Sulzer, the industrial engineering firm, has reported a strong performance in its February 2023 earnings call, with significant growth in sales, order intake, and free cash flow. The company's return on capital employed soared to nearly 80%, marking the highest profitability in a decade.
Sulzer attributes this success to market growth and operational improvements. Despite currency headwinds from the Swiss franc, the company is proposing its first dividend increase in 10 years, signaling confidence in its global position and future strategy.
Key Takeaways
- Sulzer's sales increased by 13%, and order intake grew by almost 14%.
- Free cash flow rose by approximately 50%, and return on capital employed reached almost 80%.
- Profitability was the highest in the last decade, despite the appreciating Swiss franc.
- The company plans to continue creating value and has proposed a dividend increase.
- High profitability and order intake growth were seen in the Flow division, while Services and Chemtech divisions also showed significant growth.
- Sulzer aims for a 12% increase in operational profitability, with 6-9% sales growth and 2-5% order intake growth in the short term.
- The company's strategy focuses on energy, natural resources, and process industries, with a transition to a less carbon-intensive energy system.
Company Outlook
- Sulzer expects around a 12% increase in operational profitability in the short term.
- Sales growth is projected at 6-9%, with order intake growth anticipated between 2-5%.
- The company's strategy is to focus on structurally growing markets and improve operational excellence.
Bearish Highlights
- There may be slower growth in the Chemtech division in the first half of the year.
- Sulzer cautions that the previous level of growth in emerging technologies may not be repeated.
Bullish Highlights
- Sulzer is well-positioned in the energy, natural resources, and process industries.
- The company plans to offer comprehensive packages to customers, leveraging synergies between divisions.
- Large orders are expected in the pipeline, particularly in bio-based polymers and energy sectors.
Misses
- No specific misses were discussed during the earnings call.
Q&A Highlights
- Sulzer clarified that a big M&A would consist of several smaller acquisitions.
- The Tiwel cash is held separately and is not part of the CHF 1 billion cash position under IFRS.
- Sulzer is focusing on sustainability projects, including reducing electricity consumption in pumps and energy storage initiatives.
In conclusion, Sulzer (ticker: not provided) has demonstrated a strong financial performance and is optimistic about its strategic direction. The company is committed to driving growth through operational excellence and strategic focus on key markets, with an emphasis on sustainability and innovation. Sulzer's upcoming Capital Market Day in June will provide further insights into how the company plans to serve its markets and execute its future plans.
Full transcript - None (SULZF) Q4 2023:
Suzanne Thoma: Dear ladies and gentlemen, welcome to our pilance meeting conference today in February reporting about the results 2023. We are proud to present to you good solid results and a clear perspective for the strategy going forward. Now let's first look a little bit back, look at 2023. You see here the key elements. Number one, we did have indeed quite a good market development in the last 12 -- well, now 14 months. We personally believe that this is a structural growth in the markets that we are serving more than an up and down of a more transitory nature. We will be speaking more about that in a moment. We have sales growth and it is important that we have sales growth in all three divisions and we have it across the globe, definitely in all three regions. We are very proud to say that our free cash flow has dramatically increased, which is the result among others of the first actions that we have taken to improve our operational excellence, I will call it, Sulzer Excellence going forward, our operational excellence throughout our plans. We have a return on capital employed that will be one of our most important parameters going forward, a return on capital employed of almost 80%. You will see later as far as we know Sulzer has not been there for a very long time. And last but not least, we have an increase in our profitability, also highest in the last 10 years. This also shows that in its essence this company is a strong company and is a healthy company, which is positioned in good markets. What you need to do is to take the measures that are needed that this company can reach its potential. And the potential is quite higher than what we can see even in the figures of 2023. But this is a multiyear transition. Let's quickly look at the figures. Our CFO, Thomas Zickler will speak in more detail about it. Just at one glance, you saw the key elements. If you look at the absolute figures, of course, we are reporting in Swiss francs. So we are also influenced by the appreciation of the Swiss franc, which cost us plus/minus CHF 250 million, yes, in both order intake and in sales. As our company is very well positioned with its cost also around the globe we produce, we do not produce in Switzerland. We have pilot plants in Switzerland, but we produce along the globe. We have a certain natural hedge when it comes to the profitability figures -- only to a certain extent. Thomas will speak a bit more about that. So these are now at constant currencies, the increase that we can report and we are proud of. We increased our sales by 13% and our intake by almost 14%. We have a much better EBITDA, up 25% and the free cash flow close to 50% up. The return on capital employed 300 basis points and our operating net cash flow actually soared by 160%. I would like to take a quick look at the guidance. The guidance that we gave in the year 2023 evolved. When I stood here a year ago here in the Winterthur, we gave you a -- it was not a cautious guidance at that time. It was a realistic guidance. We gave you the guidance of 3% to 6% in order intake. I'm focusing on order intake here. Then what happened is that in the first semester of 2023, we got an extraordinary amount of large orders both in Chemtech and also in Flow Equipment. And following on that we increased our guidance in the midyear to 10% to 14% and we lived up to this now in 2023. Of course, we already knew that in the second semester we would not again have a growth of 30% approximately when it comes to order intake. So looking forward for our order intake guidance, particularly, our expectation for the first semester, please keep in mind that we will compare to an extraordinary first semester 2023. If you level it out this company is growing also in order intake and it is growing above market. Sulzer is really accelerating its value creation. This has started in the past years already, but it has now gained momentum and we measure that with our return on capital employed, which was yes close to 18% in 2023, was already higher in 2022. It actually follows quite a growth trajectory over the last years. Based on this and because we see it going positively into the future, we know how and we know how we're going to do it, we are now for the first time, at least in 10 years, proposing a dividend increase. If you just look at the figures, you will see that there was a time where we paid CHF4, but that was including the medmix business, which was spun off about two years ago. So, if you correct for that, we have always paid CHF3.50 and now we increase it for -- to CHF3.75 following also our dividend policy. This is a summary of the financial figures. Now, Thomas Zickler is going to go into some more details.
