Sulzer Ltd

Christoph Ladner - Head of Investor Relations. Gregoire Poux-Guillaume - Chief Executive Officer Jill Lee - Chief Financial Officer

Reto Amstalden - Baader-Helvea Equity Research Charlie Fehrenbach - AWP Armin Rechberger - Zürcher Kantonalbank Fabian Haecki - UBS Pascal Furger - Bank Vontobel AG

Good morning, everybody and welcome to Sulzer's H1 results conference call. Today with me is our CEO, Greg Poux-Guillaume and our CFO, Jill Lee.

This conference call is also being webcasted. The link to the webcast can be found on our website.

During the conference call, we refer to the presentation that can also be downloaded from our website. This presentation contains reconciliations and supplementary slides at the back, which we might refer to but not so during the presentation.

Also, I would like to draw your attention to our Safe Harbor statement, which is shown on Slide 2 of the presentation. Please note that this statement applies to any statements in the webcast and on the call.

So this is enough from my side. I hand over to Greg.

Thanks, Christoph. Hello everybody, this is Greg.

Jill and I are very happy to be with you today. We'll run through this presentation and take your questions.

Before we start, you see that on Page 2 and 3 of the presentation you've got a few pictures that you guys will recognize from recent news. And we're going to talk today about quarterly results and sanctions, and oil and gas recovery.

And all of that is important has paced our last few months. But as John Lennon said, life is what happens while you're making plans.

And now while we were working in all these things the world continues to unfold. And Sulzer was very pleased to be part of a touching and important story; you all followed, the Wild Boars, the football team in Thailand.

And Sulzer is not always very good at marketing itself. We don't do the mini submarine thing.

But actually, most of the pumps, most of the dewatering pumps that were involved in taking the water level down in the cave in Thailand were actually Sulzer pumps. And this is what you see on these pictures.

These blue pumps are our dewatering pumps. The reason why they were chosen is that our local distributor was very reactive and diligent and went out to help.

But also because they're light aluminum structure and the challenge was that you needed pumps that could take out huge volumes of water. But that were also light enough to be transported by people into a remote place.

And this is what you see on Pages 2 and 3. So once again a very touching story that ended well.

And Sulzer was happy to play a small role in all of this. Okay.

So let's go to the highlights. Let’s go to highlights on Page 5.

Before I start running through the numbers, two things to keep in mind, the first one is that you see that we're now showing the third-party order intake and sales for the divisions. And therefore, there's no inter-company adjustments in the other "other line" anymore.

You probably need to adjust the prior's year's figures in your model as well, as we did in the divisional tables, to compare apples to apples. I know that there were a lot of questions this morning related to that, to our Investor Relations department, because the Q1 numbers still had the inter-cos and the H1 numbers don't have the inter-cos.

But I think we sent around a reconciliation table. And if you don't have it you can reach out to Christoph Ladner and he will send it to you.

The second thing is we adapted our accounting to IFRS-15. In our media report, you'll see three columns in the key figures tables.

The first column shows H1 2018 according to IFRS-15 new standards. And the second one shows H1 according to the old method.

And without getting too technical, IFRS-15 is around the revenue recognition from contracts with customers and how much and when you recognize revenue. Applying the new standard in – for H1 2018 means for us that we recognize less lower margin projects in H1 2018 lifting profitability.

And this will revert in H2 and in 2019, depending on the timing of the projects. But what you'll see in this presentation is not IFRS-15; we've kept it to comparable to the old method.

So once again, the numbers in the presentation that we'll run through today are old method but you also have the IFRS-15 new method numbers available. Hopefully, that's clear.

Okay. So let's go to highlights of H1 2018.

We've seen a continuation of the recovery of the oil and gas upturn, continuing the recovery of oil and gas downstream, which started last year and a rebound in oil and gas upstream, which started in 2018. All our other markets performed well with the exception of the power markets.

This resulted in an order intake that increased by 11.6% including acquisitions and 6.5% organically. Sales also increased organically, although they are typically trading orders like nine to 12 months and this effect is most visible when you look at Pumps Equipment.

OpEBITA margins or opROSA increased by 110 basis points versus the same period last year showing the positive impact from higher volumes, the SFP savings and acquisitions that more than offset the conversion of lower margin orders into sales. I am also pleased to report that we see no impact from sanctions in the second quarter.

Our performance in the U.S., to use that as a proxy and the USA are our order intake in Q2 was 15% up organically. So it tells you that our business continue humming along.

Our customers remain supportive. And we really minimize from an operational and commercial perspective any disruption to that adventure of a few days in April.

Now let's go directly to the divisions. I should add, as part of my introductions, that because of the strong performance we've had in H1, we're raising the guidance for orders and for sales for the full-year.

We'll see that in a minute. So orders and sales guidance up for the full-year.

All right, let's go to Page 6. Starting with our Pumps Equipment division.

The order intake for Pumps Equipment increased by 21% including acquisitions and by 12% organically. The main driver was the strong development in oil and gas, which was up by 45%.

