Sulzer AG (SUN) Earnings Call Transcript

Ladies and gentlemen, welcome to the Sulzer's H1 Results 2020 Conference Call and Live Webcast. I am Alice, the Chorus Call operator. [Operator Instructions] The conference is being recorded. [Operator Instructions] At this time, it's my pleasure to hand over to Mr. Christoph Ladner, Head of Investor Relations. Please go ahead.

Thank you, Alice. Good morning, and welcome to Sulzer's H1 Results Conference Call. Today with me is our CEO, Greg Poux-Guillaume; and our CFO, Jill Lee. In today's conference call, we'll refer to the presentation that can be downloaded from our website. As always, I want to draw your attention on the safe harbor statement on Slide #2. The call may contain forward-looking statements containing risks and uncertainties. These statements are subject to change based on known or unknown risks and various other factors which could cause the actual results or performance to differ materially from the statements made in the call. So this is enough from my side. I hand now over to Greg.

Thanks, Christoph. Hello, everybody. Thank you very much for being with us today. Jill and I are happy to walk you through the numbers and answer any question you may have afterwards. So with no further ado, when we reported our full year in February, COVID-19 was a Chinese issue, which was impacting our operations locally. When we reported our Q1 numbers in April, it was a full-blown pandemic already. We reported in April, a strong order intake and said that our sales were down 4% and that Q2 would be more challenging. We also announced at the time that we were launching decisive adapt measures to reduce our cost and energy-related activities and to protect our cash flow. Now 3 months later, I'm proud to say that we have been swift in implementing the short-term measures. Lockdowns in countries which are important markets for us have sometimes brought these countries to a standstill. This made Q2 much more challenging for us, but with order intake almost flat organically in H1 versus last year, our business has proven to be highly resilient. Sales were down 5.5% organically. Lockdowns, travel restrictions and limited customer site access took their toll, but we were able to stay operational at all times as a provider of essential services, and the business has stay on pace. With lower revenues and a less favorable business mix, our operational profitability, our opROSA, has declined by 160 basis points to 7.5%. And the main driver of this temporary drop was Applicator Systems. Beauty stores and dental practices were closed worldwide during lockdowns. Our customers saw volumes drop of up to 80% in Dental, for example, and stopped accepting deliveries for a while. But markets have reopened, and APS, Applicator Systems, saw the start of a recovery towards the end of H1, with volumes up in all segments in June. This will continue in the second half of the year. We see that in our July trading and will help us reduce the profitability gap with last year in H2. So 7.5% at the half year, 160 basis points down; 80% of that CHF 160 million comes from Applicator Systems and the lockdowns in Dental and Beauty. In H1, we generated CHF 37 million of positive free cash flow, and this is CHF 45 million above last year. We told you in Q1 that we were CHF 15 million ahead of last year. Now it's CHF 45 million ahead of last year despite challenges in Q2. And this is based on good cash collection. We've taken decisive adapt measures to bring down OpEx by CHF 60 million in 2020. And we are on track on these measures as we have already delivered CHF 21 million of savings in Q2. We are also detailing today the structural cost saving plan that we alluded to in April, with expected savings of CHF 17 million. More about this on the next slides, and we start H2 with a record backlog of almost CHF 2 billion. So it's been a challenging H1, but we held up well and have taken decisive self-help actions very early on. This makes us feel good about our prospects for the second half of the year. Let's move to the next page, the COVID-19 impact on Sulzer. Our first priority continues to be the safety of our employees. We've implemented strict social distancing procedures in our factories and offices. Everyone that could work from home was able to work from home during the lockdowns. And employees have returned gradually to their offices. If I take Winterthur, our headquarters, we're about at 50% occupancy at this point, and we're planning to be fully back after the summer break. Sulzer is not spared by the virus. We currently have 36 confirmed open cases of COVID-19. Over 80% of those cases are in the U.S. and Mexico. Fortunately, everyone seems to be resisting, and this does not impact our operations. We've been given the status of essential service provider in many countries. This allows us to remain open and operational even when the rest of the country is in a lockdown. Currently, all our factories are running. In India, we're running at 50% of capacity because of restrictions in the Pune and Mumbai areas, but we're running. And the supply chain is improving, but challenges remain. As I said earlier, we are on track to reduce our OpEx by CHF 60 million this year, the CHF 60 million that we were targeting, and we've delivered CHF 21 million already. The CHF 21 million is essentially 3 buckets in equal proportions. It's the consequences of the hiring freeze; it's the travel stop; and it's compensation and elimination of past due vacation days. Some of these savings in OpEx will stick to the longer term. I'm not sure we'll ever travel the same way again. But we'll talk in more details about the structural savings actions in a minute. The markets that we serve were impacted by the pandemic in very different ways. If I take aftermarket activities, for example, or anything water-related, those have maintained their momentum. Chemicals held up, particularly in China, which was booming. Oil and gas CapEx, industry CapEx has reduced by around 25% in Q2. So the step down has been quite significant. And then we saw markets like Beauty and Dental that just stopped with the lockdown, but they are rebounding now. Let's move to the next page and the structural savings plan that we previewed in April. We announced in April that we will significantly resize our energy-related businesses. Here's what we've done so far. In pumps equipment, we are discussing with social partners, the potential closure of a manufacturing facility in Europe. It's in Belgium specifically. We're also resizing factories in other parts of the world, particularly our energy pump factory in Portland and the U.S. and we will announce further footprint adjustments in the second half of the year. Everything will be announced by the end of September. You'll understand that I'm qualifying this language because we are in discussion with social partners in many countries. And there are rules to what you can say and how you can say it. In Chemtech, we're in the process of closing our factory in Tulsa, Oklahoma, with volumes being transferred to our factory in Mexico. In Rotating Equipment Services, we're closing a turbo