Ladies and gentlemen, good morning. Welcome to the Sulzer Half Year Results 2018 conference call and live webcast. I'm Sherry, 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. After the presentation, there will be a Q&A session. You can register for questions at any time by pressing star 1 on your telephone. Should you need assistance, please press star 0 to connect to an operator. 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.
Good morning, everybody, and welcome to Sulzer's H1 Results Conference Call. Today with me is our CEO, Greg Poux-Guillaume, and our CFO, Jill Lee. This conference call is also being webcasted. The link to the webcast can be found on our website. During the conference call, we refer to the presentation that can also be downloaded from our website. This presentation contains reconciliations and supplementary slides at the back, which we might refer to but not show during the presentation. I would like to draw your attention to our safe harbor statement, which is shown on slide number two of the presentation. Please note that this statement applies to any statements in the webcast and on the call. This is enough from my side. I hand over to Greg.
Thanks, Christoph. Hello, everybody. This is Greg. Jill and I are very happy to be with you today. We'll run through this presentation and take your questions. Before we start, you see that on page two and three of the presentation, you've got a few pictures that you guys will recognize from recent news. We're going to talk today about quarterly results and sanctions and oil and gas recovery, and all of that is important and has paced our last few months. As John Lennon said, "Life is what happens while you're making plans." While we were working on all these things, the world continues to unfold. Sulzer was very pleased to be part of a touching and important story. You all followed the Wild Boars, the football team in Thailand. Sulzer is not always very good at marketing itself.
We don't do the mini submarine thing, but actually, most of the dewatering pumps that were involved in taking the water level down in the cave in Thailand were actually Sulzer pumps. This is what you see on these pictures. These blue pumps are dewatering pumps. The reason why they were chosen is that our local distributor was very reactive and diligent and went out to help, but also because their light aluminum structure and the challenge was that you needed pumps that could take out huge volumes of water, but that were also light enough to be transported by people into a remote place. This is what you see on pages two and three. Once again, a very touching story that ended well, and Sulzer was happy to play a small role in all of this. Okay. Let's go to the highlights.
Let's go to highlights on page five. Before I start running through the numbers, two things to keep in mind. The first one is that you see that we now show only third-party order intake and sales for the divisions. Therefore, there's no intercompany adjustments in the "other" line anymore. You probably need to adjust the prior year's figures in your model as well as we did in the divisional tables to compare apples to apples. I know that there were a lot of questions this morning related to that to our investor relations department because the Q1 numbers still had the intercos and the H1 numbers don't have the intercos. I think we sent around a reconciliation table, and if you don't have it, you can reach out to Christoph Ladner, and he'll send it to you.
The second thing is we adapted our accounting to IFRS 15. In our mid-year report, you'll see three columns in the key figures tables. The first column shows H1 2018 according to IFRS 15 new standards, the second one shows H1 according to the old method. Without getting too technical, IFRS 15 is around the revenue recognition from contracts with customers and how much and when you recognize revenue. Applying the new standard for H1 2018 means for us that we recognize less lower-margin projects in H1 2018, lifting profitability, and this will revert in H2 and in 2019, depending on the timing of the projects. What you'll see in this presentation is not IFRS 15. We've kept it comparable to the old method.
Once again, the numbers in the presentation that we'll run through today are old method, you also have the IFRS 15 new method numbers available. Hopefully, that's clear. Let's go to the highlights of H1 2018. We've seen a continuation of the recovery of the oil and gas upturn, continuing the recovery of oil and gas downstream, which started last year, and a rebound in oil and gas upstream, which started in 2018. All our other markets performed well, with the exception of the power markets. This resulted in an order intake that increased by 11.6%, including acquisitions, and 6.5% organically. Sales also increased organically, although they are typically trailing orders by nine to 12 months, and this effect is most visible when you look at Pumps Equipment.
opEBITA margin, so opROSA, increased by 110 basis points versus the same period last year, showing the positive impact from higher volumes, the SFP savings and acquisitions that more than offset the conversion of lower margin orders into sales. I'm also pleased to report that we see no impact from sanctions in the second quarter. Our performance in the U.S., to use that as a proxy. In the U.S.A., our order intake in Q2 was 15% up organically. It tells you that our business continue humming along, our customers remain supportive, and we've really minimized, from an operational and commercial perspective, any disruption to that adventure of a few days in April. Let's go directly to the divisions.
