Sulzer AG
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Sulzer AG
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Ladies and gentlemen, welcome to the Sulzer's Q1 2020 Order Intake Conference Call and Live Webcast. I'm Andre, the Chorus Call operator. [Operator Instructions] At this time, it's my pleasure to hand over to Mr. Christoph Ladner, Head of Investor Relations. Please go ahead, sir.
Thank you, Andre. Good morning, and welcome to Sulzer's Q1 order intake conference call. Today, with me is our CEO, Greg Poux-Guillaume; and our CFO, Jill Lee. For this call, we have prepared a presentation, which you can find on our home page. 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 noncore 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 Greg for the presentation. Thereafter, you have the opportunity to ask questions. Greg, please?
Good morning, everybody. Jill and I are happy to be on this call with you this morning. We hope you and your families are safe and healthy. And we've taken the unusual step of having a presentation for these Q1 results. Usually, it's a press release and that's that. But given circumstances, we thought that it deserved a bit more substance, and we wanted to give you the opportunity to ask questions. So that's what we're going to do today. We've got 11 slides. I'll try to move through them quickly and then we'll open it up for questions. Starting on Slide 3, Q1 2020 performance, I'll start by saying that our first priority at Sulzer is to keep all our employees safe and healthy. We've done pretty well on that to date. We've got 3 corona cases -- 3 COVID-19 cases out of 16,000 employees worldwide, despite the fact that almost all our sites are operational and our plants are running, and we've done that through the right processes, the right social distancing procedures and also availability of PPE, which has been important in this pandemic. If I focus for a second on our Q1 orders, we're quite pleased with our Q1 order intake. Order intake rose to CHF 994 million, up from CHF 984 million the previous year. There's a significant ForEx impact, so this is actually 6.5% growth adjusted for negative currency impacts and a 3.2% organic growth. In most countries, Sulzer is categorized as a provider of essential services, and we provide essential services because we ensure the maintenance of water and energy infrastructures. And because of that, we're allowed to continue operating and to continue serving our customers. The slide says that over 90% of our employees worldwide are working. It's actually more than that. It was 90% until a few days ago when India was still closed for us as it is for all other companies. But at the end of last week, we got dispensation to reopen our India facilities as a provider of essential services. We've got the authorization to reopen with 45% of our people, so a bit less than 50% capacity. And our pumps facility is already back up and running, pumps and service and our Chemtech facility is still working through some regulatory constraints but will be back up and running sometime this week. So the 90% is probably closer to 95% today. We only have 1 plant worldwide that's closed today. It's our Elgin plant for APS in the U.S. It's in Illinois, and there's a Governor's decree closing all these facilities. Everything else, as I said, is up and running. And if I refer back to China, which was the forefront of the coronavirus, as you recall, in February, all 5 of our plants were closed. While I'm happy to report today that all 5 of our plants are running, and they're running at somewhere between 95% and 105% of capacity, which means that essentially, the Chinese market is quite active, and we are making up for lost time. The closures in India and China had an even larger impact on sales and on orders. We usually don't report sales on a quarterly basis. But to give you an indication in these exceptional times, our Q1 sales are down 2.2% adjusted for ForEx and 4.3% organically. And once again, this has a lot to do with the closure of China in February and the closure in India in late March. On the other hand, free cash flow in Q1 is CHF 15 million above the level of last year, 1-5. We'll give you more details on that in a minute. We decided to go ahead with our dividend, and it was paid actually, I think, this morning, CHF 93 million of cash out for the 2019 dividend. Moving on to Page 4 -- Slide 4, an outlook slide. Before I go into the Q1 details, let me share with you what we expect for the next couple of months and what actions we have already launched to cope with the situation. Q2 will be more challenging. We will be more impacted by the announced CapEx cuts in oil and gas by the limited site access for our service businesses by the confinement measures in most parts of the world that are, for example, slowing down the dental and the beauty market, if I use the example of APS and by the general economic slowdown. Our execution will be tested by the lockdowns and by supply chain disruptions, although we've managed actually to keep our supply chain quite stable to date. And we'll put a lot of focus on cash collection. What helps is a continued strong order backlog at CHF 1.9 billion at the end of Q1, which is about 80% tradable in 2020. We also have a very comforting liquidity cushion. Our liquidity at the beginning of 2020 was CHF 1.6 billion. CHF 1.1 billion of that was in cash and CHF 500 million was a revolving credit facility that was undrawn at the beginning of 2020. So therefore, we've got significant liquidity in whatever scenario we may think of. We're convinced that 2/3 of our business that we consider to be low cyclical will recover with the economy as it restarts after COVID-19. The other 1/3 is a combination of different things as we'll see later in this presentation, and these are mostly new equipment businesses that will rebound too, but we expect that within that, there's about 14%, 1-4, 14% of Sulzer, which is volume that we generate in new projects in oil and gas, and that 14% will suffer for a longer period of time as the oil market rebalances over the course of 2020 and part 2021. And we all understand what this is due to, it's high stocks, lower demand. We have already launched decisive measures to adapt to the new reality. We'll reduce our CapEx by CHF 60 million down to CHF 70 million on plant and equipment maintenance level. So we're taking our CapEx down from the CHF 109 million that we spent last year to CHF 70 million this year. And it's CHF 60 million lower than what we had flagged to the market at the beginning of the year. And that's already done. And that's the lowest level of CapEx for Sulzer in the last 10 years. We've also decided to reduce our OpEx by about CHF 60 million this year through a combination of temporary and structural measures. Furthermore, in anticipation of the longer downturn in oil and gas. Once again, oil and gas new is 14% of Sulzer. We'll reduce our capacity in our energy business by about 1/3. This means structural cuts, mostly in Pumps Equipment, with some ramifications in our service network and in the global functions that serve the energy business. We'll give you more details on our plans with the H1 results on July 24. And as for our role in fighting the pandemic, we