Thomas Zickler: Thank you very much Suzanne and good day and good morning to all of you also from my side. Let me get a bit more in the details of our very good and strong financial results of 2023. As you heard already from Suzanne, we had a big FX impact in 2023 because of the appreciation of the Swiss franc. We are reporting in Swiss currency and this means that we have to translate then in the end all our results in all our assets and liabilities into Swiss francs. But when we talk about, especially our order intake and our sales, you can see here on this slide and this is the last bullet point that we had round about CHF250 million impact. It was CHF250 million impact on sales on order intake a bit more CHF270 million, but you can basically say round about 8% of this performance of 13.9% and 13.2% is related to the FX impact. Why I'm explaining this? Because you all live in Switzerland you look in our financial statements and in the financial statements you see then the nominal figures, you see the prior year and this year. And when you then look at order intake, you will see that the nominal numbers that they have just increased by 4.5% because of this high FX impact. And also for sales you see that the numbers have increased nominally only by 3.2%. The rest is related to inorganic grow and to divestments and the details of all these FX impacts you can look up in our financial report. It is in the footnotes in the Section 3 in the segment Reporting. Just a few words to our sales. Sales really came from a strong growth in all divisions. All divisions grew double-digit in the last year. And when we look then at order intake, order intake close to 14%. But what is the good message about this order intake? we didn't take order intake just in to have order intake. Our order intake margin also grew by 40 basis points to almost 34%. So, this is really the very good news. It also signals -- and I also will address the situation that we received last year in H1. A lot of large onetime orders which we cannot repeat in this magnitude, at least not in the next couple of months in the first half of this year. I address this because you see that the order intake margin stays on a very high level. So, we don't see any sign for a slowdown. It is just the project business which we have especially in Flow Equipment and also in Chemtech where we can see our project pipeline and from this point of view is absolutely good news. But it's timing, as you know it also from other companies in the project business. Let's come to the next slide, Order Intake outlook. Here, I have learned, I have to say I, in this case. I have learned my lesson from the Q3 order intake release. And this is why, I bring this slide. You see that -- don't laugh. You see that we have in 2022 and in 2023 in Q1, an order intake growth which is far above the market. And yet you see when you take then the order intake growth in 2022 and 2023. And you see then in let's say dotted lines, you see that when you compare this very strong Order Intake which we received in Q1 2023 which included for example, a large order from Saudi Aramco (TADAWUL:2222) of over CHF 50 million for flow and a large order in the PLA area for Chemtech of also over CHF 50 million. You see that we had alone in Q1, large orders in a magnitude of CHF 150 million, CHF 170 million which actually we are working on it, but we cannot repeat. And therefore, you will see -- and this is where I made you aware of, you will see in Q1 this year, when you compare it to the very strong Q1 last year, that our order intake is still above the 2022. But compared to the strong order intake in Q1 last year, you will see a minus -- and this is just a calculation, because of the basis which is so high in the last year. But the underlying growth, I say it again, the underlying growth, we don't see more issues from the timing coming from our project business related to the bigger projects, but we don't see really here a sign of any slowdown. Next slide. So when we talk about profitability -- when we talk about profitability and Suzanne already mentioned it. We are very proud that now Sulzer has a profitability of over 11%. And allow me to say the following and comment on this. We have with this 11.1%, we have overcompensated, the highly profitable medmix business which we spun off in 2021. And just to give you a magnitude, yeah, I don't want to really give you then the impact on our profitability. But when you go back in the years where medmix was still called as a division of Sulzer APS, they always had an operational profit between say CHF 50 million and CHF 90 million. So that you get a bit of flavor of what does it mean, to not only have now the highest profitability in the last 10 years, but also to have compensated very excellently for this loss of one of our highest profitable divisions in the past. When we look at ROCE, you see that also in ROCE we have an acceleration of growth from 2022 to 2023. Here we have the strong sales. You see our double-digit sales growth. We have across the board and these counts for all the divisions', higher gross margins. And you will see later, we have worked on our net working capital. Here you see also the first results of our operational excellence, where we had a net working capital project with many, many initiatives and where we see here also our net working capital going down. Let's go to the Divisions. First, Flow. In my opinion, Flow is really a story of profitability and of order intake. And when we talk about order intake here -- and sorry, that I repeat it so often, but I really want to get this message across. In flow, we have the same situation that last year in H1, we got extremely high, large orders in the first half of the year and especially in Energy. And overall for the full year, in Energy BU we had a growth of 37.5%, so almost 40%. So you can see what really happened in the energy market last year. When we go to the profitability, here, I think we have really done a fantastic job. You see on the one hand side that we benefit from the good market momentum, but this is only a part of the story. The biggest part is that we already have started in flow with initiatives in operational excellence, where we now see the first results from the first measures and impacts which we have taken that we see a higher profitability in flow equipment. And you see the change 140 basis points, or now they jumped from 6.6% to 8% operational profitability. Last word to sales in Flow Equipment. Flow equipment all the businesses they are growing on the sales side. And here on the sales side, it's driven mainly from industry. In industry they grew by almost more or less 17% last year. Then let's go to Services. Services, this was for all of us quite or a bit of a surprise, let me say, it in this way, because when you ask us, what is the strongest growing division when it comes to order intake, it is Services. Services and you can see it here on the slide, Services grew with almost 20%. And Services is already our highest profitable business. And this is really a very good performance. I need to say to this or elaborate that Services, they grew mostly coming out of Americas. And here we really have seen a very good market momentum where we also had the chance with a good pricing policy and a good cost management that we really here benefited from the market situation.When you look also on the Sales side, you see that Services is our second highest division coming to sales growth of 14.5%. Then coming to Chemtech. Chemtech, they benefited last year a lot from large orders in the so-called emerging technologies. We had in bioplastic, biofuels and also process technologies in H1 a lot of one-time orders, I would call it which it's difficult to repeat. I just had yesterday a discussion with our division president from Chemtech. We have an order pipeline. The problem is it's extremely difficult to really forecast when these larger projects will come to the signature. So, therefore, we have a pipeline also for Chemtech, but we are very cautious, and therefore, I stress again that in H1 last year, we had a lot of larger projects, which is not possible in my eyes to repeat it this year. Therefore, I showed the Q1 order intake slide to prepare you for a slower growth in Q1 this year. When we look at sales in Chemtech, you see sales is the leading division in our group when it comes to sales. So, basically, Chemtech has a sales growth of 15.5%, which is excellent. And beside the sales growth they are number one when it comes to the absolute improvement of the profitability. So they increased the profitability by 150 basis points. And this is thanks to a strong commercial focus and also a favorable margin mix. Let's talk now about EBIT and net income. Both numbers are the highest for the last 10 years. When we look at our EBIT, it is clear, because of higher sales, higher margins that we have a much higher EBIT. But also when we look to the net income, we benefited last year from a tax project, which we internally started. It was one of the measures when it comes to excellence. And I don't want to go here in the details, but we did some applications for R&D tax credits in different countries. We closed successfully some tax