service facility in Rotterdam, in the Netherlands. We're also significantly resizing corporate and divisional overheads throughout Sulzer for a leaner business model. And we do so at all levels. Our Sulzer's management group, which comprises of the top 100 managers in Sulzer, has been reduced by 20% already. All remaining actions will be announced by the end of September, as I said. So you'll have full visibility and everything will be underway. These measures will bring us recurring savings of around $70 million a year, and costs us approximately $80 million; 85% of that cost goes towards footprint measures. We expect the savings of CHF 70 million to be realized over the next 2 years. We'll have CHF 10 million line of bottom line impact this year. We'll have an additional CHF 40 million, 4-0, next year. And we'll have the final CHF 20 million in 2022. These savings play an important role in achieving our target to bring our profitability back to around pre-pandemic levels as early as 2021. So decisive ambition savings plan launched very early. And we are confident that this will pay off and make Sulzer also stronger. Now let's discuss the first half business performance. Moving to Page 7, Pumps Equipment. Orders in Pumps Equipment increased by 7.3% organically in the first half, and they have even accelerated in the second quarter, with organic growth of 10% after 4.5% in Q1. This is despite COVID-19 and a drop in oil and gas CapEx by 25% in Q2. So we're up despite the fact that the market is down. Our Pumps Equipment division is comprised of 3 businesses: water; industry; and energy. Water was up by 2.5%. I exclude the usual lumpy desalination and transport projects. We had 2 big ones in the first half of last year. So that 2.5% up is for municipal and wastewater, which is most of our business. Industry -- the industry segment was down 4%, mainly on the lower orders in pulp and paper in the second quarter. Energy, on the other hand, was up significantly with improved margins on orders, too. We'll see that on the next slide Pumps Equipment sales overall were down 3.1% due to lockdowns, travel restrictions and supply chain challenges. Despite the lower sales volume and an unfavorable mix, our operational profitability has slightly improved in the first half of the year versus last year, as the team did a great job on execution and the increases in order intake, gross margin are trickling through. So as you see, we went from 2.9% operational profitability last year, opROSA, to 3.1% this year in a very challenging market. Let's move to the next page. The next page aims to put to rest 2 ideas that may concern you. One is this whole notion of, "Oh, Sulzer's late cycle. And yes, the orders are up, but it's because they're late cycle, and the market will correct down the road." The market is already corrected. There's no late cycle in a pandemic. Everything stops, and oil and gas stopped faster than anything else. This is what you see on the left side of the chart, the bar chart in blue, you see 4% up in Q1 and 25% down in Q2 is the market for oil and gas CapEx. So these are -- this is the culmination of all our customers and what they've announced. You see the market is 25% down. What you see, and it is the blue line, is the Sulzer order intake in energy. And you see that we're up in Q1 and further up in Q2. And the red line is the margin on order intake, which is the second thing that may worry you. "And maybe okay, I accept that Sulzer, it's not late cycle because oil and gas is already corrected, but Sulzer's grabbing everything with a pulse and margins are down." Actually, margins are up. We've been able to continue to be selective. And this is also, in large part due to the competitiveness that we've built through our cost actions over the last few years. It's also due to geographical exposure. CapEx in oil and gas is 25% down. But if you look at the right side of the chart, the colored bar chart, what you see is -- in green, it's our order intake in Saudi Arabia. Red is China. Blue -- I'm sorry, light green is Brazil and Blue is the U.S. What you see is what you would expect, which is the U.S. is significantly down in Q2. If you listen to people like Halliburton, which gave its results a few days ago, Halliburton said that the U.S. market was very significantly down, but that the international market was only about 15% down. And you see something along those lines. You see that the U.S. market corrected. We didn't correct by 50% because, as you know, Sulzer is not represented in shale. This is all conventional oil. And the part that's really getting hammered in the U.S. is shale. But still, our U.S. business is down. People are not building pipelines currently, for example. But what you see is that Saudi Arabia is very significantly up China is very significantly up, and Brazil is very significantly up, all in the first half of this year. So a combination of cost actions and favorable geographical exposure are maintaining the performance of Sulzer and energy despite the fact that the market is already corrected. Now we are taking significant cost actions in energy despite the fact that we're up in H1 because we do believe that the market softness over time will taper down our business in terms of the volumes, and we want to be ahead of that correction as it happens, at least as it happens for Sulzer. It's already happened for the market. But when it does slow down, when our energy business does slow down, cost will already be up. That's what we've tried to do. Hopefully, that -- [indiscernible]. Let's move to Rotating Equipment Services on Page 9. And in rotating equipment services, we grew by 10.2% for its adjusted in the first half of the year and by 6.3% organically. For Sulzer's business that's very significant. And it's all the more significant that the second quarter was full of lockdowns and restrictions and could access customer sites. Nevertheless, all product lines grew all 3 of them, Turbo Services; Electromechanical; and Pump Services. And also all 3 geographies, all 3 regions, the Americas; Europe, Middle East and Africa; and Asia Pacific, all 3 regions did very well. We were designated an essential service provider in most countries, and we were able to continue operating. Our teams also fulfill their civic duty. We offered pro bono support services for maintenance of water and energy infrastructure systems at hospitals, for example. We also helped customers keep their facilities running, acquiring new customers along the way because we were open and not everybody was available at that time. Thanks to this flexibility, sales have remained pretty stable in the first half of the year versus last year. And the operational profitability, the opROSA is unchanged at 12.1%. This, by the way, is also what we saw in the last oil downturn in 2015 to 2017. Rotating Equipment Services through its diversification and reach will ride out the storm. Let's move on to Chemtech on Page 10. A Chemtech's orders declined by 12% organically in the first half of the year, on a combination of the lockdowns that shifted large projects into the second half at least, and a significant drop