have a unique role as a provider of essential services, which allows us to offer support to health and services -- health services, I'm sorry, health services. Around the world, we have a very comprehensive service infrastructure, and we jump in whenever we can to help maintain equipment for hospitals and other emergency services. And our people are quite excited to be able to do that and to contribute in their own way to fighting the pandemic. Moving on to Slide 5. Q1 order intake overview. So 3.2%, as you see, organically; 6.5% on a ForEx-adjusted basis, and it's mostly driven by the good performance of our service business and also by the performance of our Pumps Equipment division. We've prepared a slide for each of the divisions, so I'll give you details there. I'll just point out on this one that we have a significant negative ForEx impact of CHF 55 million. Acquisitions contributed CHF 33 million in total; and GTC and Chemtech, CHF 20 million; Alba and RES, CHF 13 million. Moving on to Slide 6, Pumps Equipment. In Pumps Equipment, we were up 4.5% organically in Q1 driven by a still very active oil and gas market and a strong underlying municipal water market. Orders from oil and gas were up 52% despite the cancellation of a $20 million U.S. pipeline order. So significantly up despite a $20 million cancellation, which has already been taken out of the numbers. We've seen suspensions of orders also in the amount of $30 million, suspension of $30 million. If we adjust for 2 large water infrastructure projects that we booked in Q1 2019, orders from our Water business grew by 22% on a very good performance in municipal water. Orders from chemicals -- from the chemical market grew by 4% and the orders from the power market were down 11% on higher selectivity. Finally, in Industry, we were down 5% as a consequence of the lockdown in China, but also impacted by the general economic slowdown. Our order intake in China was impacted in February by the lockdown, but as you see on the right of the slide, we had a strong rebound in March and that rebound continues in April. Moving on to Page 7, Rotating Equipment Services. In Rotating Equipment Services, we saw strong growth across all regions and product lines, as you see, a 12.7%, which is a very significant number for a service business. I want to highlight, in particular, our Turbo Services business, which was up 24%, helped by strong markets in the U.S., but also in Southeast Asia and large orders for gas turbine services in Russia. Pump services and spares were up 8% against a very high base in 2019, boosted by a CHF 15 million retrofit order for third-party pumps. RES, our Rotating Equipment Services business, saw a limited COVID-19 impact in Q1 as China and India together are less than 3% of our order intake. However, Q2 is likely to be more impacted, not because the service business is not resilient, but because part of our service business relies on site access. We have field service, and we have our people that go to customer site, and we have customers that come and inspect the work that we've done for them in our facilities. And as you can understand right now, the market is less mobile, sites are less accessible, customers travel less, and this is going to slow our business in Q2. If I try to see -- if I try to comment on what's happening currently in current trading for the RES business in Q2 because of that site access, in April, it's -- we're roughly down 10% versus where we would have been otherwise. And the 10% is mostly due to the fact that, once again, there's less site access. And that's going to be temporary, but it's going to be visible in Q2. I should also point out, I didn't, when we were talking about Pumps Equipment, but if I look also at current trading, in April, we see the water and the industry segments continuing to do well in April. And we see the Energy business, which is really 2 separate markets. There's the U.S. market, which is pretty much idle at this point, and then there's the rest of the world. And actually, we're doing okay and -- we're doing okay in energy in April because Saudi, China -- Saudi and China are quite active and essentially supporting our activities over that period. Moving on to Chemtech on Page 8. China's not relevant for RES, or not very relevant for RES, but it's very relevant for Chemtech. China is -- was in 2019 was 30% of the Chemtech order intake. Chemtech had a difficult start in Q1 because of that, because of the coronavirus and the impact in China. You can see that on the bar chart on the right of the page, what you see is that we were impacted in February -- in January and February in China, but we had a very significant market rebound in March in China. And that rebound is continuing in April. For the entire first quarter, just for reference, Chemtech still grew 8% in China. So down in January, February. We made -- more than made up for it in March, and we're continuing to do well in April. Europe, Middle East and Africa and the Americas were down mainly because of delays in larger projects and temporary restricted access to customer sites. This is something that we'll also see in Q2 for Chemtech around the world. The Tower Field Services business, which is about 20% of Chemtech, as its name implies, is a field service business. We do outages on customer sites. And what we see is that a lot of customers are delaying outages because they don't want to give access to their sites, because they want to keep people confined and segregated, but we also see an interesting development, which is that a lot of these same customers are trying to lock up slots for September for these outages because they know that the outages are necessary. They just don't want them to happen now. And they also are anticipating that there will be a boom in outages when confinement stops, when the lockdown stop, and therefore, they want to make sure they're not left out. So it'll be slow in Q2 for TFS, but there'll be a recovery after the summer. Overall, the Chemtech order intake was up 2.1%, adjusted for ForEx, but down 12% organically compared to Q1 2019. GTC, the acquisition that we made last year, had a very strong Q1 and contributed about CHF 20 million of order intake to Chemtech. Moving on to Applicator Systems on Page 9. Applicator Systems was down 3% organically in Q1. Our Adhesives business resisted well, staying level -- staying flat despite challenging end markets like automotive and aerospace. Beauty actually demonstrated a clear rebound. You can see that on the bar chart on the right of the slide. Our order intake really picked up in January and February. And we were doing quite well until the market essentially stalled in March. And the market stalled in March, not because of anything linked to Sulzer, obviously. It's stalled because most of the beauty retailers actually had to close their doors. And for those of you in Germany, for example, if you went to your supermarket locally, you had the beauty aisle that was actually cordoned off in these supermarkets. So the rebound in Beauty for Sulzer is there, but the market is going to be stalled for part of Q2 before it recovers afterwards. And it's the same for Dental. Dental had a really strong month of March because our dental customers were