audits where we got refunds. So why I'm telling you this, because we are earning much more than we did in the last year, but our effective tax rate went down from over 30% to 24.2% in 2023. This is round about 600 basis points less on the effective tax rate. And we also can say in 2023, we had only minimum almost nonoperational impacts. So in the future Suzanne, Tom and I we will go then in a direction where we will simplify our KPIs, our metrics. We will then also focus on the op, which we have in most of our KPIs in front that we get rid of this. And this, we will do when -- we will do then our Capital Markets Day later this year. And Suzanne, will say something to this later on. Coming to the free cash flow. Free cash flow it is really a pleasure that I can say, I'm the first one for many, many years for at least 10 years, who can stand here and say Sulzer has a free cash flow, a free cash flow of over CHF 300 million. And this is really a great result. And yes, the free cash flow was impacted this year from a reduction of net working capital. This is clear. But when we look at net working capital you have to see, that we reduced net working capital round about by 12.5%. However, in parallel we grew by double digit in sales and also in order intake. So when you then -- and this is the second bullet point here on the slide. When you then set net working capital in relation to sales, we are the first time also below 20% of our sales when we talk about net working capital. And we improved from the prior year in 2022, from 23.5% to below 20% in 2023. This is because of our net working capital projects, we have internally. I'll give you one example. We managed much better last year that we get more down payments from our customers so that we have always our inventory much better financed, or more financed of our inventory. And this was one of the measures, which we have taken and you can look it up in the balance sheet. For example, you see here the delta of CHF 51 million, which we got more from down payments from the customers than in 2022. Then, let's look at our balance sheet and our net debt to EBITDA ratio. Balance sheet, I think it's clear, we have reduced our net debt and on the other hand side, our EBITDA has increased. So what is happening? Net debt reduced, EBITDA increased, our net debt-to-EBITDA ratio went down from 2.1 to 1.2. So, this is also a very good achievement. And these numbers, so that you all know, this is shown with the Tiwel cash because we don't see it as our cash and I did the calculation without the Tiwel cash and therefore, it's only this number shown here on this table. Last line on the table on the right side, our equity ratio has also increased. The equity ratio went up from 22.2% to 25.1%. And this is thanks to also an increase in our equity of 70, I say it again, CHF 70 million. Then I come to my last slide, and Suzanne already mentioned it. Suzanne already mentioned it. When we look at our dividend and exclude the years, I think it was in 2020 and 2021 when we had medmix still in our group and exclude medmix, you see that over the last nine years, I say directly, we had no development in our dividend. When we look at our results, our free cash flow of over CHF 300 million, when we look also at our dividend policy, and most of you know it, that we have in our dividend policy that we are able to pay a dividend of 40% to 70% of our core net income. And when you do the calculation for this year, it's all in the financial statements you will see that the payout ratio based on core net income is 50%. So it's in line with the CHF 3.75 dividend, in line with our dividend policy. Maybe you ask why we are not increasing it more. I think as the group CFO of Sulzer, I need to be very cautious for the company. And last year, we paid a dividend of CHF 3.50 where we had these huge write-offs from Russia. So I think last year, we paid the dividend because we wanted to be a sustainable company. This year, I think we could pay a bit more. However, it has also to compensate what we lost on our equity last year. With this, I want to close my part of the presentation and want to hand back to Suzanne.
Suzanne Thoma: Thank you very much, Thomas. I would like to give you some insight in our evolving strategy. Our evolving strategy is in a way a very simple one. You can summarize it by three points plus one point. Number one, we are focusing more consistently, I would say, on certain markets, markets which are structurally growing because of the transformation of the industry, because of the transformation of the energy supply system and which are of big importance globally. Secondly, we are going to increase our value creation at customers by adding to the top equipment that we are selling, additional services, additional packages that give a deeper value creation at the customer. And thirdly, very importantly, in the next years, we are going to increase our operational excellence. Our company, as I said, is a good company. It's a little bit out of shape -- has already improved in 2023, we can become much better. This is also a multiyear effort going forward. And the plus one -- the plus one is Sulzer is not a small conglomerate of three independent divisions. Our divisions serve plus/minus the same large markets. They are partly based in the same technology approach, and in many cases they share customers. So we can leverage this in order to improve our profitability, grow our sales. And in many cases, also by working together, improve our operations. So let's have a bit more detailed look. What markets are we speaking about? We are speaking about the market of energy. Our Energy is very interesting market because it is extremely important, and it is in transition. And Sulzer can play on both pillars. Energy, supply security globally is key -- it's also the basis to transition into a less carbon-intensive energy supply system. An important element, and Sulzer is very present there, is to use the infrastructure that we have and make it -- we -- I mean we as a society around the globe, make it safer, make it more efficient, reduce the pollution and extend the lifetime, because there's no sense in dismantling an energy infrastructure system, if you don't have a new one to go to. At the same time, no doubt, we are transitioning to a less carbon-intensive energy system. We have to keep our increasing temperature on the globe so much under control as it is possible. So is also playing in that part -- it is playing in that part because of energy efficiency, it is playing in that part because of carbon capture technology, pollution reduction and in general, higher, as I mentioned, higher efficiency. Did you know that motors, you can influence how much electricity they use, take up 45% of the whole worldwide electricity consumption. I didn't know that. I find quite interesting. The second part of our market and it is linked to energy transition partly is natural resources. We all have read about the challenges around water and water treatment and water scarcity. We may have read about the fact that to transition to renewable energy we will need more green minerals lithium for batteries, cobalt for batteries, copper for the grid. Now, getting these minerals out of the ground is not as green as it should be. It's actually a big mess. So we will need more of those minerals and we need to do it going forward in a much cleaner way. And Sulzer can contribute to this very, very important task. The third market is the process industries. They produce polymers. They produce fertilizers they produce base chemicals. We still need these things going forward. We will even need more of it if you think of the growing world population and the increasing middle classes. But we need them to be cleaner and more sustainable and they want to be like that. And we will also with our bio-based technology offer them a possibility in the polymer section to transition also towards a more renewable and more sustainable product portfolio. Step by step it's the bio-based polymer is about 1% of the market. So -- but even this 1% is a huge market going forward. So I've written down what we are doing here. I will not speak about this slide that is more for your reference. I think it describes quite nicely in a short sentence or two what it is that Sulzer is doing in these markets. An important part I mentioned it before is that Sulzer has really super very good equipment and also very good technology. But if you analyze what we are doing, you will find out that we are quite fragmented in the sense we do a little bit here and we do a little bit there. And by bringing these capabilities together and focusing them on these defined markets working together between the divisions we can offer a much better package to our customer and for us increase the -- well no for the customer to increase the value creation at our customer and of course with the benefit that it brings for us. This is for your reference just that it gets a bit more tangible what it is that we are doing. But I will speak here about three examples. I will repeat we focus on this structurally growing markets. Secondly we are going towards packages and solutions. And we do that in all three divisions. Look at the