in oil-related activities. These oil-related activities, mostly refining represent about 30% of Chemtech. The rest of Chemtech is chemicals. And chemicals, which represents 70% of Chemtech, performed much better and were up year-on-year in the first half. China, which is about 1/3 of Chemtech, recovered quickly and grew by 25% sequentially in Q2 versus Q1. Our factory in China is currently fully loaded and running 24/7, with continuing momentum. India, which is another large site for us in Chemtech is another ball game. Our factories in the Pune region -- and Pune is still under locked down, and this is having a real impact on our ability to generate revenue, as you can see from the revenue softness in the first half of the year. But still, 7.7% organically down in revenue, we're mitigating, and our factory in India is currently operating at 50% of capacity and ramping up. We expect this to improve in the second half of the year. If I refer briefly to the acquisition that we made last year, GTC Technology, a U.S. company, which we acquired in early May last year, it contributed an additional 4 months with an order intake of $20 million. FRC, which is a business that Sulzer acquired with JWC Environmental in our Pumps business actually last year, is -- FRC was a small part of JWC and FRC is a separation business through dissolved air floatation. And we transferred it to Chemtech from Pumps Equipment at the beginning of the year. This is why you have a difference between the organic and the adjusted. It's GTC, 4 months of GTC, plus the transfer of FRC to Chemtech. Let's move on to Applicator Systems on Page 11. Applicator Systems, as you know, is a highly resilient business. But when you sell dental applicators to a world which is not allowed to go to the dentist, or you sell beauty applicators to beauty companies that are seeing their retail channels shut down, business will suffer and it did. Orders were down 3% at the end of Q1. And at CHF 114 million for -- as a reminder. They're down 27% in H1 at CHF 160 million, which tells you how bad the second quarter was. Sales are off by 21%, and these lower volumes have almost halved, almost divided by two, the margin of our Applicator Systems business, as the lockdown hit hardest the height margin Dental segment. Still, APS managed to deliver almost 12% of operational profit, on aggressive cost management with $10 million of savings to date in applicator systems. The pricing has not moved at all. As the market has not changed, it has simply not been open. We're not concerned about our Applicator Systems. The rebound is already underway, as you will see on the next slide. And we had demonstrated in the first quarter that our Beauty business, our Beauty segment and applicators was back on the growth path before the lockdowns hit. 2020 will allow us to complete our Beauty retooling in Germany and to streamline our operations in all segments. Applicator Systems will emerge from COVID as a stronger business. The main debate really is on the pace of the market rebound. Let's go to the next page to have a look. So we're on Page 12 and we're showing you what our Q1 volumes were versus last year. We're showing you what our April, May and June order intake was and then we're giving you an illustrative path to the rebound for the rest of the year, so Q3 and Q4. So what do you see here? The blue line is Dental; the red to purple line is Beauty; and the green line is Adhesives. Let's start with Dental. In Dental, the U.S. rebound will be drawn out until the middle of 2021, because as you know, in the U.S., in many occasions, when you lose your job, you lose health coverage. The U.S. dental manufacturers and distributors ended furloughs in July. So they're back at work. Our European customers are still on short work for many of them. Europe recovery is the strongest in Germany. Germany is back in Dental to 80% to 90% of what the market usually is. It's also strong in the U.K. and in France. In the Netherlands, we're at 40% to 60%, and it's slowest in Southern Europe. If you take the U.S., Florida and New York and California, 3 really large states, still have heavy COVID impact and therefore, some restrictions. So what you see is a dental recovery, which is in line with what the big guys like our customers, the Straumann; the Dentsply; the Henry Schein are saying, which is that it'll take until the middle of next year, middle to second half of 2021 until the market is back at pre-pandemic levels. And the rebound is happening at a pace that you can see on here, where towards the end of the year, we've already made most of the way back. But as you understand, there's a combination of access to dentists and psychological aspects of -- dentists are open, but when will you start going to the dentist? That's what we're modeling here, and this is why we're modeling a rebound, which is significant this year, but that will need to go into the middle of 2021 to be to pre-pandemic levels. If I take Adhesives, which is the green line, and I think the end markets, construction; electronics; and automotive -- automotive aftermarket, I should say, are recovering currently. If I take handheld electronics, if I take automotive new, if I take aerospace, they remain slow. Europe is recovering faster. The U.S. and Asia Pacific is recovering slower, with the exception in Asia is China, which is up single-digit year-on-year at this point. And the pace of the rebound of the Adhesives really tracks, I'm sorry, the industrial production recovery. So you see the pace of the rebound. It happens faster than in the other segments and then the slope levels off and the recovery is slower in the later part of the year as we wait from some -- for some of the softer end markets like automotive and aerospace to recover. Moving on to Beauty. Beauty is the purple line. Beauty is interesting. Different customers have different approaches to the recovery. Some of them are deciding to launch new products early, some of them are deciding to delay new product launches, some of them are restocking right away, some of them are delaying restocking. It's really not homogeneous as a market. The recovery is faster in eyes and mass market, and it's slower in lips and prestige. Eyes, you can imagine in a world where people wear masks, that the mascara market will rebound faster than the lipstick market, for example. And mass market versus prestige, it's because prestige is in part driven by duty-free and airports, which are closed or partially open. And the mass market is really retail and supermarkets and retail shops, which have reopened. The China market is up in high single digits in Beauty, and the U.S. continues to be slow. And as you can see, at the end of the year, we believe that the beauty market will be pretty much back to pre-pandemic levels. So that gives you a view of the mix of segment rebound in Applicator Systems. Once again, pricing has not been impacted at all. We're protecting our margins through aggressive cost actions and the recovery is underway. We saw it in June, and we're seeing it in July. The current trading is good in July. I'll now hand over to Jill for the financials.

