Sulzer AG
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Ladies and gentlemen, welcome to the Sulzer Q3 Results 2019 Conference Call. I'm Andre, the Chorus Call operator. [Operator Instructions] The conference is being recorded. The presentation will be followed by a Q&A session. [Operator Instructions] The conference must not be recorded for publication or broadcast.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, and good morning and welcome to Sulzer's Q3 Order Intake Conference Call. Today with me is our CEO, Greg Poux-Guillaume; and our CFO, Jill Lee.As usual, with order intake releases, we have not prepared a presentation. Nevertheless, the safe harbor statement applies also to today's call. Just as a reminder, the call contains forward-looking statements containing risks and uncertainties. These statements are subject to change based on known and unknown risks and various other factors, which could cause the actual results or performance to differ materially from the statements made herein.I now hand over to Greg for a short introduction. Thereafter, you will have the opportunity to ask questions. Greg, please.
Thanks, Christoph. Good morning, everybody. Jill and I are happy to be on this call with you today. I'll run you through the numbers quickly, and then Jill and I will take whatever questions you may have.Sulzer just finished another strong quarter. Order intake in Q3 increased organically year-on-year by 6.7% to CHF 925 million. Acquisitions, mainly GTC in Chemtech and Alba Power in Rotating Equipment Services, both of which closed early in the year, contributed about CHF 22 million or 2.5%. ForEx, foreign exchange, rates had a negative impact of CHF 29 million or 3.4%. The trends in our end markets are unchanged from what we've seen at the midyear. So momentum continues to be positive overall.Now let me give you some more details on the divisions, and I will refer to Q3 only. Q3 order intake in Pumps Equipment increased by 16% driven by strong orders from water, chemicals, upstream and industry. Power was flat in Q3, and midstream actually declined, but it was on a base effect. As you may recall that we booked in Q3 of last year a CHF 30 million pipeline order and, therefore, that's an unfavorable base. But midstream continues to be a good business for us, just actually declining in Q3 year-on-year. So overall, we continue to enjoy robust end markets in Pumps Equipment.In Rotating Equipment Services, order intake was up a very strong 17%. Although we had a couple of sizable orders, growth was actually broad-based and not driven by one huge order in particular. All businesses and regions developed positively. Turbo services was up on a weak Q3 2018 and also up on our push into compressors and steam turbine, the compressor and steam turbine service, which we've pushed into to compensate for continuing weakness in gas turbines. Pump service continued to outperform boosted by strong volumes in repair and also good volumes in spare parts.Order intake in Chemtech was down in Q3 due to a base effect. As you may recall what we said a year ago, in Q3 2018, we said that order intake was driven by 3 major orders that together totaled CHF 15 million, I'm actually quoting. So we have that CHF 15 million exceptional order intake in Q3 of last year that creates a pretty challenging base for us. But if you exclude the large orders in both quarters, Q3 '18 and Q3 '19, and acquisition and ForEx impacts, Chemtech, from an order intake perspective, would actually have grown mid-single digits year-on-year. Large orders, as you know, can lead to a certain lumpiness in the division's quarterly development. But after 9 months, Chemtech is up 7%, following the year 2018 when it was already up 20%. All of this on an investment cycle in petrochemicals and refining which does not show signs of abating.In Applicator Systems, order intake was down 5% in Q3 and 3% down year-to-year -- year-to-date, I'm sorry, year-to-date 3%, 5% Q3 year-to-year. Dental and health care performed well. Adhesives is having a good year, but the slowdown in some significant customer end markets, mainly construction and electronics, is softening growth.In Beauty, Beauty is the story we've been talking about the last time we've been on this call. Beauty, we were closing one factory, we're opening