wastewater treatment section for Flow Equipment, more and more it is not only about selling pumps which we do and which we do profitably and well. But the waste water treatment company needs to have its water clean at the end of the pipeline and we have equipment and technology to increase this value creation at the customer. And by offering it in a package, we solve a problem for our customers. Let's look at segment in Chemtech. You can buy today for small scale applications, an entire carbon capture unit. For example for wastewater treatment. And here you see the link with the division for wastewater treatment plant, they have -- they produce a lot of carbon -- I mean not carbon but CO2 -- that has to be captured going forward. And you can buy such a SCIT from Chemtech which will take the whole process out and -- not take the process out will deliver the whole process so at the end you have the CO2. That is an important development. And even Services, Services is moving towards a more integral offering. Services more and more offers to our customers that we are looking at their installation we call it retrofit, and give advice and implement and give technological solution, so they can increase their efficiency in energy and can also reduce their pollution. That's an important part. You see here what drives our market. Why are we saying that? I'm just highlighting a few things that for me are fundamental. Number one, we have a growing world population. And this growing world population needs access to infrastructure in the area of natural resources process industry and energy. We are in a situation where spending for the established industry in the energy part is only slightly increasing, but there is a lot of spending going into energy transition or sustainability as a general trend. And as I said, we are there in both places. That is fundamental. We see a technological acceleration happening and Sulzer at the forefront of this technological innovation. I will show you an example I think in the next slide. The other final point, since I don't want to read all the points is this increase in the use of natural resources. We as a society will have to find a way to manage our use of natural resources, not that we maybe solve the carbon problem in the energy sector, but create another major sustainability problem because of the natural resource consumption. I believe that innovation and technology will substantially contribute to solving this problem and Sulzer is fully there. I give you two examples just to make it a little bit more tangible. First example is one of the things we love to do and that is to equip, we call it legacy infrastructure. Here you see a gas turbine in China who had the problem that the nitrogen oxide emission levels by law were reduced and they were there what would they do? They could either invest heavily in what we call an end of pipe solution, taking the nitrogen oxide out at the end of the process or they can come to Sulzer and find a smarter solution. And the smarter solution is a technological one. It is a combustion auto tuning system a development of our engineers that allows to optimize the parameters with, which such a gas turbine is being run to reduce the emissions, while not losing any performance. And the most important thing from the customers' perspective was they have practically no downtime. No wonder that the customer bought it and we have four or five follow-up projects only in China based on this technology. That technology can be deployed worldwide. It's like a technology platform that can go around the world. The other one is the rejuvenation of a water treatment plant in Bahrain. It's a huge installation. It cleans -- let me get that right 100 Olympic swimmig, the water the amount of 100 Olympic swim pools the water in it in a day. And it had a particular challenge not only the normal one where you have to get the solids out and the microplastics out and also the pharmaceutical residues out, we also had to get a worm out a worm which was endangering the health of the workers on the agricultural fields. Now why do you have agricultural fields in Bahrain in the middle of the desert, because in the past this water these hundred pools per day were discharged into the sea. Now it is used for agriculture irrigation. So it's contributed here with an elaborate filter system offering. Customers are very happy. Yeah. Sulzer 2028. Of course it's not only about Sulzer 2028, it's about Sulzer now. We are committed to deliver very good results also in 2024, but we have this midterm perspective because what we do also needs some time. It has two pillars, as I said organic growth and excellence. It's a very simple strategy if you want but there's a lot to do. And you see it here Sulzer today, quite good not in top shape. The company in structurally growing market and we want to grow above the growth of this structurally growing market. And we have launched 60 initiatives around the globe to push this organic growth. At the same time and just so as importantly are the excellence along the value chain. We call it Sulzer Excellence going forward. It's automation of production. It's sometimes just -- not just, it's a low-hanging fruit if you take it. Fixing situations in existing plants also to increase the throughput for the coming growth. It's optimizing our supply chain and sometimes pool our purchasing requirements so that we have a better position in negotiating with the supplier. All of that aims for Sulzer to become what we tried to describe as a top industrial company. A top industrial company there's a lot of innovation with a lot of technology, but still run like an industrial company that has to be competitive, that has to make the best out of the resources that it has resources including of course its know-how. And how do we define a top industrial company or describe it? Well, it's clearly one that creates value for the shareholders and also for all other stakeholders, by having a high-quality business and a future-proof business. We want a business that is here for a long time. Sulzer will celebrate its 190th birthday on the 5th of April. So something is very good in this company. You're not going to survive 190 years just like that. So we have the foundation, but we can take it towards the future. What we need to improve is our capability to execute. It's not only about being smart. It's about delivering results, but that's an insider. And it's about really excellence along the whole value chain. It's not only about engineering the best products. It's about doing it in the best way from A to Z. It's this more focused and also resilient business portfolio that I spoke about focused on these three very large markets. And there is a focused portfolio that really creates value at the customer. And last but not least, that's a cultural transformation over the year an entrepreneurial spirit. It's also in a way -- in a certain way Sulzer is a very entrepreneurial company. We can do much better in many ways. However, we also want to be in a resilient setup. We will manage the company in a resilient way. For example, we will make sure we are not going into too much depth going forward. Looking at the outlook short-term future 12%. We -- around 12% for operational profitability. That would again be quite an increase from 11.1%. We see our sales growth somewhere between 6% and 9% this year and we see an order intake around 2% to 5%. Please remember Thomas Zickler's graph 2022, 2023 plus 14%. And on top of this 14% we see 2% to 5% more over the whole year. We are confident to reach this order intake based on our pipeline both of large projects, but also of standard business. I come to the summary 2023. We had good results. We had also a good market development, no doubt about that. We were able to capture this good development profitably, also because we already started with our operational excellence initiatives, which will accompany us going forward. It is – when we speak about operational excellence it's Sulzer excellence. So it includes commercial excellence, sales excellence. And it continues to include a very tight management of our net working capital. Going a bit further, Sulzer in the next year, clearly on path to be a very strong, very good, very innovative industrial company. We are serving – this is important for us. We are serving essential markets that matter, essential markets that matter, energy matters, natural resources matters and also the process industry matters because they give us the base for the way we live. And we want to be active in this market and be a top company with very good, very efficient processes and a very good business portfolio. Our strategy is based on organic growth. It doesn't mean we are going to do no acquisitions in the next five years. There will be small ones to complement for example, our product portfolio among other things. It's not the focus of the strategy, focus of the strategy is organic growth and it is operational excellence. And we are very proud to say that we can fully pay for what we are planning by our cash flow that we are going to earn or produce – generate a cash flow that we're going to generate in the years to come. Thank you very much for your attention.