Thank you, Greg, and good morning, everyone, from my side. So our first half orders were up 1.7% on an FX-adjusted basis. FX had a negative impact of CHF 126 million or 6.5% on the back of a very strong Swiss franc. Acquisitions contributed CHF 42 million or 2.3% order intake. So organically, our orders were down 0.6%, so pretty much stable. The gross margin on order intake was down a bit from 33.8% to 33.3% due to mix effect. Applicator Systems, which had the largest margins, had a significantly lower order intake, while order intake in Pumps Equipment, which has the lowest margin has been growing our order backlog has increased by 8.6% since the end of the year and today stands at a record high level. So just a bit shy of CHF 2 billion. Sales were down 3.9% adjusted for ForEx. Foreign exchange had an impact of CHF 107 million or 6%. Acquisition contributed CHF 29 million or 1.6%. So organically, our sales were down 5.5%. COVID-19-related lockdowns, travel restrictions as well as supply chain impacts were the reason for the decline. Operational profit or opEBITA declined from CHF 162 million in the previous year to CHF 120 million in first half 2020 on a negative volume and mix effect, which were partly mitigated by our cost actions. Operational profitability at opROSA declined by 160 basis points from 9.1% to 7.5%. We have announced to resize our energy-related businesses. The cost for this program have been CHF 53 million in H1, of which CHF 42 million were booked as restructuring. The charge resulted in our EBIT, declining from CHF 99 million in the previous year to CHF 36 million in the first half 2020. And our EBIT margin, or ROS, to go down from 5.6% to 2.3%. Core net income, which adds back the tax adjusted nonoperational and one-off items has reduced by 26% on a currency-adjusted basis to CHF 82 million. Free cash flow was CHF 37 million in the first half versus the negative CHF 8 million in previous year, an improvement of CHF 45 million. If you recall, we said with Q1 that our free cash flow was CHF 15 million ahead of the previous year. So we have made further progress in Q2 despite the adverse environment. Let me now move to the quarterly development on the next slide, Slide 15. So in Q2, our orders have been hit by the lockdown, mainly in Applicator Systems and Chemtech as you have heard from Greg. Orders were down by 3.3% adjusted for currencies and 4.6% organically. The division that was most impacted by lockdowns was Applicator Systems. The COVID-19-related closure of beauty stores and dental offices as well as construction sites and factories in certain countries had a massive effect on APS business, mainly in April and June. But as Greg has shown -- sorry, April and May. But as Greg has shown on the earlier slide, things started to improve in June. The other divisions were also impacted by lockdowns, but not to the same extent. Chemtech has seen some larger projects push into the second half. And Rotating Equipment Services was flat despite the lockdown and limited site assets. And Pumps Equipment has even accelerated, growing 10% in Q2 versus 5% in Q1 Let me now give you a bit of flavor on what impacted our profit development on Slide 16 and move to that. The lower volumes gave the worst impact as this means some gross profit that you don't generate. Under absorption is also a result of lower volumes and stems from the fact that not all of the cost of goods sold are variable. Then we have an additional impact from mix as we had less Applicator Systems, particularly Dental, which has the higher margin. There was no price erosion rather margin went up a bit as we traded Pumps Equipment energy orders with higher margins. All in all, if you look at the purple bars, it adds up to $60 million coming from the sudden volume impact from lockdown. As mentioned earlier, we've been quick in taking costs out, this is the CHF 21 million green bar within Q2. Savings come from less travel as well as our hiring freeze, utilization of vacation leaves and other cost cuts. ForEx had no impact on operational profitability, opROSA, but lowered our operational profit by around CHF 8 million. Overall, the operational profitability has declined by 160 basis points to 7.5%. Now Slide 17, so that I can show you the development from EBITDA to EBIT. Two main items there to call out, amortization and restructuring. Amortization was at a similar level than last year. So no note-worthy change on that part. On restructuring, it was $42 million, and therefore, much higher than last year. This restructuring is related to the resizing of our energy-related businesses. As mentioned earlier, we have announced in H1 to close facilities in Europe and in USA. And we have also resized the overheads on divisional and group level besides some local resource adaptation. On Slide 18, EBIT to net income. There's actually no surprise here. The financial result is unchanged from last year, and tax is lower on the back of lower profits. Still, some of the restructuring of closed entity is not tax deductible. And therefore, the effective tax rate at the end of June stood at 28.4%. And now on Page 19, our balance sheet. Our balance sheet continues to be strong. As always, in the first half, our net debt-to-EBITDA ratio is higher than at year-end as we pay dividend and bonuses only once a year and always in the first half. So compared to last year, our net debt is a bit lower thanks to the positive free cash flow and despite an increased dividend that we have paid. The lower EBITDA in first half resulted in our net debt-to-EBITDA ratio to slightly notched up to 1.3x from 1.2x last year. And with that, let me hand you back to Greg.

