Ladies and gentlemen, welcome to the Sulzer Q3 2022 order intake conference call and live webcast. I am Sandra, the call's call operator. I would like to remind you that all participants will be in listen-only mode and the conference is being recorded. The presentation will be followed by a Q&A session. You can register for questions at any time by pressing star and one on your telephone. For operator assistance, please press Star and zero. The conference must not be recorded for publication or broadcast. At this time, it's my pleasure to hand over to Christoph Ladner, Head of Investor Relations. Please go ahead, Sir.
Thank you, Sandra. Good morning, and welcome to Sulzer's Q3 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 homepage. As always, I want to draw your attention on the disclaimer on slide number two. Please read it through carefully. Having said that, I hand now over to Frédéric for a short presentation. Thereafter, you have the opportunity to ask questions. Frédéric, please.
Thank you, Christoph, and, good morning, everyone. Despite many challenges, Sulzer enjoyed another very positive quarter in terms of order intake. Our markets continue to develop positively, despite the geopolitical tensions and uncertainties. Sulzer has grown order intake in Q3 by 8% organically, which brings our growth rate to 10% organic after nine months, sorry. I'm pleased with that development as last year's Q3 was already a good quarter and therefore the baseline was higher than in the first two quarters of the year. The highest growth came from the Chemtech division, where orders increased by 20% year-to-date, and again, another 17% in Q3. Here, we have seen investments across our markets as all businesses within Chemtech are growing double digits so far this year.
We see a high level of activity in the chemicals, gas, and refining space, as well as in the related services. An even higher level of activities we observe in Chemtech's renewable and water business segment. Here, demand for our solutions is very high. At the end of Q3, renewables accounts for almost 12% of overall Chemtech orders, and this even though we have not yet booked any large PLA order in 2022. Flow Equipment also continued to grow by 9% in Q3, bringing the growth year-to-date to 12%. High energy prices had a positive impact on the demand of our solutions in energy, resulting in 18% growth in quarter three. Industry continues its growth trajectory with all relevant end markets up year-to-date, especially in the mining sector worldwide.
Water was a bit slower in Q3, but this was mainly due to large desalination projects that were pushed out to 2023, especially in the Middle East. Finally, the service division was up 3% in quarter three and the same year-to-date. Here, we have seen a positive development in pump services, which are up 7% year-to-date, while service on other equipment is down 2%, primarily due to the turbo service business. This turbo service does not only suffer from our exit in the Russian market, but also from the fact that with the high electricity prices, scheduled maintenance of gas turbine or steam turbine is pushed out by some customers who keep on running their assets. Now let me turn to the outlook for the full year 2022 on the next slide.
In the light of the positive development in Q3 and expecting our markets to remain in good shape for the rest of the year, we have decided to increase our guidance for order intake to up 6%-8% versus our previous guidance, which was up 3%-5% versus last year. On sales, we adjust our previous guidance, which was up 2%-4%, excluding the impact from Russia to stable versus 2021. The reason for this adjustment is not only the exit from Russia, but also some renewed lockdowns in China. Last week in the Dalian area, northern part of China, we had our factory closed for 5 days.
Also we still see some shortage in electrical components, as well as some delays in certain big projects where customers ask us to ship our products later, meaning especially in 2023. The combination of increasing orders and stable sales result in a record high order backlog close to CHF 2 billion, which is the highest backlog to execute in the recent history of Sulzer. This backlog will support our sales in 2023, but some projects already be delivered in 2024. The adjustment on sales has no impact on our guidance for operational profitability, which is confirmed at close to 10% and an increase versus 2021. Let me summarize on the next slide. As I just said, we continue to grow our orders in Q3 thanks to a continued strong development in Chemtech and Flow.
Despite all these geopolitical tensions and dark clouds on the economy, we expect our markets to remain robust in the coming months. We have had no sign of slowdown in our tendering activities. That is why we have decided to increase our guidance for order intake up to 6%-8% versus last year. As just mentioned, lockdowns in China, shortage of stock of some components, as well as project delays, will shift some of our sales, which were planned in Q4 2022- 2023. This record-high backlog we expect it to be close to CHF 2 billion, $1.95 at the end of the year.
We also confirm our operational margin close to 10%, an increase compared to last year, then showing our confidence and capability that we have been able to mitigate all the various cost increases we have seen in 2022 from labor and from material. Overall, Sulzer is very well positioned. While energy transition remains an important topic for the society, also for us, energy security and energy sovereignty have become even more relevant in 2022. Investments in the energy sectors, which have been reduced massively in recent years, are now going up. At the same time, we increase our exposure to water and industry in Flow Equipment and to renewable in Chemtech. On this note, I will now hand over to Christoph for the Q&A.
