Ladies and gentlemen, good morning and welcome to Sulzer's annual results presentation here in the Park Hyatt in Zurich. This conference call is also being webcast. The link to the webcast can be found on our website. A replay will be available on our website shortly after the end of this event. As always, I would like to draw your attention to our safe harbor statement, which is shown in our presentation handouts on slide number two.
Please note that this statement also applies to any verbal statements in the webcast and on the call. The participants here in the room have received a printed version of today's press release, the presentation, and a memory stick with a digital version of our annual report. All these documents are also available on our homepage. Please note that our annual report is online only, as last year.
For today's agenda, we will have the presentation, followed by questions. Thereafter, aperitif will be served in the foyer. For media interviews, Greg and Jill will be available after the Q&A. For these interviews, we have a separate room just behind this room here. May I ask journalists to address their requests to Rainer Weihofen, so that he can coordinate. That's enough from my side. The annual results presentation will be held by our CEO, Grégoire Poux-Guillaume, and our CFO, Jill Lee. After the presentation, we will open the line on the floor for questions. Greg, your part.
All right. Thanks, Christoph. Hello, everybody. It's a pleasure to be with you today. Thank you for taking the time to be with us. I'll address this once and for all because I get questions from everybody. This is a very un-CEO-like injury because it essentially tells you I ski too much. I picked the color myself, yes. For those of you who are following online, I'm sponsored by the Schulthess Klinik in Zurich, to which I send my best wishes. But everything is fine, and we have, we think, solid results to present to you today. With no further ado, I'll get into it. It's been a busy year. Lots of things happening and some good results that we've achieved and that we'd like to share with you.
Actually, I should say, we have today not only Jill Lee, our CFO, but we also have Armand Sohet, our Head of HR, who's in the room over there, if you guys want to catch up with him at the break afterwards. This year was, as I said, a busy year, 2018. A strong year in all operational metrics. We delivered what we said we would, and we showed some pretty healthy growth.
All right. Okay, everybody awake? Yes. All right. We'll close that door. We showed some pretty healthy growth, and that bodes well for the future for Sulzer. Sanctions resolved in three days. The free float rebuilt to 51%. No impacts going forward. We've performed really well. Actually, one of the areas of the world where we've performed best in 2018 was the U.S. We had some nice stories along the way.
I mentioned at the half year that the Sulzer pumps were the dewatering pumps that were used in one of the most heartwarming stories of the year, the Wild Boars football team in Thailand. All those blue pumps that you saw on the news coverage, these were all Sulzer. 5 million shares placed into the market, CHF 860 million of bonds into the markets at pretty competitive rates, and it shows you that there continues to be an appetite for Sulzer instruments. Largest oil and gas contract won since the downturn, a $42 million pipeline pump contract in the U.S. connecting the Permian Basin to the coast in Q3.
We won the Gold Award at the Digital Economy Award for our pumps' advanced analytics platform, showing that despite the fact that I try to break CEO form by not using Internet of Things and Industry 4.0 every two sentences, we are still doing things that are measurable, that our customers are utilizing, and that we get recognized for. And finally, a nice environmental breakthrough, a steel and oil project where we are working with a steel company to use the magnetite that comes out of the steel-making process to make biofuels. A lot of interesting things happening this year. Let's get into the results. Orders up 12.5%, organically 8.4%. Sales up almost 12%, 11.9%, organically 7.8%. The opEBITA margin at 9.5%, up 110 basis points versus the 8.4% of last year. SFP savings of CHF 230 million to date.
We beat our target again this year, and as you know, we have another CHF 10 million to go in 2019. That will take us to CHF 240 million. Doesn't mean that we'll stop managing our cost base afterwards, but we'll stop reporting it as a standalone program. Financing mix, as I said, we issued four bonds between July and October, dual tranche with staggered maturities, and we're fully refinanced.
Essentially, Sulzer is in good shape with a strong balance sheet and fully refinanced coming out of 2018. We made a few acquisitions, JWC, in the U.S. JWC is a business we bought to strengthen our wastewater business. It's a grinder, screen, and crusher business, the stuff that you put up front of the pumps. It's a very well-recognized product range that's market-leading. And that takes our wastewater business to essentially number two in the market.
It might be surprising for you guys, but if you look at our Pumps Equipment business, the size of the water business is pretty much as big as the size of the oil and gas business. I think water is a bit over CHF 400 million, and oil and gas is about CHF 460 million at this point. So for all of you who have this image of Sulzer as the oil and gas pump company, our water business is just as big.
Medmix was a small acquisition. It's pharma applicators. It's bone repairs and tissue repairs for our applicator systems division. We've made no secret of the fact that we want to build a fourth leg to our applicator systems division in pharma, and it's a start. Our pharma leg is now about CHF 10 million of revenue. It's small, but we'll continue to add to it.
Brithinee is a small acquisition, a service center for the Californian markets. It gives us access to the service market for wind farms, which we think we've got some interesting things to bring to the market, and these guys had a good presence in an area that was of interest to us. Free cash flow, CHF 174 million, 37% up. I should really read my notes once in a while. Net debt to EBITDA below one turn. It's actually 0.7 if you count the money we still owe to Renova as permanent capital, and if you don't count it as permanent capital, it's 0.13, I think. It's later in the presentation. As you know, we continue to owe the dividend to Renova, but we don't pay it. We keep the money. We don't pay interest on it. It's a payable.
We don't count it as debt, but if you guys count it as debt, then you'll see later in the presentation, money held back to date between the dividend and the remaining consideration on the shares that we bought from them is, I think, CHF 185 million. You'll see that later in the presentation. Okay. Let's go into the divisions. Pumps Equipment. Pumps Equipment benefited from a rebound in the oil and gas markets. Oil and gas orders were up 39% with upstream almost doubling. The oil and gas market was very active. You may remember that downstream started rebounding in early 2017, and upstream started rebounding in early 2018. In 2018, essentially, the market was firing on all cylinders and our order intake was 39% up year-on-year. Downstream was also up.
Midstream, as I said, we received the largest order since the downturn in the U.S., a pipeline connection from the Permian Basin to the Gulf Coast. We've been able to be more selective on orders and essentially manage our gross margin in energy. Energy for us is power and oil and gas in pumps. To drive that up progressively, there's no pricing uplift at this point in the market to speak of. There are areas where we can price up a little bit, I think what you'll have heard from most of the market participants in the oil patch is that the market is up, but the prices haven't gone up yet. They will at one point, but they certainly didn't in 2018.
Because there's more opportunities, we got the chance to cherry-pick to a certain extent, that allowed us to bypass some of the lower margin orders and to focus on some of the higher margin stuff that was available. Driving up the margin of that business is not as much the pricing uplift at this point. It's more the cherry-picking. The pricing uplift will arrive hopefully sometime in 2019. Organic sales growth was driven by water and oil and gas. The water business was also quite good. The higher volumes, in combination with lower cost base, had significant impact on the profitability of this business. We went from being slightly negative to CHF 40 million of EBITDA, 3.1% opEBITA.
It's heading in the right direction, and it should continue as, I guess, the second engine of the rocket clicks in, which is once again pricing uplift, which should happen on top of the volume rebound sooner or later. We strengthened our water business. I mentioned JWC. The pie chart here is we presented it a little bit differently from previous times. You saw that what we did is we separated mid and downstream and upstream. It's not the same volatility, and we got a lot of questions on that, so we thought, why not break it out? What you see on this doughnut is actually in PE, our largest business today is water. It's about 30% of PE. Then mid and downstream is 22%, upstream is 11%. It's increasingly a diversified market exposure in PE.
That's what I have to say at this point on PE. Let's move on to RES, Rotating Equipment Services. Rotating Equipment Services, we had a strong momentum in pump services. As you see from the donut on the right, there's really three businesses in here. There's the pump service business, which is 56% of RES, and pump services mostly are pumps. We also do third-party pumps, but it's mostly an OEM business.
The other two businesses, turbo and electromechanical, are independent service providers. We service other people's equipment. Pump services are very active. It's repairs and spare parts for our pumps and other people's pumps. Electromechanical was also very active. Pump services was driven in part by the oil and gas market rebound. I mentioned that the power market continues to be difficult. You see, overall power is about 12% of Sulzer.