Thanks, Jill. So to wrap up, we've demonstrated the resilience of our business model in the first half of the year, driven by the strong performance of our service and aftermarket activities, which, as a reminder, make up about 45% of Sulzer. But we had other bright spots, such as the water and the industry business in pumps such as China for Chemtech, which performed very well. While the energy market corrected significantly in the second quarter, our order intake and energy continued to grow and with that also our backlog. Very important as well is that we did not give in on margins and maintain our profitability. The reduction of capacity in our energy-related businesses will yield structural recurring savings of $70 million per annum once all the actions are implemented. And it will also further reduce our exposure to the oil and gas markets. As a reminder, once again, in 2019, oil and gas was 28% of Sulzer, and half of that was aftermarket. So 14%, 15% new equipment exposure to oil and gas. The drop in operational profitability that we have seen is largely due to Applicator Systems, which has seen its end markets freeze during the lockdowns in April and May. We've seen the recovery starting in June. And as I told you, it's confirmed by July trading. With that momentum to continue our strong order backlog, the resilience of our aftermarket business and assuming a progressive improving economic outlook, we see our operational profitability in the range of 8.5% to 9% for the full year 2020. In addition, the savings that we expect from the restructuring actions that we have taken should lead our margin back to around pre-pandemic levels in 2021 for the full year. There's a lot of market uncertainty and nothing comes easy, but Sulzer's team members around the world have done an incredible job in the first half of the year. We look forward to continuing our rebound in the second half. And now, Jill and I are happy to take any questions that you may have.

