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