stocking up before what they expected to be slowed down activity because of lockdowns. And what we'll see in Dental is we'll see a very soft dental market for us in -- part of Q2, because people are not going to the dentist. Dental practices are closed. And the ones that are open are only taking emergency customers. And I'm sure most of you guys are delaying some of the usual sort of nonessential stuff because none of us are very excited about having somebody stick their fingers in our mouth currently. So that's going to impact negatively our APS business in Q2, but APS is a business that will rebound as people start coming out again. Okay. So moving on to Slide 10, which is a variation of our donuts that we have often used to explain that we have low cyclical businesses. What we've done is we've given you guys more details. We broke down the 1/3 of Sulzer, which is new equipment. And you can see it's broken down in chemicals, pulp and paper, power, downstream and upstream. The message that we're trying to drive across is different businesses will be impacted in different ways. Our aftermarket businesses will be very resilient. Now as I said, they will be impacted in Q2 because of the sheer limitation of lower site access, less access to customers and customer sites. But these are very resilient markets where if you -- even if you take the oil part of that aftermarket, if you have a look at how we performed in the last downturn, that business actually held up very well in terms of volumes and margins. So service parts and retrofits. Everything that's aftermarket is actually 45% of Sulzer. It's the 40% that you see in dark blue here, and it's an additional 5% that you find in Water, because, in the light blue, we haven't broken out the service and the new equipment part of water. And our Water business itself is a wastewater market. It's correlated to urbanization and population. And as we know, that is not something that drops because people are confined. Applicators, I've already talked about a minute ago. Applicators will be impacted in Q2 because people don't have access to cosmetics, and they don't have access to a dentist, but that rebounds as soon as people are allowed to travel again and move around again. Maybe there's a little bit of softness in Dental for the rest of the year because people don't rush back to their dentist right away. But if you look at the coverage of the dental world by some of the specialists out there, they expect that the dental market will progressively recover, and they see an impact for the full year for dental in the magnitude of something like 10%. So once again, that 2/3 of Sulzer is quite resilient, but still with some impacts of short-term because people can't leave their home. If I focus on the other 33%, 30%, 35% of Sulzer, the -- you have different segments that are impacted in different ways. You have things like chemicals and pulp and paper and power, new equipment that are impacted by the performance of the broader economy. Pulp and paper currently is doing well and continuing to do well in April. Because, yes, people are using less -- maybe less printing paper, but they're using more toilet paper as we all know. And they're also using more cardboard because they're buying off the Internet. If we have a look at downstream and upstream, these are markets that will be impacted for a longer period as much as pulp and paper and chemicals will rebound with the global economy. Downstream and upstream will bear the brunt of a longer downturn in oil and gas, which will be driven by high stocks and lower demand. What we're seeing currently and what we saw yesterday in the markets is that this rebalancing of the market is being forced by the market. Essentially, it's no longer about OPEC. It's about the fact that there's no storage, and that you have to put the oil somewhere. And this is why you've got things like negative oil prices short-term and WTI in the U.S. But at the end of the day, what you have to keep in mind when you think about Sulzer is that we are not very exposed to shale. We don't do fracking pumps. Our exposure to shale is minimal. It's really just related to pipelines. And we sell pipeline pumps, as you know. Most of our exposure is in conventional oil and conventional oil is driven by the national oil companies. And if you think back on things that were explained yesterday by people like Schlumberger and Halliburton when they came out with the results, I think they commented that they see CapEx in U.S. shale going down by something like 50% this year. But they see CapEx on the international market, which is conventional oil, going down by 10% because the national oil companies continue to invest. Their game is different there. And therefore, yes, there'll be a longer-term impact, and this is why Sulzer is taking the initiative of reducing its energy capacity by 30%, by 1/3. But you have to keep in mind that not everybody will be impacted in the same way. And given Sulzer's portfolio, that 14% that we have in oil and gas, which is overwhelmingly conventional, we will be less impacted than anything that is significantly exposed to shale. Moving on to the next page, which explains how we are adapting to short-term and midterm impacts. Short term, we mean 2020. We're taking the step of reducing OpEx and CapEx by CHF 60 million each. The CapEx decisions have already been driven through the business, and everybody has their target and knows what they have to stop and what they have to continue. So that's CHF 60 million.And the OpEx cuts are being affected by a curtailing SG&A through a mixture of structural and temporary measures like travel and reduction discretionary spend. But it's some temporary measures and some structural measures in OpEx. And some additional measures will be driven just by the downsizing of our Energy business, which will also have an impact on SG&A. But we'll talk more about that at the half year. The structural measures that we'll talk about at the half year in terms of resizing our energy business, I've explained that, once again, we're about conventional oil, 14% of Sulzer. It's less impacted than the U.S. shale and so on, but it's still exposure to oil. And there'll still be an impact that will go into 2021. And therefore, we are reducing our capacities in Energy by 1/3. This mostly impacts the engineered pumps business within the Pumps Equipment division. It will, to a smaller extent, also impact certain group functions and part of RES, Rotating Equipment Services, if there are things where we have facilities that are linked to new equipment facilities. But we'll give you more details about that on July 24. Moving on to the next page, where we try to give you some elements to think about our liquidity. We started the year with an opening cash balance of CHF 1.1 billion and CHF 500 million of undrawn revolving credit facility. Our net debt at the beginning of the year stood at CHF 347 million, CHF 347 million, resulting in net debt-to-EBITDA ratio of 0.8%. And we've tried to give you some elements to think about how this has -- this liquidity position has developed to date. Our free cash flow in Q1 is actually CHF 15 million higher than the free cash flow in Q1 2019. So it's CHF 15 million up year-on-year. Overall, we