Within oil and gas upstream more than doubled from what was a very low basis in H1 2017. H1 2017 was probably the trough, so up more than doubled, but once again from the trough.

We received less orders in the power market we're down about 3% in power. Organic orders from the water business and from the industry businesses were up about 4% for both of them showing solid growth.

And the acquisition of JWC the grinder screen wastewater business that we bought early this year further strengthened our position in waste water. And JWC, in terms of performance, is trending ahead of plan.

So, so far so good. Regionally order intake was particularly strong in the Americas, followed by Europe, Middle East and Africa and Asia Pacific.

The sales in Pumps Equipment are typically lagging order intake by about a year. So the sales growth is, therefore, less pronounced than the order intake growth, but we're still 6% up in sales organically.

The order backlog of almost CHF1 billion secures the continuation of this positive trend in H2 and will carry into 2019. So although we're still converting orders to sales that were taken at lower margins during the downturn, the SFP savings, as well as positive contributions from the acquisition of JWC resulted in a positive opEBITA of CHF6 million for Pumps Equipment for H1.

So we're back to profitability. We dipped below the line briefly last year, but Pumps Equipment is back to being profitable and will continue to improve in the next quarters.

Let's turn to Rotating Equipment Services, on Page 7. Okay, yes the order intake in Rotating Equipment Services is up 6.5% or 3.1% organically.

Orders for pumps, services and spares increased by 16% and orders for electromechanical services were up 4%. As you know – as you see in the donut on that page, our business is really three product lines; it's pumps, it's turbo, and it's electromechanical.

So pumps 16% up, electromechanical 4% up. Turbo is under a little bit of pressure.

We've seen lower volumes in turbo service particularly in gas turbine services. You see that we're down 7% versus the same period last year on turbo services.

Now 7% is a good performance in the market context because you know that the gas turbine market has been down in the last couple of years resulting in more competition on the installed base. And the installed gas turbines, the ones that are already in the field are cycling less and therefore requiring less service.

You see that in the Siemens and GE numbers very clearly. But 7% down, but we're resisting very well and we'll continue to do so.

Operational EBITA was on the same level as last year, but the margin declined a little bit, the reasons are twofold. First, as I mentioned, turbo services is under pressure and the second reason is a mix effect.

In pumps services, so in our pumps business, we actually had more repairs and less spares in the first half of this year versus last year. That leads to a mix effect, which takes the margin down by a few basis points.

You see we're 12.1% versus 12.8%, but once again, RES performing well, Turbo Services on a little bit of market pressure, but everything else trending up and recovering. But turbo, it's the power market that power market will continue to be tough in the next couple of years.

Chemtech, to go to the next page, so Slide 8, my page numbers look funny, Slide 8, Chemtech. Chemtech enjoyed healthy order intake, we're up 5% and there is no organic or adjusted as the same because we didn't make any acquisitions of any significance in Chemtech recently.

So we're up 5% organically and sales are up 13% in the first half of the year. The order growth was less pronounced than the sales growth as you may recall that we communicated last year that we were – in Chemtech, we've got two businesses.

Historically, we've got the separation technology, which is the products business, which is about two-thirds of Chemtech. And historically the Tower Field Services business, which is the outage business, the turnaround, it's an aftermarket service business was about one-third of Chemtech.

Now what we said a year-ago is that within Tower Field Services, which as I said is about 30%, of the business historically. We decided to discontinue one of the activities, which was an extended scope activity that we felt didn't have enough added value and had a project component which we didn't like in terms of risk-reward.

So we discontinued that activity and therefore Tower Field Services is trending down in terms of volume. In H1 this year, this year it’s closer to 20% of Chemtech than the 30%.

And I think you’ll see that continuing going forward. Tower Field Services being more closer to 20%.

Now what that means is that we're – Tower Field Services, in terms of order intake is down double-digit. I mean you can do that math going from 30% of all of Chemtech to 20% is healthy double-digit decline, which means that the separation technology business is actually growing really fast.

And it's our product business and it's the proxy of that oil and gas downstream or chemical processing industry recovery. It's continuing to be very, very healthy.

And this is also the impact that's improving our margin on order intake. If you refer to our midyear report, you'll see that our gross margin on orders has gone from 29.7% last year in H1 to 31.4%.

And this is also the reflection of that mix effect less Tower Field Services and a lot of growth in separation technology. So Chemtech is on a really good trend.

The orders are up, the sales are up, and the profitability is up quite significantly. If you refer to full year 2017, you recall there was an exceptional of CHF 10 million linked to the discontinued activity within TFS, Tower Field Services.

If you excluded discontinued activity's impact of CHF 10 million, then the profitability of Chemtech for all of last year was 7.3%. And in H1 this year, we’re at 7.5%, and continuing to go up.

So we’re pleased with the development of the operational profitability in Chemtech and you will see that that business will continue going from strength to strength in the next quarters. Now let's move on to the Applicator Systems division on Page 9.