another one, and we have the market transition, which is going to keep us busy as we adapt to our industrial assets from -- for this year and actually most of next year. So in more detail, we have the groundbreaking ceremony for the extension of our factory in Bechhofen while we progress towards the closure of our other factory in Germany in Bamberg. The Bechhofen extension should start production towards the end of next year, the end of 2020. And as you may recall, this is the extension that we're building to serve these independent customers that require a lot more integration in terms of things like decoration and have shorter-lead times. So until then, until this is operational, the structural shift in the beauty market for which we're building these production lines as well as the transition of production from Bamberg to Bechhofen, which is not completely straightforward, are likely to dampen the prospects of our Beauty segment.We're not worried about our Beauty segment. We continue to be the market leader. We continue to be profitable. We're just in a transition phase where we're suffering a little bit more. And if you guys do the math, we're, for Beauty, I think, year-to-date, we're down something like 15%. I think this is roughly what we'll be down for, for the year. And I think that it's reasonable to assume that we'll be pretty much at the trough of that business and next year, we'll be in the middle of the closure and the extension. So next year is going to be probably flattish versus that. But I think that where we are at the end of this year will be pretty much bottom for the Beauty business, then we'll be flat next year. And then as we get the Bechhofen extension operational at the end of next year, then we'll start growing again and picking up overall. So nothing broken with the business. I'll just repeat the same thing the next few exercises and when we talk because that's the transition we're engaged in, and we think this is the right plan, and we're happy with our Beauty business going forward.On APS, I should remind you that we have a new leader. Girts Cimermans took over as President of the division 2 days ago on October 21. I'm reliably told he's here, although I've been traveling, and I haven't seen him yet, but I've gotten the message from him. And Girts has a really interesting background. He's got a very deep background in medical and dental devices. We think he's a really good fit for the business. And as you know, he's also complemented by a new leader for our Beauty business, Florent Lafond, who started at the beginning of September. So quite a dynamic team, succeeding Amaury de Menthière who is retiring, as you know, at the end of the year, and I take this opportunity to thank him for everything he accomplished for APS and Sulzer.Looking forward, we expect that the trends that we have seen in the first 9 months of the year will continue in Q4. We, therefore, confirm our guidance for 2019. As you recall, our guidance is for order intake of 6% to 9% and sales growth from 7% to 9%, both excluding ForEx impact, but including around 2% of acquisition impact. I would only further qualify it by saying that sales are likely to be at the high end of that range. Our opEBITA margin is expected to be around 10% as previously announced.With that, I have closed my opening remarks. And Jill and I would be happy to take any questions you may have.
[Operator Instructions] The first question comes from the line of Christian Arnold from MainFirst.
Just 2 questions, if I may. On the one side, power end market and you were saying that it's up 3%. I believe that mainly it is linked to the Rotating Equipment Services. Now you just mentioned that you had flattish business in Q3 also in the Pumps Equipment part. So is it now, let's say, turning out that we're seeing now a growing business from the power end market also for the Pumps Equipment side? And what does it mean for the operating profitability for this segment? That's my first question. And the second question would be on Americas, you mentioned that Americas was the region which has the slowest growth, so to say. In the last call, you also mentioned that you have seen first signs of price uplift in North America, in the U.S. Has this changed? Or can you confirm that price is still somewhat moving up?
