Sulzer Ltd (SULZF) H1 2024 Earnings Name Transcript

Sulzer Ltd (OTCPK:SULZF) H1 2024 Earnings Convention Name July 26, 2024 4:00 AM ET

Firm Contributors

Suzanne Thoma – Government Chairwoman
Thomas Zickler – Chief Monetary Officer

Convention Name Contributors

Suzanne Thoma

Women and gents, welcome to our Midyear Outcomes Shows. With me I’ve our CFO, Thomas Zickler. We’re very completely satisfied to report back to you a very good H1 2024. Our outcomes are encouraging additionally within the gentle of the financial improvement around the globe. You see that in 2024 now we have recorded an excellent order consumption progress. And that’s notably exceptional as a result of within the first half 2023 we had an exceptionally excessive order consumption progress, so the baseline with which we needed to evaluate was fairly formidable. Additionally we see good gross sales improvement. And the attention-grabbing factor there may be the gross sales improvement is nice in all three areas as is the order consumption in all three areas and in all three divisions.

After we take a look at our profitability, now we have elevated our profitability up 130 foundation factors in comparison with the primary half yr of 2023. Additionally there an extra remark that’s of significance after all with our technique 2028 and all of the measures that we’re taking to execute our technique we even have extra prices that are additionally one off prices, however we file all of them as operational prices and never as non-ops. However, our profitability elevated. That is additionally the case as a result of we have been in a position to improve our margin, our gross margin by 140 foundation factors. That has two principal causes. We’re studying higher to cost our services and products fairly than price plus we’re wanting from buyer and market and are then giving the correct value level. And then again, after all, additionally our effectivity enchancment, notably operational excellence in manufacturing has a constructive affect.

So that is the abstract of our half yr outcomes and now we go into considerably extra element with Thomas.

Thomas Zickler

Thanks very a lot Suzanne. Let me begin with an summary of order consumption and gross sales. So that you see that in H1 this yr we grew by nearly 9% after we speak about order consumption and compared to H1 final yr the place we grew 24%, it’s actually a really stable end result. What it’s important to additionally know and perceive this time, like up to now, once more we have been hit since we’re reporting in Swiss francs from a unfavourable FX impression so as consumption in addition to gross sales. So in these instances our nominal values would have been in native currencies spherical about 4% increased. So that is for order consumption spherical about CHF90 million and for gross sales spherical about CHF70 million.

What can be essential to know after we evaluate our order backlog, which was spherical about CHF2 billion at finish of final yr, we reached now an order backlog with CHF2.4 billion which is spherical about CHF450 million increased than the backlog, which we had by finish of final yr. After we speak about efficiency so as consumption and gross sales, I can actually proudly say that the efficiency so as consumption and gross sales is actually coming from all of the divisions, now we have robust progress momentum in all of the three divisions and reductions actually for each for order consumption and for gross sales.

And let me simply give attention to order consumption as a result of it is a forward-looking message after we speak about order consumption margins. You see that now we have achieved the order consumption improve even by growing our order consumption margin by once more 1.2 proportion factors.

Let’s go into operational revenue and return on capital employed. So, what I wish to stress right here is actually continued worthwhile progress. When you would see that we had in H1 2022 9% operational profitability, then in H2 2023, 10.1% after which in H2 2024, once more a rise of 130 foundation factors to 11.4%. I feel that is exhibiting actually an important monitor file during the last years, from 9% to now, 11.4%.

After we speak about profitability, Suzanne already talked about it, our gross margin actually went up by 140 foundation factors in comparison with H1 final yr. And we stand at the moment at 33.7% gross margin.

Let me provide you with a brief replace on our return on capital employed. Once you keep in mind what we introduced at our Capital Markets Day, in addition to within the media convention in February, we introduced for final yr a return on capital employed of 17.7%. Why is it decrease now and why is it secure? As a result of right here on our belongings, for the reason that Swiss franc, since starting of the yr was a bit weaker in comparison with most different currencies, our belongings have elevated in worth due to the re-measurement on the weaker Swiss franc trade price. And with extra belongings, the connection went a bit down. And since we had extra improve on the asset aspect, then we may compensate to a better EBIT. We’ve now the state of affairs that the general quantity is a bit decrease. And now we have from H1 2023 to H1 2024, a secure state of affairs in terms of return on capital employed.

