Good morning, and welcome to Sulzer's H1 2022 Q-results conference call. Today with me is our CEO, Frédéric Lalanne, and our CFO, Thomas Zickler. For this call, we have prepared a presentation which you can find on our website. Please note that if you want to ask questions during Q&A after the presentation, you have to dial in via the phone number that was sent to you when you registered. As always, I want to draw your attention on the safe harbor statement on slide number two. The call may contain forward-looking statements containing risks and uncertainties. These statements are subject to change based on known or unknown risks and various other factors which could cause the actual results or performance to differ materially from the statements made in the call. Having said that, it's now my pleasure to hand over to Frédéric for the presentation.
Good morning, everyone. Thank you for joining this morning call. Sulzer has delivered solid results in the H1 of 2022, despite numerous challenges that we had to overcome and that have not yet disappeared. Order intake was not so much impacted, in fact. On the contrary, order intake has shown a very strong growth of 11% year-on-year in H1, and 8% in the Q2, driven by Flow Equipment and Chemtech division. Our sales growth of 1% was driven by positive developments in Chemtech and services. However, a lower energy business within Flow Equipment lockdown on our factories in China, which were closed during five weeks, delay in projects on our customer site, as well as continuing uncertainties in the supply chain, had a negative impact on our sales in H1.
Although we produce in the region for the region, Sulzer had some components which were in shortage. Example, some control modules for our compressors in the water market, which have delayed some sales. Altogether, nevertheless, our sales were up 1% in H1 compared to the same period of last year. While the mentioned effect had also a negative impact on our margin, we were still able to increase operational profitability by 50 basis points up to 9% compared to 8.5% last year. Operational excellence mixed effects contributed to the positive development. On May 24, we communicated that we decided to exit the Russian market, and on July 1st, we announced that we will write off most assets in Russia and Poland, and the largest part of this write-off will be booked in H1.
As you have seen, the write-off had a negative impact of 119 million CHF on our net income in H1. Thomas Zickler, our CFO, will give you more details later in the presentation. Supply chains and logistics continue to be challenging and still lead to some delays here and there, but we see the problems easing in the second part of the year, as I said before, is mainly producing in the region for the region and therefore we are not that much impacted. However, if others are impacted and therefore projects are delayed, we might see also some impact. Finally, we have published a separate sustainability report on July twelfth.
The highlight is that we have been able to reduce our carbon footprint impact by 25% in 2021, mainly through a five-fold increase in the adoption of decarbonized energy for our factories. Let's move now to slide number five, about order intake. Our regional order distribution has not changed a lot. We continue to be very balanced regionally, but thanks to strong business in the U.S. and in Brazil, the Americas have gained a bit in weight at the expense of EMEA, while Asia-Pacific remain unchanged. Americas, 36% in H1 2022 versus 33% last year, and EMEA, 39% versus 40% last year. We have also seen a very strong development in our new equipment business, mainly in Chemtech and Flow, resulting in a smaller share of aftermarket this half year of 47% versus 49% last year.
Let's turn now to our Flow Equipment division on slide number six. We have seen a strong development in all our markets. Orders have increased by 14% year-over-year in H1, and by 12% year-over-year in Q2. All segments have grown double digits in H1 in 2022. Energy developed very well in H1, and the pipeline of projects continues to be very strong, both in upstream and downstream. In the industry, we have seen continued strength in pulp and paper and very strong momentum in mining and metals. Finally, water continues to grow double digit. This market is less cyclical and therefore the growth rate is somewhat lower there in water than in industry and energy. Sales were down 4% as guided for at the beginning of the year.
The decline in order intake in energy last year, 2021, results in lower sales this year, 2022. Additionally, the lockdowns in China, which stopped production completely in our Suzhou factory during five weeks, and some project delays on the customer side did not help to realize the sales. Despite this sales, very strict control on our cost and a positive mix effect with more water and industry have increased our operational profitability by 30 basis points up to 5.3% to be compared 5% last year. In Flow Equipment, logistics remain a challenge in some countries, mainly in Asia, and might cause some delays in projects on customer side. Flow Equipment is also mainly a project-based business, and increase in the raw material and labor cost have been passed on so far to our customers.
To limit the risk on our side, we have decided to shorten the validity of our offer at time of tendering. When not possible, we also have price adjustment formula in our contract, and in 2021 and 2022, we have been able to pass this adjustment for standard products to our customers. Here, overall, we can see that we have been able so far to pass this higher cost to our customers, both from labor and raw material, and this can be seen on the margin of order intake. On slide seven, I just want to highlight one innovative project that we have supported with our pump technology. In U.S., we supporting a company named Fulcrum BioEnergy to complete the world's first commercial scale waste-to-fuel plant in Nevada.