So Applicator Systems developed well in the first half of 2018. I think there is only – there is only one number that will jump out at you if – you're trying to figure out if everything is going according to plan.

And I'll make it clear now everything is going according to plan, but if you look at the organic order intake, you see that order intake in the first half of the year is up 6.3%, but organically it's only up 1.3%, which is unsettling at first glance for a business which is in three markets, Dental, Adhesives and Beauty, they are really GDP, GDP plus types of markets. So we've been growing at 6% or 7%.

The markets have been growing at 3%. Why are we suddenly growing at 1.3%?

Well, it's actually a tale of two different things. If you take Dental and Adhesives, in the first half of year, we're up 7.5% organically.

So twice the market rate, very healthy continuing on the momentum that we had last year. Now what it tells you is that – it tells you that beauty is down.

Now why is beauty down? Well, beauty as a market is going well and it's a GDP, GDP plus type of market and our business is performing well, but we have an isolated event, which is that we have a large customer that represents significant volume for us on one product.

And it turns out that this one customer has decided to – this one customer had first generation product into the markets and we were manufacturing that first generation product. And the customer, for commercial reasons, decided to withdraw that first generation product from the market ahead of plan.

So somewhere between 6 and 12 months before he was due to do it commercially and decided to move to the second generation product ahead of plan also. Now it's not a negative over time for Sulzer because we have the first generation product and we also won the second generation product.

So actually that volume is also going to us, but in terms of immediate revenue and in terms of load plan, essentially what we have to do is we have to start manufacturing that first generation product, which was part of our load plan in Q2 and Q3. And we will only move to manufacturing the second generation product in actually in Q4 according to the customer's plan because he's working down the inventories that he had of the first generation and he's only launching us for commercial release in Q4.

So that tells you that we have a shift of volume linked to one product and one customer that goes from Q2, Q3 of this year into Q4 and mostly 2019. So by next year, we'll be back to business as usual with this customer, but this year we have this little disruption that is very manageable, but it's taking the volume of beauty down and therefore orders and sales in beauty are essentially the same thing.

So that volume is down and that's something that you're seeing in H1 because it impacted us in Q2 and that you'll see it in H2 because it will impact us in Q3. But once again, we'll be manufacturing the second generation in Q4.

Hopefully, that's clear. It's a negative impact this year, but it resumes according to normal program in Q4.

So the operational EBITA was higher in H1 2018 compared to H1 2017, we generated CHF 49 million of EBITA versus CHF 45 million, but the margin is lower. We're 40 basis points lower at 22.2 and once again, this is the effect of that disruption of the beauty business linked to that one customer, one product which had healthy margins attached to it.

And that shifting of the volume, not having the volume, not having the margin is having a little bit of a dilutive impact on our margins. But once again, we're down 40 basis points and none of that is a structural issue, it's an issue linked to this commercial decision by our customer, which will not impact us over time, but is impacting us short-term.

All right, if I go now to the – oh, I should say Transcodent, our last acquisition in APS in Dental, Transcodent is progressing well and the integration is going according to plan. Let's now move to the next Slide – Page 10, it's the SFP summary.

So SFP, we extended SFP at the end of the last year. We think we can get an additional CHF 30 million of benefit, cost-saving benefit without jeopardizing our ability to rebound with the markets.

Now it turns out, we told you guys that we would achieve CHF 25 million of incremental savings in full-year 2018, and it turns out that we achieved the CHF 25 million in the first half of the year. So, we're continuing to trend ahead of plan and what we are doing is we are bringing some of the 2019 savings into 2018.

So, we said we'll do CHF 25 million this year, we're actually doing CHF 25 million in H1 and we'll do the second, another CHF 10 million of savings in H2, so CHF 35 million for the full-year, and the remainder to get to CHF 230 million, which is another CHF 10 million, is going to happen in 2019. So SFP from an execution is continuing to go well and from a cost perspective is continuing to be completely within the band of what we told you guys historically, all right.

So the obligatory sanction slide. I have to continue talking about sanctions.

Hopefully not for too long, but the slide Page 11 is a reminder of the timing, it was a disruptive event, but it was a three-day events, three-day of being blocked and then another few days of bringing back our business to normal operation. We said within the next week we were back to normal operations.

And what you see in our financial results is that we continue to run really hard, even when we were under sanctions and we minimized disruptions short-term and we have no disruption long-term. Now a reminder of the main highlights.

We were free from sanctions within three days. There's no conditions associated to our unblocking by OFAC, there is no reporting obligations, and there is no monitoring.

So this is not a continuing story. We were blocked three days, we got a license, we move on.

But we owned 5 million shares, of our own shares acquired from Renova at CHF109 per share and as you know we have a full downside protection for that share price. All the upside is for us, and you see today that we have a latent upside and the proceeds of the transaction CHF546 million are payable in October into an escrow account as you know.

