Sulzer AG (SUN) Earnings Call Transcript

Ladies and gentlemen, welcome to the Sulzer Full Year Results 2020 Conference Call and Live Webcast. I am Moira, the Chorus Call operator. [Operator Instructions] and the conference is being recorded. [Operator Instructions] The conference must not be recorded for publication or broadcast. At this time, it's my pleasure to hand over to Christoph Ladner, Head of Investor Relations. Please go ahead, sir.

Thank you, Moira. Good morning and welcome to Sulzer's Full Year 2020 Results Conference Call. Today with me is our CEO, Grég Poux-Guillaume; and our CFO, Jill Lee. For this call, we have prepared a presentation, which you can find on our homepage. [Operator Instructions] And 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. Having said that, I hand now over to Grég for the presentation. Grég, please?

Thank you, Christoph. Hello, everybody. Let me start with our 2020 highlights on Page 4. We set ourselves ambitious targets for 2020. But with the outbreak of COVID-19 in China then worldwide, we had to adapt on the fly. We hit the breaks on our operating expenses, concurrently launched a resizing plan for our Energy-related businesses, and we did this a few months ahead of the market slump, which allowed us to remain selective and focused on margins when taking orders. In a tough year for all, our orders proved to be resilient, down about 4% organically. We hit the trough in Q3 and initiated a rebound in Q4, which was up sequentially versus Q3, contrary to our usual seasonality. Our sales were a little bit more impacted, down around 5% on the expected customer site access restrictions, the supply chain delays and customer-driven slowdown of certain projects. Note that for both orders and sales, we had a currency translation impact of around CHF 215 million, negligible impact on margin as we are naturally hedged, but that's the downside of reporting in Swiss francs. Operational profitability was down 100 basis points to 9% with the dropped -- the drop, I'm sorry, driven solely by our Applicator Systems division. The other 3 divisions together were up 10 basis points despite lower sales. Pricing was stable, execution was solid, and we took significant costs out. We squeezed our operating expenses by about CHF 60 million, and we had the first CHF 12 million savings from our targeted CHF 70 million energy resizing plan. Our Applicator Systems division is pretty much recession proof, but this wasn't a recession per se. When dentists are forced to close, you don't sell dental products. We lost most of Q2 in APS, so really a full quarter was pretty much gone. But since the summer, Applicator Systems has rebounded strongly, and Q4 was actually higher than Q4 2019. And when I look at our order intake in January in applicators, January was actually our highest month in order intake ever in Applicator Systems. Our strong focus on cash resulted in yet another record free cash flow of CHF 272 million, 28% up versus the CHF 213 million of 2019, which was already a high number. This high number, this CHF 272 million, and our strong balance sheet allow our Board of Directors to propose an unchanged dividend of CHF 4 per share to the AGM. Despite the pandemic, we've continued to strengthen Sulzer with acquisitions in the area of health care and medical and Applicator Systems and in Water in our Pumps Equipment business. I will show you on later slides why these acquisitions are of strategic importance. Looking at the split of our orders from different angles on Page 5. You see that our service division has gained against the other divisions. This is because service has grown orders in 2020 by 1% organically while the other divisions saw a decline. There is also service revenue in Pumps Equipment, in PE, and in Chemtech. So aftermarket activities overall, if I sum everything up in 2020, were 44% of Sulzer. And if I exclude Applicator Systems, which -- where the notion of aftermarket really doesn't make any sense because these are mostly consumable devices, if I pull Applicator Systems, aftermarket was actually 50% of Sulzer. Operational profits saw a temporary decline in the Applicator Systems portion. The market freeze that hit Applicator Systems in Q2 is responsible for that. But since then, the division recovered strongly, as I explained. The share of APS will be back up this year. Regionally, Asia gained mainly driven by China. No surprises there. All right. Let's move on to Page 6. Going into our divisions and starting with Pumps Equipment or PE, as we call it for short. Orders were down about 3% organically in 2020. Water was up 2% if we adjust the 2019 base for the 2 large orders we had in water transport and desalination in Saudi Arabia. These were water infrastructure projects, as you know, and water infrastructure is always lumpy. As we often explain, the real indication of the health of the world market is the performance of our core municipal Water segment, which is the lion's share of our Water business. Industry was flat as a decline in pulp and paper was offset by increases in other process industries such as metal and mining. Energy saw 2 completely different half years. H1 was strong and particularly Q2, when we defied gravity by growing while the market was shrinking, all the while taking out capacity in anticipation of the coming trough. H2 was weaker, as anticipated, as the market found its trough and we continued to be selective. Overall for the year, Energy was only down 2%, and this means that we have high comps for H1 2021. We saw a similar picture for sales. The decline was mainly driven by Energy, whereas Water was up and Industry was stable. Despite lower sales volumes, good execution and swiftly implemented cost measures pushed operational profitability 30 basis points higher to 4.3%. We closed the acquisition of Nordic Water on February 1. This is on Page 7. In Water, Sulzer historically supplies pumps, mixers, compressors and aeration systems mainly for the wastewater markets and wastewater treatment plants. We acquired JWC in January 2018, enlarging our product portfolio with grinders and screens that shred and filter large solids -- solid parts at the beginning of the process to protect the other equipment downstream. In