We have delivered highly efficient and customer boiler feed pumps, condensate extraction pumps, and other process pumps crucial to the plant energy generation circuit. This plant, in fact, will convert 159,000 tons of municipal solid waste into 41 million liters of synthetic fuel per year. At Sulzer, we believe that this waste-to-fuel process will help to reduce the carbon footprint of transport systems and also reduce the volume of waste going to landfill. This revolutionary new plant is the first in the world to achieve commercial scalability, and it will be the first of many in the rest of the world. Let's turn to services on slide number eight. In our service division, we have seen a rebound in Asia Pacific and continued growth in the Americas while EMEA suffered from our decision to exit the Russian market.
Therefore, orders increased by 3% year-on-year and nevertheless were down by 3% in Q2. Overall, H1 plus 3% year-on-year. Looking at the product lines, pump services orders have grown in H1 and Q2, while orders in other equipment, I mean, turbo services and electromechanical services, were mainly impacted by our decision to exit the Russian market. Sales were up 3% year-on-year in H1, and this is mainly coming from the positive contribution and the strong momentum in Americas, in U.S. and in Brazil. Our operational profitability remains stable at a high level above 13%. EBIT turned negative in services as this division has the largest assets to write off in Russia and in Poland. Overall, the impact of this write-off for the service division in H1 were CHF 87 million.
Here, I would like to highlight the impact of pump retrofit, and you find here a very nice example of what Sulzer can bring to our customers. I will be a bit more technical. As you can see from this picture on this slide, when we retrofit a pump, we leave large parts of this pump unchanged. We change and upgrade only the inner works of the pump and these parts which are colored on the picture. This advantage of the customer that it does not have to make a lot of modifications around the pump, such as the base plate and the piping. It can keep its existing installation. The retrofit also has a very limited impact on the plant production. I would like to highlight this project. In Norway, this large pump made by a competitor and was in operation for the last 30 years.
The design we made for the original duty of the pump of around 600 cubic meters per hour. Over the years, the situation has changed, and the throughput of the pump has reduced to 150 cubic meters per hour. With this new operation, the pumps were largely oversized and therefore not efficient anymore. We offer to retrofit the pump, adapt it to the new operating conditions, and were awarded this project in Q2, and the pump will be back in operation early next year. Overall, you can see the expected savings are significant, 900 kilowatt hours per hour and 4,500 tons of CO2 emissions per year of savings just by retrofitting one pump. Customer saves 30% on the pump, another 10%-20% on the base plate, and then overall.
Fair to say that this new pump, with all this installation, will cost almost double than the retrofit price and will cause much more nuisance during installation. Here we would like to highlight, even if a bit complex, the interest of retrofitting pumps. Let's move to Chemtech on slide number 10. Order intake was up by 21% year-on-year at Chemtech in H1 2022, and 19% in Q2, with all segments and regions growing at Chemtech. Particularly, tower field services benefited from strong orders in America, but the traditional business in chemicals and renewable continue to develop very well. Sales increased by 9% year-on-year in H1 2022, mainly driven by the renewable business.
Operational profitability was up 80 basis points to 9.9% on higher volumes in renewables and despite lower sales in China due to the impact on the local lockdowns, like I expressed in flow business. The development is even more remarkable as Chemtech's margin in China are generally extremely good. Logistics were and remain a challenge leading to project delays. Material costs inflation is also challenging but manageable. Overall, the renewable business continue to develop well, is impacted by the timing of some projects, can be volatile from one quarter to another. After a slow start in Q1, we have seen some orders coming in Q2, and the business is growing by 38% quarter on quarter. In H1, the renewable business for Chemtech accounts for 12% of all the orders. Let's have an example of what we have done on the next slide.
Plastic to chemicals. Here, I would like to highlight how we contribute to the circular economy. Today, most of the plastics are mechanically recycled, meaning that the plastic is cleaned, shredded, and then melted to get new plastics. However, there are many impurities. Usually, this process leads to down cycling to lower added value material or to a limited number of recycling rounds. A lot of research and work is being done at present time at Sulzer on the chemical recycling of plastics. Here it's a depolymerization process is used to convert the polymer plastics back into the initial monomer or basic chemical, which can then again be used and serve as a feedstock for this industry.
Chemtech has enabled a customer first plastic recycling plant, which is being built in Europe, and we expect to produce 24,000 tons of high-grade, widely used chemical every year and can be reused year after year. This is a good transition for our sustainability report. We have published our standalone sustainability report story on July 12. It can be downloaded from our website. In there, you will find a set of targets that we want to achieve, mainly a reduction of our CO2 emission by 30% by 2030 and become CO2 neutral by 2050. You also find in this report many example of what we do and how we do it.