expect a similar seasonality in our cash flows in 2020 as in prior years. Free cash flow in H1 typically ranges from minus CHF 50 million to breakeven, and we don't expect that to be very different this year. Might be a little bit of tension in our supply chain as we support some of our weaker suppliers, but roughly, we expect the same pattern. And as a reminder, we typically deliver a free cash flow yield of 4% to 5% of sales, although in 2019, we were higher than that. Other elements that you have to think about when you're modeling our cash flow. On April 21, as I said earlier, we paid our CHF 4 per share dividend for a total cash out of CHF 93 million, which is, off the top of my head, an additional CHF 9 million cash-out versus last year because as you recall, we don't pay the Renova part. We expect CapEx to be at maintenance level CapEx, which is CHF 70 million, and therefore, this is CHF 40 million lower than CapEx in 2019, which was CHF 109 million and CHF 60 million lower than what we intended to do in 2020. And at the half year, on July 6 to be precise, we will repay a bond amounting to CHF 110 million. And this is our only repayment before July 2021 where we have another bond that comes to maturity. Obviously, there are some COVID-19 impacts, as I explained, the country lockdowns, but usually, we stay open because we provide essential services. And we might be [ put into ] squeeze between -- some of our customers may be delaying some payments and some of their suppliers that need a support. We don't see that in our numbers yet, but it's not out of the question that this is something that we see at the half year. But as I said, at this point, not visible, but we just want to flag that so that you guys can think about our numbers with as much visibility as possible. Last page, I'll summarize. Our Q2 -- Q1 order intake was strong, I think, higher than most of you expected and healthy in all the businesses particularly driven by our aftermarket activities. Clearly, we like everybody else, really. We're withdrawing our 2020 guidance despite the fact that actually we were within guidance for Q1, as you know, but there's not enough visibility, and therefore, it really doesn't make sense to maintain that guidance, which, anyway, excluded the impact of the coronavirus. We're fully mobilized to provide essential services. As I said, about 95% of Sulzer people around the world are working. And our aim is to stay active, to stay busy and to stay mobilized for our customers. We mostly rely on self-help. We haven't made significant use of short time work to date. We've mostly relied on things like reducing holiday accruals. We've asked people to take their vacations. And we've asked people to that across Sulzer. Because at the end of the day, we believe that companies like ourselves should rely on self-help before they rely on the government. So regardless of our comfortable liquidity position, we believe that it's important for our people across the company to all contribute. And taking your holidays early has been a way to contribute to that, and we've done that quite effectively. The impact on the Sulzer businesses in Q2, as we said, will be more significant but we'll be resilient, because 45% of Sulzer is aftermarket and 65% of Sulzer is low cyclical. We have a high backlog, and we have strong liquidity. I talked about the CapEx and the OpEx cuts, CHF 60 million each. I've talked about the structural adjustment in energy by 1/3. And beyond that, Jill and I are happy to take any questions that you may have on Sulzer before we make wrapping comments. I'll open it up for questions now.
[Operator Instructions]The first question comes from the line of Andre Finke from HSBC.
Yes. I maybe go through them one by one. The first one is related to the structural capacity adjustments in energy or mainly oil and gas. The 1/3 you mentioned, is that roughly the market decline you would see over the next, say, 1, 2 or 3 years? Or do we -- I mean, are you cutting capacities on a bigger magnitude than you would expect the market to go down?
We're cutting capacity by a bigger magnitude. We -- it's easier to slow these things down than to accelerate them. And therefore, we believe that at this point, it's not about half measures. It's about taking the bull by the horns and being proactive. And once again, cutting capacity by more than we're anticipating the market to decline by is also a way to continue to be able to be selective, which is important to us because prices never really recovered from 2019. And at this point, it's pretty clear that prices are not going to recover in oil and gas anytime soon, and therefore, selectivity is important. Did I answer your question, Andre?
Yes, it does. Maybe a follow-up on that. How quickly could you ramp up capacities again? I mean, clearly, you mentioned that you expect the market weakness to persist at least until well into 2021. On the other side, you mentioned in the past that you think reduced investment levels of your customers may curb production capacities on a sustainable basis at some stage. So if we assume that some sort of recovery will come through maybe in late 2021, 2022, to which extent could you build up capacity soon and a potential recovery scenario again?
I think we could, and we've been quite effective at doing that in the past. If you remember the last oil downturn, which wasn't that long ago, 2015 to '17, we kept capacity, but we were able to ramp back up afterwards as needed. Cutting capacity for us, when we say structurally, usually involves some types of factory closures. But what we've also learned from the last downturn is that we've become a lot more efficient in our manufacturing, and therefore, a lot more scalable with the assets that we do have. So we believe that we'll be able to build back up if the market lends itself to that. And we do expect that there'll be a rebound sometime, probably in 2021. I mean, if you look at what some market observers are saying in terms of pricing, they probably expect to rebound before that because of the sheer shock of the adjustments and the shut-ins that are currently happening. I mean our job is not to speculate on when the market will rebound, it's to take proactive actions, and -- but scaling back up, I don't think will be the constraint. It's more about adjusting to be ahead of the wave.
Okay. And do you have any indication on potential costs for taking out that capacity?
No. As I said, we'll be more forthright on that on July 24 when we announce our half year results. We've got pretty clear ideas as to what the possibilities are and what the numbers should be. But there's a little bit of -- a little bit of work to do and a little bit of social consultation to do on this also. So bear with us until the half year, which doesn't mean that we'll wait until the half year to launch measures, but we'll wait until the half year results to detail the measures.
Okay. Fair enough. The second question relates to the order backlog which you mentioned already. You already talked about this pipeline cancellation in Q1 in Pumps Equipment. Do you expect or maybe already saw further cancellations in April and beyond? So is there risk to that order backlog -- what is -- I think this is relative to secured.