I should add, as part of my introduction, that because of the strong performance we've had in H1, we're raising the guidance for orders and for sales for the full year. We'll see that in a minute. Orders and sales guidance up for the full year. All right. Let's go to page six. Starting with our Pumps Equipment division. The order intake for Pumps Equipment increased by 21%, including acquisitions, and by 12% organically. The main driver was a strong development in oil and gas, which was up by 45%. Within oil and gas, upstream more than doubled from what was a very low basis in H1 2017. H1 2017 was probably the trough, so up more than doubled, but once again, from the trough. We've received less orders in the power market. We're down about 3% in power.
Organic orders from the water business and from the industry businesses were up about 4% for both of them, showing solid growth. The acquisition of JWC, the grinder screen wastewater business that we bought early this year, further strengthened our position in wastewater. JWC, in terms of performance, is trending ahead of plan. So far so good. Regionally, order intake was particularly strong in the Americas, followed by Europe, Middle East and Africa, and Asia Pacific. The sales in Pumps Equipment are typically lagging order intake by about a year, so the sales growth is therefore less pronounced than the order intake growth. But we're still 6% up in sales organically. The order backlog of almost CHF 1 billion secures the continuation of this positive trend in H2 and will carry into 2019.
Although we're still converting orders to sales that were taken at lower margins during the downturn, the SFP savings as well as positive contributions from the acquisition of JWC resulted in a positive EBITA of 6 million for Pumps Equipment for H1. We're back to profitability. We dipped below the line briefly last year, but Pumps Equipment is back to being profitable and will continue to improve in the next quarters. Let's turn to Rotating Equipment Services. Page seven. Okay. RES. The order intake in Rotating Equipment Services is up 6.5%, or 3.1% organically. Orders for pump services and spares increased by 16%, and orders for electromechanical services were up 4%. As you see in the donuts on that page, our business is really three product lines. It's pumps, it's turbo, and it's electromechanical. Pumps 16% up, electromechanical 4% up.
turbo is under a little bit of pressure. We've seen lower volumes in turbo service, particularly in gas turbine services. You see that we're down 7% versus the same period last year on turbo services. 7% is a good performance in the market context because you know that the gas turbine market has been down over the last couple of years, resulting in more competition on the installed base. The installed gas turbines, the ones that are already in the field, are cycling less and therefore requiring less service. You see that in the Siemens and the GE numbers very clearly. 7% down, but we're resisting very well and will continue to do so. opEBITA was on the same level as last year, but the margin declined a little bit. The reasons are twofold. First, as I mentioned, turbo services is under pressure.
The second reason is a mix effect. In pump services, so in our pumps business, we actually had more repairs and less spares in the first half of this year versus last year. That leads to a mix effect which takes the margin down by a few basis points. You see we're 12.1% versus 11.8%. Once again, RES performing well. Turbo services under a little bit of market pressure, but everything else trending up and recovering. Turbo, it's the power market. The power market will continue to be tough in the next couple of years. Chemtech, to go to the next page, slide eight. My page numbers look funny. Slide eight, Chemtech. Chemtech enjoyed healthy order intake. We're up 5%, and there's no organic or adjusted as the same because we didn't make any acquisitions of any significance in Chemtech recently.
We're up 5% organically, sales were up 13% in the first half of the year. The order growth was less pronounced than the sales growth as you may recall that we communicated last year that in Chemtech, we've got two businesses. Historically, we've got the separation technology, which is the products business, which is about two-thirds of Chemtech. Historically, the Tower Field Services business, which is the outage business, the turnaround, it's an aftermarket service business, was about a third of Chemtech. What we said a year ago is that within Tower Field Services, which as I said, is about 30% of the business historically, we decided to discontinue one of the activities. It was an extended scope activity that we felt didn't have enough added value and had a project component which we didn't like in terms of risk/reward.
We discontinued that activity, therefore Tower Field Services is trending down in terms of volume. In H1 this year, it's closer to 20% of Chemtech than the 30%. I think you'll see that continuing going forward, Tower Field Services being more closer to 20%. What that means is that Tower Field Services, in terms of order intake, is down double digit. You can do the math going from 30% of all of Chemtech to 20% is healthy double-digit decline. The separation technology business is actually growing really fast, and it's our products business, and it's the proxy of that oil and gas downstream or chemical processing industry recovery. It's continuing to be very, very healthy. This is also the impact that's improving our margin on order intake.
If you refer to our mid-year report, you'll see that our gross margin on orders has gone from 29.7% last year in H1 to 31.4%. This is also the reflection of that mix effect, less Tower Field Services and a lot of growth in separation technology. Chemtech is on a really good trend. The orders are up, the sales are up, the profitability is up quite significantly. If you refer to full year 2017, you recall there was an exceptional of CHF 10 million linked to the discontinued activity within TFS, Tower Field Services. If you excluded that discontinued activity's impact of CHF 10 million, the profitability of Chemtech for all of last year was 7.3%. In H1 this year, we're at 7.5% and continuing to go up.