I really would like to highlight the fact that at Sulzer we are very proud that in 2021 we decreased our CO2 emissions by an impressive 25% compared to 2020, despite a higher sales volume. This significant decrease was reached in all monitored Scope one, two, three, thanks to our team actions and a decisive shift towards non-fossil fuel electricity. We have also improved our energy efficiency at factories level through a coordinated approach between our lean and manufacturing teams. All our initiatives are governed by our newly created CO₂ working group, which gathers multidisciplinary teams and meets monthly. It designs the program and is responsible for the completion throughout our factories and service centers worldwide.
We are planning to further expand our reliance on non-fossil fuels and expect to get at least 70% of our site shifting to clean energy as a source of electricity by end of this year, 2022. Another highlight in 2021 was we managed to increase the rate of recycling of our waste produced in our factories and service center. In 2021, 62% of the total waste produced by Sulzer was recycled. More than 57% was achieved in 2020. We are on track to achieve our target of recycling all our waste by increasing 80% of recycling. We are not only working on our side to reduce our own footprint. With our technology, we are also enabling our customers to reduce their footprint.
I would like to highlight major achievements in Canada to help a Canadian coal-fired plant in Saskatchewan that is using Sulzer technology to capture CO₂ emissions. Since the beginning of the project two years ago, in 2020, more than 4 million tons of CO₂ have been captured, which is up to 90% of the CO₂ emission of this plant. I repeat, 4 million tons of CO₂ captured by Sulzer technology just in one plant in Canada. From these great stories about sustainability, but also about our operational performance, I would like to now hand over to Thomas, who will present in detail the financials.
Thank you, Frédéric, and good morning to everyone, and welcome also from my side. Let's start with the overview on slide 41. Frédéric has already given all the details on order intake, sales, operational profit, and operational profitability. Therefore, let me focus on the other lines. Order intake gross margin was slightly down in H1 2022, compared with the same period of last year. While the margin was up in Flow Equipment and stable in Services, it was down in Chemtech, mainly due to mix within the division. Overall, the margin level proves that in general, we are able to pass on the higher input costs. Order backlog has increased by 10% to CHF 1.9 billion, despite the de-booking Russia orders of CHF 71 million.
As Frédéric explained, sales were up by 1%, driven by Chemtech and services, while Flow Equipment was mainly down because of energy. Operational profit increased by 5%, which is faster than sales and therefore resulted in a positive margin development. Main driver here was mix, with lower volumes coming from Flow Equipment and higher volumes from Chemtech, coupled with the improvement of the margins in both divisions. On EBIT, you see the one-off impact from the write-offs of our Russian and Polish assets. I will give you the details later on. Just note that EBIT, without the write-offs, would have been CHF 107 million compared to the CHF 97 million a year earlier, so about 10% higher. The same is true for net income.
Excluding the write-offs, net income would have been CHF 770 million instead of the -CHF 49 million, a 15% increase compared to last year. Earnings per share, shown here as a - CHF 1.43, would become a + CHF 2.08 if adjusted for the write-offs. Free cash flow in H1 2021 still included CHF 34 million from medmix, which we spun off in September last year. Excluding medmix contribution, the basis of comparison becomes CHF 83 million. The negative free cash flow of CHF 78 million in H1 2022 stems mostly from increased working capital needs to cope with supply chain and logistics challenges. The decline in FTEs that you see at the bottom of the table is mainly related to the sale of our Chemtech tower field services business in Brazil.
Let's move to the next slide, where I explain to you the bridge from operational profit to EBIT. Below operational profit, we incurred CHF 29 million of amortization and non-operational items, which compared to CHF 30 million last year, leading to an adjusted EBIT before Russian and Polish write-offs of CHF 107 million, which is, as said, 10% higher than last year. Write-offs in relation to the exit from Russia and closures in Poland amounted to CHF 133 million, broken down to CHF 87 million in services, CHF 32 million in Chemtech, and thirty million in Flow Equipment. This resulted in a reported EBIT of -CHF 26 million. Now let's walk down from EBIT, shown on the previous slide, to net income.
Compared to last year, when financial income was a negative CHF 9 million, the positive CHF 9 million this year mainly comes from a CHF 21 million positive impact from unhedged intercompany loans to Russia, where from mid-March onwards, it became impossible to hedge any ruble exposure. Despite a negative pre-tax profit, we booked CHF 31 million of taxes as the write-offs in Russia and Poland are not tax deductible, and we have tax charges in all of our other profitable worldwide businesses. Excluding this impact, the normalized tax rate would have been 23.6%, which is on a similar level than the 24.4% a year earlier. All in all, this leads to a negative net income of CHF 49 million. Now let me explain to you the impact of Russia step by step on the next slide.