Nordic Water, we strengthened our screens offering and add processes and equipment -- sorry, for sedimentation and filtration. This made Sulzer one of the very few companies that can offer equipment for all major steps in municipal and industrial wastewater treatments. Nordic Water also offers access to the freshwater treatment market, which is using the same filtration technology. The water treatment market is expected to grow somewhere between 4% and 6% a year. We see significant sales in aftermarket synergies as the product overlap is limited between Nordic Water and the rest of our Water business. And Nordic Water complements us well geographically. For 2021, we expect Nordic Water to generate sales of CHF 80 million and an EBITDA of CHF 13 million, 1-3. Moving on to Page 8. We give you some insights into Pumps Equipment's Energy business. While you see on the chart that orders suffered in Q3 and Q4, margins on orders were still up compared to the previous year due to our continued selectivity. You can also see that at division level, with order intake gross margin up 100 basis points for the year, we actually did well. Energy takes about 9 to 12 months from orders to sales. We started to ramp down our capacities and adapt our cost structure early when orders were still growing but in with line our expected view of the market. Well, we think that we've seen the market trough in the second half of 2020, and we expect a gradual sequential improvement in the first half of 2021. We announced in April last year that we would reduce our energy capacities by about 1/3. We announced the closure of a factory in Belgium that we expect to complete in 2021. In addition, we significantly downsized our engineered pump factories in Portland in the U.S. and in Brazil. When the market does recover, and I believe that banks like JPMorgan and Goldman Sachs see Brent at $100 in the not-too-distant future, so there are voices out there that think that the market will recover in the foreseeable future, we can ramp up as needed as we debottleneck our remaining factories in parallel. But this ramp-up is not what's in our working scenario for 2021. Now let's move to our Rotating Equipment Services division. It was boringly flat, but boring during a pandemic is actually pretty great, I think. Orders were up in service organically close to 1% despite customer site access restrictions and a general belt tightening in the markets that we serve. We saw positive developments in Asia Pacific and in the Americas, and we were stable in Europe, Middle East and Africa. Our sales in RES were slightly down as our customers asked for delays and pushed out some maintenance work. Profitability remained stable, showing the resilience of our business model. RES is a division that generates 14%, 1-4 operational profit year in and year out. And from a volume perspective, a bad year is a flat year, and a good year shows about 5% growth. It's the bedrock of what we do. The first half of 2021 will continue to be slow as lockdowns are still in effect, but we expect some pent-up demand to be released once lockdowns are lifted. On Slide 10, we show you an example of why RES is resilient and why its offering is broader than you may think. I mean who generates exceptional cruise ship orders during a pandemic that is idling the majority of ships? Well, RES did. Cruise ships, while they remain idle, some operators frequently brought forward maintenance work but only for complex, essential stuff. Modern cruise ships are powered by electric propulsion systems. If one of the pair of motors develops a serious fault, the vessel must remain docked until repairs are completed. In this particular case, the OEM, the original manufacturer of the motors, proposed to replace the complete stator, which would have implied cutting out the hull in a large dry dock. That's convenient for the OEM, but it's not really convenient for the cruise ship operator, as you may imagine. At the end of the day, it's all about the customer. Sulzer offered a solution to repair the motors on-site turnkey. The work was performed on all 4 motors from 2 sister ships inside the ship. My Sulzer team, composed of engineers and technicians from Australia and the U.K. with high-voltage coils that came from one of our sites in U.K. -- we kept our people in their own bubble while in the vessels because there were other teams doing maintenance at the same time -- kept everybody safe, developed the project on time, on budget with Sulzer quality to the full satisfaction of the customer. And this was a significant order. We're talking mid-single-digit million francs, just so you get a little bit of perspective as to how valuable these orders are. Let's move on to Slide 11, Chemtech. Chemtech orders declined by about 7% organically and by 1% adjusted for ForEx. While China was very strong, up almost 30% for the year, 3-0, 30%, large chemical projects in other parts of the world were postponed. Site access restrictions also had a negative impact as sales were down due to the impact of lockdowns, particularly in our factory in India, which remained either closed or understaffed for many weeks because of local restrictions. But despite lower sales, operational profitability was stable at 9.6% on strict cost discipline. You may notice that we changed the way we present the order split. Chemtech develops chemical processing and separation technologies that enable our customers to operate world-class plants in evolving market segments. And part of this evolution is leading us to present the business differently. Chemical applications are almost 55% of what we do. Service is about 15%, 1-5. And gas and refining is about 20%. The remaining 10% is the fastest-growing and most promising segment. We call it our renewables segment, and it encompasses sustainable applications like biopolymers, recycling processes for plastic fibers -- plastic or fibers and things like biofuels or carbon capture, low-carbon applications. This segment was close to CHF 50 million, 5-0, in 2020 and will grow significantly in the next couple of years. An example of that can be found on Page 12. Chemtech supported the development of China's first fully integrated sugar-to-polylactic acid plant located in Bengbu