There's two places where we have power exposure. There's Pumps Equipment, where we do about CHF 100 million of pumps for the power market every year. There's Rotating Equipment Services, where a lot of the turbo services business is power, because it's a lot of gas turbine service. There's also compressors and steam turbines, but it's a lot of gas turbine service. Orders for us in the power market in RES were down 9% on the year. 9% down is not a good number. If you compare that with the other market participants, if you follow GE or Siemens, these guys had drops that were much steeper. What it highlights is that we have a fairly resilient business model with joint ventures where some of the volume is captive.
9% down, but also we had a high comparative base in 2018 because you may remember that we booked a large order in turbo services in the power markets in Q3 of 2017 for CHF 32 million. The combination of a market that's a bit difficult in power and a high baseline in 2017 is the 9% down for the power markets once again. Sales increased along the lines of the order intake and opEBITA was slightly up.
The margins were slightly down. The main driver of that was the competitive pricing environments in gas turbine services. We bought this small service business in California, CHF 10 million of sales, small impact. The remainder of the acquisition effect, if you compare adjusted to organic, is the tail end of the Rotec acquisition that we made in June 2017. Overall, RES almost 6% up organically. A good year for us.
Chemtech. Chemtech had a very strong year. Chemtech is up 20% organically, as you see, and it's a 20% organic growth in a year where we readjusted downwards the tower field services business in Chemtech. I'll explain that in a minute. That tells you that the downstream and CPI markets were very healthy in 2018, and we see good continuing trends in these markets in 2019. As I said, we're 20% up despite the fact that we shrunk the tower field services business by around 10% in 2018, and we did that on purpose. As you may recall, in 2016, we discontinued what we call the extended scope business, which was part of TFS. We took an exceptional non-operational charge linked to that business wind down in 2018.
There's a separate slide on that where we highlight two offsetting one-offs, one positive, one negative. I'll come back to that in a minute. The weight of the separation technology business in Chemtech went from 76% to 82%. Today, more than 80% of Chemtech is separation technology, which is a products business.
This business was growing by almost 30% in 2018. Part of that was the return of larger projects, which had been absent in the market in the years before. Operational EBITDA has increased disproportionately due to higher volumes, improved productivity, and a favorable mix. Good momentum overall for Chemtech. Applicator Systems. Applicator Systems grew 4.2% on the year in orders and 6.3% on sales. That's adjusted. If I look at organic, the number is pretty much flat for order intake in 2018 versus 2017. That's not what we sold to you guys.
We told you these are markets that are GDP plus, essentially 3% growth a year, and we said we grow at something like twice the market rate on average. Actually, that's what we did in if you look at the segments, it's beauty, adhesives, and dental. In adhesives and dental, on the year, we grew at 5% organic.
We shrunk by 5% in beauty over that same period, and it's not because there's anything wrong with the beauty market. It's something that we've explained to you already at the half year. It's because we had a single product, single customer exposure. We try to fragment our product exposure because a lot of these products are sold to. It's Valentine's Day. They're sold to a very analytical customer base that is not emotional and is quite stable, but still there's an element of fashion.
A mascara, it's not all science. You have to click with the product. We manufacture these applicators, but sometimes the products take off and sometimes they don't. It turns out that we had a customer where we allowed ourselves to have really large exposure to that customer because we were single-sourced.
This was a good customer of ours. The volume grew from small volume to a pretty large volume. Then in 2018, at the end of the first quarter, they decided to pull the product from market and to go with a second generation that they'll start manufacturing with us in 2019. That created a production hole for us, and it's really hard to turn these things around in a few months, because you have to acquire additional products and you have to set up the manufacturing, and these things don't come to market overnight.
We had a production gap linked to that customer. We were able to partially make that up, but not fully, hence the 5% down in beauty. There's nothing wrong with the beauty market overall. Once again, it's a case of an exposure to a customer that we probably allowed to get too large. We don't have other large customers with single products like that in our beauty portfolio. It's one of these things where it was very successful for a while and then the customer pulled the product. Overall, as I said, dental and adhesives 5% up on the year. The opEBITA and the margin for APS increased in 2018 due to strong dental volumes. Dental is higher margin, so it's a favorable mix for us. As you see, we went from 20.5% profitability in 2017 to 21.1% in 2018.
We acquired Medmix, as I said, in August 2018. Pharma applicators, it's a beginning for us. It's a start to that pharma segment, which it says 1% here because it was only not even half a year, but on a full year basis, it's about a CHF 10 million business overall, if we take what we have plus what we bought from Medmix. Once again, it's a start. It's a start, and we'll continue to add to that. I mentioned these offsetting one-offs. Let me go to that right away. What you see here is two offsetting one-offs and a future upside. Net effect is minus CHF 2 million for the year of the two offsetting one-offs. Then there's an upside for the future, which is going to happen sometime, probably over something like a two-year period.
We don't know how much of it, but I'll explain that in a minute. Tower field services, I've mentioned that in the past. We discontinued this extended scope business, which was supposed to take us beyond the tower. Beyond the tower was this idea that the tower field service business was the tower specialist.
We replaced the tower internals, and there's a moment in our history where we thought, "Well, why don't we address things around the tower?" It turned out not to be a good idea because we didn't have a whole lot of added value beyond the tower, and a lot of the things that were available beyond the tower, things like heat exchangers, these things were actually EPC contracts. I'm not a fan of EPC contracts. I've run EPC businesses, and it's a very difficult way to make a living.
We decided in 2016 that, not long after I arrived, that we were going to de-emphasize this business, and actually, we decided to discontinue it a bit later. As we discontinued it, we had two remaining projects in the backlog. The two projects were with the same customer in the Middle East. A small one. Sum of the two projects, about CHF 50 million. A small one around CHF 10 million and a big one around CHF 40 million. The small one, we've renegotiated with the customer. We've renegotiated the price, we've renegotiated the scope. We're in good shape on this one. The large one, we were in execution, and we had very significant disputes with the customer in terms of the timing and the scope.
Timing, because they've made a bunch of changes that impacted the execution of the project, and these were people-intensive projects, lots of people on site, and essentially, our cost went up because of that. Scope, because there were a lot of areas in which we had a very different contractual understanding from the customers.
At the end of the day, these projects, you have to execute them and you have to discuss afterwards, because that's the way these contracts are built. It's part of the reason why I don't like them, by the way. That's what we did. We executed the project. We handed over the plant to the customer sometime around the summer in 2018. It's handed over. The customer is running the plant. The plant is running well. We had these additional costs that we are in commercial disputes with the customer.
Commercial dispute not helped by the fact that we're discontinuing the business. What we essentially ended up doing in 2018 is we said, "We'll take all the cost." CHF 30.1 million, all the cost to complete, so that we get those out of the way. The commercial dispute we'll treat as an upside. These were claims that we submitted for CHF 36 million. I think we submitted most of that. There's probably the tail end of that that's being submitted as we speak. This is going to be a lively commercial dispute with that customer for the next two years, probably. That's the way that market works.
It's unpleasant, it's painful, but because we had this offsetting one-off in 2018 of roughly CHF 28.5 million, we decided that it was the right time to take all the cost and to leave the upside for the end of that commercial dispute resolution. The upside that I show here, the 28.5%, is an equity instrument that we were carrying at cost. It's a legacy policy that we had at Sulzer in the days when we had a lot of manufacturing around Winterthur. We had affordable housing for our blue-collar employees. We had that for a long time, and as operating assets essentially. Over time, as we decreased manufacturing in Switzerland, this became something that we were carrying on our balance sheet at cost. We exited that in 2018.
Most of the disposal price was an upside because we were carrying at a cost and sold it for the consideration that you see here. This offsets the cost of completes that we were able to book in 2018 while having an effect which is close to zero. As I said, once again, there'll be upside somewhere in the future.
I have no clue how much it's going to be. I have no clue how long it's going to take. It's a difficult part of the world, and it's a lively legal process, but that's our life. What else should I add on this? That's pretty much what I have. Let's see. Yeah. Okay. Let's go to SFP now. SFP, ahead of plan, ahead of target, CHF 230 million to date at the end of 2018, CHF 45 million achieved in 2018. I had a question earlier this morning.
Somebody said, "Oh, you came in lower than what we expected in terms of EBIT." We have CHF 10 million more of SFP cost in 2018, that we had originally planned. The delta is CHF 10 million of SFP cost, and the rest is acquisition-related costs for JWC and the tail end of Ensival Moret from the year before. CHF 10 million more in cost in 2018, also CHF 10 million more of savings, and another CHF 10 million to go in 2019 before we stop reporting SFP.