There aren't additional cancellations in April that I'm aware of. Actually, we said there's a $20 million order that was canceled. It was the [ Red Oak ] pipeline in the U.S. And that was in Q1. It was -- we said there's about $30 million of order suspensions. And actually, last feedback I have is there's an order within that $30 million, which is another U.S. pipeline, which is about $15 million of that $30 million. And we've got oral confirmation from the customer yesterday that it's not going to be canceled. It's just going to be delayed a little bit, which I think we've done most of the work in terms of the manufacturing, and we've got a very protective cancellation clause. So I don't want to say that it's okay for us either way, but it wouldn't be the most painful thing for us, but the customer still intends to go ahead. I don't have any new cancellations that I'm aware of that I could disclose to you guys. I mean, I expect that there'll be some, because at the end of the day, people will adapt on the fly. And I think that the cancellations that we will see will probably come disproportionately from the U.S., but nothing new to report at this point.
Okay. And the pricing pressure has recently already increased or are there customers coming back to renegotiate existing contracts?
The pricing pressure, it's an interesting thing, because if you refer to -- actually, I was reading the transcript from Schlumberger or Halliburton, I can't remember which one, yesterday. They were pretty much saying the same thing. And one of the CEOs, I can't remember which one, said that in terms of pricing pressure, he said prices never really rebounded from 2016, and therefore, the difference in terms of this downturn versus the last downturn is that there's really not a whole lot to give in terms of pricing. So his view was that it was going to be really about volume, but that the companies like his didn't have a whole lot to give in terms of pricing. And I think it's pretty similar in our case. There just hasn't been that much of a rebound, which -- in terms of pricing, which means that we're -- I'm not sure many of our customers are expecting that there's an additional notch in the belt. But surely, there'll be some pressure. But once again, I don't think this is what's going to be the story. I think what the story is going to be about, about volume.
Okay. And my last question relates to M&A. You were quoted probably from a press interview or so that your liquidity is rising if the dust settles. Maybe you can elaborate a little bit on that whether large-scale acquisitions could become an option and whether you think 2020 would be already a year where you could look for some stronger inorganic growth given the environment and probably some cheaper assets or whether that's something you would rather think of with regard to next year?
It's not a priority right now. It's not even a concern right now because I think the markets moved from focusing on opportunities to focusing on liquidity. And I think our liquidity is a great asset. It gives us a lot of optionality in terms of what we do down the road. So at this point, it's really about shoring up our businesses, [ writing ] out this incredible period. And as I said earlier, if -- when the dust settles, if we feel good about the visibility that we have, we still have a very comfortable balance sheet that we can deploy. We just don't intend to do it now.
The next question comes from the line of Fabian Haecki from UBS.
I also go with my question, one of you can answer. Starting with services. Still the question a bit about the cyclicality. I mean as you said, short term, it's more about the site access that is a bit of an issue in Q2, but it should recover. But if we think of nonperforming assets in the oil and gas industries, like refineries, oilfields, don't you see the risk that the service is being neglected, service intervals being stretched out or some assets are like mothballs where there's absolutely no service needed? This is my first question on services. And the second one is, if you exit some pumps applications that you deem are not profitable, can you still do or even grow the service partners, the independent service supplier like you do in the total services business? Or do you think you will also lose out on the service business when your installed base will start to shrink in certain applications in oil and gas?
Okay. Okay. Thank you, Fabian. Look, energy, Fabian, we're not getting out of energy. We're just reducing our sales because of the storm, essentially, if I can use metaphors. So we'll still be in that market. And we -- I pointed out that in the first quarter, part of our service -- good performance in services, a CHF 15 million service order on other people's pumps. So yes, we can do third-party work. We do that today quite successfully, and we continue to do that successfully. But I think the question you were pointing to is you're trying to figure out whether a service itself is also cyclical. And what I would do, once again, is I would point you to the last oil downturn because, really, this -- your question is about oil. And if I point you to the last oil downturn in 2015 to 2017, have a look at our RES division performance. You'll find that it continued growing at 2%, 3% a year and the margin was remarkably flat. I mean off the top of my head, it was like 13.7% or 13.8% every year for 4 years during that downturn. So I think there is resilience to the service business, and that resilience has been demonstrated, including in oil and gas. Now to your point of will there be stranded assets in oil and gas? Will there be assets that are shut down? Yes, probably, but the demand will recover and people will need to run the refineries and they will need to run their pipelines if only to move that massive amount of oil around, so that's where the resilience of the aftermarkets business comes in. So once again, the proof is in the pudding. And the last time you got to see that pudding was 2015 to '17, and you can have a look at the numbers. I think they speak for themselves.
Okay. And again, here on your -- okay, you don't call it a partial exit of the oil and gas business. But when you shut -- when you reduce your capacity in the future, will you more focus like do more cherry-picking, say, okay, we just go for the tenders that have sufficient margins. Or do you say, certain applications will never have satisfying margins and we'll just leave certain product groups. So this is not the case how I understood you, just...
No. We're going to continue being a full-service provider to the oil industry. We have a very strong franchise, and we have very good customers that rely on us. We just -- once again, we don't want our commercial approach to be driven by capacity. We want a commercial approach to be driven by opportunities. And this is why we're trying to get ahead of the wave essentially. I think I answered your question, Fabian. Anything else?
Yes. Yes. Maybe then a last one on your new CapEx guidance, which goes down to the maintenance level. Is the kind of your project of moving from Bamberg to Bechhofen, I think the building is built, but probably needs quite some equipment, the machines to be treated with. Is that project kind of delayed? Or is there no impact on that transition?