[Operator Instructions] The first question comes from the line of Charlie Fehrenbach with AWP.

I understand you correctly, that you see the obligation to where mass is a possible driver for the mascara business? And also, did I understand it correct, do you see -- do you think the beauty business should be, by the end of the year, on a good level again, at the end of the year?

Yes. Charlie. Hello again, Charlie. You're correct that we think that the beauty markets -- we think that our beauty performance in terms of order intake will be back to around pre-pandemic levels by the end of the year. So as we project the market reopening, we think that commercial activity will be at that level. And as you know, between the moment you take orders and the moment that turns into sales, there's a bit of a lag, but we think that the beauty market is the market that will recover fastest. And that it will mostly be back at the end of the year. Now mass driving mascara, the point I was making is that in the beauty market, its conditions are more favorable to eye products than they are to lip products because people are wearing mask. I wouldn't go as far as to say that because people are wearing mask, they're buying more mascara. But certainly, because people are wearing mask, they might buy less, less lip products. But if you need any more like cyclical insights on lips versus eyes, I'll ask Jill to jump in because I'm out of my depth a little bit on that.

I can definitely add that worrying lipstick is a little bit of a problem when you have to wear mask.

So my sector expert confirms, Charlie.

The next question comes from the line of Fabian Haecki with UBS.

A few questions, just one off [indiscernible]. So the first 1 is on PE, where I'm really surprised about the resilience of the business, A. And B, I'm even a bit more surprised to saying this is not late cyclical. This is actually real resilient, thanks to your regional exposure and also your products' exposure, which you outlined in detail here. However, my question is, what did you see in the recent weeks? And particularly, when I look at the countries, the regions that recovered substantially like Saudi Arabia, Brazil, and also China, but particularly the first 2 countries, Saudi and Brazil has been very volatile in the past, and sometimes it's been very difficult to make out a trend here. So how would you assess the recovery we've seen in Q2? And what read would you make into the second half and also into longer term? Or what structural trends do you see that you're better positioned in PE? That would be my first question.

Okay. Let me take that one, Fabian. The Saudi Arabia hasn't been too volatile. Brazil has been very volatile in the past, you're right, and some of that has to do with political circumstances and the fact that the main customer in Brazil, Petrobras, was undergoing some issues in the past. I think I don't expect Brazil and Saudi Arabia to necessarily be at these levels going forward. I think there's an element of momentum in these countries that have a lower cost of production than many other producers around the world. But I do think that there'll be some element of softening and we won't stay at those levels. But I also do believe that whatever the drop, they'll be more resilient than, say, for example, the U.S., which has a structural issue with the fact that shale doesn't work at $40, $45. It just doesn't. So Saudi Arabia will continue to be an active market, but I think it's going to soften in the second half of the year and probably for part of 2021. Overall, we believe that the energy market will be a challenging market for most of 2021 as the world rebalances. There's already been a very abrupt rebalance because there's been a massive demand drop during lockdowns, but there's also been a massive supply cut. And as companies stop investing in the U.S., for example, in shale, the natural drop of production when you don't invest, is in the range of like 40% a year. It's very, very steep. So that rebalancing is already leading to a situation if you follow what most observers are saying. It's already leading to a situation where demand is higher than supply currently, but there's a lot of supply that can be brought back online. So what we see -- what we believe is that there'll be a market that will kind of hover at kind of depressed levels for the next 18 months, with countries like Saudi Arabia and China doing better than countries like the U.S. or international oil companies. And this is why we're adjusting our cost base ahead of this adjustment. We hope the momentum in the countries where we're strong continues as long as possible, but we're not betting on that. We're betting on softening. And whenever it happens for us, at least, we'll be quite prepared for it because the actions were launched early. Does that answer your question, Fabian?

Yes, it does, Greg. And then the second question to this is pricing. I mean so far in Q1, you said pricing, you expect it to be more stable than in the last downturn as you already came back to quite a depressed level and it has not so much recovered from this level. What were the drivers and dynamics in Q2 in terms of pricing, particularly for your energy-related equipment?

Well, if you look at that slide on Page 8, where we have the Pumps Energy details per quarter. What you see is that our margin on order intake in Q2 was actually higher than in Q1. And was actually -- our margin on order intake and energy in Q2 was the highest margin for the last 1, 2, 3, 6 quarters. So is that geographical exposure? Is that momentum? Is it a combination of both? We'll see. But we're not expecting the -- we're not expecting our margin to drop significantly in order intake for energy and pumps. And the reason why we're not expecting that. We're seeing price pressure in the markets, but the fact that we're cutting capacity and that we're cutting cost allows us to continue to be selective and continue to favor the places, the segments, the applications in which our products are more differentiated and we're more protected. So as you rightly said, there wasn't much of a pricing recovery since the last downturn. And I don't think there is that much of the step that companies can drop to create some elasticity. I think what we're seeing at this point is that our competitors are quite reasonable in how they're approaching the current market situation, and we're not seeing people doing silly things.

Okay. That's clear. And next one is on -- how shall we model and deal with the cost savings announced? So there are 2 big blocks. The one is a CHF 70 million structural cost savings, as the name says, it's structural. And then we got this CHF 60 million in OpEx. And how much, with how much of the CHF 60 million should we calculate in 2021 and beyond? Because as you also said, some of it is temporary in nature, like traveling, and then some. I think there's also the temporary salary cuts in there. So is it actually, if we assume in a positive or bull case, the markets are going, let's say, APS, fully in recovery mode, industrials as well, energy, let's say, at least stable, would the CHF 60 million completely evaporate? Or will something of it remain sticky here?