As I said, we'll continue adjusting our cost base. We continue making acquisitions. As we make acquisitions, we acquire factories. Sometimes we have opportunity to rationalize by combining things, we'll stop reporting it as an ad hoc program. We'll continue to be transparent about restructuring, we won't report it as part of SFP from the end of 2019 onwards.
You saw from the 110 basis point uplift in our EBITA that all the hard work we did in SFP is making its way to the bottom line, and it will continue to be that way as we finish this program. Slide I dislike, but I present anyway because the one time I didn't present it, I was asked, "Why don't you have this slide anymore?" The famous Bundesliga table that we introduced some years ago that creates all sorts of issues because we're comparing apples and pears. Still, we made our bed, now we have to lie in it. I'll comment it again this year. As you see here, Sulzer is continuing to migrate towards the top of the table.
When you look at 2014, 9.4%, 2018, 9.5%, it doesn't sound like a great uplift, you know what happened in the middle in the markets, you see that we reacted better than most of our competitors. The light blue stuff that you see on those bars is, these are the companies that have mostly water exposure, not oil and gas. This essentially in terms of operating profitability, there's three of our peers that performed better than we did in 2018. Two of them are almost exclusively water-related, and one of them is really no longer a peer of ours because they sold a business that was closest to ours. I guess we've made this anonymous, so it says Company A. Probably starts with W and ends with an R, right? It has EI in the middle.
What it tells you is, look, this is not a perfect comparison. I don't want to make it too scientific, but it does show that compared to people that have similar exposure to ours, we are trending better, and we've probably handled our cost adjustment more decisively and effectively. Management team. I have this up because we had two changes in the year.
The first change is Jill. As you know, Jill's not new to Sulzer. Jill was a board member for six years, and she was the Chair of Audit Committee. It tells you that we have full transparency because our Chair of the Audit Committee becomes our CFO. She knows everything, she's done a great job. She joined on the 4th of April, and the sanctions, remember, hit on the 6th of April. Jill had a very lively start to her tenure.
She performed admirably, we're very happy to have her on board. She'll present the financials in a minute. The other change that we have is that Frédéric Lalanne, who used to be our Chief Commercial and Marketing Officer, became the head of our Pumps business at the end of 2018, replacing Michael Streicher.
Michael remains in the organization. He actually reports to Frédéric. He runs our water business. We felt that Frédéric's profile was suited to what we need to do going forward, Frédéric has a very strong track record, both on the commercial side, but also on the operational side. He ran larger businesses than Pumps Equipment in General Electric and in other businesses in the past. The rest of our team is stable, has been on board for a few years now, and it's a very solid team that I'm honored to lead.
Our board has also been very stable. We had three changes in 2018. One of them was Jill going from our board to our executive team. The other one was Thomas Glanzmann, who'd been a board member for six years, who didn't stand for re-election. The third one was Axel Heitmann, who was a Renova representative who dropped off during the summer as we worked with Renova to bring their board representation in line with their influence today.
Essentially a minority influence, you see that they have two out of the seven board members. It's a sign that Sulzer is no longer a company that has an overly influential, significant shareholder. As you guys all know, Renova is no longer allowed to buy, they're no longer allowed to sell, and they have limited board representation. We're happy to have them as a shareholder.
They've been a very supportive shareholder throughout, and they continue to be a very supportive shareholder, but they're a passive supportive shareholder. Okay. On those words, I hand over to Jill, who's going to walk you through the numbers, and I'll come back at the end to wrap this up. Jill?
Thank you. Thank you, Greg. Ladies and gentlemen, also a warm welcome from my side. Very happy to meet you in my new role. Before I forget, Happy Valentine's Day too. Very happy that it's organized on this special day. Let me run you through the next couple of slides, giving you some insights into our financials. Greg already commented on the order intake sales and opEBITDA, so let me comment the other lines.
Order intake gross margin, as you can see here, decreased to 33.3%, mainly as a result of the rebound of the oil and gas pumps new equipment, resulting in actually a negative mix effect. Now, this business inherently carries lower margins, but it is the source of future service and spares revenue. It's a business that we like too, as we have that later, the revenues later.
Order backlog was up by 4.6%, and would have been even higher excluding the negative currency effect. EBIT was 34.5%, up to CHF 184 million, resulting in an EBIT margin or return on sales of 5.4%, up from 4.5% in 2017. Core net income, which is the net income including tax-adjusted non-operational items, increased by 25%, about the same magnitude than operational EBITDA. When looking at EPS, you have to be careful because this is calculated on the average shares outstanding during the year. For almost half a year, we actually have the 5 million treasury shares, and therefore the average of the outstanding shares would have been reduced due to the effect. Core EPS therefore rose disproportionately by 37%.
With the growth in volumes, also the headcount, as you can see here, grew by 5.7%, and this is primarily also driven by acquisitions. Let me go to the next slide. When looking at our fourth quarter, we are happy to report that the organic growth, order growth of 12.2% too. With the exception of APS, all divisions contributed to growth. Even in APS, there's actually nothing to worry about because the orders can shift from one month to the next. When we are looking at the APS sales, in fact, Q4 has increased. Looking to the market in Q4, what we see is as well very good order intake in oil and gas despite the decline in oil price. All in all, we had a good Q4.
We had quite significant impact as well from foreign exchange, which shaved off about CHF 31 million or 4%. The acquired businesses JWC, Medmix, Brithinee, contributed a combined CHF 22 million to our Q4 order intake that's shown here in bullet four. Let me give you some other insights on the next slide regarding our opEBITDA.
As you can see here, for three years in a row, we've been reporting on market headwinds. For 2018, the market impact is actually neutral. You can see that meanwhile, the positive contribution from the higher volumes are offset by the negative impacts from margins from mix and from the cost of growth that we have to put in offset. Therefore the headwinds effect, in fact, is meanwhile neutralized. And you see the entire flow-through of the CHF 45 million, 0.8 percentage points dropping to our bottom line.
I probably do not have to explain volume. Margin is negative as we have taken orders at lower prices in 2017, that became sales as we worked down our backlog, in 2018, primarily in Pumps Equipment. Mix should not also be a surprise as we sell once more, again, more of the new equipment business.
The other cost relates to the other operating costs that have increased with our higher volumes. What does it mean looking into 2019? Probably you're trying to do your models here. It's going to be quite reasonable for you to assume that volumes will continue to impact positively. Margins, at least, on a neutral level. Mix and other costs are likely to be negative impact once more. As Greg has mentioned before, we expect additional savings from our SFP in the tune of about CHF 10 million.
With that, you now have the building blocks that you can use for your model on our expectations for 2019. Let's take a look at the bridge then the flow-through from opEBITA to EBIT. In 2018, amortizations have been higher, CHF 15 million higher than in 2017, mainly due to the acquisitions of JWC, Medmix, and Brithinee. Restructuring and impairment of assets were lower compared to the previous year, but the other non-operational costs were higher. As Greg mentioned earlier, we saw an unquoted equity instrument related to affordable housing that we have historically provided to our employees. From this we made a profit of CHF 28.5 million relative to the low cost that we have in our books, which helped to neutralize the cost of the extended scope business.
The other operational costs are primarily the SFP-related cost of CHF 28.5 million, acquisition-related expense of close to CHF 9 million, and we have around CHF 6.5 million that's associated with the sanctions. Earlier on, we had told you that it would be within an envelope of CHF 10 million rather in the mid-range, and this is where we end now. Total SFP cost in 2018 therefore has been in total CHF 45 million.
You can see in the headline here. Compared to the year before, EBIT in 2018 increased therefore by 34.5% to CHF 184 million, resulting in an EBIT margin or return on sales of 5.4%. Let's take a look at the extension now from EBIT to net income. EBIT grew by 34.5% to CHF 184 million, as I mentioned earlier. Our financial results was higher, CHF 8 million higher in 2018 on the back of a higher level of debt of borrowings.
The effective tax rate slightly lower, 29.8% versus 30.5% in 2017. The normalized tax rate was 23.1% versus 23.4% in 2017. The difference between the effective and the normalized rate is primarily due to the fact that not all the SFP costs are tax-deductible in the respective geographies that we have.