We're pleased with the development of the operational profitability in Chemtech. You will see that that business will continue going from strength to strength in the next quarters. Let's move on to the Applicator Systems division on page nine. Applicator Systems developed well in the first half of 2018. I think there's really one number that will jump out at you if you're trying to figure out if everything's going according to plan. I'll make it clear now, everything is going according to plan. If you look at the organic order intake, you see that order intake in the first half of the year is up 6.3%. Organically, it's only up 1.3%, which is unsettling at first glance for a business which is in three markets, dental adhesives and beauty, that are really GDP plus types of markets.
We've been growing at 6% or 7%. The markets have been growing at 3%. Why are we suddenly growing at 1.3%? It's actually a tale of two different things. If you take dental and adhesives, in the first half of the year, we're up 7.5% organically. Twice the market rate, very healthy, continuing on the momentum that we had last year. What it tells you is that it tells you that beauty is down. Why is beauty down? Beauty as a market is going well, and it's a GDP plus type of market, and our business is performing well. We have an isolated event, which is that we have a large customer that represents significant volume for us on one product.
It turns out that this one customer had a first-generation product into the market. We were manufacturing that first-generation product. The customer, for commercial reasons, decided to withdraw that first-generation product from the market ahead of plan. Somewhere between six and 12 months before he was due to do it commercially, and decided to move to the second-generation product ahead of plan also. It's not a negative over time for Sulzer because we had the first-generation product, and we also won the second-generation product. Actually that volume is also going to us. In terms of immediate revenue and in terms of load plan, essentially what we had to do was we had to stop manufacturing that first-generation product, which was part of our load plan in Q2 and Q3.
We will only move to manufacturing the second-generation product in actually in Q4, according to the customer's plan. He's working down the inventories that he had of the first generation, and he's only launching us for commercial release in Q4. That tells you that we have a shift of volume linked to one product and one customer that goes from Q2, Q3 of this year into Q4 and mostly 2019. By next year, we'll be back to business as usual with this customer. This year, we have this little disruption that is very manageable, but it's taking the volume of beauty down. Therefore, orders and sales in beauty are essentially the same thing. That volume's down, and that's something that you're seeing in H1 because it impacted us in Q2, and that you'll see in H2 because it will impact us in Q3.
Once again, we will be manufacturing the second generation in Q4. Hopefully, that is clear. It is a negative impact this year, but it resumes according to normal program in Q4. The operational EBITDA was higher in H1 2018 compared to H1 2017. We generated CHF 49 million of EBITDA versus CHF 45 million, but the margin is lower. We are 40 basis points lower at 22.2%. Once again, this is the effect of that disruption in the beauty business linked to that one customer, one product, which had healthy margins attached to it. That shifting of the volume, not having the volume, not having the margin, is having a little bit of a dilutive impact on our margins. Once again, we are down 40 basis points, and none of that is a structural issue.
It is an issue linked to this commercial decision by our customer, which will not impact us over time but is impacting us short term. All right. If I go now to the. I should say Transcodent, our last acquisition in APS in dental. Transcodent is progressing well and the integration is going according to plan. Let us now move to the next slide, page 10. It is the SFP summary. SFP, we extended SFP at the end of last year. We think we can get an additional CHF 30 million of cost-saving benefit without jeopardizing our ability to rebound with the markets. Turns out we told you guys that we would achieve CHF 25 million of incremental savings in full year 2018. It turns out that we achieved the CHF 25 million in the first half of the year.
We are continuing to trend ahead of plan, and what we are doing is we are bringing some of the 2019 savings into 2018. We said we would do CHF 25 million this year, we are actually doing CHF 25 million in H1, and we will do another CHF 10 million of savings in H2. CHF 35 million for the full year. The remainder to get to the CHF 230 million, which is another CHF 10 million, is going to happen in 2019. SFP from an execution is continuing to go well, and from a cost perspective, is continuing to be completely within the band of what we told you guys historically. All right. The obligatory sanction slide. I have to continue talking about sanctions, hopefully not for too long. The slide, page 11, is a reminder of the timing. It was a disruptive event, but it was a three-day event.