Now let me go within the divisions. Circulation division is the primary one. So Circulation can be a story of progress and excellence. And also you see excellence, you see the operational profitability has gone up 250 foundation factors from 7% to 9.5%. And in addition right here I provide the quantity from H1 2022. Keep in mind, in H1 2022 we have been at 5.3%. And after we speak about this, what are the explanations for this profitability improve? It is actually operational excellence in our plans, in our move group. It is a strict price self-discipline and likewise the give attention to pricing, which enabled us to indicate this very robust efficiency during the last three years.

After we speak about order consumption, I additionally wish to remind you that order consumption this yr is 6.3% plus. Nonetheless, final yr in H1, perhaps a few of you keep in mind, we have been 25.1% plus. What occurred? So, on the order consumption aspect this yr, now we have water in industrial BU, the place we grew nearly 11%. And in Power, in business now we have a progress price of, I’d say, only one.3%. However let me provide the background to the one 1.3%. Final yr in H1, we grew in vitality by 84.3%. So I feel it is a very massive achievement from our colleagues in Power and Infrastructure that they ended the H1 with a plus quantity within the proportion comparability to final yr with plus 84%.

Once you take a look at the gross sales, you see gross sales 11% plus. Final yr in H1, we have been 14% plus. We’ve gross sales primarily coming from the vitality BU as a result of final yr we acquired all the massive vitality orders in, they’re working now on execution. In Power and Infrastructure, now we have a plus of 32% in our gross sales in comparison with H1 2023.

Now let’s go to Providers. Providers, they continued now actually to develop double-digit in each order consumption and gross sales. Once you take a look at order consumption, you see that they’re rising by 12.6% after they’ve grown final yr by 22% in H1. And even on the year-end, it was nonetheless shut to twenty%. What now we have right here on the order aspect, now we have a extremely robust progress momentum, particularly coming from the Americas and from APAC.

After we look on the gross sales aspect, you see that on the gross sales aspect, now we have 12% and we’re even stronger on the gross sales aspect than we have been in H1 one yr in the past, the place we have been at 11% on the gross sales aspect, I can say very, very proudly that each one the areas contributed to this accelerated progress on the gross sales aspect.

Now let me discuss concerning the profitability. You see that the profitability in providers has not elevated. It is the one division the place now we have no improve this yr on the half yr. Why? As a result of we had lots of investments to satisfy actually our rising demand. And what does it imply? We’ve invested in OpEx, in folks to help the geographic extension and likewise to organize us for the longer term progress which now we have mainly labored out in our ambition 2028.

So briefly phrases, it’s funding sooner or later into future progress of the profitability in providers. Then let me speak about Chemtech. Chemtech, for me the headline is actually that now we have orders above 500 million in H1. That is actually an important end result. Nonetheless, now we have additionally in Chemtech, the second greatest profitability improve. And also you see it on the slide of 150 foundation factors. We at the moment are coming in Chemtech nearer to our Providers division. Providers division, you keep in mind, was 14.2. Now we’re in Chemtech, 13.2.

So Chemtech can be fairly a hit story in terms of profitability. You see right here additionally the primary impacts of our measures, which now we have taken and carried out from our ambition 2028 technique. As a comparability, in H1 2022, we have been in providers at 9.9%. Once you take a look at the gross sales aspect, now we have the 7.2% and the 7.2% it’s important to set right here in relation to a really robust H1 final yr with 24.3%.

Let me go to our EBIT and internet earnings. So it’s clear with the upper gross sales, increased gross margins that the operational revenue is actually driving the upper EBIT and the upper internet earnings. You see on the EBIT that we’re spherical about 20% increased than we have been in H1 final yr. Once you take a look at the EBIT, you see that it’s not solely the higher margins, we even have achieved the rise by lots of Sulzer Excellence enhancements.

After we take a look at each numbers EBIT and internet earnings, you see the final bullet level on the correct aspect, that for each now we have solely minor one-off objects in 2022 within the first half yr, once more as we had within the final yr.