A – Suzanne Thoma: Ladies and gentlemen, now we have the time to answer some of your questions. We start first with the guests here in the room and then we will move towards the guests, who are here virtually.
Christian Arnold: Christian Arnold from Stifel. Maybe if you can move to this famous order intake charge Q1.
A – Suzanne Thoma: Order intake...
Thomas Zickler: Is it possible? I think...
A – Suzanne Thoma: [indiscernible]
Christian Arnold: Yes. It's very beginning. I mean you are showing us here growth for Q1 2024 versus 2022. You show that also in absolute terms. That's correct. Because this 859 you were referring I mean this is two years ago. That means we have now like a minus 10% FX impact so that means, your indicated bar here implies some 20% order intake versus 2022. Is that correct?
A – Suzanne Thoma: Round about, yes. That was our message. We had this bump but we are in an upwards trajectory.
Christian Arnold: Okay. Clear. Then on the pump division development of your profitability here, which is impressive. This 8% you're showing here. I wonder – to what extent that has to do with a positive product mix. I believe energy market is very strong. Here you have engineered pumps usually having higher profitability versus other pumps. Could that change? Could that be more challenging going forward?
Thomas Zickler: I answer the question the following way. When we look in the Flow Equipment Division and we see that the order intake margin has been stable during the year 2023, seeing that energy has round about a plus of 38% when it comes to order intake I think this answers the question.
A – Suzanne Thoma: And I would like to add something that you also mentioned. The growth that you see has happened despite of pricing discipline. Actually, we could have grown more but we didn't because we wanted to earn money and not just have this top line growth. And on the other hand, we have already quite an improved situation in our plants. That is thanks to a strong effort in flow equipment.
Christian Arnold: Okay. And maybe last question similar question to the Chemtech business, where we also have seen a very positive development of profitability. I mean here you're serving a lot of let's say, new market, not so mature market…
Thomas Zickler: Yeah.
Christian Arnold: …fast-growing markets. And usually these kind of, markets are offering actually less profitability. But here now it looks like that -- it's very, very attractive market also in terms of profitability. Could you a little bit elaborate on that?
Suzanne Thoma: Yeah. The improvement in profitability comes from a change in our pricing philosophy. It has something to do with becoming a top industrial company. We have focused a lot on cost plus in the past. And now we have developed better instruments, to really understand, what is the value creation? What are customers willing to pay, also by statistical analysis and that led to us to being a bit more courageous, when it comes to negotiating our prices. But yes, if it's the first, -- the first plant equipped with our technology in a new polymer, biopolymer then we have to have a certain flexibility. But all in all, we can increase our pricing.
Christian Arnold: Thank you.
Suzanne Thoma: Yes. Please yeah.
Alessandro Foletti: Okay. Thank you very much. Alessandro Foletti from Octavian, I also have a couple of questions. Maybe on the CHF 300 million free cash flow.
Thomas Zickler: Yeah.
Alessandro Foletti: Good number.
Thomas Zickler: Thank you.
Alessandro Foletti: And you mentioned the effect of working capital.
Thomas Zickler: Yeah.
Alessandro Foletti: My first impression was fantastic, but not repeatable. Now you seem to imply something else. Can you elaborate?
Thomas Zickler: We have on the net working capital as I said. Yes, impacts on the free cash flow because we used our net working capital in 2023. But our target and we see it based on our business performance which we plan for 2024, is that we plan and this is the planning with a free cash flow of around about CHF 270 million for 2024. I see your point. It won't get in the 300 area, because we have reduced a lot of net working capital already in 2023, but the work is not fully done yet. And we still have some improvement potential in our processes, also in our collections. So this means the 300 is not far away.
Suzanne Thoma: In 2024.
Thomas Zickler: Yeah.
Alessandro Foletti: Fantastic. And maybe very briefly on the order intake again, because you mentioned Q1…
Thomas Zickler: Yeah.
Alessandro Foletti: I guess, we all got the message. Q1 is going to be weak.
Suzanne Thoma: …Compared to 2023, not compared to 2022.
Alessandro Foletti: Oh, …
Thomas Zickler: This is…
Alessandro Foletti: Sorry. Maybe I didn't get that.
Suzanne Thoma: Really?
Alessandro Foletti: But now we got also that message. What about Q2 i.e., how should we sort of interpret your 2% to 5% guidance, obviously a little bit skewed in second half. But when is it starting to sort of then beat again 2023?
Thomas Zickler: It is the second half, because when you look at our Q1, the big orders which we had last year we cannot repeat. What we see currently...
Suzanne Thoma: To that extent. It's not that we're not expecting any big order.
Thomas Zickler: Yes, to that extent. What we see is when we look in our order pipeline with our customers in Chemtech and in flow, that there's ramping up again, some bigger orders to materialize. But I cannot talk about this right now. So what we expect is that in Q2, it's getting a bit better and when you compare them this with the Q1 and the Q2 from last year, we then land around about the zero line. And then in H2 it will pick up. And this is why on the total period it is "only" and I say it really in hyphens between this, what we gave here in the guidance, because of the strong H1 last year.
Alessandro Foletti: Right. Fantastic. I have two more. One another small one up front financially, I'm not -- how should I say, I'm not disregarding you, …
Suzanne Thoma: No, no all okay. I enjoy it. Please go ahead.