Renova is a 48% shareholder of Sulzer now that are blocked from making any further acquisitions of any Sulzer financial instruments, shares, bonds, options whatever, they can't buy anything linked to Sulzer now and going forward, independently of sanctions. They have signed something that says they will no longer buy anything linked to Sulzer in the future.

They can sell, but they can't buy. They've actually drop off a member of the board that was representing Renova.

So our board has minority Renova representation. We've got four independents and three Renova representatives on our board.

In the time that we had after the sanctions, we leveraged the good relationship we have with OFAC to do something that we haven't announced yet, but we were informing you guys of it today because I think it tells you, it highlights the good relationship we have with OFAC. In some of the investor meetings I've had from U.S.

investors I had the question of, can you confirm to us beyond reasonable doubt that a U.S. person or U.S.

investor, or U.S. financial institution can take part in a debt offering, a share offering, to take part in any placement related to Sulzer.

And it got us thinking because we thought that well one day we'll take the shares to market and when we take the shares to market, we will get this question. So what we did is we reached out to OFAC and we said, can you guys write us something that we can show investors that says, as written by OFAC that U.S.

persons and U.S. investors can take part in a share offering of Sulzer, the day we decide to place the treasury shares on the markets.

And OFAC was very supportive of this, said, yes apply for license. We applied, they wrote the license, they issued it to us a couple of weeks ago and we haven't made it public because there is no point in making the license public until we are ready to sell the shares.

But you should know that we have a license from OFAC that says very, very clearly – it was the only purpose of the license that U.S. investors have no restrictions whatsoever in taking part in a bond offering, share placements or anything related to Sulzer.

I don’t important to you guys, but I thought I'd mention it because it was important to some of our investors. So short-term impact I continue to get questions about the famous CHF10 million that we highlighted as the cap of the short-term impact.

I don't have a final tally for you guys. My guess is that the final tally will be closer to half of that, so closer to CHF5 million than closer – than to CHF10 million.

I think today we have – the tally today I don't know if Jill will probably look at me funny, I don't know if I'm allowed to say the number, but I think the tally today is about CHF 3 million. And we think that when the meter stops, we're still looking at some of the under-absorption we had related to that disruption.

We may end – and some of the legal costs in continuing to have support in the U.S. I think at the end of the day, we'll give you a final number at the end of the year.

And I think it will be something like half of the initial envelope that we talked about. So there is no – no concerns to be had in any way shape or form.

It's actually going to be a lot lower than what we said. And as I said, but I'll repeat it again, there's no long-term impact, once again we are up 15% in the U.S., commercially in Q2, its business as usual.

All right, so on those words, I'll hand over to Jill for the financial review. Jill?

Thank you, Greg. Good morning, everyone.

Welcome as well from my side. Greg has already mentioned the most important points on this slide so – and I'm talking about Slide 13.

So let me go over that quickly and then going into the details. Order intake increased by 11.6% or 6.5% organically, mainly driven by Pumps Equipment and a positive development of the oil and gas market.

Our order intake gross margin are slightly down as we are booking more new orders – new equipment orders in Pumps Equipment that carry a lower margin. Order backlog increased by roughly CHF 200 million since end of 2017 and will support sales momentum in H2 in 2019.

Sales were up 10.05% or 5.4% organically, mainly as a result of a positive order intake last year and a higher opening backlog, and higher opening backlog. Looking at opEBITA, opEBITA was disproportionately higher resulting in an operational EBITA margin or opROSA of 8.5% compared to 7.4% last year.

The increase is the effect of higher volumes, SFP savings and acquisition that more than offset the pressure of converting lower margin orders to sales. EBIT and core net income also increased significantly due to higher due to higher opEBITA.

And I will give you more details on free cash flow later, but let me at this point mentioned that the more negative cash flow figure in H1 was mainly due to a volume-driven inventory build up that should reverse in H2. We – you can see that we also have more employees as of end of June, most of this as a – due to the acquisition of JWC.

Now let me go to the next Slide, which shows you the quarterly order development. Looking at the – and this is Slide 14, looking at the quarterly order intake development on the next slide let me make some comment on our Q2.

Compared to a high base last year, our orders were growing by 5.3% or 0.8% organically. Acquisitions added CHF 38 million and the foreign- exchange impact was a positive CHF 20 million.

The ones of you on the call who are calculating quickly would probably have found out that some of our – that of our division only Pumps Equipment, and we’re taking equipment services at positive organic growth in Q2, whereas Chemtech and Applicator Systems were negative. Greg has already what happened in Applicator Systems so I won't go further.

In Chemtech we have a base effect as well as less order intake in the Tower Field Services business. Additionally Chemtech is mostly do some project business and the quarterly order intake can be lumpy.

Now let's go to the next slide, Slide 15. On the next slide, you will find the opEBITA bridge; whereas volume and SFP saving contributed strongly, lower margin orders that are converting sales partly offset the positive margin development.

Acquisitions also had a positive contribution to opEBITA of CHF 11 million. And let me now move to the next Slide, which shows the development from opEBITA to EBIT.