Three days of being blocked and then another few days of bringing back our business to normal operation. We said within the next week we were back to normal operations. What you see in our financial results is that we continued to run really hard even when we were under sanctions, and we minimized disruptions short term, and we have no disruption long term. Reminder of the main highlights. We were free from sanctions within three days. There is no conditions associated to our unblocking by OFAC. There is no reporting obligations, there is no monitoring. This is not a continuing story. This is, we were blocked three days, we got a license, we move on. We own 5 million shares of our own shares acquired from Renova at CHF 109 per share. As you know, we have a full downside protection for that share price.
All the upside is for us, you see today that we have a latent upside. The proceeds of the transaction, CHF 546 million, are payable in October into an escrow account, as you know. Renova is a 48% shareholder of Sulzer now. They are blocked from making any further acquisitions of any Sulzer financial instruments, shares, bonds, options, whatever. They cannot buy anything linked to Sulzer now and going forward, independently of sanctions. They have signed something that says they will no longer buy anything linked to Sulzer in the future. They can sell, but they cannot buy. They have actually dropped off a member of the board that was representing Renova, sorry. Our board has minority Renova representation. We have got four independents and three Renova representatives on our board.
In the time that we had after the sanctions, we leveraged the good relationship we have with OFAC to do something that we have not announced yet, but we are informing you guys of it today because I think it highlights the good relationship we have with OFAC. In some of the investor meetings I have had, from U.S. investors, I had the question of, "Can you confirm to us, beyond reasonable doubt, that a U.S. person, a U.S. investor, a U.S. financial institution, can take part in a debt offering, a share offering, take part in any placement related to Sulzer?" It got us thinking because we thought that, well, one day we will take the shares to market, and when we take the shares to market, we will get this question.
What we did is we reached out to OFAC and we said, "Can you guys write us something that we can show investors that says, as written by OFAC, that U.S. persons and U.S. investors can take part in a share offering of Sulzer the day we decide to place the treasury shares on the market." OFAC was very supportive. They said, "Yes, apply for a license." We applied, they wrote the license. They issued it to us a couple of weeks ago. We have not made it public because there is no point in making the license public until we are ready to sell the shares.
You should know that we have a license from OFAC that says very clearly, it was the only purpose of the license, that U.S. investors have no restrictions whatsoever in taking part in bond offerings, share placements, or anything related to Sulzer. I do not know if it is important to you guys, but I thought I would mention it because it was important to some of our investors. Short-term impact, I continue to get questions about the famous CHF 10 million that we highlighted as the cap of the short-term impact. I do not have a final tally for you guys. My guess is that the final tally will be closer to half of that, so closer to five than to 10.
The tally today, Jill will probably look at me funny, I don't know if I'm allowed to say the number, but I think the tally today is about CHF 3 million. We think that when the meter stops, we're still looking at some of the under-absorption we had related to that disruption. Some of the legal costs in continuing to have support in the U.S. At the end of the day, we'll give you a final number at the end of the year, and it'll be something like half of the initial envelope that we talked about. There's no concerns to be had in any way, shape, or form. It's actually going to be a lot lower than what we said. As I said, I'll repeat it again, there's no long-term impact.
Once again, we're up 15% in the U.S. commercially in Q2. It's business as usual. All right. On those words, I'll hand over to Jill for the financial review. Jill?
Thank you, Greg. Good morning, everyone. Welcome as well from my side. Greg has already mentioned the most important points on this slide. I'm talking about slide 13. Let me go over that quickly, and then going into the details. Order intake increased by 11.6%, or 6.5% organically, mainly driven by Pumps Equipment and a positive development of the oil and gas market. Our order intake gross margin are slightly down as we are booking more new equipment orders in Pumps Equipment that carry a lower margin. Order backlog increased by roughly CHF 200 million since end of 2017 and will support sales momentum in H2 in 2019. Sales were up 10.5%, or 5.4% organically, mainly as a result of a positive order intake last year and a higher opening backlog. Looking at opEBITDA.
opEBITDA was disproportionately higher, resulting in an operational EBITA margin or opROSA of 8.5% compared to 7.4% last year. The increase is the effect of higher volumes as of key savings and acquisition that more than offset the pressure of converting lower margin orders to sales. EBIT and core net income also increased significantly due to higher opEBITDA. I will give you more details on free cash flow later. Let me, at this point, mention that the more negative cash flow figure in H1 was mainly due to a volume-driven inventory buildup that should reverse in H2. You can see that we also have more employees as of end of June. Most of this added due to the acquisition of JWC. Let me go to the next slide, which shows you the quarterly order development. This is slide 14.