Net income was CHF 116 million, an increase of 33.6% compared to last year. Core net income, which is the net income as explained, excluding the tax-adjusted effects of non-operational items, was CHF 223 million, and that means 6.6% of sales, 25% higher than in 2017. That means that the core net income to our shareholders was CHF 113 million or 35.8% higher than a year before. Cash. How does it look on the free cash flow? If you look to our mid-year report, in 2018 presentation, we then reported a buildup of our net working capital.
We had explained at the time that we expect this to be reversed somewhat in the second half. Indeed, this is the case. We have a built up in H1 and H2, we had a reversal. At the end, our net working capital remained unchanged despite a significant increase in growth. Whereas our level of depreciation has remained unchanged from the previous year.
The amortizations have gone up due to our acquisitions. CapEx was higher last year as we have invested in a new test bed for pumps in India, which we have shared earlier, and also opened a factory for APS adhesive business in Poland. All in all, our free cash flow actually grew by CHF 47 million higher compared to previous year. The CHF 174 million now represents about 5.1% of sales, up from 4.2% in 2017. Balance sheet.
This is somewhat unusual, this balance sheet, in the sense that we have some special items. We're fully transparent here. You see we have a total of CHF 185 million. Just now you heard Greg talk about that.
That is CHF 185 million owed to Renova, but not due yet. We have split that out so you can make your own calculation. It is not debt, but rather payable. That's because it doesn't bear interest, there's no maturity tenored to that, and both would be necessary prerequisite or conditions for setting it as debt. Nonetheless, we show this transparently for you. Part of the CHF 185 million is the 2018 dividend of CHF 76 million that we have not paid out, and the other CHF 109 million relates to the share repurchase, which we now would have to repay to Renova.
Again, once more, there's no maturity date on this, and it's non-interest bearing. Depending on how you look at it, you can see here that our net debt to EBITA, with that included, it would be 0.7 times. When we were to take that separately, our net debt would be slightly higher to CHF 424 million, and as a result of which, it would be 1.3 times, but both of which are in very healthy zones. If we look to what we have done during the year, we have issued two dual tranche bond, and the details of the bonds are respectively here. That allows us more financial flexibility. It gives us a better maturity profile all in all. It basically allows us to have a very flexible balance sheet at this point in time to support our growth.
On the dividend side, you can see that with the good free cash flow, our board of directors will propose an unchanged dividend of CHF 3.50 per share. If you have bought this on 31st December, taking that as a reference, it would translate to 4.5% in terms of dividend yield. When I look to yesterday's close of CHF 91.15 in terms of our share price, that would still be a yield of 3.84%.
Important to mention once more, Renova's dividend, part of the dividend, which is about CHF 58 million in this year, when we would have the CHF 3.50, that's their share for the 48.8% stake will not be paid out like before. We will once more, for the portion that is coming out from this year, be reflecting it as a payable, just like the CHF 76 million that I spoke about.
With that, I think I would have covered my section, and I would like to pass now to Greg on the outlook.
Thanks, Jill.
Thank you.
Jill will be back for questions. The both of us will take questions. I've got three slides, I think. Outlook. All our markets are going up except the power market, which is 12% of Sulzer, but everything else is showing positive trends. It's not a very popular view these days, because whenever I say that we've got good market momentum, and our early indicators are unperturbed and showing that momentum of 2018 is continuing in 2019, I get a lot of questions. Yes, but what about this China slowdown? What about the trade wars? What about different impacts? The reality is this is what we're seeing today. The leading indicators that we have are things like non-binding offers, inquiries from customers.
We track that to see whether these inquiries that will lead to orders maybe six months down the road or one year down the road, whether these continue to hold up. They've been holding up. We don't see a slowdown at this point. In oil and gas, unless the world goes into recession and demand starts going down, I really don't see how there'd be a slowdown. As I said again, pent-up investments. Look at the big five oil companies. Three out of the five have increased their CapEx for 2019 very significantly, and the other two are roughly flat. That's what our customers are saying, that's what our early indicators are saying, and that's what the market is saying at this point. Good momentum and a pretty good balance that allows us to feel optimistic about 2019.
Once again, we stay close to our customers, we stay close to the market. We understand the world's a difficult place, and we are able to react should our businesses slow down in any area. At this point, we're not seeing it. Guidance, 2%-5% for order intake, 3%-5% for sales, around 10% profitability on an opEBITA basis for 2019. The 2%-5% in terms of order intake, if you remember our guidance for 2018, early in the year, I think was. What was it, Christoph? 5%-7%, and 5%-7% was all in including non-organic, and the 5%-7% translated into 3%-5% excluding acquisitions.
This is organic because there's no significant acquisition impact for 2019 because we made a significant acquisition, JWC, with about CHF 80 million of sales, but that was in January, therefore, you've got almost a full impact in 2018. The other two acquisitions, Medmix and Brithinee are small, therefore, they're negligible in terms of the delta between organic and non-organic. These numbers are pretty much organic numbers, and from an order intake perspective, it reflects the 2%-5%. I had the question before this meeting. It reflects a view on upside and downside, essentially. If the market continues as we think it will, I think we have a chance to perform well within that guidance.
It also is reflecting the fact that there could be instability down the road and that we want to make sure we come out with a range that we feel comfortable that we can execute. That's what we're showing here. The 3%-5% sales, historically, what we told you is that orders in year N are pretty much sales in year n+1 , give or take, because we have a mix of short cycle to long cycle that changes all the time. More short cycle in the last few years as we developed APS, long cycles coming back as the oil and gas rebound drives the order intake. If you take the middle of that 3%-5% guidance in sales, you'll find roughly the order intake of 2018. It's in line with what we've said historically.
The around 10% of opEBITA is we continue to feel the benefit of both the volume increase and the results of our cost takeout over the last few years. As I said, there's no significant adjustment linked to acquisitions because JWC early in the year, and the rest was small. On those words, I'll move to the summary.
Summary, successful year, at or above guidance on all our KPIs. As you know, we took our guidance for orders twice up. We took it up twice in the year 2018, despite all the external stuff that we had to cope with during the year. It tells us that the business has good momentum and is resilient. The increased SFP commitment, another CHF 10 million to go in 2019. Once again, it doesn't mean that the extent of our cost takeout in 2019 is CHF 10 million.
It means that what we report as part of SFP before we close the book on SFP is CHF 10 million. We'll continue to adjust our cost base and in a proactive manner, we just won't report it as part of SFP. We'll freeze the cost, and we'll freeze the savings, and the rest of it we'll still report, but we'll still disclose it to you guys, but we'll stop talking about SFP. All markets expected to grow in 2019 except power, which once again is 12% of our business. Volume rebound plus the competitive cost base are driving our profitability upswing. We're not factoring, at this point, a price uplift. We think it will come, but we'll talk about it when we have something that we can measure, and for the time being, it's volume and cost, essentially.
I've added a pie chart at the bottom of it as a conclusion because I've come to realize over the last three years that 80% of the questions I get are on oil and gas. I think it underpins this notion that Sulzer is a really cyclical company that's exposed to the oil and gas cycle. We are exposed to the cycle, but actually, if you break down our businesses differently, aftermarket, applicators, and water. Water is wastewater mostly, and wastewater is a GDP-type business. It's driven by population growth. I always go down the wrong path if I start commenting this. Look, wastewater is not a cyclical business. Applicators is not a cyclical business. Yeah, you can tell me, oh, beauty went down 5%, but it was a very isolated case linked to one customer.
Otherwise, these are GDP markets, and these are markets where we do better than GDP ourselves. Aftermarket is resilient. It's spare parts and service, and even in the downturn, even on the oil and gas-related part, you saw that we didn't swing much. Essentially, I've put the water aftermarket with water. This is why maybe if you look at the aftermarket number, you'll say, "Well, it's lower than what you usually say." It's because the water aftermarket is in water. If I take aftermarket applicators and water, this is two-thirds of Sulzer, the order intake, and it's more than two-thirds of the profitability. I'm trying to alter this notion that 80% of your concerns on Sulzer should be oil and gas. I really don't think that's the case.
I think the business is shaped differently today, and hopefully, this is the beginning of an explanation of that. On those efforts to hopefully slightly alter your perception, Jill and I are happy to open it up for questions and answer anything that we can answer. Thank you, Jill. Maybe just for organizational matters. We first take a couple of questions from the room, and then the guys at the call can also ask some questions. We flip forth and back. That also the guys on the call know who you are, please, whenever you ask a question, say your name and firm, please. We start here.