No. That project is not delayed. And we're going full speed ahead on that one. It was in last year's CapEx, and there's still some cash out this year. I think there's about CHF 20 million of cash out this year. And we're not slowing that down. One, because we're well engaged in that transformation. And we are closing Bamberg and therefore, we need the extension of Bechhofen. But two, as I said earlier, our Beauty business really rebounded in the beginning of the year, and we think that rebound is going to be confirmed when the market resumes. So it's important for us. If anything, actually, it gives us a little bit of time to get set up before the market picks up again in Beauty.
Thank you very much for the very comprehensive presentation here for Q1.
Thanks for saying so. Other questions?
The next question comes from the line of Alessandro Foletti from Octavian.
I have a couple as well. One on the order backlog conversion, basically, CHF 1.9 billion seems to me quite a high level of order backlog. You've mentioned that as well. But then in Q1, your sales were down. And so obviously, there must have been -- maybe you could have delivered more from the order backlog. And I was wondering, is it due to the fact that your customers are on lockdown? And how do you expect that to move for the rest of the year? It'll be my first question.
Let me answer that, Greg. Okay. So on -- we have CHF 1.9 billion of backlog that we opened with. And if you look to the tradable stuff that goes into our sales this year, you can use about 80% that we have. What you see in Q1, the reduction in sales is pretty much driven by the fact that we had the China lockdown -- shutdown. And we have, in the last week of March as well, India. So this is for sure going to come later since China is now open. India is in the process. We have 45% of our capacity of our workforce already working. So from that perspective, this is just a question of time. And overall, you can say 80%, yes.
Okay. Okay. So basically, what you're saying is you will be able to catch up everything you plan to deliver?
Yes.
When we look at that backlog, we've analyzed it. And as long as our facilities remain open, which should be the case and as long as our supply chain continues to hold up, which has been the case to date, we believe that we could deliver 80% of that backlog. There's a few caveats. You can always have a situation where you finish the work, and the customer has to come and do a final inspection and the customer doesn't show up for whatever reason because the customer may be trying to delay the invoicing. These things happen in downturns. But well, all things being taken as equal, we think that 80% of that backlog is tradable this year.
All right. And then a similar question related to the commercial activity. Obviously, that was less impacted because you still had good growth in orders. But now it's more in lockdowns Q2, i.e., maybe not relevant for you, but more for your customers, the fact that you do not have access to customer site and so on. Will that slow down your order intake?
Yes, it will. As I explained, it will. Well, you'll see the full impact of the COVID pandemic in Q2. If I take them one by one, I tried to do that during the presentation. But if I kind of summarize what I said, what you'll see is you'll see -- if you take our Pumps Equipment business, what you'll see in Q2 is you'll probably see our Water business that continues to perform quite well because it's about water utilities and essentially, it's an essential service. Industry is doing well in April to date, but Industry will be disrupted by the economic cycle and it will be disrupted by some customers being less available. But if I look at how we're performing in April, we're not seeing a slowdown at this point. And if we take our Energy business in Pumps Equipment, you'll see that -- I think I highlighted that the U.S. will be very slow in part of Q2, but we see a lot of activity in Saudi Arabia and China and to some extent, in Russia also. So that's kind of for Pumps Equipment. For RES, as I explained, we have part of our activity, which is linked to field service, linked to having access to customer sites, to go inspect the equipment, to go provide services on sites. And that will be impacted by the lockdowns. And therefore, Q2 will be slower. And I think I highlighted earlier that if I look at April, how April is performing versus Q1, we're about 10% down in terms of run rate, and that's mostly due to customer site access. And I explained that APS was linked to people being trapped at home and therefore not going to their dentists and not being able to buy cosmetics mostly. And I think I also touched quickly upon Chemtech. Chemtech is also a tale of 2 stories. You've got the Chinese markets and strangely, the India market, despite the fact that we're on lockdown, which are commercially active. And you've got the rest of the world, which is disrupted with larger projects being shifted out and customers being a bit more confused as to how quickly they want to go ahead with things or not. Did I answer your question, Alessandro?
Yes. Can I ask you one last one? I know it's a little bit of crystal ball thinking. But do you think, after all, it's going to be a V-shaped recovery? Or a U-shaped recovery?
I have no clue, and I try not to speculate on shapes. What we try to do as Sulzer is we try to be ahead of the curve in terms of taking action. So that if you've already taken action and you've already reined in spending and you're already maximizing cash flow, and you're already doing the capacity cuts where they are needed, then you have more opportunities that if you're still scrambling and running after the market. So that's our approach. And I certainly have a personal view as to the recovery, but I would never dare to venture on a call with guys like you that also have your own view. And at the end of the day, nobody knows.
Next question comes from the line of Charlie Fehrenbach from AWP.
You said you cannot give any details about the structural measures in the Energy business. But you may have an idea or could give us an indication of how many people could be concerned in the overhead of the group level in Switzerland, Winterthur, respectively.
No. I really don't want to get into that. As you -- I'm sure you understand, it's a sensitive topic. It impacts employees. There's social law considerations, and therefore, it's really not the right thing to speculate on these things or to send up trial balloons. We have a clear view of what the opportunities are for us. And we'll handle them thoughtfully in full consultation with our social partners, and we'll start doing that right away. We've already started, and we'll detail that for you guys on July 24. I apologize, but I really can't get into that.
The next question comes from the line of Armin Rechberger from ZKB.
Well, most of my questions were already answered. But still, I'm a little bit confused just for the definition. In earlier days, you were referring to oil and gas business. And now, you are referring to Energy business. Is it the same? It covers exactly the same area? Or are there differences?