And that is Slide 16. Now on Slide 16, you can that our amortization has increased compared to last year due to the acquisition of JWC and Transcodent.

SFP costs shown in restructuring, impairment of assets and other non-operational items amounted to CHF 22 million. This may be more than some of you have expected, but is completely corresponding with the higher savings that we have shown in the earlier slide.

Our results in EBIT stood at CHF 78 million, giving an EBIT margin of 4.9%, which compares well to the 3.9% in H1 2017. Now let's move along to the next slide which show the net income development.

You can see that our financial results was on the same level as last year. After balance sheet date, we issued bonds amounting to CHF 400 million in total to refinance the revolving credit facilities that we had used for the acquisition of Transcodent and JWC.

So that means that the bonds that we recently issued are not yet on the balance sheet because this came after. Not surprising, income taxes have increased due to better-operating results, despite this, the effective tax actually declined to 23.2% in H1 2018, down from 24.7% in H1 2017.

We did not have any major items that were not tax deductible and therefore the effective and the normalized tax rate that we have shown in previous presentations are in the same range. For 2018, we expect to continue our tax rate of around 23%.

Finally, as a result of the above, reported net income to shareholders has increased from CHF 37 million in H1 2017 to CHF 55 million in H1 2018. And core net income to shareholders has increased as well from CHF 75 million in H1 2017 to CHF 99 million in H1 2018.

Now we are at Slide 18. This slide is now showing you more details on our free cash flow.

You can see that the main drag on our free cash flow is essentially inventories, as all the other items net out to zero. Now the increase in inventories was driven largely by the anticipation of higher sales as well as some shift in our factory.

The inventory levels will be normalizing over the next couple of months according to the execution of our backlog. And now the slide on our balance sheet, Slide 19.

And here let me also share with you a little bit specifically on our net debt position. Due to the acquisition of JWC the dividend payment and the negative cash free cash flow, our net debt position increased to CHF 522 million, which corresponds to a net debt to 12 months trailing EBITA of 1.75 times.

As I mentioned, after the midyear, we have increased our financial flexibility by raising CHF 400 million in the Swiss Capital Market via a dual tranche bond issuance as of July 6, 2018. The first tranche of CHF 110 million has a term of two years and carry a coupon rate of 0.25% and was placed at a price of 100%.

The second tranche of CHF 219 million has a term of five years and carries a coupon of 1.3% and was placed at a price of 100%. You might want to know that actually, this is from our eyes quite positive one, and it is actually the largest in the Swiss bond market so far.

And with that transaction, our debt once again has a longer maturity with CHF 850 million out of the CHF 881 million shown on the chart covered by bond that are mostly maturing 2022 or later. And let me now hand back to Greg for the outlook.

All right, thanks a lot, Jill. Okay, so a few slides left, I'll go through them quickly to leave you time for questions because I know you've got another call at 10:00.

The market outlook on Page 21, all our markets are trending positively except power. Power will continue to be difficult to new few years, less power plans being build and lots of competition on the installed basis as I have mentioned earlier.

Everything else is trending positively. Oil and gas, I would say that the volume recovery is underway upstream – I am sorry, downstream started last year, upstream started this year but the pricing recovery is not underway yet.

I think we'll still see a depressed pricing environment in oil and gas in 2018 because the factories are not full or anywhere near full yet and people are continuing to grab the volume that they can. So it's still pretty much a buyer's markets, but I think that will start shifting in 2019.

So once again don't expect a price uplift this year just a volume uplift, but I think the price uplift is will come about a year later. Okay.

And the guidance slide. As you see on Page 22, we expect our order intake to increase by 7% to 10% for the year, up from the 5% to 7% that we had given before.

So we're up from 5% to 7% to now 7% to 10% for the full-year. Sales we're also going up to 6% to 8% versus our previously guided 4% to 6%.

We're not changing our profitability guidance at this point 9.5% as per the previous statements. And I note that this guidance adjusts for the currency effects and includes the acquisitions announced in 2017, namely Transcodent and JWC.

So to wrap this up, summary on the next slide. The oil and gas market recovery is underway.

And once again, the volume at this points, hopefully pricing next year, all the Sulzer markets were healthy apart from the power markets, which is about at this point about 13% of our volume. Sales are the volumes improving, there's a lag of nine to 12 months, so that will be more noticeable next year than this year.

Operational profitability is up 110 basis points on higher volumes, the SFP savings, and the acquisitions. And we've raised our target for 2018 for SFP to CHF35 million up from CHF25 million that we had before.

I think we've hopefully demonstrated there's no impact from sanctions based on our numbers for this first half of the year, but also on the order growth of 15% organically in the U.S. in Q2.

And we are raising our guidance and believe that the momentum for the rest of the year will continue to be quite, quite healthy. That's really it for us.

And at this point, I'm happy to open it up for any questions you guys may have.

Yes. Good morning.