On slide 17, I explain the bridge from reported net income to adjusted net income. The sum of the two green columns gives you the CHF 133 million impact on our EBIT, broken down to the areas of the income statement which are affected. In COGS, you have the write-downs of inventories and advanced payments to suppliers. While in OpEx, the major charges are for impairment of fixed assets in other operating expenses. While write-downs of contract assets and trade accounts receivables are separately disclosed in the income statement. The rest is in G&A. I just explained the CHF 21 million positive impact on net financial income on the previous slide. Additionally, we have CHF 8 million of tax assets which also needed to be written off.
The adjusted net income would be CHF 70 million, an increase of 15 million of 15% compared to the CHF 61 million net income from continuing operations last year. Coming to slide 18, I will give you more details on the bridge from reported EBITDA to free cash flow, adjusted for the impact from Poland and Russia. If you take the numbers from our cash flow statement, you would calculate only a small increase in net working capital, which is correct accounting-wise, but the write-offs for Russia and Poland mask the increase in underlying net working capital. Without the Russian and Polish impacts, underlying net working capital has gone up by CHF 60 million. This is mainly caused by increased inventories and work in progress to cope with the global supply chain and logistics issues. Another big impact is tax paid.
The amount is higher than last year, mainly due to higher payments in China and catch-up payment effects in the U.S. and in Switzerland. With all these effects, you get to a negative CHF 48 million cash flow from operating activities. Further deducting CapEx of CHF 31 million gives a free cash flow of negative CHF 78 million. Turning to net debt on slide 19. Compared to December 2021, our debt has essentially stayed unchanged, and our cash position has declined mainly due to the negative free cash flow and the ordinary dividend that was paid out to shareholders, except for Tiwel, in April this year. With that, our net debt has gone up to CHF 269 million, which is an increase compared to end of December 2021, but still an improvement compared to the end of June 2021.
Net debt to EBITDA has gone up from 0.2x at the end of December 2021 to 1x at the end of June 2022. This is driven mainly by two factors. Firstly, net debt has increased, and secondly, EBITDA has been negatively impacted by the Russian write-offs. With that, I hand back to Frédéric for the outlook.
Thank you very much, Thomas. Let's turn to our guidance for the full year. We expect good momentum in our market despite the prevailing macro and geopolitical uncertainties, increased volatility, and inflationary pressures. Nevertheless, we decided to confirm our guidance for the full year, excluding the impact from Russia. When issuing this guidance in February, we didn't know what will happen in Russia and that we will have to exit the market. We also did not account at that time for another lockdown in China, where our three factories in the South were closed during five weeks in April and May. While we believe to be able to catch up in China in Q3 and early Q4, the impact from Russia cannot be absorbed easily by other business and likely to be in the magnitude of CHF 50 million sales for this year.
We continue to expect organic growth to be in the range 3%-5% in 2022. Not so ambitious, maybe compared to 11% growth in H1. Bear in mind that we have a much higher baseline from H2 2021. We also remain cautious due to external factors as just described. We will have a clearer view after Q3 and still could update at that time. We expect the organic sales growth in the range 2%-4% as guided, but this is excluding the impact of exiting the Russian market. As I said, that most likely will cost us around CHF 50 million on the top line. Finally, we expect our operational profitability to continue on its upward trajectory to be close to 10% of the sales this year, compared to 9.3% last year.
Our midterm ambitions remain unchanged. We target an average sales growth of 4%-5% year-on-year, and an operational profit margin in the range 10%-11%. Let me summarize now, this conf call on slide 22. We have navigated well in a difficult market environment. We had, and we still have to cope with this inflation issue. That it already before the war in Ukraine, but this war has clearly aggravated the situation. In addition, the renewed lockdowns in China have put another strain on the supply chain and logistics that only start to recover at the end of this year. Despite all these negative developments, we have been able to increase our orders by 11%, our sales by 1%, and our operational profitability by 50 basis points.
We had a massive one-off impact of the write-off of our assets in Russia and Poland, but underlying business is doing well, and we have shown you with adjusted figures throughout this presentation. Finally, we confirm our guidance that we have set at the beginning of this year. We are just excluding the impact of exiting the Russian market. We have now reached the end of the presentation, and now I'm going to open the floor for your questions. Operator, please, let's start with the questions. Thank you very much for your attention.
The first question comes from the line of Patrick Rafaisz from UBS. Please go ahead.
Thank you, and good morning, everyone. Thanks in advance for the color you've already provided in this call. I would have three questions, please. The first one is on the one-off charges related to Russia and Poland. You had already mentioned that the majority is being booked in H1. How much do you expect for H2? How much is potentially left here? That's the first question. The second one is a couple of quantifications, specifically the impact of the China lockdowns on H1 sales and also the impact of the component shortages in that affected water. Yeah, if you could just quantify that. Then number three is on cash flow. Wondering about your expectations here for H2.