in China's Anhui Province. The facility utilizes Sulzer's distillation, crystallization and polymerization technologies to produce 30,000 tonnes a year of polylactic acid. Polylactic acid is the most promising form of biopolymers, and most PLA plants worldwide use Sulzer technology. The new facility uses locally sourced glucose to produce polylactic acid. Sulzer played a crucial role in the construction of the plan. We designed, we engineered and we supplied customized mass transfer equipment for the purification of lactide and the polymerization processes. Moving on to Applicator Systems on Page 13. APS, Applicator Systems, started off the year strongly, but our markets collapsed in Q2 as dentists and retailers were forced to close. We then saw a strong recovery in Q3 that has continued in Q4 and carried into January of this year. Q4, as I told you, was 5% higher than the same quarter in 2019, and the rebound was across all segments. While pricing remained stable, the drop in volume had a negative impact on profitability of Applicator Systems. We lost most of the second quarter and ended up at 13%, 1-3, 13% operational profitability, down from our usual 21%. We expect Applicator Systems to go back to the high teens in 2021 as markets get back to cruising altitude around the midyear and to be back in the 20s in 2022. The business has been great, and people still have teeth and eyes, and they still buy iPhones. We were simply hit by the -- essentially the 100-year wave for that business. We used 2020 to complete our Beauty transformation by closing the factory in Bamberg and expanding and retooling Bechhofen. We're now back in fighting shape in Beauty and this is behind us, which is great. Finally, the acquisition of Haselmeier. Through that, we're building our fourth leg in Applicator Systems in Medical. I'll give you some more insights on the next slide. Haselmeier designs and produces drug delivery devices such as injection pens for subcutaneous applications like fertility treatment, growth hormones, diabetes and, increasingly, rare diseases. With the addition of Haselmeier, the Medical segment of Applicator Systems now includes medical applicators for bone and tissue repair and drug delivery devices. Haselmeier's products are based on its own IP, intellectual property, with some 200 patents. Haselmeier, therefore, is not a contract manufacturer. The latest D-Flex platform is highly flexible and allows for faster customization and certification of new drugs. We have ambitious targets for that business. We believe that we can more than double sales, I'll give you numbers in euros, from the EUR 35 million that the business delivered when we acquired it to EUR 90 million by 2025. And we also believe that we'll increase EBITDA margin in the same period from 15% to 30%. On Slide 15, you see the recovery of APS in a graphical form. In Q2, you can see that the markets that we serve in APS collapsed because, once again, dentists were closed and retailers were closed and these were forced closures. It had nothing to do with demand. It had everything to do with the pandemic. As you can see on the chart, we started to recover in the summer, and that has continued in Q4 and carried into this year. As I said, January is our highest month ever in order intake in APS. Now this doesn't mean that volume fluctuations were totally behind us. There's currently an element of restocking. And lockdowns, while milder, are not over. But the rebound is clear, and our customers are looking past the pandemic at this point. We see volumes recovering fully by the summer with some markets faster than others. In Dental, for example, the U.S. market will be slower to recover mostly for health insurance reasons linked to people losing their job. As you know, it sometimes works that way in the U.S. Let me talk now about our recurring cost savings that I mentioned earlier. Slide 16 gives you more details on our ambitious plan. We're downsizing our footprint in Energy as I explained. We said last year that we would reduce our capacities by about 1/3, and all the measures are either completed or well underway. We are fully on track to deliver the the CHF 70 million of savings -- recurring savings that we are targeting. We're in the process of closing a factory in Belgium -- pump factory in Belgium. We expect the closure to be completed by the end of the year. We -- as I said, we significantly downsized some factories in Portland and in Brazil. And we also closed the Chemtech factory in the U.S. We closed a large turbo service facility in Europe, and we resized corporate and division overheads. So we really tackled everything, mostly Energy but also some of the overheads. We already had savings of CHF 12 million hit the bottom line in 2020. We expect an additional CHF 40 million, 4-0, in 2021 and the final CHF 20 million in 2022. All of that is recurring. So the CHF 70 million is recurring. And as I said, these savings are structural, the CHF 70 million, and it will be sticky. Moving on to the next page, Page 17. I alluded to a massive ForEx translation effect. Now Sulzer is a fully global company which does business in a multitude of different currencies, only a small fraction of which being Swiss francs. But Swiss francs is the -- our reporting currency. And the franc is strong, to say the least. This leads to a significant translation effect that we show you on Slide 17. Here you see how orders have been impacted over the last 10 years. For sales, it's pretty much the same thing. We lost a bit more than CHF 1 billion of orders over that period solely due to ForEx, ForEx exchange movements. And even if you leave the first bar in 2011 aside, the negative impact is still about CHF 600 million. It was minus 6.6% last year alone in 2020, and it looks like the trend will continue as ForEx rates currently suggest that the impact in 2021 will again be negative by about 2%. So keep in mind that when you look at Sulzer's growth, the reported number is distorted negatively by ForEx. We may, at some point, decide to change our reporting currency as it no longer reflects the substance of our operations and makes our nonadjusted numbers hard to read. Now over to Jill for a more in-depth analysis of our financial figures.

