Sulzer AG (SUN) Earnings Call Transcript

Ladies and gentlemen, welcome to our midyear results presentation. 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 margin, 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 markets 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, Suzanne. 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 around about 4% higher. So this is for order intake around about CHF 90 million and for sales around about CHF 70 million. What is also very important to understand when we compare our order backlog, which was around about CHF 2 billion at the end of last year, we reached now an order backlog with CHF 2.4 billion, which is around about CHF 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 it's the forward-looking message when we talk about order intake margins. You see that we have achieved the order intake increased 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%. And when we talk about profitability, Suzanne 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 remeasurement 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 plans in our Flow organization. It's the strict cost discipline and also the focus on pricing which enabled us to show this very strong performance over the last 3 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 and Industrial BU, where we grew almost 11%. And in Energy and 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 1 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 expansion 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 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 CHF 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 on 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%. And the 7.2%, you have to set here in relation to a very strong H1 last year with 24.3%. 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-end, a higher net working capital. We have increased our net working capital. And we also have had higher tax payments and also a higher CapEx so that you have some numbers in mind, higher CapEx, around about CHF 16 million, and higher tax, CHF 5 million. So this is around CHF 21 million alone coming from this. Also, when you look at the net working capital on an H1-to-H1 comparison, you see this that when you compare just H1 '23 with H1 '24 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 Suzanne. And yes, Suzanne, go on.

Yes, thank you, 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, semipublic infrastructures and public infrastructures. And there, we sell, at the end of the day, 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 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 their government regulation warranted. 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 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. Sulzer 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 meter 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 1 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 EBITA 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 to 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, this 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 of 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 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 a 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.

Yes, ladies and gentlemen, we now have the moment for question and answers. We are going to start with phone calls that come in. There 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 Services 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.

Yes. 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.

Good. We have three questions from Patrick Rafaisz, starting with the first one. The order backlog margin is again higher than reported gross margin. Is that a good proxy for what we should expect in half 2 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 and our plans 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 early, we are not declaring them as nonoperational costs. We put them into the operational cost, 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. Services 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...

Yes, around about 14.6%-ish, say this way.

Which means that will then be a slight increase.

Yes.

Good. Moving to working capital question. Working capital increased to a growth in 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 net working 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 CHF 80 million net working capital. Our clear goal is that we reduce around about CHF 50 million of this CHF 80 million until the year-end.