Looking at the quarterly order intake development on the next slide, let me make some comments on our Q2. Compared to a high base last year, our orders were growing by 5.3%, or 0.8% organically. Acquisitions added CHF 38 million, and the foreign exchange impact was a positive CHF 20 million. The ones of you on the call who are calculating quickly would probably have found out that of our divisions, only Pumps Equipment and Rotating Equipment Services had positive organic growth in Q2, whereas Chemtech and Applicator Systems were negative. Greg has already mentioned what happened in Applicator Systems, so I won't go further. In Chemtech, we have a base effect as well as less order intake in the Tower Field Services business. Additionally, Chemtech is mostly still some project business and the quarterly order intake can be lumpy. Now let's go to the next slide 15.
On the next slide, you find the opEBITDA bridge, where volume and SFP savings contributed strongly. Lower margin orders that are converting sales partly offset the positive margin development. Acquisitions also had a positive contribution to opEBITDA of CHF 11 million. Let me now move to the next slide, which shows the development from opEBITDA to EBIT. That is slide 16. On slide 16, you can see that our amortization has increased compared to last year due to the acquisition of JWC and Transcodent. SFP costs shown in restructuring, impairment of assets and other non-operational items amounted to CHF 22 million. This may be more than some of you have expected, but is completely corresponding with the higher savings that we have shown in the earlier slide.
Our resultant EBIT stood at CHF 78 million, giving an EBIT margin of 4.9%, which compares well to the 3.9% in H1 2017. Let's move along to the next slide, which shows the net income development. You can see that our financial results was on the same level as last year. After balance sheet date, we issued bonds amounting to CHF 400 million in total to refinance the revolving credit facility that we had used for the acquisition of Transcodent and JWC. That means that the bonds that we recently issued are not yet on the balance sheet because this came after. Not surprising, income taxes have increased due to better operating results. Despite this, the effective tax rate actually declined to 23.2% in H1 2018, down from 24.7% in H1 2017.
We did not have any major items that were not tax deductible, and therefore the effective and the normalized tax rate that we have shown in previous presentations are in the same range. For 2018, we expect to continue our tax rate of around 23%. Finally, as a result of the above, reported net income to shareholders has increased from CHF 37 million in H1 2017 to CHF 55 million in H1 2018. Core net income to shareholders has increased as well from CHF 75 million in H1 2017 to CHF 99 million in H1 2018. Now we are at slide 18. This slide is now showing you more details on our free cash flow. You can see that the main drag on our free cash flow is essentially inventory, as all the other items net out to zero.
The increase in inventories was driven largely by the anticipation of higher sales as well as some shifts in our factory. The inventory levels will be normalizing over the next couple of months according to the execution of our backlog. The slides on our balance sheet, slide nineteen. Here, let me also share with you a little bit specifically on our net debt position. Due to the acquisition of JWC, the dividend payment, and the negative free cash flow, our net debt position increased to CHF 522 million, which corresponds to a net debt to 12 months trailing EBITDA of 1.75 times. As I mentioned, after the mid-year, we have increased our financial flexibility by raising CHF 400 million in the Swiss capital market via a dual tranche bond issuance as of July 6, 2018.
The first tranche of CHF 110 million has a term of two years and carries a coupon rate of 0.25% and was placed at a price of 100%. The second tranche of CHF 290 million has a term of five years and carries a coupon of 1.3% and was placed at a price of 100%. You might want to know that actually this is, from our eyes, quite a positive one. It is actually the third largest in the Swiss bond market so far. With that transaction, our debt once again has a longer maturity with CHF 850 million out of the CHF 881 million shown on the chart covered by bond, that are mostly maturing 2022 or later. Let me now hand back to Greg for the outlook.
All right. Thanks a lot, Jill. A few slides left. I'll go through them quickly to leave you time for questions because I know you've got another call at 10:00 A.M. The market outlook on page 21. All our markets are trending positively except power. Power will continue to be difficult the next few years. Less power plants being built and lots of competition on the install base, as I've mentioned earlier. Everything else is trending positively. Oil and gas, I would say that the volume recovery is underway. Downstream for the last year, upstream started this year, but the pricing recovery is not on the way yet. I think we'll still see a depressed pricing environment in oil and gas in 2018 because factories are not full or anywhere near full yet, and people are continuing to grab the volume that they can.
It's still pretty much a buyer's market, but I think that will start shifting in 2019. Once again, don't expect a price uplift this year, just a volume uplift, but I think the price uplift will come about a year later. The guidance slide, as you see on page 22, we expect our order intake to increase by 7%-10% for the year, up from the 5%-7% that we had given before. We're up from 5%-7% to now 7%-10% for the full year. Sales were also going up to 6%-8% versus our previously guided 4%-6%. We're not changing our profitability guidance at this point, 9.5% as per the previous statements. Note that this guidance adjusts for the currency effects and includes the acquisitions announced in 2017, namely Transcodent and JWC.