The CHF 60 million is not going to completely evaporate, but the CHF 60 million is not recurring. So I struggle at this point to give you an exact number of what will stick because it's an evolving situation. But as I said, about 1/3 is travel, about 1/3...

Is the vacation leave, and then we have as well, hiring freeze.

And hiring freeze and OpEx cuts in there and SG&A cuts in there. I think the hiring freeze and the OpEx cuts, I don't see us ramping back up very quickly anytime soon. I think that we will be conservative for the foreseeable future, and adding people to our business, because it's a lot less painful not to add than to have to reduce. If I look at travel, I don't know exactly how the world will travel in the future. But if I take Sulzer, I would expect that for the long term, we'll -- our travel cost will be at least 1/3 lower than what they were historically. Because there's that 1/3 of the stuff that we need to do because we need to -- customers want to see us, and we need to see us for certain things. And we need to intervene locally in many cases. But all the internal stuff, all the stuff about, I need to go to China because I need to interact with my team there. And otherwise, they'll feel that I'm not paying attention to them. I think that will, in large parts, go away because people will not travel the same way again. So if you look at the -- I think the travel spend of a company like Sulzer, is off the top of my head, it's like...

CHF 40 million.

CHF 40 million a year of air tickets. And if you assume that 1/3 of that will not come back, that already gives you a little bit of perspective. Now if I take the compensation cuts -- I hope that will come back. I hope we'll do well enough that we will be able to return compensation to pre-pandemic levels as we make our numbers in the future. But if I -- on the basis of our budgets and 3-year plans, obviously, we're under pressure and that will have -- that has an impact for a while. So I didn't really answer your question in a very helpful way, but take the CHF 60 million, I don't know, I would say somewhere between, I don't know, CHF 20 million, at least will stick. And depending on how people travel and how would the market rebounds, maybe more for 2021, but I don't have a number at this point. I wish I did, but I don't. The CHF 70 million, it's recurring savings, it's structural. It will stick, and it will hit the bottom line.

That was very helpful. And then my last one for Jill. You mentioned at Q1 results that free cash flow could stay in a range of, I think it was 4% to 4.5% of revenues, which was already quite reassuring. Now you had a better free cash flow. And I think if I'm not mistaken, there's a strong seasonality as well in free cash flow skewed into the second half. So is this still a range you think is reasonable to achieve?

Well, at this moment, what we have certainly seen is that with intensifying our collections by calling the customers more promptly, we have seen that coming into our cash flow and bring it to a higher level than previous year, my assumption would be that we continue to work on improving our working capital for the rest of the year, and that's not something that we're going to start stop. But we also have the counter effect that we will have some of the restructuring measures where we need to pay out the restructuring costs. And that might reverse some of the positive gains that we have so far. But all in all, that's at least the level that we are shooting for. Yes. I hope that answers.

So you think despite the extra restructuring outflows, it's still feasible or realistic? Did I get that correct?

Restructuring cash outflow, Jill, will -- there will be some this year, but a lot of it will be next year?

Yes. Well, a part of it will be this year. And I think a lot depends on the negotiation that we have. But all in all, I would say 1/3 at least, would be out in this year.

Okay. So out of the CHF 53 million?

Out of the CHF 80 million.

Out of the CHF 80 million, you think about 1/3 will be cash out this year. And the rest is -- all the rest will be next year, actually.

All the rest will be next year. Yes.

Because we're very early in the actions. We moved very fast, which means that the cash out is also front-loaded. I think Jill is correct on this.

The next question comes from the line of Armin Rechberger from Zürcher Kantonalbank.

Yes. Not much left for me, but Rotating Equipment Services, I was surprised how can you manage to do so many services within -- or during lockdown times. So can you elaborate a little bit on that sure?

Sure. Sure, Armin. I mean, look, as long as you're pleasantly surprised, I think we'll take that. The business, the Rotating Equipment Services that Daniel Bischofberger runs is really, a very local business in the sense that we have global product lines, but we are -- we have more than 100 service centers around the world, and we built proximity to customers. So we were impacted by travel restrictions, but not as impacted as we would have had -- as we would have been, had we had to travel across borders, for example. And a lot of the service that we do is actually done in our workshops. Field service is lower-margin business and field service is really not the -- not the heart of our RES division. The heart of our RES division is highly technical repairs and service done in our workshops. And there weren't that many restrictions to equipment traveling. Our customers didn't want to give access to their sites, but they were quite happy taking out a pump, putting it on the truck and sending it to us or taking out a rotor from a turbine and sending it to us. Even in countries where you had very significant restrictions, take for example, Indonesia. Indonesia, all flights were canceled, they only had military flights. I'll give you an example. There was a power plant, I think, on Sumatra, which had a turbine that was down. And the OEM couldn't intervene because the OEM said we can't come, we don't have people, we can't access. But we actually have a very large service center in Indonesia that's quite impressive. And what the Indonesian government did, because it was very important to keep electricity going to the population is that they put our service guys or service personnel on military planes and took them to the power plant so that we could fix the turbine. So this is the notion of essential services. It's not just something that we say, so we can stay open. It's because governments and utilities do see us as an essential service. That allowed us to mitigate things. But yes, there's an impact on field service. There's an impact on some customers. There's an impact on certain customers that are just delaying outages. You see that in RES, and you see that also in Tower Field Services and Chemtech. You have a lot of U.S. customers that are saying, you know what, I had plan to do an outage this summer, but I'm pushing it back to either September, October or maybe to next year. That's happening a lot also.