All right. Thanks, Christian. The line was pretty bad, but I think I've understood your questions. I'll answer them. And if I've missed anything, jump in at the end. So power is up 3%, but the power market hasn't turned. The power market continues to be pretty depressed. We're talking -- obviously, we're talking conventional power, not renewable. It continues to be pretty depressed. Essentially -- and on the pump side, power is really the -- more an adjustment variable for us because it's power and oil and gas or the same type of pumps, they are engineered pumps made in the same factory. So essentially, we balance for load by mixing some power with oil and gas. And oil and gas is 5x the size of power pretty much. And in power, we kind of pick and choose. So if we were to look at the margin on the order intake of new pumps for power, you'd see that the margin has actually been going up, but it's been mostly going up on essentially cherry-picking. And we're not trying, in particular, to deliver growth in the power sector in pumps because, as I said, it's about cherry-picking and complementing the oil and gas side of things.In RES, we are trying to deliver growth from the power side of things. And as I explained in my initial comments, the gas turbine market is depressed. It's no longer really dropping, but it's kind of at the bottom. And we've adjusted our strategy to capitalize on opportunities out there, and opportunities out there are for chasing things like compressors and steam turbines, on which we focused in some geographies maybe a bit less in the past. And we found that we make pretty good margins on those, and we've been quite successful bringing additional business in. So that's allowed us to, essentially, if you take the turbo service business, the power side of the turbo service business is actually doing quite well because of that sort of mixed elements linked to our specific focus on things like compressors and steam turbines.And then -- and anything linked to pumps, power aftermarkets, it's kind of like oil and gas. We've got good volumes right now, and we're making pretty good money and that kind of rounds out the whole thing on power. So not a priority to grow in power in Pumps, a priority to grow in power in RES and a lot of it driven by the change of focus or the increased focus that we have on steam and compressors. Not a market upswing, and I don't expect a market upswing in power anytime soon.In Americas, Americas is -- has been a good market for us. And especially North America, we've commented previously that we've seen price upswings, and it continues. I mean the pricing continues to be more favorable in North America for pumps than anywhere else in the world. And it mostly is a reflection of the fact that the -- North America has picked up, and the rest of the world hasn't really. It's been more cherry-picking in the rest of the world. That hasn't really changed. Did I answer both questions, Christian?
Yes.
The next question comes from the line of Andre Finke from HSBC.
I actually have 2. One is related to your guidance, you mentioned in the release that given that the lower nonoperational expenditures, growth rate for net income will be significantly higher compared to growth rate for EBITA in the full year. Just wondering whether you could give an indication on the magnitude of nonoperational expenses in full year 2019 and whether you think then it's probably a bit too high on that. And the second question relates to APS again. And it's basically related to strategic options that you could or would potentially consider, maybe you can elaborate a little bit on that, whether that's something in terms of disposals or growing the business inorganically, whether there are any strategic options that you consider for that segment.
Okay. All right, Andre, I'll take them backwards. I'll start with the APS question. APS, we like the portfolio that we have. As you know, we've been trying to build a fourth leg in health care, in pharma really, pharma applicators. Our business today is about CHF 10 million of revenue in pharma applicators. And we'd like to make that significantly bigger, and that we'd go through an acquisition. And we've been kicking the tires on a bunch of different things. We made an offer on a business, a sizable business, last year, which ended up being too expensive for us or more than we thought it was worth. And there's other things that we are chasing, but I don't really have a timing on when any of that is going to become available and actionable because mostly the things that we're chasing are not per se for sale. As you know, our M&A approach is mostly to target the assets that we like, not to wait for things to come to us through a process. But that also means that there's a lot of timing uncertainty and actionability uncertainty because you're talking to people that you're trying to convince that accepting a check for us would be a good thing to do when this is not necessarily what they're focused on right now.So we'll take any opportunity to round our dental or adhesive portfolio, but it will be mostly incremental acquisitions on the smaller side because we're pretty sizable already in both of those. We're not looking to grow Beauty for the next few years inorganically because our focus is really on that transition in Germany and our launching of our factory extension to serve these independents. And in health care, we consider making a sizable acquisition if we could find one. But as I said, there's a lot of uncertainty as to what will be actionable and when. But there are targets that we like.Your question on the nonops and the net income guidance. I think I'll hand that one over to Jill and what we'll -- what Jill will probably do is mostly give you a bit more indication of where net income should land for the year. And we'll talk about the detail of nonops next time. But as you know, we're working those down as we get to the end of the SFP process this year. But Jill, you want to talk about net income?
Yes, I think to your question on net income, first of all, let me speak a little bit on the nonop, that essentially the nonop, as you know, are the nonrecurring cost that relates to SFP; and two, our other restructuring type topic that really forms the restructuring, like the [Foreign Language]...
[Foreign Language] is the closure of the factory in Germany.
Sorry, that's...
Our language, sorry.
With the closure of Bamberg, yes. So with the SFP, we have told you that we expect to land a little bit higher. So we now see ourselves rather in the ballpark of around CHF 20 million and...