The summary on the next slide. The oil and gas market recovery is underway. Once again, the volume at this point, hopefully pricing next year. All the Sulzer markets are healthy apart from the power markets, which is about, at this point, about 13% of our volume. Sales are, the volume's improving. There's a lag of nine to 12 months, so that will be more noticeable next year than this year. Operational profitability is up 110 basis points on higher volumes, the SFP savings, and the acquisitions. We've raised our target for 2018 for SFP to CHF 35 million up from the CHF 25 million that we had before. I think we've hopefully demonstrated there's no impact from sanctions based on our numbers for this first half of the year, but also on the order growth of 15% organically in the U.S. in Q2.
We are raising our guidance and believe that the momentum for the rest of the year will continue to be quite healthy. That's really it for us. At this point, I'm happy to open it up for any questions you guys 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 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 to ask your question. Anyone has a question may press star and one at this time. The first question is from Reto Amstutz by the RWE. Please go ahead.
Yes, good morning. A few questions regarding your oil and gas business. Can you give us here a bit and a better insight how you see the project pipeline developing in the next quarters in terms of pricing as well as in terms of order value over the project's entire life cycle or time? You may have here some better insights. Also in this oil and gas business, what is currently the capacity utilization in your Pumps Equipment factories today, and what is your expectation for 2019, given that your current project pipeline is expanding and also the backlog is significantly higher? Also in oil and gas, when we look at the backlog, what is here at the remaining share of low margin, low priced orders of the entire backlog as of today? Thank you.
All right. Thanks, Reto. Taking them one by one. Oil and gas, the market recovery is underway. What we're seeing at this point is still a lot of familiar names, i.e., projects that were put on hold that are being taken to market now, and therefore, it's kind of the dusting off of what's been on the shelf of the oil and gas companies over the last few years. What I think is going to be interesting in the second half of the year is that hopefully we'll start seeing some new projects, some larger, more ambitious projects, some of the multi-year investment type of things where first oil is a few years down the road that oil companies have been very reluctant to get into in the initial phase of the recovery because they were mostly doing field extensions and things that had a short payback.
We think at this point that there's a lot of signs that these new longer-term projects will start emerging in the second half of the year. That will certainly be an indicator we'll be looking for. As I said, the pricing it remains a buyer's market because it ties into your question on capacity utilization. We closed a bunch of factories, we restructured heavily, but we also debottlenecked. If you take our business today, we could double the size of our Pumps Equipment business probably without building a single other factory. It's not a very scientific answer to the capacity question because the reality is that most pump factories these days are assembly factories, and the bottleneck is around the testing and the initial engineering right at the beginning of the project.
Do you have enough specialized people to do the initial engineering so that you can place the purchase orders so you can deliver the projects on time? If you try to highlight the main constraint to our ramping up our volume is to rebuild that order-related engineering, that initial engineering capacity that we shrunk over the downturn. Now we've got to rebuild that skill set, and that is going to be the main factor of our ability to ramp up because it's going to be the main factor of our ability to offer short lead times. Apart from that, we're nowhere near being capacity constrained on oil and gas. The backlog, we're coming out of two years of, well, almost three years of a very difficult oil and gas backlog, oil and gas market. Our engineered pump backlog is at low margins.
We've been trading those margins over the last couple of years, and therefore, there's no reason why you guys should expect the bottom to drop out because this is business as usual at this point for us. My message was not there's more downside. My message was there's upside, but the upside is not in 2018, because the pricing has not rebounded commercially yet. When the pricing rebounds, that means you're replenishing the backlog at higher margins, but it means that the sales at higher margins are only coming nine to 12 months afterwards. On that one, I think it's an emerging story, but you'll have to wait for another year for that. Did I answer your question, Reto?
Yes. Thank you.
Thank you.
The next question is from Charlie Feuerbach, AWP. Please go ahead.
Good morning, gentlemen. Everybody else globally, we are very worried about the trade dispute between U.S. and China and Europe. I just want to hear a short comment how you see this, and where do you see the biggest dangers for Sulzer if the conflict is escalating. Thank you.