Alessandro Foletti: …with my last question. Foreign exchange it was massive …
Thomas Zickler: Yeah.
Alessandro Foletti: Honestly much more than I had expected. Now I have to imagine that for 2024 at least until October we have the same sort of headwind.
Thomas Zickler: If Swiss franc is further depreciating, yes -- sorry, appreciating, yes, because we had last year this massive impact, because against most of the currencies say U.S. dollar, Chinese renminbi round about 8% to 10%, the Swiss franc has appreciated. And therefore, we have this huge accumulative FX impact. So when you look at the Swiss currency, currently, also a bit going in the other direction, again, I cannot give you a forecast when it comes to the FX impact. But I can only say, last year, it was around about 8%. And this is in line with the currency movements of the big currencies against the Swiss franc.
Alessandro Foletti: Very good. I would like to go up to Slide 23. That's on the strategy where you mentioned the sort of the way I understood it selling less single components and going more to -- no not that one. This is already too complex.
Thomas Zickler: Which one?
Suzanne Thoma: 23.
Alessandro Foletti: Yes, yes, sorry. That -- so going more towards solutions and so on. How should I understand this exactly? How can you do that? Because at the end of the day, I sort of partially understand the issue of having processing maybe you have one customer that really asks the whole portfolio, but maybe you have one customer that doesn't. So can you really sort of push in, can you really increase sales and then profits with that started.
Suzanne Thoma: I don't think we need to push our customers. I think the need is there. I would like to say as an introductory remark, and I'll give you an example out of the water treatment area. It is not just about having filters or having pumps. There's also about having grinders, and having other equipment that if they are sold in a package, you have solved a problem for the customer, because he doesn't have to deal with all of these things. And we can give it in an optimized way to the customer. Another example would be cross divisional in mineral processing. If you think of the lithium excavation and then processing of lithium. You need the pumps who can do that and you may need extraction technology coming from Chemtech to gain the lithium that is in a salt solution and needs to get active in a more environmentally compatible way. So these are these two examples that I can give to you.
Alessandro Foletti: But is it the market that is changing? Or is it just you guys realizing that you can cooperate? Sorry, if I'm a little bit long.
Suzanne Thoma: Well, the latter one has some truth, as I said, we were maybe a bit small conglomerate with quite thick walls. In between that wasn't hindrance for growth for Sulzer that we want to tear down. And the other thing is that if you look at the water treatment offerings also from our competitors, everybody is quite specialized in single equipment, single type of equipment. And there is the niche market, but the niche is big for us where packages can be sold. I have to quickly because we have some other people, but I can come back to you if you still have time later.
Alessandro Foletti: I have a lot of time. Capital Market Day, that's correct.
Suzanne Thoma: Yes. That I can say. We will have a Capital Market Day at the end of June. It will be, because we are very productive and very efficient and to the point it's probably going to be a capital half day. But there we will go and explain in more detail how we are serving our markets and how we are changing going forward. Yes. [indiscernible].
Unidentified Analyst: Yes. Maybe again a bit on the order intake guidance for 2024. I assume you mentioned that there is some probably larger orders in the pipeline and I assume with the 2% to 3% growth on already 2 -- sorry 2
Suzanne Thoma: 5.
Unidentified Analyst: 5% sorry on a very high 2023 order, it means, yes, there must be something larger in the pipeline. Can you elaborate a little bit maybe where in which segment it is the larger order? That's a bit the first point?
Suzanne Thoma: Yes, I can. Can I just do that while I have your question in mind? The very large orders concentrate on Chemtech and in Flow Equipment. Services also has large order but not of the magnitude that we are discussing. Chemtech we see an increasing interest in the market for bio-based polymers, polylactic assets, in particular. We have sold one huge plant, technology in the equipment for that plant last year. We see an increasing interest there. And in Flow Equipment, we see the large orders come out of the business unit energy. And as we highlighted, we have two issues in the energy supply system. The one is energy security which means the current infrastructure needs to work. And then the energy transition, which means that the carbon footprint of the energy supply system has to become less. And we have there also that order may come or not this year. That's a very large order and I'm not going to say which country, for obvious reason, large carbon capture. Carbon capture on the large scale is also slowly coming into market, of course, also due to the subsidy that there's some governments do provide for this type of technology.
Unidentified Analyst: Thank you. And maybe on Flow on the margin, yes, I was thinking that the energy segment in the past at least sometimes was even on margin side negative, because you wanted to get then the service business, which is more attractive. But, looking at your guidance that you are still thinking to improve the margin, I was wondering you talked a bit a lot but it was -- we don't have to expect a decline in Flow margins for 2024 despite the adverse, let's say, potential mix effect?
Thomas Zickler: To give you a short answer, yes. Yes, we don't have to expect it.
Suzanne Thoma: So no, we will not have a decline -- no misunderstanding here.
Unidentified Analyst: Is it because you clearly improved the margin on the energy side? And that must be a big jump I think from the past where it was breakeven or even negative. And then on the margin, you presented the 2028 vision, but I think you didn't give any margin indications here. I was wondering you are talking very positive on the margin to get better and excellent. So I was wondering do you have something in mind in terms of margin what you can achieve in 2028 or is it?
Suzanne Thoma: No, we are not going to speak in fixed number about 2028. We're going to give some sort of mid-term guidance expectation at the Capital Markets Day, but we clearly say that we will grow above market and we will further increase our profitability. That is going to be around 12% in 2024.
Unidentified Analyst: Thank you.
Thomas Zickler: And let me add to this. On the Flow side, you have on the one side what I said. You have the order intake margin, which is stable despite the much higher energy part. But on the other hand side, you also have to see the execution part in our plans where we now work and Suzanne addressed it with many, many initiatives where we work on our execution improvement. And this is then when you will also see in the future in the gross margins an increase.
Suzanne Thoma: Any questions from this side? Yes?
Benjamin Triebe: Thank you. Benjamin Triebe of NZZ. Two points if I may. The first one regarding your focus on key markets in the future. Does this mean on the other hand that you will abandon some markets or areas? Could you give some examples for that? And will this lead to divestments or reshaping of the company in any way?