Thank you, Grég, and good morning, everyone. Let me highlight the most important numbers on Slide 19. As Grég just mentioned, we had a significant translation impact on orders and sales. On an FX-adjusted basis, orders were down 2.2% to CHF 3.414 billion and down 3.8% organically. The order intake gross margin has increased by 40 basis points due to order selectivity and pricing discipline and despite a lower contribution from our Applicator Systems division. Our order backlog continued to increase. You'll see a lower number of CHF 1.759 billion. But actually, adjusted for the FX, the number went up by 5.4% versus 2019. Sales were down 4, 6% FX-adjusted, and 5.6% organically as we suffered limited access to customer sites and some markets were temporarily closed. Operational profitability was down by 100 basis points to 9% due to negative mix effect from lower sales in APS. The other 3 divisions together, on the other hand, increased their profitability by 10 basis points despite the lower sales. EBIT decreased mainly due to higher restructuring expenses that we incurred on our measures to resize the Energy business. Therefore, the reported return on sales dropped from 6.5% to 4.5%. On free cash flow, we hit a new record high of CHF 272 million, up 27.5% versus the previous year. So now let me go into more details in the subsequent slides. Slide 20. Our operational profit was significantly impacted by the drop in volumes and also the negative mix effect from lower APS. The other cost that you see on the chart was mainly under-absorption, about half of the CHF 24 million you see on the chart, and the rest relates to pension valuation impact from lower discount rates as well as COVID-related increase in allowances for bad debt, each around CHF 5 million. We took swift actions to squeeze our operational expenses by CHF 60 million, had the first CHF 12 million from our Energy resizing due to our swift actions but had higher costs from announced which [indiscernible] -- which we did not withdraw and therefore achieved a net savings impact of CHF 59 million. FX had a translation impact on the absolute operational profit, but not on the margin. Due to the mentioned effects, our operational profitability went from 10% in 2019 to 9% in 2020. The next slide, where I show you now from the operational profit or op EBITDA, as we used to call it, to EBIT. Amortizations were almost unchanged from last year. Restructuring expenses increased by CHF 32 million to CHF 56 million due to the resizing of our Energy business. Most of the restructuring expenses were booked, therefore, in Pumps Equipment. We impaired assets by CHF 10 million in relation to the footprint adjustments on facilities in the U.S. and Europe, as mentioned by Grég. In addition, we had CHF 15 million of other nonoperational items mostly attributable to this mentioned resizing measures and a bit of M&A-related costs. Still, compared to 2019, this is CHF 23 million lower. Next slide, Slide 22. If you go further down the P&L, you see that our financial result is unchanged versus the prior year. Taxes on -- were lower in 2020 in absolute, but the effective tax rate was higher than our normalized tax rate of around 24% as some of the restructuring costs are not tax deductible. Our restructuring -- our reported -- sorry, our reported net income was therefore CHF 87 million in 2020 versus the CHF 158 million in 2019. When you correct for tax adjusted one-off, core net income stood at CHF 200 million in 2020 versus CHF 258 million in 2019, which is a drop of 22%. Now moving to the next slide, Slide 23, on free cash flow. While net profit was down, free cash flow reached a new record high, as you can see on the slide. We continued on our disciplined management of net working capital and generated CHF 41 million cash flow from lower accounts receivables and inventories despite a reduced level of accounts payable. This was, however, largely offset by an increase in work-in-progress that could not be delivered due to the project timing driven by COVID factors. We have also a positive impact from provisions made but which will be paid in 2021, mainly restructuring related. About 2/3 of our restructuring-related costs of CHF 71 million will be paid in 2021. On the CapEx side, we stayed focused in 2020. We added CHF 72 million of new plant and equipment to our balance sheet on top of the Bechhofen expansion that was decided in the previous year. So overall, we spent some CHF 89 million in property, plant and equipment CapEx and added another CHF 7 million on intangible assets. So these are the main components to our free cash flow of CHF 272 million. Now on Slide 24, let me also share with you the situation on our balance sheet. Our balance sheet remains solid. At the end of 2020, our net debt stood at CHF 415 million, an increase of CHF 68 million versus the prior year-end. The net debt-to-EBITDA ratio came to 1.3x at the end of 2020, higher than the 0.8x a year earlier, mainly attributed to the temporarily lowered EBITDA that was down on COVID-induced lower volumes and restructuring. And obviously, the EBITDA will rebound in 2021, therefore improving once again our ratio of net debt-to-EBITDA. Next slide, 25. On the back of that solid balance sheet and the healthy free cash flow, we are proposing an unchanged dividend of CHF 4 for 2020 to the AGM. This reflects really the solidity of our balance sheet and our confidence in Sulzer's future performance. As a reminder, we increased the dividend from CHF 3.50 to CHF 4 last year and stuck to our guns despite the pandemic. Our cash flow generation in 2020 and the rebound of our share price close to prepandemic levels validate this approach. And with that, let me hand back to Grég for the outlook.