Thank you very much. Charlie Fehrenbach, AWP. You said last summer that you were a bit worried about the trade dispute. In the meantime, some fees and customs are introduced. In what way did this take influence onto your figures, onto your business?
Second question, also a bit politically, did you prepare any measures to face the hard Brexit? Thank you.
Jill will take the first question, the cost of tariffs, essentially. I'll take the questions on measures related to Brexit. Jill?
Well, I think, on the cost, I presume you're referring mostly to the tariffs that was imposed. We have some temporary effect, which we took, some of which we could manage by managing our supply chain, some of which to the customer, overall, it's a low single digit that we have taken in our books, the net effect.
Low single digits.
Yeah.
CHF 4.5 million?
Yeah, around CHF 4 million.
Yeah, something like that. Somewhere between four and five, so not very significant.
Yeah.
As Jill said, we were able to rejig our supply chain. Whenever we buy externally, we usually have multiple suppliers for the same thing. If we have a supplier from China and the tariff is an issue because you're bringing it to the U.S., we can shift to another supplier. If it's our factories internally that are providing products, we can also change the flows. The example I've used in the past is applicators for adhesives. We have a factory in Poland, and we have a factory in China. Historically, the Chinese factory is supplying the applicators for adhesives to the U.S. Turns out that adhesive systems are on the tariff list. What we do is we have something which is not very logical, which is that we have China supplying Europe and Europe supplying the U.S.
There's a cost, there's a logistics cost, and it's part of that CHF 4.5 million that we talked about in terms of adjusting these things. We can adapt. At this point in time, unless you have a crystal ball on geopolitics, it's about maximizing flexibility. Maybe at times you're a bit suboptimal, but at least it allows you to sort of react on your feet, essentially. Brexit, flows from Europe into the U.K., CHF 20 million a year, flows from the U.K. into Europe, CHF 30 million a year. It's not very material because if you look at what we have in the U.K., we have a large service business, which mostly is a domestic business. We have a pump factory for oil and gas pumps, which most of the oil and gas pumps don't go into continental Europe.
We have a water pump factory in Ireland, and Ireland is part of the EU. Essentially what we have in terms of measures is our factory in Wexford, historically, the trucks drive through the U.K. and go to continental Europe. The trucks will go on a ferry in Ireland and go to continental Europe directly, so we don't have to go through customs twice, probably. If there were to be something like this. These are the type of plans that we're talking about. It's really not rocket science. The scale of it is limited for Sulzer, and it's quite manageable.
Andreas Meyer, Finanz und Wirtschaft. Concerning the Pumps Equipment, the margin there is still very low at 3.1%. In two to three years, what is possible as a margin improvement?
What has to happen in the market that the margin can go up?
Okay.
What can Sulzer do to improve the margin further?
Pumps Equipment is really three businesses. It is an engineered pump business, which is oil and gas and power. It is a standard pump business, which is our water business. It is the configured business, which is our industry business. The industry business is doing very well. It is growing. It is at very competitive profitabilities if you benchmark us with anybody else. The water business is growing also, and the profitability is still increasing.
In terms of EBIT for the water business at this point, we are high single digits, but this is a business that should be double digit and will be double digit down the road as we continue growing and as we continue generating the benefits of the cost takeout we have had over the last few years. After we acquired Cardo, there was a lot of integration that we had to take care of.
Industry, I think business as usual. Water, the growth will continue, and that profitability will continue migrating up, because everything is in place for that. Then it is about the engineered pumps. The engineered pumps, the picture is a bit distorted because the engineered pumps, all the service and spares are in RES, in Rotating Equipment Services. You only have the products, the new products in PE.
The oil and gas business and the power business for these capital goods is, these are businesses where you make all the money on the aftermarket. Look at the GE and the Siemens results on their power business. They break even at best when they sell turbines, and they make the money down the road. The customers are built that way, and it is very hard to alter the view on where the value should be recognized by the customer.
Now, the margin is still going to go up and should go up still significantly because you've got essentially two things. You've got the market rebound in oil and gas, where the pricing has not gone up yet. Pricing will go up, because as people see their factories filling up, there's a moment where they change their pricing by increasing it, because they feel that they're able to take the chance of losing. You're still in a market where people felt that they had to grab whatever they could grab. Part of our guidance for 2019 is also, we're going to be selective. We're not trying to drive volume for the sake of volume in engineered pumps. We have to take the prices up, and we have to make that business healthier from that perspective.
Then the second impact is as the volume goes up, the absorption goes up, because we're not building factories. The combination of these two things will have a significant impact on the engineered pump business. What that means in terms of P, the margin in P is going to continue to go up. At this point, we're not giving guidance on margin for P down the road, but it will certainly continue to go up and things are in place in terms of the cost takeout, the way we're organized, and the commercial policies that we have in terms of being selective and using the fact that we're a market leader to try to contribute to driving the prices back up in the market that really needs it. The trend is going to be up, clearly.
By how much and how far and how long it will take, we're not guiding on at this point. Question right behind you, Vera.
Thanks. Thank you. This is Patrick Rafaisz from Vontobel. Maybe starting with the first one. In terms of markets, your comments were quite bullish. Is it fair to assume that also January was another strong month, in particular when having in mind that last year you were facing rather tough comps? Then the second question related to this, you mentioned you apply a cherry-picking strategy, so some project you are not accepting. Is there other competitors in the market out there who accept those projects still, or what is happening with those?
You're trying to get me to give you the play-by-play of where we are in January and I'll succumb. January was actually a good month. The momentum is intact. January was a good month by all metrics. Once again, this is not gloom and doom. We see the market continuing on its momentum. I had the question of are we guiding conservatively? Well, the last two years, we took our guidance up during the year. We have a tendency to recognize that there are geopolitical risks that if there was a simple view of how the market is going to perform this year, we'd all be rich. What we rely on is our early indicators. Our early indicators are good, and the momentum continues into January. No change on that. The other question, I'm sorry, was what?
The cherry picking.
The cherry picking. Cherry picking, look, these are tender markets. There's a call for tender and people submit a price. It only takes one. It's the process of having prices go up in markets that are not organized markets. Essentially, this is not a cartel, clearly, as you can see from the margins in engineered pumps. The process of that is people have to have the same read of the market over time. There are companies that still. Well, I'll say it differently. You look at our growth in 2018. Most of our competitors are not at those levels. What that probably tells you is that there are companies out there that are still probably more volume challenged than we are. We're not comfortable by any stretch of imagination in engineered pumps.
We're running one and a half shifts on most of our engineered pump factories. We're not back to the heydays, but we have enough visibility in the market that we feel that we can be selective. If you take oil and gas, we're a market leader. We're the market leader. It's essentially us and Flowserve at roughly the same level. I think over time, the market will pick up in terms of pricing because volume continues to have good momentum and people have taken capacity out over the last few years. We're playing our parts. We'll see when that happens overall.
Maybe last question for Jill on free cash flow. Last year, you opened up two factories, is it fair to assume that CapEx will be lower in 2019? With regards to net working capital, you kept it basically flattish, which was basically quite a strong performance. Any further improvements on that side in 2019? Thank you.
We don't guide on the working capital, what I can say to you is that certainly, we continue to look into how to improve our working capital as we have done in 2018, managing that we stay stable on that despite the fact that we have a higher growth. We do still have the seasonal effect, you can see that traditionally, we tend to be high on the first half in terms of working capital, then we are in the second half better. I still continue to see that kind of pattern just because it's reflecting the way we run our business. On the topic of CapEx-wise, we still have some increase for 2019, primarily because we are also expanding.
I think we talked about the Bechhofen plant that we will be doing in terms of expanding the APS capacity as well as in addressing some other new segments.
Can I take that one as the resident beauty expert?
Yeah.
Come on.
Yes, everyone.
I've tried all the applicators. We guided last year, we said we'd be up in CapEx versus our normative level because we said we're opening the factory in Poland for APS adhesives. We also had the new test bed in India for pumps. The Indian government changed the rules. You have to test within country.
We were testing outside. We had to build a test bed. The adhesives factory in Poland is up and running. All of that is good. The test bed in India, we delayed it a little bit. Therefore, we spent less in 2018, and we have the tail end of that in 2019. The Bechhofen APS beauty development that Jill talked about, I said that the market in beauty is healthy, and the market is healthy, but it's changing. It's changing in terms of customer types.