Then let me come to my final slide, free money move and elevated internet working capital. So free money move, it’s a bit decrease, nevertheless it’s nonetheless a stable free money move. We’ve a constructive working internet money move in all our divisions. Why is it decrease? It’s decrease as a result of now we have in comparison with final yr and a better internet working capital. We’ve elevated our increased internet working – now we have elevated our internet working capital and we even have had increased tax funds and likewise a better CapEx. So that you’ve got some numbers in thoughts, increased CapEx spherical about CHF16 million and better tax CHF5 million, so that is round CHF21 million alone coming from this.

Additionally, while you take a look at the online working capitals on a H1 to H1 comparability, you see this, that while you evaluate simply H1 2023 with H1 2024, that in relative phrases to gross sales, we’re even higher than we have been final yr in H1.

So with this, I’ll hand again to Suzanne and sure, Suzanne, go on.

Suzanne Thoma

Sure. Thanks. Thanks. Thanks, Thomas. Excellent. Let’s proceed. Only a fast reminder what Sulzer is definitely doing. So Sulzer is current in our clients’ infrastructures, each personal infrastructures, semi, public infrastructures and public infrastructures. And there we sale – on the finish of the day, sale we offer options for very particular important steps in these infrastructures.

This usually has to do with enhancing the effectivity of the infrastructure, which as we speak all the time means saving vitality, and has additionally to do with decreasing the environmental impression be it as a result of our clients have the technique themselves to cut back the environmental impression of their installations, or as a result of the federal government regulation warranted. That is what we do. And these are very technical, however very actual – very technical, however they’ve a really actual life impact for our clients.

And notably, now we have to get it proper, as a result of if we do not, then our clients have a significant downside. That, then again, offers us a sure pricing energy. We very systematically choose these purposes the place we with our expertise and our know-how could make a distinction. As a result of the markets that we’re serving are giant and we may select additionally totally different market segments. However we wish to be there, the place now we have pricing energy, what now we have to supply actually counts. And the place after all, there may be progress.

Why are we talking about progress? Structurally rising market. You may have heard that earlier than additionally on the Capital Market Day presentation, we do serve structurally rising markets for various causes. And we’re not the one ones who’re saying that that is the case. You see right here, this examine from S&P World and also you see that wastewater, chemical, metallic, mining and vitality energy have been rising for a very long time, however the progress is accelerated. And naturally, that brings us again to the truth that we nonetheless have a worldwide rising world inhabitants.

We nonetheless have economies and societies popping out of poverty in the direction of having extra folks within the center courses and with that, consuming extra vitality and extra issues typically. After which, after all, now we have nonetheless the necessity to decarbonize as a lot as attainable our business and our infrastructure, and to cut back environmental impression typically. And these are our markets and that’s what we’re doing.

So we’re structurally rising and sure, together with oil and gasoline. Oil and gasoline shouldn’t be rising as quick, after all, because it did, nevertheless it’s nonetheless there for a very long time. On the identical time, the infrastructures in oil and gasoline and typically wish to keep in operation longer. So we’re there to assist to increase the lifetime of those necessary installations, each in the best way how lengthy you’ll be able to safely run the installations and likewise how one can cut back the environmental impression of those installations.

Right here, now we have one instance. I’ll solely present you one, however I discover it very fascinating. It’s a good instance of why we’re talking that Sulzer is contributing to each a sustainable society and a affluent financial system. It’s the world’s largest wastewater remedy, it’s in Egypt. Sulzer contributed considerably with over 260 items of apparatus and lots of know-how on learn how to run such a wastewater plant. We communicate of seven.5 million sq. – notsquare, after all, cubic meter of water. And what does that imply? Properly, it implies that it’s extra – ten occasions greater than what an Egyptian family will devour throughout a full yr is cleaned right here throughout in the future.

Extra importantly, it permits to extend the meals safety of Egypt. Egypt remains to be importing lots of meals. We will contribute to that. And it’s an instance of round financial system as a result of the water that comes from the agriculture drainage is being cleared. It’s then being put into a close-by lake, which first needed to be cleared by this set up and might then be used for irrigation. In order that’s a beautiful instance how Sulzer helps each prosperity and sustainability.

And since we’re in these essential, structurally rising markets and now we have good services and products to promote, we have been in a position to talk an up to date steering a number of days in the past. So the order consumption that we see till the tip of the yr is between 9% and 12%, gross sales up 9% to 11%, and the EBITDA margin round 12%. You see the comparability to the steering that we did talk in February.