Okay. It's an important question. We are concerned about the evolving trade environments, and it comes with a lot of question marks that we're certainly not capable of lifting at this point. What we do is we have a tendency to worry about what we can control. Now, if you look at the way Sulzer is set up, most of our markets, our customers want a certain level of proximity from a manufacturing perspective. They either want to have production in their country or production in their region. It's certainly the case in the engineered pumps business. If you look at our water business, it's also very much like that. It's also valid for Chemtech. When you look at these businesses, what you have to understand is we have factories in multiple geographies capable of producing the same products.
It means that from a trade constraint perspective, we have a little bit of flexibility. We have degrees of freedom. Now, the issue for us is a supply chain issue, because our business and most, I would say, well-organized multi-factory manufacturing businesses are organized with a feeder factory and a bunch of assembly and testing factories. What that means is that usually have a very cost competitive, larger scale factory somewhere that is producing components, and you've got other factories around the world that are mostly assembling these components and testing. That is impacted by the trade disputes because if your feeder factory ends up being in the wrong place, or if you're buying externally, if your supply chain ends up being in the wrong place, then it complicates your life. A lot of the work we do today is to build additional degrees of freedom.
What that means is we try to make sure the components are not single-sourced and not single geography, so that whatever happens, we're able to reshuffle our production and our supply chain in order to have as little impact as possible. It's disruptive to the business, and it makes our life a little bit more complicated. At this point, it's manageable. Does that answer your question, Charlie? Hello? Moderator, I think it answers Charlie's question. Maybe we go to the next question.
Next question is from Armin Rechberger, ZKB. Please go ahead.
Yes. Good morning, gentlemen and lady. Guidance for operating EBITDA was not listed even though because you changed standards to IFRS 15, you gained 70 basis points in the first semester. There is to be expected such a positive factor in the second half as well. Why didn't you lift the guidance for operating EBITDA? My second question is, in the beauty of Applicator Systems, there you said about this project, and there is a gap. I don't understand really why there is such a gap of almost half a year. Are the products meanwhile not needed, or is it just they have such a big stock, or
All right
Do you experience a gap? Then is it the brush for the electrical cigarettes, this project, or what is it?
All right. Thanks for your questions, Armin. The first question on guidance. Our guidance is old method, there's no IFRS 15 in there. We gave you the numbers today in this presentation with the former IFRS method. We've stuck to that. Theoretically, you can assume that the IFRS 15 method has an uplift. What we said earlier is that actually between H1 and H2, it pretty much balances itself out. I don't know if it exactly balances itself out. Frankly, I haven't looked into it, and maybe Jill can answer that question. The 9.5% is in the old methods. There's no IFRS bonanza in there.
Okay.
The second question on beauty. It's tricky to answer your question without pointing out who the customer is, and you've speculated as to who the customer could be, and I'm sure you can understand that I can't answer that question. It's a customer that had a very aggressive commercial push on a product in multiple geographies, and it built inventory to sustain that push. As they decided to shift to the next generation product a bit earlier, they're working down in inventory. It's really nothing linked to our business at all. It's linked to our supporting our customer and being flexible to whatever their commercial needs are. That's really all I can say about that. I apologize for not being able to be more explicit.
Okay.
I commend your investigative skills. Anyway, let's move to the next question.
All right.
As a reminder, if you wish to register for a question, please press star and one on your telephone. The next question is from Fabian Haecki, UBS. Please go ahead.
Yes, good morning, everyone. Three questions from my side. The first one is, why again it is quite an H2 loaded years, particularly at pumps, turbo, and to some extent at Chemtech. To me, it seems officially that doesn't seem to be a seasonality, but in the last years is that proof that actually there was a seasonality and also seems to be this year. Maybe some comments on that one. The second question is on raw materials and wage inflation. Do you see an increasing headwinds? How do you manage that? Could it be a risk or a damper to your further margin progression? My third one is on the SFP program. You executed faster this year, so you're ahead of plan. Could you give a bit color in which areas and where you still see some work you need to do on?
Thank you.
All right. Thanks, Fabian. Why is our business H2 loaded? It's a really good question. There's some seasonality in parts of the business. We have customers that have a tendency to order right at the end of a financial exercise. You see that in some businesses. APS has a little bit of that. There's other businesses in Sulzer that have a little bit of that. I think it has a lot to do with the market recovery. If you take oil and gas, for example, we seem to be subject to the financial years of our customers, i.e., they start reassessing whether they should accelerate towards the second part of the year and so we're getting a little bit of that commercially. Now, from a sales perspective, we're ramping up. We're growing, and there's a lag time between orders and sales.