The beauty markets today, I'm trying not to feel self-conscious lecturing you guys on the beauty market. The way the beauty market works is historically, the beauty market was driven by the large companies, the L'Oréals and the Cotys and the P&Gs of this world. Because we're the market leader in Europe and the Americas, those were our traditional customers. If you look at how the beauty market is evolving today, the large incumbents are suffering in terms of growth. The growth is being captured by independents. The independents are essentially small companies that have no assets, mostly. They launch their products through viral marketing. The approach is essentially, you get Kendall Jenner to endorse a mascara applicator that looks like a snowflake for Christmas.
She communicates on that, demand picks up, suddenly you have to make a mascara applicator that looks like a snowflake. We're the guys that make these things, but these customers are very different. Our traditional customers, they spec, they iterate, they have strong views on a lot of the industrial aspects and a longer lead time. The independent customers, they have really short lead times.
It's about viral marketing. The market today is not the market tomorrow. They have no assets, so what they want is our traditional customers tell us, "Make the applicator, and we'll fill it, we'll put it in boxes, we'll send it to Sephora." The independents, they say, "Make the applicator." The applicator is very decoration-heavy because it's viral marketing, so a lot of it is the look of the product. They say, "Fill the applicator yourself.
Get the mascara and fill it, put it in boxes, and send it directly to Sephora." For us, it's a great upselling opportunity because these customers rely a lot more on us for things that we can make money on. It forces us to reconfigure our business essentially so that we can make those lead times and we can incorporate these decoration-heavy products that these independent customers want. We're spending somewhere between CHF 20 million and CHF 30 million to double the size of our plant in Bechhofen next year and to in-house decoration capabilities and to shorten lead times by about half. We think that's going to make us very competitive on those customers going forward, we think these types of customers will continue to capture a disproportionate amount of the market growth in beauty.
It's really about adapting the business for the evolution that we see in the markets. That's a CapEx that's a little bit out of the ordinary for us, that is mostly going to be incurred next year.
To your point on cash flow, in the past, you have seen in the previous years, we traditionally have about 4%-5% free cash flow as a percentage of sales, we see ourself continuing with that. Yeah.
Ernst Meier, Tages-Anzeiger. Airbus, as I've seen, is a customer of you. They announced stop producing the A380. Does this have any impact on you?
Airbus is not really a customer of ours.
As much as I've seen on your homepage right now?
On what?
On your homepage, it's written that you're producing glue.
Oh, okay. I apologize. We probably produce adhesives. I'm sure we do if you've seen it. We produce adhesives for Airbus. Our total adhesives business is like CHF 150 million, and I'm 100% sure that Airbus is not material in this. For us, some customers go up, some customers go down, some customers shift things out. I don't think Airbus is going to stop making planes. The adhesives are the same on whether it's an A380 or an A320neo or whatever. I don't think there's a specific adhesive for the A380. It's really more about them than it is about us. It's just like indirectly, one of our big customers is Apple because we make adhesives for people like Foxconn to make the iPhones. We're actually sensitive to iPhones also.
It's a mix of customers and what explained in beauty one customer with one product that had a disproportionate weight really doesn't happen overall in our APS business. No, Airbus is not an issue for us. Question behind you, Villena.
Yannick, Credit Suisse. I have a question on leverage.
You always highlight it in your slides that you have substantial headroom for acquisitions-
Yep
for dividend, sorry. Basically, you don't do that anymore. Now you're at a fairly moderate level now, and your dividend is stable, and you only do bolt-on acquisitions. What has changed, or do you have a different target now?
No, actually, it's an important question. Nothing's changed. Our bread and butter is the bolt-on, add-on, whatever you want to call them, acquisitions. Why? It's because it allows you to be really targeted. You buy something that doesn't come with a bunch of other things that you don't want. It's easy to integrate usually because it's usually single market or a single product, and the way to integrate it into your business is quite straightforward.
Mostly, the valuations are pretty good, and you see that we're a value investor, I guess, is the way I'd call it. Somewhere in the back of the presentation, there's the multiples that we paid on the businesses that we bought over the last three years, and it's mostly somewhere between single-digit EBITDA multiples, somewhere between nine and 10, and some of them lower than that.
What I've said in the past is we're open to two things. We're open to, we think there should be a market consolidation in the flow control space. We continue to think that this market needs it, and that it would create significant value to shareholders. You got to be two to tango, and it didn't happen when the market was down, and it's probably not going to happen at this point when the market is rebounding because people are focused on capturing growth. We're still open for business. We believe that scale matters in flow control because, once again, outside of combining ranges or factories, you make all the money on the aftermarket. Sulzer to operate its pumps business needs 100 service centers around the world. Most of our competitors have somewhere between 100 and 150 service centers.
You combine any of these two companies, you still have 100 service centers because that's full coverage. There's value to scale. The flow control market is still fragmented, as I said, you have to be two to tango, and at this point in the cycle, I've given up hope that anybody will want to focus on value creation from that perspective. The other thing that we're focused on is we have the means to make larger acquisitions. Actually, over the last 12 months, we've looked at larger acquisitions. We've bid. We made binding offers on two large acquisitions. When I say large, it's kind of roughly close to CHF 1 billion of enterprise value.
In both cases, we walked away because we have a view on value, if the process or if the seller runs away from that in a way that we're not comfortable with, then we'll pass. We'll continue to look at things, once again, it's not about just buying stuff for the pleasure of buying. The value creation equation has to be in place, it just hasn't been for the things that we looked at over the last 12 months. We'd still do something if the right business came along, right now, we don't have anything large like that that we're engaged on. We engaged on two such deals in 2018, actually, the tail end of one was recently. At this point, we don't have anything active in terms of large acquisitions.
Doesn't mean that it's not going to happen later in the year, it has to be the right business, it has to be the right value. Anyway, more information that you were looking for, anyway.
Okay. Is there a number, is there a factor of leverage that you would be comfortable with?
We intend to stay an investment-grade business. We've got good cash flow generation. I think we're capable of that, and the type of things that we're looking at are not in ranges that make us uncomfortable.
Thank you.
Right here, Villena, up front.
Yes. Armin Rechberger from ZKB. First question, you mentioned a big order connecting via pipeline from the Great Basin to the ocean in the south-
Yep
in North America. How big was this?
$42 million, $30 million booked in Q3, $12 million booked in Q4. Don't ask me why it was booked in two parts, it was.
Is that the right number?
Yes, correct.
All right. Okay, good.
Okay. Regarding the dividend you keep from Renova, what's the plan there? What will happen in the future, and when?
It's a complicated question. I've addressed it in the past, and I'll try to give you again my view on where this thing lies. Renova, when we were collateral damage to the sanctions applied on Renova, we essentially bought shares from them. We worked them down to below 50%, and we signed an agreement with them, blessed by OFAC, that essentially limited a certain number of their rights. One of the things that was limited by this agreement is Renova agreed that we would not pay the dividend until. The until is, if I paraphrase the wording, essentially we will pay the dividend to Renova the day Sulzer, through a legal counsel of its choice, gets a legal opinion that says that there are no secondary sanction risks to Sulzer associated to paying the dividend.
It's quite a high threshold because lawyers probably wouldn't confirm that my cast is pink. I wish the best for Renova. Viktor Vekselberg's been a very supportive investor, continues to be a very supportive investor. I really take no pleasure in what's happening to them. The reality is that we can't pay the dividend to them, as long as we don't have certainty that it doesn't expose us to anything. Which essentially, the simple way of looking at it is probably until the day he's no longer under sanctions. There, your guess is as good as mine. The U.S. political climate as it relates to Russian sanctions is probably not conducive to lifting sanctions anytime soon, at least my read of the same newspapers that you guys read.
I think that money would be on our balance sheet for a while. It doesn't carry interest. It's not sequestered. We can use it for financing. Look, the Renova guys, I should really give them credit for that. They could've made that a lot harder at the time when we were negotiating over the weekend. When we said, "Look, we can't pay the dividend," Viktor Vekselberg's reaction was keep it in-house. Don't sequester it. Use it to finance the company. If I can't have it, Sulzer might as well do something positive with it. Look, it's a good form of financing for us. We hope for Renova that we'll be able to pay to them sometime down the road, but there's no indication that it's anytime soon. Did I answer your question?