Thank you, Frédéric. Before we start the Q&A session, I would like to point out that we will only answer questions on our results, so on Q3 and operations, not about the leadership change announced last week, as we believe that we have given all the context and explanation in the press release and its companion communication last week. With that, I hand now over to the operator to start the Q&A.
We will now begin the question and answer session. Anyone who wishes to ask a question or make a comment may press Star and one on the touchtone telephone. You will hear a tone to confirm that you have entered a queue. If you wish to remove yourself from the question queue, you may press Star and two. Participants are requested to use only handsets when asking a question. Anyone with a question may press Star and one at this time. The first question comes from Arben Hasani from Vontobel. Please go ahead.
Yes. Good morning, gentlemen. Thank you for having my questions. First, I was wondering about the situation in Europe. Your industrial customers in Europe, have you seen any signs of downturn there, especially in the chemical space or pulp and paper? Yeah, that would be my first question.
As you know, industry which is electro-intensive in Europe has been impacted, and especially the chemical sector in Germany. So far, at Sulzer, we have not seen a major slowdown in the industry. Pulp and paper is very solid, fueled by the demand for cardboard. That's clearly going ahead. I have to say [audio distortion] it's great to see what's happening at present time. We have no excuse for slowing down at present time. You mentioned Europe. I really would like to express the fact that in Americas, we see a huge level for our activity in the industrial sector. You mentioned industry.
The mining sector is extremely active at present time for us, and this is linked to the energy transition and the preparation of the industry. Overall, we might maybe expect some slowdown, especially in Europe, but for the time being, no sign. Our other industrial markets, rest of the world are very, very active and very well oriented.
All right. Thank you. Maybe just my second question will be around the water business.
Mm-hmm.
Maybe if you can provide a bit more color there, what you're seeing there. You mentioned these, delayed-
Yeah.
Desalination projects. What are the reasons there?
Yeah. As we know, in the water segment, we operate with three main areas. Desalination, I will come back, the wastewater for the wastewater treatment plant and the clean water. We have seen, in fact, some delays in the desalination because this market is mainly in the Middle East. I mean, Middle East, including Saudi Arabia, Egypt, and some of the large projects have been delayed. On the execution side, where the projects are being pushed, but also on the tendering activities. It's more a delay than the project being canceled. At present time, we see massive and huge projects coming, especially in Saudi Arabia, where the very old installations which were built in the seventies are now being renewed with the latest technology, which are energy efficient.
Because you know that in the desalination, the cost of energy represents 65% of the OpEx for a desal plant. When your operation is 65% based on energy, some people have interest to redesign and reshape their future projects. That's why we see some change in projects. But this project will be there, and we expect not only Saudi, as I just mentioned, but also in the Emirates, in Qatar, in Dubai, a strong and solid activity for desalination. This also might or will come in other places like, U.S., in California, but also starting in South Europe, in view of what, the hot summer we have experienced.
Desalination remains a niche market compared to the size of water, but we see more kind of, not adjustment, but reshaping the size of the project. For the rest of the business, we are, I would say, following the market trend and which is quite positive and stable, and the water segment overall grows with GDP. If you want to have a good indication of the water segment, you take the GDP and this market grows around that level. Sometimes you have some slowdown or going up but overall as I explained in the past you have a very good. I would say driver for this wastewater and clean water segment.
Maybe a less explosive growth compared to what we have seen in energy and mining, but very stable and very solid and highly predictable.
Predictable.
Predictable, yes. Sorry for that.
Maybe just one final comment on water. You were mentioning that M&A was also kind of a central part of the strategy there.
Yeah.
Can you maybe provide some info on that?
Yes. On M&A, in the last year, we have done two acquisitions, as you know, JWC in California four years ago, and just last year, we acquired Nordic Water. Now we are deploying our strategic plans according to the plan, which is scaling up globally these two companies, which were regional, JWC mainly in North America and Nordic Water mainly in Europe and Scandinavia. Thanks to Sulzer, now we have been able to book projects in Hong Kong or in Singapore, for Nordic Water, which were not reachable for them in the past. Thanks to Sulzer, now this type of projects are reachable. Overall, we are on our target for the integration of Nordic Water. For future acquisition we are looking at the market.
You know that also the water segment attracts lots of attention. The recent transaction that took place were extremely expensive. We were not successful on one or two acquisitions because we put also some financial discipline in our approach. We are looking, in fact, at present time to do things to expand our portfolio of products and solutions, which is one of the largest portfolio of products in the industry, and expand it globally. At the same time, looking at potential acquisition that will keep on, expand adjacent solution to what we have in pumping solutions or filtration.