Properly, I want to come to my final slide, simply summarize. It’s good. The corporate is rising in a balanced manner. It’s rising geographically balanced. And from our three divisions, that’s necessary for the way forward for our firm. Clearly, these first half outcomes that we have been in a position to current to you might be a sign of the early effectiveness of Sulzer 2028.

We incur each a bit extra price for the implementation of what we’re getting down to do. However on the identical time, we additionally have already got outcomes, as you’ve gotten seen, for instance, within the elevated margin. Our ambition is to be a powerful firm, a prime industrial firm with a really enticing product portfolio, product and providers portfolio, top quality and really positively a future proof enterprise.

Our technique is evident. It’s each worthwhile progress and excellence. Operational excellence, excellence as a approach to run our firm in all our processes, in all the pieces that we do, after all, that feeds on one another. The expansion and the excellence help one another. We’re proud to serve important industries, industries that matter, industries that make distinction to folks globally. And with that, we’re privileged to contribute to a affluent financial system globally and to a sustainable society globally.

Thanks very a lot. Sure. Women and gents, we now have the second for query and solutions. We’re going to begin with cellphone calls that are available in. They’re a number of, I’ve simply been knowledgeable. So let’s start with the primary query, please. Thomas?

Query-and-Reply Session

A – Thomas Zickler

Good. We begin with move from Christian Arnold [Stifel]. You may have elevated your profitability regardless of a unfavourable product combined with vitality pumps having the very best progress however normally the bottom margin engineered pumps. I’m wondering if in case you have booked extra providers and or aftermarket enterprise into Circulation divisions as an alternative of the service divisions. Or is it simply linked to the working excellence, strict price self-discipline and powerful pricing?

Thomas Zickler

Quick reply, sure.

Suzanne Thoma

No. There isn’t a rebooking that now we have executed to let the figures look any higher.

Thomas Zickler

Sure. Sure. They’ll even get higher after we are going extra into providers with our strategy which now we have in Water, with the built-in options which we wish to supply on the Water aspect the place we then have extra providers additionally within the Circulation division.

Suzanne Thoma

Thanks.

Unidentified Firm Consultant

Good. We’ve three questions from Patrick Rafaisz [ph]. Beginning with the primary one. Your order backlog margin is once more increased than reported gross margin. Is {that a} good proxy for what we should always anticipate in half two or 2025?

Thomas Zickler

You may assume since we work on operational excellence, it’s considered one of our pillars for ambition 2028 that sure, over the course of the following, say years that we work on say excellence in terms of automation in our plans, in terms of course of excellence general, that then sure, the gross margin ought to all the time be higher than the order consumption margin. Sure.

Suzanne Thoma

However, on the quick finish, all these tasks, they do additionally trigger some prices and as I discussed earlier, we’re not declaring them as non-operational prices. We put them into the operational prices, which additionally forces our divisions to be very disciplined with the one-off prices of their tasks.

Unidentified Firm Consultant

Good. Shifting to the second query of Patrick. Providers – service orders slowed down in Q2 after, have been there any occasions particular to the quarter and what can be cheap run price for the remainder of the yr?

Suzanne Thoma

Properly, we’re all the time evaluating towards a really excessive baseline. There may be nothing that we’re seeing when it comes to any basic slowdown within the Providers division. We’ll almost certainly see truly an acceleration in APAC, however APAC remains to be comparatively small so there isn’t any particular occasion relating to the margin that we see in the direction of the tip of the yr, that’s…

Thomas Zickler

Sure, round about 14.6-ish, say this manner…

Suzanne Thoma

Which implies that will then be a slight improve.

Thomas Zickler

Sure.

Unidentified Firm Consultant

Good. Shifting to working capital query. Working capital elevated to a progress and CapEx as effectively impacting FCF. What are your expectations for the second half of this yr?

Thomas Zickler

That we do nearly the identical efficiency as we did in H2 final yr the place we actually have achieved that we diminished our networking capital by rather a lot. You see that compared to H1, sorry, compared to year-end final yr now we have constructed up round about 80 million internet working capital. Our clear purpose is that we cut back spherical about 50 million of this, 80 million till the yr finish.