Yes. I have two more questions.
Please go ahead.
One is, you mentioned costs from sanctions-
mainly due to the fact we just spoke about.
Yeah.
Maybe about Iran.
Can you give us some figure there, how big Iran, how big the costs were there?
Iran as a business for us was, I think what we said in the past was that it was not material because order intake in 2018, we stopped taking orders in Iran early in the year. What did we say for 2018 for Iran?
0.6.
0.6%. Iran was not a very large business for us, it was a business for us. What we did is when the U.S. sanctions were announced, we went into full wind-down mode. We had a local office, we had a backlog. What we did is, in line with the U.S. sanctions, there was a wind-down period where you were allowed to deliver and get paid for orders that had already been taken. Essentially, we delivered everything apart from, I think, the remaining backlog that we didn't deliver for Iran was in single digits CHF 7 million. Mostly, it wasn't even stuff that we'd started. It was stuff that we didn't start because we knew we'd never complete it in time, we never expended much money on it.
There was a little bit of write-off still, it's all low single digits.
It's all low single digits.
All low single digit. It was very effectively done in terms of the wind down. Shame for us because it was a booming market, it is what it is.
Yeah.
Look, Russia, Iran, Venezuela, you have to be nimble these days, huh? Because it forces you to adapt all the time. You had another question.
Last question.
Yeah, go ahead.
Yeah. Regarding aftermarket, if we go to page 27 or slide 27.
Yep
there you have an aftermarket share of 40% and then some from water, including aftermarket.
Yep.
So-
You're trying to reconcile the numbers. Exactly what I pointed out too. I said, "You're not going to recognize the number because.
If I turn to page 29, I get another figure for aftermarket, 51%.
Yeah. I knew this was going to happen. See? It's a good question, but it's the beauty of mathematics because here what it says is that 51 aftermarket excluding APS. APS, there's no notion of aftermarket. Right? APS is a business. You sell a product, and it's a disposable product mostly. When we were indicating aftermarket, we were always saying excluding APS because we're trying to give you. We didn't want to count APS as aftermarket because you guys would've said, "Oh, you're counting APS as aftermarket. It's not aftermarket." We didn't want to count APS as new equipment because you would've said, "Oh, it's new equipment. Sulzer has a lot of new equipment," whereas APS is very resilient.
We were kind of between a rock and a hard place, and we said, "We'll give that split without APS." The split here is all of Sulzer because we're counting APS. You got APS here, applicator here, and then you've got water. Water is 12% overall. I think in water, probably a third of water is aftermarket, roughly. If I take 4% for the hell of it, that makes me at 44% aftermarket on all of Sulzer. If I take 51% aftermarket divided by Sulzer without APS, which is probably CHF 3 billion. It's probably equal to 44% aftermarket if I divide by CHF 3.5 billion. You guys can do the math, but you know what I'm talking about, right? Did I explain that well, or did I lose you guys along the way?
It's 51% of Sulzer minus APS, or it's something like 44% of all of Sulzer, including APS. Once again, it's not to confuse you guys. The reason why I wanted to use this slide instead of that one is that one's always been an attempt to get you guys to stop thinking about us like this incredibly volatile company where horrible things were going to happen. APS was a different animal. If I stick APS in, it gives you guys the impression that we're more volatile. If I stick APS in aftermarket, I give you guys the impression that I'm trying to pad the aftermarket numbers. Instead, essentially what we're trying to talk about is low cyclicality. This is low cyclicality. It's aftermarket for everything except water. Water and aftermarket for water and APS, and it's two-thirds of Sulzer.
It's a different way of looking at it. I apologize if we've confused you guys. It wasn't the intent.
I have a follow-up on that.
Please.
Thank you. Alessandro Foletti, Octavian. I wanted to ask a question on this subject as well. If I take the 40%, forget the water for a moment. That's about CHF 1.4 billion-
Yeah
in 2018. The RES, which I imagine is included there-
Yeah
is CHF 1.1 billion. Can you give an indication of what the CHF 300 million is?
Yeah.
Where did it come from?
It comes from three places. The lion's share of the 1.1 or 1.2 is RES.
RES is totally inside there, I imagine.
RES total is inside there, yes. In P, you have aftermarket, which is the water part that you see here.
What's P and EP?
The water part is still in P, the industry part is also still in P, which is not broken out here. The industry service is in here. The reason for that is water and industry, these are standard configured pumps, and it's an industry where the aftermarket is smaller because people have a tendency to take out the pump, put a new one in. In terms of supply chain, it doesn't make business sense to have a separate supply chain, a separate business for that, because there's not enough scale for it. We keep it within new equipment, and therefore, it's counted in P. We're also counting the TFS business, because when I exclude the business that we discontinued, the rest of it is all aftermarket.
Not, let's say, the separation part of Chemtech.
ST, no.
is not there.
We count that as full product. Thanks. Other questions?
Eugen Perger from Research Partners. I wonder whether you can see in the oil and gas business, especially in upstream, some areas where especially interesting like enhanced oil and gas discovery or deep sea, geographically or thematically, which are especially good or especially weak, maybe.
The market in upstream. Because your question is on upstream, right?
Yeah.
The market is quite active overall. How much were you up by in upstream for pumps in 2018?
Almost double.
It's like 40% or 50%, I think it was. I think it was like 50% up or something like that, or magnitude. We'll get the exact number. We're benefiting from investment trends throughout. In terms of things where there's potential for differentiation, I guess, where you're not just rising with the tide. It's counterintuitive, the subsea market is quite interesting because first of all, there's really only two companies that have subsea pumps. We're the second mover. There's a historical player that had pretty much a monopoly, we developed a product with FMC, which is now TechnipFMC over the last few years. We put the first two in the water in 2018. One in Brazil and the other one in Africa. We're a player in that market now. It's not a massive market, it's a market that has interesting trends.
One, it's a very complex product, very differentiated, which is good for pricing. The second one is in a world where people think oil companies will not invest in deep water because deep water is expensive. Actually, deep water is, in many areas of the world, is quite competitive.
If you take Brazil, for example, Petrobras doesn't really have a choice than to invest in deep water because that's where the reserves are. Also, there's been so much work done on deep water that the value equation for our customers is actually a good one. What they do is they look at some of the subsea pumps. What they look at is they look at existing fields, adding a platform is really expensive. We're in a world where oil companies are trying to favor investments that have shorter paybacks and less exposure.
What they'd rather do is a field extension. Sometimes the field extension is complicated because the platform is already saturated. When you can have a subsea pump instead, you're taking real estate from the platform onto the seabed, therefore, you're allowing yourself to tie more wells back to the same platform. It's a really interesting play in terms of field extension for oil companies. We have another product range that plays the same thing. In our Chemtech business, in ST, we have an upstream business that we built from two acquisitions. This upstream business is essentially what it does is it does inline separation. Traditional separation, it's big equipment that takes a lot of floor space. What we do is inline separation, which is much more condensed, which allows to free up real estate on platforms also.
We've got the subsea pumps and the inline separation, subsea pumps in PE and the inline separation in Chemtech. Both of those, it's a play on freeing up real estate on the platform so that you can have field extensions. You can tell I'm more comfortable on drilling than I am on the scar applicators, but I used to be a drilling engineer, in a prior life. Other questions?
Maybe a question for Jill. You gave on page 18 the building blocks for the EBITA margin next year. I was wondering if you can give a similar statement for the next page, the building blocks for below that line.
For below the line. Let me see. We are talking about slide
19
19. Okay. I think, on this part, the discontinue and affordable piece are pretty much exceptional items.
Hopefully there'll be no sanctions also.
It will be no sanctions, I hope. We continue to have the SFP as we'll complete the CHF 10 million realization that we talk about.
SFP calls for next year, what we said CHF 10, right?
CHF 10 million. We will have the acquisition piece depending on part, but most of it will be there. Over time, we would expect the convergence between the operational and the EBIT level. There will be, as Greg mentioned, from time to time, whenever, depending on the conditions, we continue to drive the optimization of our operations and it might not be under the SFP bracket, but there might be one or the other restructuring when it makes sense for us, in terms of fine-tuning the capacity.
On the restructure you would expect less expense now this year or on this CHF 13 million piece?
Restructuring? You want me to take that one?
Yeah.