CHF 20 million savings.
CHF 20 million of savings. And with that, typically the costs related to implementing SFP and especially the [ yield of the ] land is now about 1 to 1.2x of that. So you can take that as a ballpark for your modeling.The other part is on the Bamberg piece. Last -- in H1, we told you we have around CHF 6 million. It could be a little bit higher in the second half because some of this we take as it is incurred. And yes -- and then a little bit else related to M&A type topic. So that's what you can see.Amortization as well as impairment is pretty much consistent with previous years. So all in all, when you take that, we will be increasing our op load in the guidance, in the ballpark guidance around 10% and these are the components that I have mentioned. That's why our net income certainly would be much higher in the increase. And it would be...
You want to qualify it much higher?
Well, I mean, let's say that usually when you use the fixed exchange kind of guidance, significantly higher usually, something that is more than 30%. So I think you can use that kind of as ballpark.
Okay. So hopefully, you've got helpful elements from Jill. Summary is the nonops is really 2 things. It's the tail end of SFP, which you can extrapolate to being roughly in line with the savings that we'll announce for this year and the part of the Bamberg closure that we haven't put in restructuring. So most of it is in restructuring, some of it is in nonop. And everything else is kind of minor because it's -- we're at the end of that SFP program. It doesn't mean that we're no longer adjusting our costs. As you know, we're continuing to do that in as aggressive a manner as we can. And the closure of Bamberg is not part of the SFP program, as you know, as an example. But that's what you can expect, more than 30% up for net income, I guess, is what Jill is saying. Follow-on question on that or is that okay?
No, that's okay. Very helpful.
The next question comes from the line of Andreas Meier from Finanz und Wirtschaft.
I have 2 questions, actually. One is about the growth rates of your orders? Are they about inline of the relevant markets? Or are they better or maybe below the market development? Or can you give also a bit more insight into the development of the markets? And then the second question is maybe your expectations for next year and if you don't want to give any expectations, maybe your gut feeling about what could develop next year as we hear from slowing economic trends?
All right. Thanks, Andreas. So our growth -- is our growth in line with our end markets? At any point in time, it's actually a hard question to answer because certainly if you look at it from a quarter-to-quarter perspective, it's a bit impacted by specifics of what happens in a given quarter. So you have to look at a wider population to know whether you're inline or not. If you look at where we are full year, we're growing at something like 7% overall for the company. We've got significant growth rates in oil and gas and in water. And I'd say probably in both of those, we're doing better than the market. If I compare what we've done with what's been announced by our competitors, certainly, we've done better than the market in water. And I think that also applies to oil and gas, despite the fact that in oil and gas, we're being quite selective on the pump side of things.But in Chemtech, we don't really have to be selective because the pricing levels in Chemtech are already high, and we're fully benefiting from the market upswing. In power, I couldn't really tell you whether -- I mean I think at 3% growth, clearly we're doing better than the market because the market in power, for conventional power, is flat. But as I said, it's -- we play on a pocket of the power market which is the -- on the RES side of things, which -- it's really the aftermarket for Rotating Equipment, which is really just a subset of that market. In places like dental, I think we're performing quite well versus what the market is doing. In areas like beauty, to give you an example, because we -- this is where our numbers are a little bit strained from what we've done historically. We're 15% down for the year in Beauty. We're probably doing a bit worse than the market. And we're probably doing a bit worse than the market because we have an overrepresentation of the larger customers. The big guys that are suffering a bit more this year in terms of where the growth is going. The growth is being captured by the smaller players, the guys that do viral marketing.And the other aspect is that we're closing a factory in Germany, and that's a level of disruption. And therefore, for -- if you were to do an analysis of the mascara brush market for this year, I don't know what the numbers would be. But my guess is that if I take the 15% down, it is probably 