You think you can work down some of the inventory and work in progress. Yeah, what's your expectation for can you catch up on the outflow in H1, or are we looking at a more or less neutral break-evenish free cash flow year in 2022? Thank you.
Mm-hmm.
Thank you for the three questions. Let me start coming to the one-offs and how much you expect or you're asking us we expect in H2. Here I can clearly answer the question. As of today, we do not believe that there are material additional impacts above those communicated today. I think with these one-off impacts which we have shown in our H1 balance sheet, that's it. Yes, there will come additional FX impacts, but only minor ones. We are talking here about single-digit numbers. To answer your question, it's clearly we are not expecting any more impacts coming from Russia or Poland. Then maybe Frédéric, let me give to you with the next one.
Yes. On the second one, your question was about the China lockdown. In China, we do have four factories, one in Dalian in the north, which was not so much impacted. We do have three factories in the south, one for Chemtech in Shanghai, one for water in Kunshan, and one for energy in Suzhou, so in the south of China. These three factories have been completely closed during five weeks. We did have some people living and working in the factories to try to mitigate a little bit during this four to five weeks. Overall, the impact we had on the sales during this part is around CHF 40 million-CHF 50 million of sales, which were delayed for the three factories.
We are now catching up in Q3, and we have a good hope that in October this delay will have completely disappeared. Which is a very positive development. In Dalian, in fact, minor impact. On the component shortage, we had some issues on electronic cards. It's the printed board which came from our suppliers in China to be integrated in our compressor business. The sole supplier is in China today. He has only a factory there. We had some inventory ahead of us, but we have been impacted and now it's back to normal. I have to say this is behind us, and these were a few million CHF.
Something not so much important in terms of sales, but more on the delivery time of the goods, which were delayed for our customers. This now is, we can say, behind us. We also see some improvement on the reliability of the transportation. Here, it was not only a China issue, it's also a problem in the States to find truck drivers. We had massive issues to find drivers just to ship the goods out of the factories in North America. Overall, this pain is still there. We still have this pressure on the logistics, but this is improving. In our perspective, and it's a little bit also your question about inventory and the WIP.
Yes, we have increased the WIP, so work in progress, and the inventory during H1. This is helping us now to deliver our sales in the second part of the year.
Mm-hmm.
Maybe, Thomas, you would be more precise on the figures.
Yeah. On the cash flow, let me add the following, coming back to your question. Yes, we have a high net working capital, especially inventories. You all know this is because of the supply chain constraints, the logistics problems which we have. You know, when one part is missing, we cannot deliver, we cannot send out the invoice, and this is the whole story. Expecting in H2 that the situation is getting a bit better than in H1, yes, I think we can work on our net working capital, especially on the inventories, to get this down. Then finally turn in cash flow, in free cash flow.
However, comparing it with last year, where we had more than CHF 200 million free cash flow at the end of the year, I don't think that we can reach this target this year. I think that we can really improve our cash flow in the H2 of the year.
You think you can overcompensate the cash outflow as you work down a bit the inventories and work in progress?
Yes.
Also more deliveries, right, et cetera. Okay.
To be clear, the priorities for our teams for the second part of the year is clearly delivering the backlog, because we did not give that figure in the presentation. We have an historical high backlog to deliver, close to CHF 1.9 billion for Sulzer in this format. It has never been so high at CHF 1.9 billion. A big part of it, of course, will be traded in H2, but also now we start to have a decent backlog for H1 2023. At present time, all our factories are full.
Excellent. Thank you very much for these clear answers.
The next question comes from the line of Ardem Hasani from Stifel. Please go ahead.
Good morning, gentlemen. I would have a few questions. First of all, I would be interested to know what was the price effect that you saw. What is kind of the split between price and volume? That will be the first one. The second one would be on Chemtech, where the demand is really striking. I would be interested to know kind of what kind of projects are we talking there. Is it really a new plant? Because so far, I think it was quite concentrated in Asia, China. Now it seems to be more kind of broader regionally. What trends are you seeing there? Also in the near term, is the momentum still kind of strong or do you see any slowdown there? Thank you.
Thanks a lot for your question regarding the price and the inflation. Overall, we estimate that in our the price effect that we see and we have been so far able to pass in our order intake is in the range of 3%-5%. Depending on the product, depending on the nature of activities. As you know, when we have pure services, it's only manpower. When we have a product, it's a combination of raw material and manpower. Depending on the regions and the type of activity, we say that we estimate, because it's not easy, we estimate a price impact in the range 3%-5%.