A few question regarding your oil and gas business. Can you give us here a bit of insight how you see the project pipeline developing in the next quarters in terms of the pricing as well as in terms of order value over the project's entire lifecycle or time as you may have here some better insights?

Then also in this oil and gas business, what is the currently the capacity utilization in your Pumps Equipment factories today and what is your expectation for 2019 given that your current project pipeline is expanding and also the backlog is still significantly higher? And then also in oil and gas, when we looked at the backlog and what is here at the remaining share of low margin, low priced orders of the entire backlog and as of today?

Thank you.

Thanks Reto. So taking them one by one, oil and gas, the market recovery is underway.

What we're seeing at this point is still a lot of familiar names i.e. projects that were put on hold that are being taken to market now, and therefore it's kind of the dusting off of what's been on the shelf of the oil and gas companies over the last few years.

What I think was going to be interesting in the second half of the year is that hopefully we'll start seeing some new projects, some larger more ambitious projects, some of the multi-year investment type of things, where first oil is a few years down the road that oil companies have been very reluctant to get into in the initial phase of the recovery, because they were mostly doing field extensions and things that had a short payback. But we think at this point that there's a lot of signs that these new longer-term projects will start emerging in the second half of the year.

That will certainly be an indicator we'll be looking for. As I said, the pricing – it remains in buyer's market because it ties into your question with capacity utilization.

I mean, we closed a bunch of factories. We restructured heavily, but we also de-bottlenecked.

And if you take our business today, I mean we could double the size of our homes business probably without building a single other factory. So it's not very scientific answer to the capacity question, because the reality is that most pump factories these days are assembly factories, and the bottleneck is around the testing.

And the initial engineering right at the beginning the project, you have enough specialized people to do the initial engineering, so that you can place the purchase orders, so you can deliver the projects on time. If you try to highlight the main constraint to our ramping up of volume is to rebuild that order related engineering, that initial engineering capacity that we shrunk over the downturn.

Now we've got to rebuild that skill set. And that is going to be the main factor of our ability to ramp up because it's going to be the main factor of our ability to offer short lead times.

Apart from that, we're nowhere near being capacity constrained on oil and gas. And the backlog, we're coming out of two years of, well almost three years of a very difficult oil and gas backlog – oil and gas market.

So our backlog is at, our engineered pump backlog is at low margins. We've been training those margins over the last couple of years and therefore there's no reason why you guys should expect the bottom to drop out because this is business as usual at this point for us.

But my message was not there's more downside, my message was there is upside, but the upside is not in 2018, because the pricing has not rebounded commercially yet and when the pricing rebounds that means you're replenishing the backlog at higher margins, but it means that the sales at higher margins are only coming like 9 to 12 months afterwards. So on that one, I think it's an emerging story but you'll have to wait for another year for that.

Did I answer your question, Reto?

Yes, thank you.

Thank you.

Good morning, gentlemen. Everybody else, globally we are very worried about the trade dispute between U.S.

and China and Europe. I just wanted to hear a short comment, how you see this and where do you see the biggest dangers for Sulzer if the conflict is escalating?

Thank you.

Okay. So it’s an important question.

We are concerned about the evolving trade environments and it comes with a lot of question marks that we're certainly not capable of listing at this point, so what we do is, we have a tendency to worry about what we can't control. Now if you look at the way Sulzer is set up, most of our markets, our customers want a certain level of proximity from a manufacturing perspective.

So they either want to have production in their country or production in their region. It's certainly the case in the engineered pumps business.

But if you look at our water business it's also very much like that, and it's also valid for Chemtech. So when you look at these businesses what you have to understand is we have factories in multiple geographies capable of producing the same products.

So it means that, from a trade constraint perspective, we have a little bit of flexibility. We have degrees of freedom.

Now the issue for us is a supply chain issue, because our business and most, I would say, well organized multi-factory manufacturing businesses are organized with a feeder factory and a bunch of assembly and testing factory. So what that means is that usually have a very competitive – cost competitive larger scale factory somewhere that is producing components, and you've got other factories around the world that are mostly assembling these components and testing.

That is impacted by the trade disputes, because if your feeder factory ends up being in the wrong place then it complicates your life. So a lot of the work we do today is to build additional degrees of freedom.

What that means is we try to make sure the components are not single source and not single geography, so that whatever happens we're able to reshuffle our production and or supply chain in order to be – to have as little impact as possible. But it's disruptive to the business and it makes our life a little bit more complicated, but at this point it's manageable.

Does that answer your question, Charlie? Hello.

Moderator, I think it answers Charlie's question, so maybe we go to the next question.

Yes, good morning, gentlemen and ladies. Guidance for operating EBITA was not lifted even though – because you changed the standards to IFRS-15 you gained 70 basis points in the first semester.

So there is to be expected such a positive factor in the second half as well. So why didn't you lift the guidance for operating EBITA?

And my second question is, in the beauty of applications system there you said about this project and there is a gap. I don't understand really why there is such a gap of almost half a year.