Thank you, Jill. For 2021 -- this is on Page 27. For 2021, we expect a progressive return to prepandemic levels. The first half of 2021, at the very least, will continue to be impacted by the pandemic with regional lockdowns hampering business interactions, and H1 will be compared to a high 2020 baseline. Our business most impacted by lockdowns in 2020, Applicator Systems, should build on its strong H2 2020 rebound to return to prepandemic volumes by the middle of 2021. Progress with vaccination and ensuing economic boost should bring an acceleration to all Sulzer businesses in the second half of the year. Sulzer order intake in 2020 was only down 2% for the year on the back of a strong first half. Against this robust baseline, we expect orders to be up 3% to 6% in 2021 on a currency-adjusted basis. There's still some uncertainty on the speed of the rebound at this point. And you see that Energy, which had a massive H1 2020, will be a 2.5% -- percentage point drag, with acquisitions a symmetrical 2.5 percentage point boost. We expect sales to grow by 5% to 7% in 2021 on a currency-adjusted basis. Operational profitability will benefit from the rebound in Applicator Systems to profitability in the high teens, while we will get an additional CHF 40 million uplift from structural savings but a release of some of the CHF 60 million OpEx squeeze to feed the growth. Overall, we expect operational profitability to return to prepandemic levels, close to 10%. Moving on to Page 28, our final slide before questions and answers. Takeaways. What would we like you to take away from Sulzer in 2020? Well, we believe that we demonstrate the resilience of our business model. The drop in operational profitability was solely due to APS. But the APS impact was temporary and quite unique in history, really a 100-year wave hitting a very low-cyclicality business. That will soon be an unpleasant memory, and everything else actually increased in profitability in 2020. Although there's still a real factor of uncertainty caused by the pandemic, we will resume growing in 2021. And this growth is increasingly driven by Water in pumps, health care in Applicators and our renewables segment in Chemtech. To paraphrase somebody else's slogan, not your father's Sulzer. We were very quick to adjust our cost base, and the structural savings of CHF 70 million, together with higher volumes, will lead to a profitability of close to 10% in 2021 and above that in 2022. Finally, our strong cash generation and solid balance sheet allow for an attractive dividend yield and continued bolt-on acquisitions. On those words, I hand over to the operator for the Q&A session.