We have been able to pass this cost increase or mitigate them by efficiency or passing them to the customer. We can see that I repeat that also since last time. The very strong indicator for me is the margin of order intake. We are seeing that margin on order intake remains flat. Our costs increase, but the margin we are able to book on top of this cost remain flat or stable. When we see the execution of the project, the margin on project being executed is also very solid. During execution, we have no impact also from the cost increases. When we do have some impact, we're able to mitigate or to pass through the customer.
It shows that our business model at Sulzer on that front is quite strong. Again, to counter that, the cost discipline here is absolute priority of myself, but also on all the teams, right, to have this cost discipline well in place. That's the first to answer broadly your first question about the price. Your second question was about Chemtech and the demand. You're right, I think you used the word striking, and this is quite impressive. It's true that a big part of this demand is coming from Asia and mainly from China. So far, we do not see any slowdown in the demand of activities in China, in the chemical and petrochemical activity. We all know that this slowdown will come.
That's why also we have decided to focus more on our teams in the rest of the world, and we booked large projects in H1 in Europe and also in the USA, where we were not so used to have this large project. Now we will see the impact on the sales as well for Chemtech in H2 and in 2023 of this large project. Some of them being in the chemical sector, but some of them also being in very large process and water treatment or solvent treatment where we offer a solution to our customer, mainly in Europe, I was thinking about that to help also their processes in terms of energy efficiency impact on their processes and the title is Solvent Recovery Unit.
In fact, we are helping the customer when they use solvent in their process to recover the solvent and reuse them in their process. Creating then a virtuous circle on the use of this highly polluting component in their processes. We have won two projects of this type in Europe and to be implemented in most likely end of 2022, and the sales will be in 2023. This is clearly a shift, not a shift of focus, but knowing that the slowdown will come in China, that pushing our teams of Chemtech to focus on Europe and North America. As you know as well, there will be wave of investment to come in Europe and in Americas and maybe less in Asia because after all what happened during this year on logistics disruption. The fact that we...
Most of our customers reinvesting locally or regionally, and we will benefit from that in Chemtech, but also in Flow Equipment. That's to answer your question. The momentum is there, and the momentum is both in renewables and clean technologies and in the traditional business, chemical and petrochemical of Chemtech. Good perspective for this activity for this year and most likely in 2023 as well.
Very helpful. Thank you.
The next question comes from the line of Alessandro Foletti from Octavian. Please go ahead.
Good morning. Can you hear me?
Yeah, absolutely. Yes.
Okay, great. A very quick one first. In Russian asset, CHF 133 million, you'll be speaking about impairments and write-offs, et cetera. There is nothing cash effective there? Did I understand you correctly?
Yes. Yes, I can confirm this.
All right. The second one may be surprising for me, but this exit from the Tariffs service in Brazil, you mentioned that this was what caused the reduction in personnel. That's about 1,000 people. It was, in a way, bigger than I thought. Can you explain what's the background of that exit and how big of an impact it has, if at all, in terms of sales?
It has a big impact in number of personnel, but a very low impact in number of revenues. Because this activity was, I would say, a bit abnormal for Sulzer, that we are depending on the project up to 1,000 people, but sometimes it was down to 100 because, in fact, it was bringing manpower to the petrochemical industries. This is not the business of Sulzer to provide manpower to our customers in Brazil. In fact, it shows a significant reduction in personnel, but in terms of impact of the sales, it's maybe less than CHF 10 million. This was not at all a core business for Sulzer.
look, we found a contractor really active in maintenance activity for Braskem, for Petrobras, and that took over the employees and really was, for him, this activity was his core business, and for us it was clearly non-core. That's why we decided to divest this business.
Okay, understood. If I may, I have a couple of more general business-related questions, starting from the examples that you gave in the presentation. Can you say how relevant this waste to fuel business is or it can be, both in for you and for the client? I mean, when you say, now I don't remember how many tons you produce, but is it big?
In fact, so far for us is an excellent reference project, and you have plenty of technology now under development. We just mentioned or highlighted here the waste to fuel. You do have also all these biofuels technology. We announced a few weeks ago that we were part also of some project in the Netherlands, working with Shell on recycle. We had also plenty of projects on biofuels. Today, there is not one technology that will emerge. There are a large portfolio of technologies being under development worldwide in Americas, in Europe, mainly. We aim with our pump and compression solution to be part of this technology.
To be very clear and honest with you, all these projects are startups. Now they come from the lab to a commercial scale, so that's the one that we are highlighted in U.S., in Nevada, so which is commercial scale. You can see that, you can imagine that many of the municipalities, not only in U.S., but also in Canada and the rest of the world are watching. Because here we are really converting municipal waste. It can be from whatever garbage you have, can be solid for water treatment, or can be a solid from all the garbage into fuel. If it's successful and if it works, this has massive opportunities around the world. Today, this is the first project in U.S.