10% of it which is the market, and it's probably 5% of it which is us. And when I say the 10% of it which is the market, you guys will go back to your research, and you'll say, hold on, the beauty market is not 10% down this year. But actually, if you see what's coming out of the big players in terms of new launches in mascara, this seems to be the year of skin care and not the year of mascara so much. So therefore, this is an overall market impact, which is negative. But -- so I'd say overall in the important markets for us, oil and gas, water, dental, even power, I think that we're actually overperforming. And probably in beauty, we're underperforming, but we know why, and we're not overly worried about it. We just have the plan to implement and then beyond that in trying to think in which markets we would feel that we're underperforming for the year. But I don't really think we're underperforming anywhere else than Beauty at this point.And now if I go to your question on expectations for next year, it's a bit early to give guidance for next year. We usually do that in February. But what I'd say is that orders and sales will be up next year, and profitability will be up next year. So we'll continue along the trend of having all our main indicators, orders, sales and profitability improving next year. And at this point, it's a bit early to tell you by how much, but we'll give that guidance in February. I think the message that I'd like to leave you with is that we're on a positive trend and we're a business that also generates a significant amount of its sales from backlog. And therefore, a lot of what we'll deliver next year will be in our order book at the end of the year. I think something like 60% to 65% of the sales for 2020 will be in our backlog on the 1st of January. So, so far, so good. We keep a close eye on what's happening around this in the market, but our trajectory next year will continue to be positive on all key indicators. Does that answer your question, Andreas?
Yes.
The next question comes from the line of Johannes Brinkmann from AWP.
Do you see an impact of the trade war between China and the U.S.A. on your business? And the same question goes to the -- if you see any impact of the tensions in the Persian Gulf on your business?
Jill?
Yes, but it's really quite slight. Let's say, around maybe CHF 5 million just because we...
Sorry, how much?
Up CHF 5 million of costs.
Up CHF 5 million of costs.
CHF 5 million of costs.
From the tariffs itself.
U.S.-China.
U.S.-China.
U.S.-China, look, to illustrate we've got factories everywhere. So we can balance things quite well. But if I take, for example, our engineered pumps, our feeder factory is in China. We make pumps in the U.S., but we have a tendency to shift some of the components or even sometimes the bear shaft pump from China. There's a 20% to 30% tariff, I can't remember how much exactly. We did the analysis of should we be importing these components from somewhere else. And even with the tariffs, we're still cheaper out of China. So essentially, we're eating those tariffs, and it's impacting us to the tune of around the ballpark of what Jill said, about something like CHF 5 million for China, U.S. I don't know the exact number, but its inefficiencies, it's certainly less than CHF 10 million, but it's somewhere in that ballpark.And the Middle East, not really impacting us. We're present in oil and gas worldwide. We have kind of a natural balancing, which is one region will be up, another region will be down, with the exception of shale, in which, as you know, we're not -- we don't have a significant presence, which these days is a good thing because shale was the part of oil and gas, which has slowed down significantly. So with the exception of shale, we're really present around the world in oil and gas. And the geopolitical stuff is, it mostly leads to up somewhere, downs in other places, and it kind of works out for us. Does that answer your Johannes?
Yes.
[Operator Instructions] The next question comes from the line of Armin Rechberger from ZKB.
Two questions. Applicator systems, while you had a weakening sale -- order intake again and you were talking about Beauty mainly, but what is the situation with your main client, with -- for the brush for the e-cigarette? Do you still don't have any deliveries there, any orders there from this client? My second question is regarding the low oil price and about the project pipeline in oil and gas. What feeling do you have there? Does it influence the project pipeline? Are projects already put on hold again? Or how [ reactive ] your main big customers in oil and gas, especially upstream?
Okay. All right, Armin. I'll try to answer both questions. The APS question, as I said, APS year-to-date is down about 15%. I think it will be down about 15% for the full -- what?
Beauty.