Very clear. Thank you.
Thank you.
The next question comes from Alessandro Foletti from Octavian. Please go ahead.
Yes. Good morning, everybody. Thank you for taking my questions. I was wondering when I look at the outlook into Q4, just purely mathematically, you expect some form of deceleration, still growth, but some form of deceleration. Maybe you can explain that. Then I have a couple of more other, others more on financial questions.
Okay. You've done your math. We did it as well. So it's clear that we have taken a cautious approach for Q4 because as you know there are a certain number of uncertainties. It is clear that when we upgraded our guidance up 6%-8% even in that there is some element of cautiousness because when we see the trends today and luckily for Sulzer but it's not luck it's because our positioning and because how we position the company in the past years we have been able to grasp and capture these opportunities.
You know also that some of these large projects that can make a difference, you know, knowing that if we book the project in November or in December or in January, when you have projects which have a lifetime of three years or sometimes more, the decision-making process can be slowed down for whatever reason. We are not always mastering the decision on this large project. That was we were quite cautious in our approach, but good surprises are not excluded, if I can say so.
Okay, good. Thank you. Maybe on two small financial issues. Can you give an indication on the free cash flow that you might expect for 2022? As I remember properly, in H1 you were saying that, due to working capital, it should sort of turn around and then deliver good cash flow in second half of the year. Any changes there, and if it can be precise enough for them.
You've seen that we are again increasing the order intake 6%-8% versus last year when our sales expect to remain stable. Meaning that having a backlog of CHF 2 billion, we will have to finance this backlog. Again, the pressure that we had at the end of H1 will remain at the end of H2. The free cash generation is today the point of attention for us, and it's absolute priority to generate this free cash. We had to finance this growth despite the fact that we received some advance payment from the customer. We have to pre-purchase some of the components then or fabricate it, or motors, casting, whatever. This is our point of attention for this year.
Thomas Zickler, CFO, is close to me. Maybe you want to say another word on that, Thomas.
Yes, Frédéric, I just a couple of words from my side. Since we are in this call only updating on the order situation, it's difficult for me as the CFO to really give you more insights on our cash flow or free cash flow. I think what I can say in general, Sulzer has the same situation as most of the other industrial corporates in these days. We have the problem with the supply chain. We are missing in the process some components. What I want to say is, we also have a higher net working capital compared to the prior years.
The conclusion then you can draw by yourself that yes, this year the cash flow situation will not get to the same levels as we had it last year.
Okay. Now without willing to open a Pandora's box, in the first half, you had a negative cash flow from working capital. I understand what you all just said, but this is still qualitative, so you're not pointing for sake of trimming it down a little bit to another negative H2 in working capital terms. Can we-
Yeah.
still expect some positive cash flow from working capital in H2?
Yes. This is what I can confirm to you. Yes. Do not get too much worried about this. I just said that our cash flow is getting lower than last year, but still in the positive territory.
Right. Okay. Thank you very much. My last question would be on the dividend. It has been now, you know, if I strip out the CHF 0.50 from medmix, basically flat for the last 3- 4 years. Do you think there is upside?
It's a bit too early to answer the dividend. W e are just in October at present time, so depending on the yearly results we will decide on the dividend policy and the board will decide at that time. But it's too early to comment on this question.
All right. Thank you.
The next question comes from Dominik Feldkessel, NZZ. Please go ahead.
Yeah, thanks.
We lost connection with the questioner. We will take the next question. It is from Mr. Christian Arnold from Stifel. Please go ahead.
Good morning, gentlemen. A question from my side in terms of your order backlog on record levels that is close to CHF 2 billion. Can you comment on the profitability on this backlog? Do we have to fear any mismatch of costs and selling prices, thinking that some orders will only become sales in 2024? Thank you.
On this, I can give you a very strong level of confidence on the quality of this backlog. When we look at what we disclose, the full account year end. The margin on order intake that we have had so far is at the same level as last year. This means that so far we have been able to pass on to our customers all the cost increases we have received, be it labor and energy, or mitigate all these costs. That's why we are very proud at Sulzer to be very cautious in our approach. We are not growing for the sake of growing. Being president of Flow or CEO, I was always very clear that when we grow, we want to grow in a profitable manner.
You will never or you never heard me talking about growth, but always about profitable growth. When you look at the backlog today, close to CHF 2 billion, the quality of the backlog is very high. The second indicator, as I mentioned in the past, I always look at two indicators. I look at the margin on order intake, and then the margin when we sell, so when we ship. You will see, and you have seen that at the end of H1, and you will see at the end of H2 that there is no discrepancy between the margin when we book an order or project and when we sell and when we deliver this project six months, 12 months or even 18 months ago. We have a clear policy in terms of aging our cost or managing our cost.