It will take few years for them to make the assessment, but I believe that at Sulzer, we have to be part of all these projects, either on the pump side, but also Chemtech. Chemtech also, as I explained, is part of all these projects now. You can see where the energy efficiencies and the impact on less effluent to be released and more reuse of all the effluent is a key topic. Yes, it's growing. It's slow, but we are present in all these technologies.
Can you say if you put in a ton of garbage in that process, how many kilograms of fuels are coming out?
Really, I don't know. You put me a good question, but I will try to give you a feedback on that. I prefer to stay silent rather than saying a stupid thing.
All right.
on the efficiency of the process. That's a good point.
Right. Maybe also the CO₂ capture that you mentioned. Wasn't aware of that. I imagine. Are you using Chemtech technology for that? What are you doing?
Yes. CO₂ capture here is something which is super interesting. It's not new technology. This CO2 capture exists more than 20 years or 25 years, and they have been developed by companies like Alstom, Siemens at that time. Sulzer has always been a partner for this CO₂ capture. What we are doing, in fact, we are in the output of the CO₂ , of the chimney of the plant, all these guys go through equipment which are provided by Chemtech, within the columns. Thanks to that, we are able to capture the CO₂ , and then the CO₂ is liquefied. This is here, in that case, one technology.
Once liquefied, it is either reinjected in the ground, in reservoir, which are empty, or it can be, stored or used in some industrial processes as well. You see it's quite impressive, just this factory, one plant, 4 million tons. Today, the highest level of CO₂ emission comes from the coal power plants in the world. You have seen that due to the crisis in Ukraine, Germany is reopening coal plants. U.K. will extend the lifetime of their coal plant by 10 years. China is burning highest level of coal in the history. They are even reopening old plants and commissioning new plants. Coal is there to remain for decades, and we have to be present in this CO2 capture technologies. Chemtech already for more than 20 years is present.
This technology, we are never able to take off because considered as too expensive. When we see now the cost of electricity, if all what could have been done 20 years ago would be in place, I think it would have a massive impact on the CO₂ . Yes, we are there. I think it's potential great development for the power plant, but also for the cement industry, which is also one of the largest CO₂ emission. We are also active in CO₂ capture with partnering in California with a company named Blue Planet, where we are part of this venture, along other famous name here in Switzerland, Holcim, and oil industry with Chevron, and we are the technological partner of Blue Planet in California. Different technology, but we are there as well.
Fantastic. Thank you very much. May I squeeze in a last one on the service?
Yeah.
Upside? If I exclude Russia, basically, and let's say 50/50 split of sales, CHF 50 million, CHF 25 million in H1 that you lost, does it mean that underlying
Service has been growing as well, almost double-digit. If yes, can you give a little bit more color where the growth came from, et cetera?
Yes, your math is correct. In fact, we grew the pump service business by more than 10%, which is aligned, in fact, with the new business, which is growing at 14%. The pump service business grew at 10%+. It is clear that the impact is mainly coming on turbo activity because of Russia, which was very important for our turbo business. Electromechanical services are, I would say, flat this H1. Pump service grew by 10%+.
Thank you.
The last question for today comes from the line of Christian Obst from Baader Helvea. Please go ahead.
Yes, good morning, and thank you. Just coming back to costs. You are talking of course about cost discipline, and we have seen that in the numbers, of course, so far. Nevertheless, going forward, personnel costs will come in with some kind of a delay, especially also in Americas and now going forward in Europe, the same is true for energy costs. This normally you cannot pass on directly to customers, but you have to mitigate within your organization. How do you think you can mitigate these increasing personnel and energy costs going forward like you have done it in the past? Because it's increasing.
Yeah, you're right. In energy costs, first of all, we are not so much energy intensive at Sulzer. We do not have any foundry anymore. When you look at the cost of energy for us is mainly electricity and heating as well for our factories, heating or air conditioning in summertime, but it's mainly electricity. It's not a lot in the total cost for our products. Where we might see an impact is clearly on all the castings that we receive on all the pieces which need a lot of energy with ovens and so on.
A big part of our business today in any case is on cost plus because we are on projects, and this is not only impacting Sulzer, it's also impacting our competitors. Today, so far, we have been able to pass this cost. When we look at our own costs, how we mitigate, it's very clear that we have a cost discipline on the recruitment. We have a cost discipline on all what we do in the consumption of energy, in the waste management. It's a sum of plenty of small actions. There is no miracle in this business. That's why all the guys and all the operation teams, and you know that we have more than 40 factories at Sulzer and 100 service centers, it's their daily task to be cost conscious.