Beauty, I'm sorry. Everybody was fainting around the -- I'm sorry, Beauty. APS is down 3% for the year. Beauty down, everything else is up. If I take Beauty 15% down year-to-date, it'll be 15% down roughly for the year. It'll be kind of flat next year. It'll be rebounding in 2021. So that's kind of like the summary.Now if I take your specific question on that customer for e-cigarettes. I try to avoid commenting directly on specific customers because I end up revealing more about their business and ours. But what I would say is, at this point, our order intake with those guys year-to-date is still 0. We'll expect -- we expect that it will be less than CHF 1 million for the full year. And we expect that it will, therefore, lead to a favorable base as we go into next year. We will enter production with those guys pretty soon, but it just hasn't happened yet. So don't expect more than CHF 1 million this year. And it's -- it will be a very, very marginal business for us this year, but it'll be something that we can relaunch as we move into next year.Oil prices, I mean you qualify them as low. I don't know what low means anymore. I mean if -- when Brent is somewhere in the $55, $60, whatever, it's -- that's a pretty good level for most of our customers. It avoids having the shale guys go crazy because this makes most of the fields marginal at best. It allows the big oil companies to make money, actually quite good money. And it's been fluctuating, but the commercial pipeline hasn't fluctuated. It's business as usual with our customers. They -- our leading indicators in terms of inquiries, nonbinding offers, all that good stuff are not moving down. It's kind of, as I said, kind of continuing on the same trends. And this fluctuation in oil prices don't lead to fluctuation in terms of intentions or early inquiries from our customers. We don't really anticipate that there'll be a change in trends in 2020 because we do believe that conventional oil is still in the early phase of the investment cycle, after a few years of underinvestment. So we expect that to continue.But we'll update you guys on the leading indicators every time we talk. I think it's a good practice to update those views because I think there's a little bit of confusion in the market as to what's happening in oil and gas. And if you guys cover companies that -- I mean Sulzer is a diversified company. At the end of the day, oil and gas is, what, 32% of what we do when I exclude petrochemicals and petrochemicals have very different trends. And in this 32% of what we do, a significant chunk of it, probably half of it, is actually aftermarket. And the aftermarket doesn't fluctuate much. So when we start boiling it down, the exposure in terms of new products for oil and gas, excluding petrochem, once again, is probably something like 15% of Sulzer.But if you look at companies that have significant exposure to oil and gas and especially the guys that have significant exposure to the part that was growing really fast the last few years, the U.S. shale patch, I mean those guys are suffering. You saw what Halliburton announced a few days ago. You saw what Schlumberger was saying. And these guys were mostly suffering from the slowdown of investment in shale, which is due to the fact that mostly the economic equation doesn't work. It works for a really good acreage. It doesn't work for most of the other stuff. But we're conventional oil. We're not trying to suspend the laws of physics. And we sell to people that are in the early phase, from our perspective, of the investment cycle. Did I answer your question, Armin?
Yes. I have one more question, if I may. We were talking about profitability at Pumps Equipment. And in the first half year, we saw just a slight negative figures on EBIT level. What do you expect for the full year? I mean you mentioned rising profitability. So am I right to expect EBIT -- positive EBIT margin for Pumps Equipment in second half?
Yes, yes. I mean look, our Pumps Equipment off the top of my head, and Jill will correct me if I say something silly, I think our EBITA percentage last year was like 2.7%. I expect us this year to get close to 4%. And I certainly expect that, that will continue next year as we trade a better backlog into next year than we were trading at the beginning of this year. So I think that's as clear as I can be, from 2.7% to something close to 4%. And we'll continue along that trend in terms of improvement next year. Do we have more questions?
We have no more questions at this time.
All right. Well, thank you very much for taking the time to be with us today and for all the thoughtful questions. Jill and I appreciate your time. And hopefully, we gave you the flavor of the fact that Sulzer is continuing to perform in a market where there are some uncertainties, but overall, for us, the balance of risk and opportunities is more in the opportunities category than the risk category, and we think that will continue as we go into next year. On those words, thanks, again, and we'll talk to you soon.
Ladies and gentlemen, the conference is now over. Thank you for choosing Chorus Call, and thank you for participating in the conference. You may now disconnect your lines. Goodbye.