[Operator Instructions] The first question is from Aurelio Calderon from Morgan Stanley.

I guess the first question I had was around your OpEx squeeze of CHF 60 million in 2020. So how much of that do you think would basically unwind in 2021? And how much are you aiming to retain as permanent cost savings? I appreciate you also have the CHF 40 million of the permanent cost savings program on top of that, but just I would be curious for my great modeling to know how much of that do you think can stick. And I'll take this from one after that, please.

Yes. Okay. Thanks for -- Jill, you want to take that one?

It's okay. Yes.

Okay.

So let me answer. I think overall on the OpEx squeeze, we expect -- we talk about CHF 60 million of OpEx squeeze this year, and we expect at least 1/3 of this to be still sticky in 2021. So if you consider the additional CHF 40 million of structuring -- of structural savings that will come in this year, essentially what we are saying is it's a wash versus the last year. Last year, we talked about CHF 60 million of OpEx squeeze. The normalization will not be fully in this year. We'll continue to take some of the savings. And therefore, in total, we expect, together with the structural savings, to be able to mitigate fully whatever we had saved in 2020.

Yes. If I can add to what Jill said. The OpEx squeeze is really composed of 3 things: it's composed of a compensation squeeze, it's composed of a travel squeeze and it's composed of an SG&A squeeze. And we believe that compensation will come back because as the market picks up and people hit their numbers, bonuses will be paid and, therefore, compensation will come back. We believe that travel is not going to come back fully. We think that something like 1/3 of business travel is going to go away because we will not travel for internal meetings. We'll travel to see customers but not for internal meetings. And then we'll -- we've got the SG&A squeeze. And some of that will stick. Some of that will be released so that we can feed the growth. I mean I think Jill is right that over time, we'll keep maybe CHF 20 million out of the CHF 60 million OpEx squeeze. But really, the debate is going to be how fast the market recovers in 2021. If the market recovers really fast, we'll release the OpEx squeeze really fast. If the market recovers slower, we'll just release the OpEx squeeze slower. So it's essentially -- it's a toggle that allows us to adapt to whatever market conditions we see. Does that answer your question, Aurelio?

Yes. And if I may take another one, please. It's mainly on the performance of your Rotating Equipment Services through the year and maybe more through the second half. I would be curious to know the different dynamics you saw in the Pumps business and the Turbo Services business and the Electromechanical Services business. And especially, the -- if you could comment something on pricing pressures because we've been hearing from other players in the industry that there have been some pockets of, let's say, pricing pressure. And so -- but I see that your margins were quite resilient. So we'd be curious to know what's -- what was the balance there for you.

Okay, Aurelio. Well, I think there -- some people overintellectualize our RES division, our service business. We can break it down in the various sub-businesses, but really the way you should think about it is this is a multi-product service business that uses the same workshops to service our pumps, other people's pumps, other people's turbines, other people's compressors, other people's motors. It's a combination of various products in various geographies. And because it's quite a diversified set of end markets and a set of customers and a set of products, it allows us to be very resilient year in and year out. So if you take the last 5 years -- my tenure has been 5 years, so I know those numbers at least -- and you can see that our margin every year is around 14%. I mean I think the lowest it's been is probably like 13.6% or 13.7%, and it's gone up to 14.1%. But it's really within a narrow band. And when the market was really bad during the oil downturn, the last 2 oil downturns, I mean, we were essentially flat to slightly up. And when the market is good, we're plus 5%, plus 6%. So there's a bunch of different dynamics. You'll have different markets moving up, moving down. But at the end of the day, our diversification and the fact that we're mutualizing the rooftops is what allows that business to be actually quite easy to forecast and quite predictable. Does that answer your question, Aurelio?