Suzanne Thoma:
--: When we speak that we focus on these markets, we also speak about focusing our sales force on this market. We have a more scattered sales force right now focusing more in this area, and also our innovation and technology development to really serve these large markets. One area that may be of less importance going forward, maybe we haven't decided yet is for example the area of textile recycling that could be in better hands somewhere else.
Benjamin Triebe: Thank you. And secondly as you described to us the strategy runs to 2028. So, can we expect you or maybe expect you to stay Executive Chairwoman until 2028?
Suzanne Thoma: No, no, no, that you can say. We'll see.
Benjamin Triebe: Thank you.
Suzanne Thoma: Thank you. Yes please.
Arben Hasanaj: Good morning. Arben Hasanaj from Vontobel. I would -- just would like to come back to the margin guidance that you've given. I mean the step-up is quite remarkable. So as I understood it's mainly driven by the business mix you have in your backlog. But how do for example input costs factor in? Do you see tailwinds on that side?
Suzanne Thoma: I would like to add it's not mainly the mix. It's better pricing and maybe more courageous pricing that has also worked out well in 2022 L3. And it is clearly we are working on our cost. I mean I call it operational excellence but we're working on our cost. So, that is this. And now I didn't understand your question, sorry.
Arben Hasanaj: Not [indiscernible] but in terms of input costs I mean things like raw materials, energy, labor, how do you see that developing?
Suzanne Thoma: Right now we see a rather stable development in raw material and in energy. Energy with tendency to come a bit down.
Arben Hasanaj: Thank you.
Suzanne Thoma: Thank you.
Unidentified Analyst: [indiscernible]. A question on your balance sheet. How do you think about your ideal balance sheet and I guess all these results have to improve the free cash flow towards 2028? So, what are the priorities to allocate capital given that you showed already to have a strong balance sheet?
Thomas Zickler: The main goal is that we always have say a balance sheet which is so strong that we stay within investment-grade. This is our overall main goal. When you look at our equity ratio, we are currently around about 25%. So, this is for me a minimum which we should keep in the future so that we have at least an equity ratio of 25%. When it then comes to cash flow and to other items on the balance sheet, I think we can further improve our net debt. We have currently a very small net debt. It's around about CHF500 million but we can further work on this. And then in the future we can talk about increasing dividend payments.
Suzanne Thoma: I would like to add something. In the calculation of our equity ratio there are also because of IFRS standards, quite some impact from the pension plans and the discount rate. Everybody knows that. So, there are some elements that we cannot influence. We have to take that out. So, when Thomas Zickler speaks about 25% then yes, but it is without this not exchange rate discount rate impacts on our pension obligations due to IFRS regulation complicated thing for me as an engineer. And the second thing which is really important I spoke in a resilient framework. We will -- we have an entrepreneurial culture in a resilient framework. When we speak about resilience, this means we want to have our net debt to EBITDA not higher than 2.5, so we can always access capital if we should we need it.
Unidentified Analyst: Thank you. And on the sheet 15 where you show actually the balance sheet maybe is because I see it's like more than CHF1 billion you have in financial debt. So, there's a lot of bonds.
Thomas Zickler: Which one?
Unidentified Analyst: 15. Sorry it's different. It was on the -- on my presentation it was 15. Yes sorry. So, you have quite a few bonds, but actually you have the same amount in cash. I don't follow. Why would you have almost CHF1 billion in cash and CHF1 billion in bonds?
Thomas Zickler: It is not like you say because when you look at our cash of almost CHF1 billion don't forget that CHF365 million are not belonging to Sulzer. This is cash which we have accumulated for Tiwel and we are not allowed under the OFAC regulations to pay out these dividends. So when you see our cash situation, we currently have a cash of around about CHF 600 million. And then it looks different. And when you say CHF 600 million and you have to CHF 600 million around about CHF 1 billion debt then you see we will need in the future a lot of cash flow, and a lot of positive EBITs and net incomes to really then drive this around from our net debt-to-EBITDA ratio to a level where they then become close to a zero net debt, because we don't treat the Tiwel cash as our cash. And we cannot do by the way.
Unidentified Analyst: Maybe final question, you have a focus on operational profitability, not on EBIT. Are you having thoughts to change that, because it's like 10% difference or whatever. It's just confusing, I would say.
Suzanne Thoma: I know. The figures are very confusing. As Thomas Zickler already announced, we are going to change our key parameters. Nevertheless, the operational profitability tells you something about the efficiency of the operation. So, it's for us not a worse -- less figure, but it's not so much of a strategic figure. So we build up on what has been done in the past. At the end, it's the money that we earn that we can then invest or distribute and that is much closer to of course the EBIT. So EBIT is very important for me. But you may want to adjust, what I'm just saying.
Thomas Zickler: No. I fully agree and this is what I also addressed, and what with most of you I already discussed in many, many individual meetings and discussions. This -- what we currently have with this op EBITA and this EBIT and EBITDA, we want to simplify it and this is why I really focused on that this year, it's the first year where we really don't have any non-ops, yes? And it was introduced in the past because Sulzer has a huge fuel potential program. There were reasons for this, but this was in 2015. And since then, it has never been changed. We will change it this year.
Suzanne Thoma: This is another example of operational excellence or Sulzer Excellence along the whole value chain. You can imagine, how much confusion this bouquet of financial parameter is creating in Sulzer. So we want to get rid of that. It's not value creating. Yes, please.
Q – Unidentified Analyst: On this margin improvement, we don't have to expect big restructuring, cost to achieve the improvement in 2024, right?
Suzanne Thoma: No, big restructuring. Maybe some -- nothing in the pipeline that I know of so far.
Q – Unidentified Analyst: And then a question on the service business, growing very strongly 14% and driven by the US or America. So I assume that has above group -- above vision growth. And I was wondering, what is the driver there? Is there something -- is it pent-up demand maybe post-COVID where still might be the driver? Or is there something, which you are already offering I remember, the packaged services also which is showing some impact?
Suzanne Thoma: Yes, what we see is the fact that we can offer in services quite a broad spectrum. I mean, we are doing pump. We are doing Turbo, we are doing compressors and we are doing motors. And that particularly in the United States, you can easily get more or less out of one installation is very attractive to our customers. It also helps us to set the pricing. We have also a very good reputation of reliability. We know that because of the comparison to the -- to our competitors. So, that's a small, not so spectacular, but still relevant example of putting more focus on the package. Yes, Please
Q – Unidentified Analyst: Thank you. It's me again. Since you have that slide up already, I would like to go back on this. If we projected say to 2028 since this is your timing for the strategy that CHF 365 million will give or take maybe double. You have increased the dividend. So it accumulates at a faster pace, right? Plus, as far as I understand, you are not planning M&A not big M&A.