I mean, are the product meanwhile not needed or is it just they have such a big stock or why do you experience a gap? And then is it the brush for the electrical cigarettes, this project or what is it?

All right. Thanks for your questions Armin, so the first question on guidance.

Our guidance is old method, so there's no IFRS-15 in there. We gave you the numbers today in this presentation with the former IFRS method, we stuck to that so you can – theoretically you can assume that the IFRS-15 method has an uplift.

But what we said earlier is that actually between H1 and H2, it actually – it pretty much balances itself out. So I don’t know if it exactly balances itself out.

I mean frankly I haven't looked into it and maybe Jill can answer that question, but the 9.5% is in the old methods so there is no IFRS-bonanza in there.

Okay.

Okay. The second question on beauty.

It's tricky to answer your question without pointing out to who the customer is and you speculated as whose – as to who the customer could be. And I'm sure you can understand that I can't answer that question.

But it's a customer that had a very aggressive commercial, pushing the product in multiple geographies, and it built inventory to sustain that push, and as they decided to shift to the next generation product a bit earlier, they're working down in inventory. So it's really nothing linked to our business at all.

It's linked to our supporting our customer and being flexible to whatever their commercial needs are. That's really all I can say about that I apologize for not being able to be more explicit.

Okay.

But I commend your investigative skills. So anyway move to the next question.

Yes. Good morning, everyone.

Three questions from my side. So the first one is why again it's quite an H2 loaded year practically at Pumps, Turbo and to some extend at Chemtech?

So to me it seems officially there does not seem to be a seasonality but in the last years is the proof that actually there was a seasonality and also seems to be this year. Maybe some comments on that one?

The second question is on the raw materials and wage inflation; do you see an increasing headwind? How do you manage that?

Is could it be a risk or a damper to your further margin progression. And then my third one is on the SFP program.

So you executed through this year so you are ahead of plan, could you please give a bit color in which areas and where you still see some work you need to do? Thank you.

All right. Thanks Fabian.

Why is our business H2 loaded? It's a really good question.

There are some seasonality in parts of the business. I mean we have customers that have a tendency to order right at the end of a financial exercise.

You see that in some businesses. EPS has a little bit of that.

This other businesses in Sulzer have a little bit of that. But I think it has a lot to do with the market recovery, people – if you take oil and gas, for example, we seem to be subject to the financial years of our customers i.e., they start reassessing whether they should accelerate towards the second part of the year and so we're getting a little bit of that commercially now.

From a sales perspective we were ramping up, so we were growing and there's a lag time between orders and sales. So essentially when you have a commercial push in the second half of 2017 then you have a sales increase in the second half of 2018.

So I think it has more to do with – it has a little bit to do with seasonality and some of our businesses and it has a lot to do with how people or how our customers are handling the decisions that they have to make linked to the market recovery. The raw material and the wage increase, the raw material increase has been a trend.

I think it swung up over the last year; it stabilized a bit more at this point. Our approach is to minimize the time between the order and the purchase order, so essentially we bid for projects at a certain price, which includes a certain view on raw materials and wages.

I mean commenting this time really on raw materials, and what we try to do is to do the engineering as quickly as possible at the beginning of the project so that we can place a purchase order and essentially de-risk from a raw material perspective. As long as we keep that window small then we're mostly mitigating the impact.

And because that – whatever is in our price is still representative of what we're buying at the time that we're buying. And you also have to understand that with our supply chain we have purchase agreements that usually have prices that are guaranteed over a period.

So it's not like when we're buying casings, steel casings, it's not like our suppliers are doing mark to markets on this field. They have commitments for periods of time and it moves more in steps than it does continually.

And SFP we've gone faster on a lot of the indirect procurement aspects, about half of our SFP increase was the additional CHF30 million that we put on the table, about half of it was in direct procurement was we continue to save on a lot of things like insurance, facility management, and things like that, that we are back loaded because they were multi-year contracts and you have to wait until the contracts lapse until you can sign with somebody else at better conditions. And some of that just, I don't know if we'd forecasted too conservatively or if we were able to move some of these things forward a bit more aggressively than we thought, but it actually ended up pending out a bit quicker.

There's not going to be more SFP, the CHF230 million is going to be the CHF230 million because there's a moment where we have to stop talking about SFP. And also the market story is the market recovery.

It's really dangerous to continue to be too focused on taking structural costs out because there is a moment where it starts playing against you. So we are continuing because we will do everything that we can do that doesn't impact our ability to rebound and to benefit from the market rebound.

But there's a moment where it's going to become business as usual. So end of next year when we will have achieved the CHF230 million I think will close the books on SFP and everything else will become continuous improvement.

Jill, you want to add anything to this?

I think no.

Okay, Fabien follow-up questions or did we answer?

All answered. Thank you very much.

Thanks a lot.

Good morning from my side. So just again sorry to enter with a follow-up question on the guidance and this time talking about IFRS-15.