The reason why we use Energy is that if you take our pumps business, which is about half of Sulzer, as I explained in the past, the pumps for oil and gas and the pumps for power are very similar and they're made in the same factories. And therefore, we call that the Energy business. In prior days, it was called the Engineered Pump business. But now we have a tendency to define that by the end market. So therefore, when you take action on that, you take action on the plants and the infrastructure, which targets both power and oil and gas, hence, our name for it, which is Energy. So in Pumps Equipment, which is mostly concerned by these adjustments, it's actually called the Energy business. There's 3 businesses in Pumps Equipment. You've got the Water business, the Industry business and the Energy business. And in RES, whenever there's -- there can be an extension to RES because we also have these pump service centers that service these pumps. And sometimes, they're unshared facilities with the manufacturing facilities. So instead of finding a complicated name for it, we used Energy, which has -- which mostly refers to our Pumps Equipment business. But then again, the actions are mostly related to our Pumps Equipment business, not solely related to pumps equipment, but mostly.
Okay. Then China, you explained that you're running up 90% to 95% again there. And that's really capacity utilization, so the demand is already back at that level. Is that the case?
Yes. The demand is actually -- we mentioned that, in fact, we are working in a number of the factories actually beyond the 100%. So 105%, 95% to 105%. So from a utilization perspective, we are full. And we are -- we have enough backlog to work on. That's the reason for that, so yes.
Okay. An important production area for you is also Texas and the surroundings there. And the situation there seems to -- also to be quite dramatic. But so far, you don't have any closures there. But looking forward in 1 to 2 weeks' time, I mean, difficult to say, but do you assume you have to close down some plants there?
So I think what you said is partially true but deserves to be detailed. When you mentioned Texas, I think you're mentioning Texas and the shale area in general, for oil and gas, or at least that's the way I understand the question. And what you have to keep in mind is that this is not a significant market for us for new pumps, for example.
No, no. I was rather referring to Houston and the likes, really big cities which are really hit hard, also affected by the virus.
Well -- but you're trying to -- are you trying to -- would you like to know whether we're locking down some of our facilities because of the virus? Or whether we're closing -- we plan on doing restructuring because of less business? Which question?
Yes. Because of the virus, rather, yes.
Oh, okay. Now Houston, we're operational. We've got Pumps Equipment, commercial and engineering office, we've got the GTC business, we've got a huge service facility in La Porte, which is a Houston suburb, where we've got almost 1,000 people. And we -- all 3 of them are operational, all 3. We've got a pump service center in Houston also. All of that is operational. The people are working. We have very stringent measures in terms of health checks. As people come into the plant, we take temperatures, we do social distancing. We do all these things, but we are continuing to work to be active. And actually, these guys had a very -- they had a very good first quarter. And certainly, on the service side, which is a big facility that we have there, we continue to be quite active in April.
The next question from the phone comes from Christian Arnold from MainFirst.
I have a question on the Applicator Systems. So actually 2 questions. On the one side, the Beauty business. You have shown there this significant start, there's a nice rebound. I wonder if you have observed the differences among your customers. So the traditional large houses versus the independent e-commerce-related customers. And have you seen there a different pattern in terms of the development, Q4, Q1? And then going forward, what do you expect? And the second question would be actually on the development of the different segments. So I'm a little bit puzzled by the fact that the Adhesives business in the Applicator Systems was flat. I would have expected a much larger negative impact here. And definitely, going forward, I would assume that -- I mean, looking at this chart maybe in 1 year time, we probably see that the Adhesives business is much more down than the other 2 segments. Is that a fair assumption?
So you're puzzled about Adhesives, but it's a good puzzle. You're surprised that it's not more impacted. Yes. Look, the Adhesives business, I think, has a larger correlation certainly than Beauty and Dental with the economy at large. And our customers or -- the customers of our customers, because our customers are the Henkels and Sikas and 3Ms of this world but the customers of our customers are in aeronautics, automotive, electronics, construction, all sorts of applications, which are impacted by the current crisis. So yes, we expect that the Adhesives business will be under more pressure in Q2. But we also expect that this is a business like Dental and Beauty that will rebound as the world reopens sometime this summer and as people start buying things again and start being able to leave confinement. So there'll be more impact on Adhesives, I think, in Q2. But once again, we expect that, that market will also rebound as the world reopens. Your question on Beauty, I mean, frankly, I haven't spent a whole lot of time analyzing Beauty in Q1 because the rebound was a good one. It was clear. But right now, the market has kind of stalled just because people can't buy cosmetics. I think we had the combination of a number of things, the fact that we changed our commercial approach to be able to serve better some of these more nimble e-customers, if you want to call them that way. Part of the effect was also that some of our traditional customers had product launches that they went ahead within Q1. And actually, quite a few of them have product launches that they intend to launch this summer because our cosmetics customers have quite a high level of confidence on the market recovery. So I think it's a little bit of everything, but it's -- I expect that rebound to continue. I'm just not really in a position at this point to give you that much more insight.
There are no more questions from the phone.
So we take the questions from the webcast then. We have a question from Jorg Schirmacher from Baader-Helvea.So what kind of seasonality should we expect in 2020? Is it all more back-end loaded? First question.
I mean honestly, anybody that can predict seasonality for 2020 deserves an award. I think you have to predict how long the lockdowns are going to last, what's going to be the success of the confinement, whether there's going to be a secondary wave. There's so many things coming into play that I really would like to stay away from trying to speculate on that. What I would say is that we had a strong Q1. Our weakest quarter of the year will be Q2, and we expect the rebound to be progressive in Q3 than Q4. But how that translates into our numbers this year, it's really too early to say.
And the next question is the good order backlog should help the top line at least for 2020. How should we think in terms of households who could be able to secure profitability in 2020 given the high backlog, but temporary production shutdowns on one hand? And then on the other hand, the cost measures on the other hand.