Restructuring, the short answer is I'm not sure. In terms of recurring, not recurring, but in terms of something like CHF 10 million in normal run rate, you're always adjusting somewhere. That order of magnitude is not silly, but the issue is that restructuring is very lumpy because we're no longer at the point where we're painting the corners.
I mean, essentially we've closed quite a few factories and we've optimized our footprints, and anything else that we take out is essentially factory closures because the specific adjustments to given factories have already been made and the market is going up. You saw the momentum in 2018 carrying into 2019. Where would that come from? It comes from. I'll give you an example. We said Iran was not a huge business for us, but it was still a few tens of millions of CHF of business a year.
Most of that came from Europe. You don't see the fact that Iran is gone as a market from our numbers because there's growth, but the growth is coming from elsewhere. Sometimes you have an issue where you have one factory that's overloaded and one factory that's underloaded. The question is, can we rebalance? Can we shift a load from one place to another? Or do we get to a point where we say, "Well, for the foreseeable future, we believe these markets are close to us and therefore this feeder factory doesn't have a future." These are the things that I think that as the tariffs get resolved in 2019, the China-U.S. things. As we figure out which markets remain foreseeably closed and which markets reopen, we'll know a bit more whether we have to do additional adjustments.
I think it'll be kind of binary. Either it stays at low levels or if you have a factory closure the size of the factories that we have, it's anytime you do one, it's like somewhere between CHF 20 million and CHF 30 million because of people, geographies and so on. We don't get enthusiastic about closing things. We hate closing factories and we hate restructuring. It is our responsibility to anticipate market conditions for the long term, and there's still a few areas where we have question marks because of this changing geopolitical environment that's closed off certain markets that were significant markets for certain factories. I'm sorry, long speech.
Okay. Gives an indication. Thank you. My last question on this chart maybe. CHF 35 million amortization was in Pumps Equipment. Can you explain me where that comes from?
Primarily from-
Do you know where-
Yeah. From the JWC acquisitions we have, because last year we had the acquisition of JWC that added like CHF 210 million into our books. Those are related to those recent acquisitions that we had.
Yeah. The reason I'm asking is because the EBIT that you say here for JWC and Ensival Moret combined was CHF 300 million. Unless all of that was either intangible and not goodwill, I was a little bit surprised to see CHF 35 million. That's why I'm asking.
Yeah. We have intangibles, yes. Because we have the typical stuff like IP, we have customer relationship stuff, and yeah, software. I think Alessandro was looking for a split, if you have one. Otherwise, we'll come back to you.
No, maybe I find also that in the final report.
Yeah.
We can discuss that.
Yeah. Right. It's primarily linked to the intangibles. Yeah. Mm-hmm. Yeah. Easy.
Christian Arlt,Main First. Also, just a follow-up question on this chart. We also continue to have this amortization impact roughly about CHF 70 million.
Yeah. If you're looking to whether there's goodwill impairment, then no, it's amortization of intangibles.
Exactly. That will remain, and if you do.
Yeah
more acquisition, it go even up.
Yeah.
Okay. Second question is on the order intake gross margin. You were saying that it's down because of mix effect, that I understand. We don't have to be scared that We have seen lower oil prices.
No
last quarter, that you actually acquired orders with maybe less attractive pricing.
We don't have to be scared about that?
No. The gross margin on orders in Sulzer, it went down this year because we had a disproportionate amount of growth coming from oil and gas, new equipment, and that's lower margin. The good margin is down the road when you have parts and service, and that starts 18-24 months after you sell the new equipment. If I isolate oil and gas pumps and try to give you an answer on a number that we don't disclose, the trough, in terms of margin on orders for oil and gas pumps, was in Q1 of 2018. Trough. Q2 was higher than Q1, Q3 was higher than Q2, Q4 was higher than Q3. Once again, it's not about pricing, it's about arbitrating. It's, I don't know, you're in leads, you have two potential orders.
One of them comes from Angola and the other one comes from the U.K. sector. The one in Angola, for whatever reason, is at a higher margin and sometimes you're able to cherry-pick a little bit. The trough was in Q1 for margin on orders for oil and gas pumps new.
Okay.
We look at that. I have the answer ready because I actually look at that often, and that's how I also guide the businesses. I tell them the market is recovering. I understand that we'll still have, at times, orders that we take because we feel that we need the load in a certain place, and we feel that the overall value of it with the aftermarket is a good move for Sulzer. I still want to see the overall basket go up, because otherwise, you're digging a hole for the future. We're still trading that backlog that was a challenging backlog from that time. The stuff that came in in 2018, margin's going up all the time.
You once commented also that your customer are happy to invest if the oil price is at 60 or above.
You're very positive right now. Oil price is actually not much higher than 60.
Yeah.
Is this kind of hurdle, did it come down or?
No. Maybe I'm a victim of my own simplistic communication, maybe. What I try to say is that, if you take the five large oil companies that I've mentioned, most of those guys today make money with oil in the 40s, Brent. Maybe they won't invest as much if oil is in the 40s, but they make money at those levels.
They didn't make money at those levels five years ago. They've adjusted their cost base, and they've adjusted their approach to developing fields also quite significantly. Before it used to be everything was tailor-made, everything was bespoke, and now these guys really look at how they can reuse concepts and products and so on. The 60 number that I gave, what I tried to say is, we see oil remaining, we as Sulzer, see oil remaining for the next year in the current levels it's at today.
Our plan is not predicated on anything that's coming from oil prices going much below something in the 60s. At those levels, our customers haven't changed their investment patterns because oil went from 75 to 65. It's roughly we don't see the difference in the inquiries of our customers.
Because at those levels, they're fine. Once again, the difficult explanation at times that I try to. The reason why I try to break this down is that actually lower oil prices is really good for the downstream guys, right? Lower oil prices is not great for the upstream guys, but our exposure to downstream is like three times our exposure to upstream. Even the notion of oil prices on Sulzer, what perturbs me is that when I look at the way the share price behaves, I try to never comment on the share price.
It's really interesting where if you look at what's happened to Sulzer since the 4th of, what was it? November, when oil prices peaked. We're correlated to the oil prices, and we're correlated to Weir and Petrofac, and we have nothing to do with Weir and Petrofac. One of them is an oil field services and construction company, and the other one is actually a fracking company, which is the one thing that we don't do in mining. We've been put firmly in that oil and gas basket, and people think that the swings are actually more pronounced than they are. Even in our oil business, if you forget CPI that we separate here, even in the oil business it's not the lion's share of Sulzer.
It's a smaller part of Sulzer than you think when you break it down, but also the downstream part is a much bigger part than what you think. Upstream is growing right now, that 11% number is going to go up. Once again, our customers are showing in their communication and their CapEx expectations for 2019 that they're not overly worried about these short-term fluctuations. Once again, our plan is not built on the higher oil prices. If oil prices went down significantly, yeah, there's a moment that has an impact because there's a moment where that forces our customers to rethink their investment ambitions. We're in a range where, that 60-plus range sort of thing is fine. For us, at least.
Thank you.
Thanks. Question right here.
Thank you again. You mentioned your strongly reduced footprint you have.
Now you have this good recovery of the market, oil and gas market. Will your customers have to wait longer to get their products? Do you see any bottlenecks in production, maybe?
In which part of the business? Anything specific?
Oil and gas market.
Oil and gas. It's an important question because the way markets rebound, the way oil and gas rebounds is that despite the fact that our factories are probably operating at one and a half shifts. That would tell you that we have plenty of capacity, and therefore, we should be able to take whatever comes our way. The reality is that in these market rebounds, customers have a tendency to wait until the last minute to order. The differentiator is not so much spare capacity as it is lead time. You try to debottleneck so that you can have short lead times so that these guys who place their order and want everything tomorrow, you're able to serve them. We've invested time in lean processes in our factories. We've invested money.
If you look at where we spent money in the last few years in CapEx, we spent money on test beds because in pumps, for example, the bottleneck is usually the test bed. We think we're in decent shape for that, lead times are really important, despite the fact that in some of these businesses, the factories are not full. Other questions?
There are also no questions from the call.
All right. Well, thank you very much for your time. I know it's a busy season for all of you. We hope we were able to answer your questions. As I said, Sulzer has a positive outlook on the market. We've got good momentum, and we believe that our numbers will continue to improve along the trend that we've demonstrated over the last few years. Thank you very much.