Unidentified Firm Consultant

That was the final query now we have obtained thus far. Truly, there only one got here in, apologies.

From Martin [indiscernible]. The order ebook is sort of robust. What number of month’s visibility offers this end result on firm degree and on a divisional degree? Thanks.

Suzanne Thoma

Properly, all in all, it offers us about 4 to – fairly six month’s visibility. It’s extremely totally different from division-to-division, even from BU-to-BU. So the big orders that we once more obtained within the enterprise unit, vitality and business might be executed over the following, as an example, 18 months. Whereas within the providers division, after all, the visibility is shorter. And in terms of Chemtech, it’s someplace within the center, perhaps, Thomas, you wish to add one thing?

Thomas Zickler

Sure. It is precisely such as you stated, Suzanne. The one factor I wish to add is in our providers division, since now we have right here actually a very good order consumption state of affairs that additionally right here we’re going above six months when it comes then to execution. So, sure, as Suzanne stated, now we have a very good visibility for the following six to 9 months, and I feel nothing so as to add.

Suzanne Thoma

Thanks.

Unidentified Firm Consultant

We’ve one other query that simply got here in from Adrian Knoblauch [ph]. You may have a much bigger bond of CHF250 million attributable to redemption in October with a traditionally low coupon. Do you’ve gotten any refinancing plans, or do you plan to backpack with out an extension, contemplating your money?

Thomas Zickler

I feel Suzanne, I reply this query. Sure, now we have the intention to refinance this bond absolutely to be versatile additionally sooner or later. I feel it’s extremely cheap to do that as a result of, sure, now we have lots of money, however you realize that the money is in nations like Brazil, China, India, so it is not really easy, actually, it is type of not restricted, nevertheless it’s type of restricted money. We will pull it again right here to Switzerland over dividends and that is what now we have began this yr. However that is inflicting a better efficient tax price as a result of now we have to pay withholding taxes relying on the nations, between 5% and 10%.

So, to reply the query, sure, the intention is to refinance absolutely this bond, to have the identical liquidity and money state of affairs as now we have now.

Suzanne Thoma

So it is, as all the time, a balanced strategy, the place we attempt to cowl or have an optimum state of affairs additionally in terms of the soundness and the resilience of the corporate.

Thomas Zickler

Wanting on the July order consumption, a query from Hans-Joachim Heimbürger. How has order consumption developed within the first month of July? Any showable, seen?

Suzanne Thoma

I can after all not let you know the way it developed, however I can let you know that. No, we see no slowdown so as consumption in July. Truly, the order consumption in July, I do not know but, as a result of we’re nonetheless in July. What I do see are the pipelines of our main tasks that now we have, and now we have giant tasks additionally in Chemtech, additionally in move, even in providers. In order that we see no slowdown thus far.

Thomas Zickler

Subsequent query right here, extra on the danger aspect. What proportion is trapped in China or different tough jurisdictions?

Suzanne Thoma

Proportion of what?

Thomas Zickler

I might assume, order consumption.

Suzanne Thoma

Okay. Our gross sales in China are round about CHF 600 million. Slightly bit extra. We do not contemplate it in the interim as trapped in China. We positively even have bit a China for China technique, which we’re going to, as an example improve. So we produce rather a lot for the Chinese language market in China itself. And thus far, we hope that international commerce will proceed as a result of it’s within the curiosity of worldwide prosperity.

Thomas Zickler

The query was truly more money associated than order consumption. I used to be simply clarified by Adrien Knoblauch, so associated to China and different. So I am not disclosing the precise quantity, how a lot money now we have in China, nevertheless it’s greater than CHF 100 million.

Suzanne Thoma

But it surely’s not trapped. I imply now we have to get it out. It has a value, however that’s all the time a part of our calculation.

Thomas Zickler

There’s at the moment no questions in a queue, no lively caller.

Suzanne Thoma

Properly, then I thanks very, very a lot in your curiosity. Women and gents, it is all the time a pleasure to report the outcomes and improvement of Sulzer. Sulzer celebrated its 190 yr anniversary within the first half of this yr, and we’re very proud that we lead along with the chief committee, Sulzer, into the longer term. Thanks very a lot.

Thomas Zickler

Thanks.