Look, 2020 is a year of huge disruption and huge uncertainty. And our first level of focus, as I said, is safety for our employees. Our second level of focus is to be able to continue serving our customers, which we've managed to do quite well to date. We've got this backlog. We'll execute as much of the backlog as we can because it's about serving our customers and keeping the economy going and keeping our people busy. I'm not sure that the -- I don't -- I'm not able to give you forecast for this year because I think, as I said, there's too many factors that come into play. But what we hope to do is to be able to mitigate the impact on order intake in Q2 and to show a rebound in Q3. And therefore, to finish 2020 in a world which is healthy and operating again with a backlog that is not too depleted, and having demonstrated the resilience of Sulzer. And if we do that, I think we'll be in good shape. And hopefully, that will allow you guys to continue supporting what we do.
And the third question from Jorg. Sulzer has had a very positive cash flow development in previous crisis. Can we expect a similar development in 2020? For example, driven by a lower net working capital?
Well, as we have communicated in the past, we put a strong focus on working capital. We started and we are still running improvement projects on inventory management, on collections, on vendor management, on DSO. And we, therefore, expect that despite the challenges posed by COVID-19, we will be able, to a large extent, to mitigate that. We've given you an indication that our full year typically is, in the past, 4% to 5% of sales. In terms of free cash flow generation, we expect that with the efforts that we drive internally, we'll be able to keep to the same profile. Yes.
But to add to what Jill said, I mean, I think mechanically, the question is correct. In a business like ours and when orders start going down and you're executing your backlog, you deplete your working capital and therefore, you generate cash. I think the caveat in the current situation is nobody's ever been in a world where there's a lockdown that people are not allowed to leave home and there's an additional 22 million people unemployed in the U.S. in 3 weeks and so on. And what the -- what opposite effect may -- that could put pressure on our cash is, once again, the ability of our customers to pay us on time and whatever support we may have to provide to our supply chain in order to protect some of the weaker companies in our supply chain. Once again, this is a temporary crisis. And therefore, this is not about blowing up people. This is about making sure that the guys that have been serving us well continue to be able to serve us. And therefore, there will be some trade-offs that we'll have to make. But as Jill said, I think there's pluses and minuses, but we don't expect free cash flow to be the biggest concern this year.
Yes. I mean I think we have a strong balance sheet. We have a good track record of generating positively on our cash flow, and yes. So in spite of the COVID-19, we will continue like in all fronts on the costs and CapEx part to do our self-help measures to mitigate. And if everything happens in a good way, then your assumption would be a positive one. But on the other hand, at the end of the year, we might have also a higher execution level. So if you look into the full year, I think we are working towards having a similar pattern like the past.
And at the half year, so that you guys don't all flip out when our half year numbers come out, I mean, we performed better from a free cash flow perspective in Q1 than last year. But at the half year, we're usually flat. We're usually somewhere between minus 50 and 0, usually flat to slightly negative in free cash flow. As you know, our free cash flow is usually backloaded. And given the pressures that we're seeing in the markets, it's probably more likely to be slightly negative than it is to be slightly positive. But I don't think this is indicative of anything. I think it's only indicative of the fact that Q2, and especially the current period, is going to be the most unusual quarter any of us have ever lived through. But once again, we feel pretty solid about our liquidity position and pretty solid about our free cash flow for this year. Other questions?
Yes. There are 2 questions from Eugen Perger of Research Partners. And first one, might there also be some midterm opportunities arising from a lower-for-longer oil price, such as crowding out of other forms of energy or more water desalination or such things?
The desalination market continue to be quite active. It's driven by -- is mostly driven by the Gulf region. The crowding out, I don't really know. I don't really know. I think that the -- this industry continues reducing capacity, the oil industry. And therefore, as you continue to reduce capacity and as demand recovers, because demand will recover, you end up in a situation where the balance between the buy-side and the sell-side is probably a little bit better over time for the sell-side than it's been in the past, which probably lends itself to some pricing rebalance over time. But as in terms of crowding out anything else, I think ESG is an important thing for the world. I think sustainable energy is important for the world. And I don't think governments will allow lower oil prices to crowd out other renewables, other types of energies, especially renewable ones. So that, from a political perspective, I don't expect that to be the case.
Then the last question -- or the 2 questions, are you aware of any corona-related infrastructure support programs initiated by governments which might boost the Water business in the midterm?
Not yet.
Okay. And might Saudi Arabia, because of the oil price collapse, cancel some planned water engineering projects?
It's hard to read Saudi Arabia. What we see to date is that the country, it's tightening its belt because it'll have more trouble balancing its budget, obviously. But the commercial activity level continues to be quite high. So I wouldn't speculate, but I would say, certainly from our perspective, so far, so good.
Okay. No more questions.
Other questions? I think we're done. Thank you very much for spending the time today. Jill and I really appreciated your attention, your time and your thoughtful questions. Once again, this is all about resilience. I think what we're going to show you guys and what we're hoping to show you guys is that our diversified model is proving to be resilient. We see that in Q1, and we think we'll see that throughout the year. It doesn't mean that we won't be significantly impacted like everybody else. But once again, it's diversification in different businesses, and that diversification will really show its positive impact. I'd like to point out, once again, that new oil projects are a small part of Sulzer. It's 14% of Sulzer, 1-4. It's not insignificant, but it's not the main driver of Sulzer today. And keeping in mind once again that within that 14% of new equipment for oil, most of it is conventional and less impacted than what's happening in shale, which is really the story of the day and the story of the year, I think. And finally, we've got the liquidity. We've demonstrated the agility in the past. We've had to adapt Sulzer to a lot of things in the last few years. And hopefully, you guys see that those muscles of ours in terms of agility are quite exercised and will serve us well in this crisis. Thank you again for your time, and stay healthy, stay safe, and talk to you soon.
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