longer So we are there to help to extend the lifetime of these important installations, both in the way how long you can safely run the installations and also how you can reduce the environmental impact of these installations. Here we have one example. I will only show you one, but I find it very fascinating. It is a good example of why we are speaking that Sulzer is contributing to both a sustainable society and a prosperous economy. It is the world's largest wastewater treatment. It is in Egypt. It's also contributed significantly with over 260 pieces of equipment and a lot of know-how on how to run such a wastewater plant. We speak of 7.5 million cubic meters of water. And what does that mean? Well, it means that it is more 10 times more than what an Egyptian household will consume during a full year is cleaned here during one day. More importantly, it allows to increase the food security of Egypt. Egypt is still importing a lot of food. We can contribute to that. And it is an example of circular economy because the water that comes from the agriculture drainage is being cleared. It is then being put into a nearby lake, which first had to be cleared by this installation and can then be used for irrigation. So that's a wonderful example how Sulzer helps both prosperity and sustainability. And because we are in these very important structurally growing markets and we have good products and services to sell, we were able to communicate an updated guidance a few days ago. So the order intake that we see until the end of the year is between 9% and 12%, sales up 9% to 11%, and the EBITDA margin around 12%. You see the comparison to the guidance that we did communicate in February. Well, I would like to come to my last slide, just summarize. It is good the company is growing in a balanced way. It is growing geographically balanced and from our three divisions. That is important for the future of our company. Clearly, these first half results that we were able to present to you are an indication of the early effectiveness of Sulzer 2028. We incur both. a bit more cost for the implementation of what we are setting out to do. But at the same time, we also already have results, as you have seen, for example, in the increased margin. Our ambition is to be a strong company, a top industrial company with a very attractive product portfolio, product and services portfolio, high quality and very definitely a future proof business. Our strategy is clear, it is both profitable growth and excellence, operational excellence, excellence as a way to run our company in all our processes, in everything that we do. Of course, that feeds on each other, the growth and the excellence support each other. We are proud to serve essential industries, industries that matter, industries that make difference to people globally. And with that, we are privileged to contribute to a prosperous economy globally and to a sustainable society globally. Thank you very much. Yeah, ladies and gentlemen, we now have the moment for question and answers. We are going to start with phone calls that come in. They are a few. I have just been informed. So let's begin with the first question, please, Thomas.

Good. We start with Flow from Christian Arnold. You have increased your profitability despite negative product mix, with energy pumps having the highest growth, but usually the lowest margin, engineered pumps. I wonder if you have booked more services and or aftermarket business into Flow divisions instead of the service divisions, or is it just linked to the operating excellence, strict cost discipline, and strong pricing?

Short answer, yes.

No, there is no rebooking that we have done to let the figures look any better.

They will even get better when we are going more into services with our approach which we have in water, with the integrated solutions which we want to offer on the water side, where we then have more services also in the flow division.

Thank you. Good. We have three questions from Patrick Suffice, starting with the first one. Your order backlog margin is again higher than reported gross margin. Is that a good proxy for what we should expect in half two or 2025?

You can assume, since we work on operational excellence, it's one of our pillars for the Ambition 2028, that yes, over the course of the next, say, years, that we work on, say, excellence when it comes to automation in our plants, when it comes to process excellence overall, that then, yes, the gross margin should always be better than the order intake margin. Yes.

Nevertheless, on the short end, all these projects, they do also cause some costs. And as I mentioned earlier, we are not declaring them as non-operational costs. We put them into the operational costs, which also forces our divisions to be very disciplined with the one-off costs in their projects.

Good. Moving to the second question of Patrick. Service orders slowed down in Q2 after. Were there any events specific to the quarter and what would be a reasonable run rate for the rest of the year?

Well, we are always comparing against a very high baseline. There is nothing that we are seeing in terms of any fundamental slowdown in the services division. We will most likely see actually an acceleration in APAC, but APAC is still relatively small. So there is no special event regarding the margin that we see towards the end of the year that is

Around about 14.6, say this way.

Which means that will then be a slight increase.

Good. Moving to working capital question. Working capital increased to a growth and capex as well, impacting FCF. What are your expectations for the second half of this year?

that we do almost the same performance as we did in H2 last year, where we really have achieved that we reduced our networking capital by a lot. You see that in comparison to H1, sorry, in comparison to year end last year, we have built up around about 80 million networking capital. Our clear goal is that we reduce around about 50 million of this 80 million until the year end.

That was the last question we have received so far. Actually, just one came in. Apologies. From Martin Bechert. The order book is quite strong. How many months visibility gives this seltzer on company level and on a divisional level? Thank you.

Well, all in all, it gives us about... four to rather six months visibility. It's very different from division to division, even from BU to BU. So the large orders that we again received in the business unit energy and industry will be executed over the next, let's say, 18 months. Whereas in the services division, of course, the visibility is shorter. And when it comes to chemtech, it is somewhere in the middle. Maybe, Thomas, you want to add something?

Yeah, it's exactly like you said, Susan. The only thing I want to add is in our services division, since we have here really a good order intake situation, that also here we are going above six months when it comes then to execution. So, yes, as Susan said, we have a good visibility for the next six to nine months. And I think nothing to add.

Thank you. We have another question that just came in from Adrian Knoblauch. You have a bigger bond of 250 million Swiss francs due to redemption in October with a historically low coupon. Do you have any refinancing plans or do you intend to backpack without an extension considering your cash?

I think, Susan, I answered this question. Yes, we have the intention to refinance this bond fully, to be flexible also in the future. I think it's very reasonable to do this because, yes, we have a lot of cash, but you know that the cash is in countries like Brazil, China. India. So it's not so easy, really. It's kind of not restricted, but it's kind of restricted cash. We can pull it back here to Switzerland over dividends. And this is what we have started this year. But this is causing a higher effective tax rate because we have to pay withholding taxes depending on the countries between 5 and 10 percent. So to answer the question, yes, the intention is to refinance fully this bond to have the same liquidity and cash situation as we have now.

So it's as always a balanced approach where we try to cover or have an optimum situation. Also, when it comes to the stability and the resilience of the company.

Looking at the July order intake, a question from Hans-Joachim Heimberger. How has order intake developed in the first month of July? Any showdown visible?

I can, of course, not tell you how it developed, but I can tell you that no, we see no slowdown in order intake in July. july actually the order intake in july i don't know yet because we're still in july what i do see are the pipelines of our major projects that we have and we have large projects also in in chemtech also in flow even in services so that we see no slowdown so far

Next question here, more on the risk side. What percentage is trapped in China or other difficult jurisdictions?

Percentage of what?

I would assume order intake.

Okay. Our sales in China are around about 600 million Swiss francs, a little bit more. We don't consider it for the time being as trapped in China. We definitely also have... bit of China for China strategy, which we are going to, let's say, increase. So we produce a lot for the Chinese market in China itself. And so far, we hope that global trade will continue because it is in the interest of global prosperity.

The question was actually more cash-related than order intake. It was just clarified by Adrian Knoblauch.

So related to China and other... So I'm not disclosing the exact number, how much cash we have in China, but it's more than 100 million.

But it's not trapped. We have to get it out. It has a price, but that is always part of our calculations.

There's currently no questions in the queue, no active caller.

Well, then I thank you very, very much for your interest, ladies and gentlemen. It's always a pleasure to report the results and the development of Sulzer. Sulzer celebrated its 190-year anniversary in the first half of this year, and we are very proud that we lead together with the Executive Committee Sulzer into the future. Thank you very much.

Thank you.