Yes, that's great.

Your next question is from Charlie Fehrenbach from AWP.

Yes. I'm not sure if I got this correctly from your guidance of order intake growth and sales growth '21. Is half of it coming from the acquisitions you've done and half of it would be organically?

What we said for the order intake is that we said we'd grow 3% to 6%. And what we said is that we have an effect which is we bought 2 businesses last year, well, Nordic Water and Haselmeier, and these businesses together will contribute about 2.5% of the 3% to 6%. But we also have a high baseline in Energy because in the first half of last year, we had a really high order intake in Energy. And as the market stabilizes on the levels that we saw second half of the year a little bit higher, that will have a negative impact of about 2.5%. So essentially, Energy as a negative and acquisitions as a positive essentially neutralize themselves. And everything else will contribute somewhere between 3% and 6% of growth. Does that clarify things?

Okay.

Your next question is from Patrick Rafaisz from UBS.

Three questions, please. I'll start with the first. You were talking about you had an order intake gross margin that improved 40 bps in 2020. With the order growth you're projecting, what kind of margin mix assumption are you making here? Do you -- would you anticipate a further improvement in the order intake mix?

You want to ask all 3 questions? Or you want me to take them one by one?

I can ask the other 2 as well.

Ask the [indiscernible]

The second one would be on free cash flow. Obviously, very strong for 2020, and you talked about the bridge here. But what are you anticipating for 2021, right? I mean there will be some cash-outs from the cost takeout program and CapEx potentially picking up a bit. Do you think there's a chance you can defend free cash flow at the record level of 2020? Or should we conservatively assume a bit of a lower number here? And the third question would be around the growth prospects you talked about in Chemtech for renewables. You said significant. Any chance you could add a bit more color on that or potentially quantify?

Okay, Patrick. Jill, I think, will take the first 2 questions, and I'll take the third.

Okay. Good. So on the gross margin, we have the 40 basis point. What do you -- what can you anticipate? From a mix perspective, you would expect that the mix will help us. I think pricing is going to be pretty much the same. We will practice our continued disciplined management on pricing. So it's not going to be one that you'll see a market being supportive in terms of pricing. But mix is definitely in our favor because as APS rebound, and we have seen that already in Q4 continuing in Jan, this should help us in the overall gross margin for your modeling. You can do that. And we also expect with the acquisition of water and the -- depending on the -- how the pandemic pan out. But clearly, in terms of the service and Water part, we expect resilience and coming back to growth. So it's only the Energy part that would be lower. So all in all, the mix is going to be favorable. So you can't model with a higher mix. We talk about the 2.5% drop in the -- 2.5 basis point drop in Energy. So as you know, Energy is the lower-margin part of it. And everything else, you can plan with the balance of the 3% to 6% order intake growth. So I hope that helps you in terms of your modeling.

Yes. So actually, the Energy -- the lower contribution from Energy should also prove positive for the mix?

Exactly. From a mix perspective, yes, correct. And as we grow more of the others, it would help on our gross margin.

You'll tackle free cash flow?

And on free cash flow -- yes. On free cash flow, so we have a record high free cash flow in 2021. What can you anticipate -- in 2020. And I think likelihood of us having the same record high in 2021 would be fairly low given the fact that we have restructuring expenses that we have provided but will be paid in 2021. I mentioned that about 2/3 of our CHF 71 million will be paid rather in 2021. So you can model like around close to CHF 50 million to be paid from -- on that front. Our CapEx, we have squeezed our CapEx in 2020. We expect our CapEx to go back a little bit up. And of course, we will continue to be prudent on that. We will release that when we see the market actually coming back. But you can plan around CHF 20 million on the CapEx part, up -- higher CapEx compared to 2020 of around CHF 20 million. And I think we will drive our net working capital. But typically, you can also anticipate that with volume up, I think to continue to squeeze our net working capital down, that would be difficult to do. But in percentage-wise, you can -- our net working capital is around 20%. So when we plan that -- we plan to keep around that level. And all in all, that will -- should bring us to a free cash flow that is more on our normalized curve of around 5%. Typically, we say in the past our cash flow is around 4% to 5%. So I think with that modeling, you'll see us coming back more to the normalized curve.