Yes. And I think you do see mixed behavior as well in the area of cruise ship, for example. You see like in Australia, people are more confident with the cruise ship, that eventually business may come back. So during the time when people are not now taking the cruise ship, they're actually servicing the motors and servicing -- from that, doing the repairs. And you have other places where people are more worried and not sure about whether business is going back to the cruise ship travels. And therefore, they are holding back their repairs and upgrades in the moment.

Yes, that's a very good illustration by Jill. If you take cruise ships, in Australia, we took something like CHF 7 million of orders for refurbishing turbines on cruise ships. It was one of the big operators that said my ships are [ okay ]. And I might as well do these things so I can be ready when the market restarts. If you look at the U.K., that market went to 0. So it's geographically dependent. But sometimes it's negative, sometimes it's a positive.

And the situation at Chemtech, I mean there, it must have been the opposite. Tower Field Services must have suffered a lot because there, you ship the crews around -- about ship. You fly them around in planes. Is there to be expected, a turnaround now in second half year because they are able to fly again?

Yes. There will be. And it's -- no, it's not even the flying. It's -- if you take, for example, our Tower Field Services business in the U.S. or in Saudi Arabia, our guys are local. I mean, mostly, they go there with trucks and pickup trucks, buses and so on. But an outage, Sulzer will provide 100 -- or 100 people that come on-site to do the outage, because the aim is you go in, you go out, you do it as quickly as possible. And customers don't want to have 100 or 200 people showing up on their doorstep and having to screen them and take the risk for their own population. So it's been pushed back. Tower Field Services suffered in the second quarter. There'll be a partial rebound in Q3. As I said, some U.S. customers shifted the outage to September, October. But I think we'll see also a lot of customers just shift things into 2021 if they can wait that long.

Yes. That brings me to another topics mentioning shifts. You mentioned some bigger projects being shifted by customers. You were talking in this case of Tower Field Service projects or...

No, I was talking separation technologies. I was talking chemical plants. And some of the big investment decisions in chemical plants have drifted in time. And they've drifted because our customers were in lockdowns, too. A lot of them were in home office. It was more difficult to organize. And despite the fact that the chemical market has remained active, there are some customers that have had a wait and see attitude. So if I take the chemical market for Chemtech, for separation technology; once again, it's a products business. The market in Asia has been really, really good, especially in China, where customers are going full speed ahead and we're working 24/7. If I take the markets in the U.S. or in Europe, it's slow currently because people are kind of holding back and deciding when they want to give the green light. And I think what we'll see is we'll see a little bit of project shifting from -- we saw projects shifted from H1 to H2, and I think we'll see projects shifting from H2 to the first part of next year. Nothing is getting canceled, but things are not materializing as quickly as they were in the past, simply because people are cautious.

Okay. And then my last question, probably. If I look at how value did with Pumps Equipment in Saudi Arabia, Brazil, is that just a lucky punch and will reverse now? I mean, will that stay that way, that the Saudi Arabia, China and Brazil will outperform kind of in the second year that is -- I mean, second half year, that is, I mean?

Well, Brazil, as I alluded to earlier, is not -- it's a lumpy market. It's not linear. And the reason for that is a lot of the energy development, a lot of the oil development in Brazil is deepwater. And the way you do deepwater development is you do FPSOs, flotation, production and storage ships. And these ships are big investment decisions, and that market was very active in the first half of the year. We expect that market to be a lot less active in the second half because a lot of orders were placed in the first half. So we think Brazil will go down. But Brazil, as I said, is lumpy. Saudi Arabia, we continue to have a good pipeline, but we are also seeing that projects are shifting a little bit in Saudi Arabia. Aramco gave instructions to some of its vendors to slow some of the projects down. So we expect Saudi Arabia to continue to outperform the rest of the oil markets, but we expect Saudi Arabia to be lower in the second half of the year than it was in the first half of the year. So overall, we see a slowdown in energy. The point I'm making is that the market slowdown has already happened, but Sulzer has kept going strong. And I'm also making the point that geographically, we have a more favorable balance than most other companies that you'd be looking at. And in particular, we have no exposure to shale. But at the end of the day, gravity applies to everybody, just we're more resistant to it at this point than some of the other players that have other exposures are. Does that -- is that clear?