It goes for everything and when you put all these actions together, we are able to have this mitigation plan. On the labor cost, it's true that we see some cost increase in Europe, in America, but not everywhere. We have less inflation in China, for example. In China, the inflation is under control. We do not have this type of pressure on the cost. We don't have the same pressure as well in India. People are focusing on the labor cost increase 5%, 6%, 8% that might happen in Europe and in North America. There are other places in the world where we do not have this type of labor cost pressure as well. Overall, we are navigating. To tell you that it is simple, no, not at all.
It's really very hard work from all of us. So far, and also what's very important when I look at the margin on execution versus the margin on the intake, there is no deviation. We are clearly able to manage that all together. There's always a small size difference, but there is no deviation at all over the last 12 months between what we book and what we sell.
Okay, thank you for that. Do you have, going forward, any kind of problems or rising problems to get the new employees you need for your growth, especially in service?
Finding the right talent is difficult. It's difficult in all segments and all countries, and not only for Sulzer, I think for overall industry. We have difficulties to find low labor skills because here it's high competition with Amazon warehouse or whatever. But we do have also difficulties for highly qualified people in the mechanical industry. When you have very large mechanical companies saying that they want to hire thousands of technicians and engineers, then of course it creates some pressure on the market. We do need to find permanently a specialist in all our operations in mechanical engineering, in electrical engineering, in control and instrumentation, in welding. But we consider that Sulzer is a good employer.
So far, it's a hunt, but we have a decent number of jobs open at present time. Sulzer is always considered as a good place to work. This is not only true in Europe, where we have this reputation, but also in America, in Brazil, in China. We are able to attract people, but not only attract, retain them. I think Sulzer and it's part of our objective for all our human resources team is not only attracting people, but also retaining them. We take a lot of care also about that. Yes, it's nothing is easy at present time, but can we say that we are more impacted than the rest of the traditional industry? I would say no. We are at par with the rest.
Okay. Last but not least, I have a question concerning a factory setup. You said that you have approximately 40 factories around the world and numerous service stations. Do you plan to change anything in this kind of setup in the next 2-3 years?
First of all, we have done already a major change. You know that, before being the CEO, I was running the pump division and I still run the pump division, by the way, so I'm double hat. We have done two major change, in fact, during the last two years, was the closing our historical factory in Portland, in Oregon, which was dedicated to the pipeline market in U.S. and this pipeline market completely disappeared. This factory now is completely closed. It was closed completely in June. We had also quite a large factory in Belgium from coming from the acquisition of Ensival Moret, and we closed that. We even sold the property, and now the production has been transferred to Germany, France, and U.K.
We have no intention to do more of footprint adaptation, but what is clear in our future industrial investment, if we need to invest in industrial capacities, we will invest as close as possible from the place of consumption and the place of the customer. Our policy at Sulzer was always regional for regional, and we will keep that. We will keep that. I can just give a highlight what we are doing now in Finland. In Finland it is where we have the factory for production of industrial pumps, mainly for pulp and paper and mining. We are investing in a fully automated manufacturing line and testing line, and that will help us to improve the efficiency and the throughput time in the factory, significantly.
This is already in our factory, but this line will be available beginning of 2023, and it is one of the largest industrial investment Sulzer is doing at present time. This is in Europe, and this is in Finland. We do not have large investment plan in China or in India, if you want to be very clear. I do not have also intention to reduce the setup. The setup will be mainly used for the domestic market in China and India, little bit of export, not more than 10%-15%. If we do have to invest now, we will invest more in Europe and in Americas to be as close as possible from our customers.
Thank you very much for your time.
I think there are no more questions. If you want to do some closing remarks, Frédéric.
Again, thanks a lot for your attention and the quality of your questions. I believe that I tried to picture the situation of Sulzer, which is objective. We have done great results in H1 in view of all the uncertainties and the challenge we had to face. We had to navigate the company through a mini crisis over the last 3-4 years, starting mainly in 2018. Since 2018, it's one crisis after another. Despite that, we have been able to grow the business, to develop the profitability, to create perspective, to reinvent ourselves for the energy transition, to be part of the circular economy, we discussed that before.
Also to benefit from the renewed momentum in the energy sector, while being on track with our strategy to grow in water and industrial segments. So many clouds in the sky today. What will be the impact of inflation, recession to come in Europe, in U.S., when, for how long? We don't know. We have proven that Sulzer has a very resilient business model. We had an impact on Russia this H1. No impact or very limited impact on our operations. We will be able to swallow that. We are now again up and running once we have digested that, to really focus on the real market and growing and developing the company worldwide. We are close to 13,000 employees in the world.
again, as we said, it's a big word of thanks for all these guys because they are super strong, dedicated, and committed, and it's because of them that we are delivering these results. Thank you for your time and for your attention and hope to talk to you soon. Thank you very much.