4% to 5% of sales is actually what Jill was [indiscernible].

That was -- yes. Thanks for that. 4% to 5% of sales, yes.

Okay. I'll take the growth question, Patrick. So Chemtech has this exciting segment that we call renewable applications. And in there, you've got the biopolymers, you've got the bioplastics, different technologies that we have for that, whether it's PLA or PEF. We've got technologies that are commercial. We've got technologies in the final stages of development. We've got recycling process applications like what we're developing with H&M for textiles or what we are building for ArcelorMittal for carbon monoxide to -- turning to biofuels or what we're doing for the Quantafuel people in Northern Europe for transforming plastics into biofuels. There's a lot of different applications in there. And the overall size of that segment in 2020 was about CHF 50 million, and this is something that should grow significantly in the next few years. When I look at the pipeline that we've got for 2021, this is something that could be up. It could be 50% up, even 100% up in 2021. I mean I expect that segment to be -- I probably shouldn't be guiding on this, but I expect that segment to be somewhere between, I don't know, CHF 70 million and CHF 90 million or CHF 100 million in 2021. It's hard to predict in some ways because these are novel technologies and because these are customers that are being pioneers in terms of implementing things. Sometimes it takes a bit longer for them to analyze and to decide before they actually write a check. But the pipeline of discussions that we have supports these types of numbers. Did I answer your question, Patrick?

Absolutely. Very, very helpful.

Your next question is from Armin Rechberger from Zürcher Kantonalbank.

Yes. Well, just an additional question to your Chemtech answer now. You said you see the renewable part may be going up from -- to CHF 70 million to CHF 90 million in '21 from close to CHF 50 million it was in 2020, when I'm right. So really astonishing growth you see there. Is that correct?

Yes, it's correct. I mean this is growth on -- if we're honest about it, it's growth on still reasonably low levels because you're only talking about a CHF 50 million segment at this point. But these are technologies that are very much at the heart of what the world needs today. And if I look at our commercial activity in terms of how our tendering resources are spent, they're increasingly being consumed by these discussions because we have a lot of customers that want to do novel things and want to essentially increase their sustainability profile. So a few projects can make those numbers grow by 50%. So I wouldn't -- clearly, this is not -- no business that will grow 50% year-on-year in the long term. But as you are in the kind of -- in the lowest part of the curve, I believe this is -- if not exponential, at least this is going to be a significant driver of our Chemtech business in the future.

Okay. Then additional question regarding growth. I mean on local currency terms, you mentioned until now minus 2% because of the strong Swiss franc ForEx influence. And so your growth expectations on local currency and organic terms, if I can't correct or calculate correct, it's, for order intake, 0.5% to 3.5% only. Even though with this expectation for the renewables part in Chemtech and APS, you expect growth, it sounds to me, astonishing low, only 0.5% to 3.5%.

Armin, Armin, Armin, our guidance is on a ForEx-adjusted basis.

Yes. That means on local currencies?

No. I mean our guidance is at the -- is ForEx adjusted. So you don't have to adjust for guidance for ForEx. ForEx will be whatever it is, yes.

Yes. So the guidance reflects more or less the movement on the local level because that is the -- that is ForEx adjusted.

You're essentially adjusting twice because we're guiding -- I mean, I can't predict the Swiss franc versus other baskets of currency. All I can do is -- at a constant exchange rate, I can tell you where we think the business is going to go. So the 3% to 6% is a real growth number. If we have 2% uplift on top of that from currency, then the 3% to 6% becomes 5% to 8%. And if we got 2% negative because the Swiss franc goes up again, then the reported number, instead of being 3% to 6%, is going to be 1% to 4%. But...

Yes. Yes, yes.

We gave you an indication of 2.2% for the year of ForEx, but that 2.2% is not reflected -- is reflected in -- I mean, our guidance is on a ForEx-adjusted basis. So you shouldn't adjust the -- our guidance.

No.