Suzanne Thoma: Not big M&A. We have in our financial project, the projections until 2028, we have a contingency for M&A, but it's very unlikely that you will hear from one big acquisition sorts of buying, I don't know whom very unlikely to happen.
Unidentified Analyst: So that means, if I interpret these numbers correctly, that the way for you to sort of optimize the balance sheet is really the dividend at some point.
Suzanne Thoma: We will increase our -- we will keep our dividend policy. But of course, with our income increasing, we will pay more dividends. We still have some costs to bear. I mean, the productivity improvements that we are targeting, partly, they come with some investment and partly they come with one-off expenses, that is obvious. We have some contingency for M&A, but not much, spread over the years until 2028. And yeah, we will finance everything out of the cash flow.
Unidentified Analyst: Right. But did you run some scenarios on how fast that number can grow, because at some point, it just becomes...
Thomas Zickler: We have done an internal financial model, but sorry, I'm not talking about this.
Unidentified Analyst: Yeah. An add-on question. Pricing. Can you give us some indication how big the pricing impact was? Maybe -- I know that's difficult because you have different -- how much maybe was the strong growth you achieved in 2023, how much was driven by better pricing and how much is volume? And is it fair to say that, yeah, this value approach maybe is really showing better contributions because you -- probably some of your input costs are coming down in 2024, but you're still expecting a nice growth in sales. So I assume there is still a component that you probably will keep or even increase prices in 2024. Is that a fair assumption or -- ?
Suzanne Thoma: Yeah, that is indeed a fair assumption. We are trying to do more and more value pricing and sometimes also just more discipline in not accepting orders that will fill up our plan. And then as we explained at large three months later, we get a big order and then we don't have the capacity. So it's mainly everyday decisions, not every day, but decisions to take that, in its sum is increasing the profitability. I think that you have to answer the impact on the profitability, the price and the volume?
Thomas Zickler: It is really very difficult to say why because most of the price increases we had in 2022, yes? And already in 2023 when you see the numbers and yes, we had some of the price increases in 2023 but not in this extent when we increased in -- or end of 2023. So currently, really, I'm not able to give you a percentage number. But what I can say in 2023, we had much less price increases and yes, in 2024, on a very selective basis, you will see that we are able to increase the prices. But actually, the inflation story is more or less over.
Suzanne Thoma: We have of course, to make a difference between the price increases that come because we managed to give our input costs further that we are trying to do, and we were successful, particularly in 2022. In 2023, and going forward, it's more to basically sell our products better. We call it sales excellence and commercial excellence. That will be less, that it was Thomas saying less big step, but it's a more financially sustainable step.
Thomas Zickler: But it's fair to say that, the price increases 2022 were probably in the order intake. So you deliver it in 2023 and then where it's visible on the sales.
Suzanne Thoma: Partly, yes. We have a question back here.
Unidentified Analyst: Thank you. Ingor Stesel [ph] from UBS. Regarding your net debt EBITDA on a run rate, I mean, I assume the 2.5 times maximum is more if you do M&A. But what's kind of the expectation on a run rate basis until 2028?
Thomas Zickler: On a run rate basis, it's for sure below 1. The 2.5, as you said, is really when we do a bigger M&A, and we need then also to go to the Capital Markets to get more cash for this. For this, we have a governance for the next years until 2028 that we say we don't -- we never want to be over 2.5. But taking this big M&A out, I think it's below 1.
Suzanne Thoma: Just to make a very consistent message, because it's true. A big M&A means several smaller M&As, adding up to a certain number.
Unidentified Analyst: Okay. And a follow-up on the Tiwel payable. The cash, it's not an escrow or anything. You can still use it for operations as far as I understand. Is that correct?
Thomas Zickler: No. The Tiwel cash is on a separate bank account. And this is basically like we do kind of an internal escrow. And this is why I say always when we talk about our CHF 1 billion cash position, which we need to show under IFRS this is not true because almost CHF 400 million belongs to Tiwel.
Unidentified Analyst: Okay. So it's restricted cash essentially.
Thomas Zickler: In this interpretation, yes, but not under IFRS. Answer
Suzanne Thoma: We pay no interest on it. And of course we also don't have an expiration rate -- date.
Thomas Zickler: Expiration Date.
Suzanne Thoma: That is what makes it special.
Unidentified Analyst: Thanks.
Suzanne Thoma: Go head.
Unidentified Analyst: Sorry. It came to my mind another question. On the sustainability and the Energy segment I of course get the topic of carbon captures. But I was wondering how you -- yes the transformation in, especially, in the security public segment I always thought it's more the oil and gas activity. So probably it's still a bit on the old fossil activities. How do you close the gap between sustainability and potentially being still active in let's say fuel cell market. And maybe -- yes I interpreted it's mainly on the energy consumption of your probably pumps or whatever it's sold in that segment. And yes, is that fair? Is there really a step-up in terms of energy consumption in your pumps or in your other activities? Or a little bit to better understand that.
Suzanne Thoma: Yes I can give you a few examples that make it easier to grasp. Number one, if you increase -- if you decrease the electricity consumption of our pumps you already have -- you have to build quite a few wind mills to compensate for that on a global scale. So that is important. The other thing is we have projects. We spoke about it regarding battery storage where we store energy that is heat at 750 degrees in molten salt and of course, you need an infrastructure that can manage that. And we are part of this project. That's a development project, but with a customer in a big pilot plan. We have another development project with a customer quite of importance where we have a pump that in the pumping can separate between oil and gas in one and methane for example. So these are steps that make a huge difference in the next years to come where we still do rely to quite some extent on the existing energy security our energy supply system.
Thomas Zickler: Any questions on this side?
Suzanne Thoma: Are there any more questions in the room? Then if our guests our virtual guests had the patience to wait if they're still there we would now be open for questions from your side.
Operator: [Operator Instructions]
Suzanne Thoma: So the questions were obviously -- or your questions were obviously not exhausting, but exhaustive. Also for our virtual guests we close our event. I thank you very much for coming here. I also thank the guests who came here virtually. Thank you for your interest and have a very nice day. Bye-bye.
Thomas Zickler: Thank you very much. Bye.
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