So we see higher volumes, you mentioned SFP savings CHF10 million ahead of initially [indiscernible] and then also we see a lower impact of only like half of initial CHF10 million related to U.S. sanctions.

So this brings me just back, in conclusion, is it fair to consider your 9.5% of EBTIDA margin guidance as rather conservative? And then second question just on M&A, you have a track record of like two to three deals, is the pipeline still full?

And now in terms of financing and also taking into account for the whole like sanction Renova situation, what kind of size do you think it's still possible for this year? And then last question, JWC, I mean we saw a strong performance of like CHF47 million order intake in the first half year, is there a seasonality element in there or it's just that general water market which is booming?

Thank you.

All right, thanks Pascal, lots of questions. I will start with the JWC question, the business is doing really well.

There's a whole lot of seasonality in JWC, but honestly I don't have a definitive answer on this. I would say that what you're seeing is more a reflection of the strong commercial momentum that they have than any seasonality.

But I'll check and I'll make sure that I give you full heads up if for any reason I've missed some seasonality that exists. I don't think there is, I think it's just the strong commercial momentum.

The M&A we've, yes you're right our pace has been like two to three deals a year. We always have a pretty active pipeline because you saw the deals in the last few years that we've made.

We've bought seven or eight businesses and I think only one of them was part of a whole process, everything else, its direct approaches. We know what businesses fit and we just talk to people and talk to them until they're ready to do something with us and ready to do it at the right price.

So you never really know when these things are going to come out, we were a little bit distracted over that, that sanction period where we had a few things to solve and it probably wasn't the best time to approach, somebody is saying, hey, become part of the Sulzer family. But all of that is behind us now and we're back to normal business in terms of M&A.

We've got a few things that are more advanced than others. And the pace should continue to be those two to three deals a year.

Maybe a bit less this year because we've had a little gap but there's a couple of things that could happen before the end of the year in the small to medium size range that we've been in. We've bought things anywhere between CHF 30 million of enterprise value and CHF 300 million of enterprise value and that's where we'll probably stick to for the time being.

And Jill, you want to talk about the financing and where we are in terms of leverage and what that gives us in terms of capacity?

Yes I mean, in terms of financing you can see that on the – on our balance sheet currently, we are at 1.75. And we basically are still within the industry among the companies that are better leverage level leverage.

So from that point of view, I think that as Greg mentioned we will be able to continue, like in a past to get our bolt-on acquisitions, and financing will not be an issue on that front, yes.

So as Jill said we've got small to medium sized stuff. We've got like at least two years of investment capacity available on our balance sheet.

He had a question in there about larger deals and Renova. There's always – there's a few businesses – larger businesses, more expensive businesses that we're interested.

There is always we’ve been focusing on small to medium size acquisition. But there are businesses closer to a billion range that we would love to get our hands on.

Maybe the difference between before and after the sanctions is that, before there was a question as to whether Renova would support – whether Renova would – would there be a capital increase, would Renova be diluted, would they participate? If anything happens that leads to the necessity to go to the market for capital increase the only difference today is that Renova no longer has – is a minority voter at our board and Renova is not able to participate in a capital increase.

So I think that anything that we would do that would be a larger acquisition would stretch our balance sheet – might necessitate our going to the markets and would mechanically lead to a dilution of Renova. But at the same time, there's not anything like that on the horizon.

We have good cash generation capacity. And I think that we will continue to demonstrate our ability to buy businesses and then improve our balance sheet through our cash flow generation.

Your question on the guidance, first of all the CHF10 million, which is now probably more half of that for the impact of the sanctions is non-op, we said that we treated is non-op. So it’s not – it doesn’t have an impact on our 9.5% guidance.

So whether it's 10% or 5% or zero is not reflecting in the 9.5%. It's a non-op number.

Just to keep the business readable. And we haven't changed our guidance because we think that 9.5% number is a good number.

We think it was a challenging number and the additional volume helps us a little bit solidify that number. But you have to keep in mind that we are continuing to evolve in an environment with price pressure.

As I said, the price rebound will not happen before 2019 in oil and gas. I'm pretty convinced of that.

So I mean you see some isolated cases of things that we get at higher margins, but mostly it's still a buyer's market. So the 9.5% in our view I wouldn't qualify it as a conservative number I'd qualify it as a good number.

And we'll see how our business evolves through the rest of the year. Anything else, Pascal?

No, thank you very much.

Thanks Pascal. End of Q&A

Okay. I think we’re pretty much in time, its 10 o'clock.

And I know you guys have a really busy day ahead of you. So Jill and I wanted to thank you for your attention, your thoughtful questions and your support of Sulzer.

And as we told you today, we've had a good H1, we've mitigated the impact of the sanctions and hopefully, we've demonstrated that all of that is a thing of the past. And that we look forward to continue to fight hard in a market that is showing signs of life and hopefully continuing along a similar trend in the second half of the year.

Thank you very much for your attention and good luck today.

Thank you.