That's why this backlog is of very high quality and the confidence for 2023 is very high that we are going to deliver according to the plan and according to what is in our books at present time. Okay. The plan or midterm target is 10%-11% operating EBITDA. That remains intact, right? Yes. A year ago, we said we'll be close to 10% for this year in operational profitability. I've been in the company almost seven years now, navigated in so many crises, and we have always year-on-year improved the operating profitability. Since 2016, every year we have increased the operational profitability. This year, again, we confirm that we'll be close to 10%.
I cannot say exactly how much, and Thomas will confirm in few months. For sure it will be again an increase compared to last year. The midterm target 10-11 is clearly within reach for Sulzer in the next 2-3 years midterm. Step by step we are moving close to the 10% and normally we will exceed the 10% bar.
Very clear. Thank you very much, and wish you all the best for your professional and personal future. Thank you very much. Thank you.
As a reminder, if you wish to register for a question, please press star and one. The next question comes from Dominik Feldkessel from NZZ. Please go ahead.
Yes, I'm sorry I got disconnected before. Could you hear me still with my questions? Not at all. Could you please repeat again? Not at all. No. Okay. I'll repeat it. I'm really sorry about that. Sorry. My question was about the sales guidance. Just to if you could clarify that for me. I mean, you say now that there will be some stable, or, it will be stable at the organic growth, there. And does that now include the impact from Russia or does it still exclude it? That would be my first question. Then my second question would be really about if you could elaborate a bit again on the exit from Russia and Poland. I mean, what has happened now so far?
Where do you stand there? I was also wondering, I mean, on our front page in Yeah. Okay. Thank you, Dominik, for your question. Clearly, we decided not to talk about the various impact, including Russia not, and so on, like we did in July. If you remember in July, we said we are up 2%-4% excluding the impact of Russia. Here when we say stable it includes the impact of Russia because it includes everything, in fact. It includes the impact of Russia, it includes the slowdown or the closing in in China, as I just explained a few days ago. It also includes the fact that some components are missing and we don't get the components as expected from our sub-supplier.
It includes everything. When you put everything we expect that will be stable compared to last year. That's the first point. Regarding the status of Russia and Poland exit the board decided to exit the Russian market in June. Since that time we have engaged a process of negotiation with various stakeholders third-party management as well, who have some interest to take over. The discussions are ongoing now, and because we are under confidentiality, I cannot elaborate more. The aim, of course, is to try to close a deal as soon as possible, but it's a bit complex environment as you can imagine, but negotiations are ongoing. Regarding Poland, situation is very simple. We have terminated all the employees in Poland.
Our entities are completely inactive at present time. We just keep three or four people for the closing, or maybe five people exactly for the closing of our entities. So far, we have transferred all the activities which were done in Poland for the service division to other entities in Europe, in the Netherlands or in other places. For the market, we are now out of the market from our Polish entities. So far, there is no activity for us in Poland.
Okay. Can I ask a follow-up question there, Poland? So how many people then have left the company in Poland? And I mean,
How hurtful is that for you? I mean, obviously, Poland is a booming industrial country, lots of new plants there, and you have to leave it. You have had to leave it right now.
Well, the
That must be quite. I mean, what's the impact of that?
The impact was disclosed in June, but in terms of number of people who left, we are above 200 people. Some of them moved to other entities. We offered also some positions within the group in Europe. We offered some of our colleagues to work in Germany, in the Netherlands, in other places as well. From the total number of people at that time, it was more than 200 people for Sulzer only which were impacted by this decision.
Ladies and gentlemen, that was the last question. I would now like to turn the conference back over to the management for any closing remarks.
Yes. If no other question, once again, thanks a lot for for your questions today, your support but also your continued interest at Sulzer. I'm looking back at the last seven great years I spent in this company. What was an amazing journey when I joined in Switzerland and Sulzer almost seven years ago. I'm sure and convinced that I leave the company, which is stronger than ever before. It's very well set to continue on its growth path. With you external stakeholder, it has been always a pleasure to pleasure to work with you, can be from the journalists, but also for the banks, investors, advisors. I'm sure that we will see each other again in one of the events in the future, in Switzerland or anywhere else.
As a French living in Zurich, I can tell you my intention is to stay here in Zurich and keep on living on the shore of the lake. Thank you very much. Thanks for your attention and, yeah, we'll talk to you soon. Bye-bye.
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