Essentially when you have a commercial push in the second half of 2017, then you have a sales increase in the second half of 2018. I think it has a little bit to do with seasonality on some of our businesses, and it has a lot to do with how our customers are handling the decisions that they have to make linked to the market recovery. The raw material and the wage increase. The raw material increase has been a trend. I think it swung up over the last year. It's stabilized a bit more at this point. Our approach is to minimize the time between the order and the purchase order. Essentially we bid for projects at a certain price, which includes a certain view on raw material and wages. The common thing this time, really on raw materials.
What we try to do is to do the engineering as quickly as possible at the beginning of the project so that we can place a purchase order and essentially de-risk from a raw material perspective. As long as we keep that window small, then we're mostly mitigating the impact. Because that whatever's in our price is still representative of what we're buying at the time when we're buying. You also have to understand that with our supply chain, we have purchase agreements that usually have prices that are guaranteed over a period. It's not like when we're buying steel casings, it's not like our suppliers are doing mark to markets on steel. They have commitments for periods of time, and it moves more in steps than it does continually. SFP, we've gone faster on a lot of the indirect procurement aspects.
About half of our SFP increase was the additional CHF 30 million that we put on the table. About half of it was indirect procurement, was we continue to save on a lot of things like insurance, facility management, and things like that were backloaded because they were multi-year contracts, and you have to wait until the contracts lapse until you can sign with somebody else at better conditions. Some of that just, I don't know if we'd forecast it to conservatively or if we were able to move some of these things forward a bit more aggressively than we thought, but it actually ended up panning out a bit quicker. There's not going to be more SFP, the CHF 230 is going to be the CHF 230 because there's a moment where we have to stop talking about SFP. Also the market story is the market recovery.
It's really dangerous to continue to be too focused on taking structural costs out because there's a moment where it starts playing against you. We are continuing because we will do everything that we can do that doesn't impact our ability to rebound and to benefit from market rebound. There's a moment where it's going to become business as usual. End of next year when we will have achieved the CHF 230, I think we'll close the books on SFP and everything else will become continuous improvement. Jill, do you want to add anything to this?
No, I think that's totally fine. Yeah.
Okay, Fabian, follow-up questions or did we answer?
No, it was all answered. Thank you very much.
Thanks a lot.
The next question is from Pascal Furger from Vontobel. Please go ahead.
Good morning from my side too. Just again, sorry to insist, a follow-up question on the guidance and this time talking about IFRS 15. We see higher volumes. You mentioned SFP savings, CHF 10 million ahead of initially scheduled. Also, we see a lower impact of only half of the initial CHF 10 million related to U.S. sanctions. This brings me just back. In conclusion, is it fair to consider your 9.5% opEBITA margin guidance as rather conservative? Second question just on M&A. You have a track record of two to three deals. Is the pipeline still full? Now in terms of financing and also taking into account for the whole sanction Renova situation, what kind of size do you think is still possible for this year?
Last question, JWC, I mean, we saw a strong performance of CHF 47 million order intake in the first half year. Is there a seasonality element in there or it's just the general water market which is booming? Thank you.
All right. Thanks, Pascal. Lots of questions. I'll start with the JWC question. The business is doing really well. It's got great products and it's being driven very dynamically and successfully by the team in place. I'm not sure there's a whole lot of seasonality in JWC, but honestly, I don't have a definitive answer on this. I would say that what you're seeing is more reflection of the strong commercial momentum that they have than any seasonality. I'll check and I'll make sure that I give you a full heads-up if for any reason I've missed some seasonality that exists. I don't think there is. I think it's just the strong commercial momentum. The M&A, you're right. Our pace has been two to three deals a year. We always have a pretty active pipeline because you saw the deals in the last few years that we've made.
We've bought seven or eight businesses, and I think only one of them was part of a formal process. Everything else, it's direct approaches. We know what businesses fit, and we just talk to people and talk to them until they're ready to do something with us and ready to do it at the right price. You never really know when these things are going to come out. We were a little bit distracted over that sanction period where we had a few things to solve, and it probably wasn't the best time to approach somebody saying, "Hey, become part of the Sulzer family." All of that is behind us now and we're back to normal business in terms of M&A. We've got a few things that are more advanced than others, and the pace should continue to be those two to three deals a year.
Maybe a bit less this year because we've had a little gap. There's a couple of things that could happen before the end of the year in the small to medium size range that we've been in. We've bought things anywhere between CHF 30 million of enterprise value and CHF 300 million of enterprise value, and that's what we'll probably stick to for the time being. Jill, you want to talk about the financing and where we are in terms of leverage and what that gives us in terms of capacity?
Yeah, I mean, in terms of financing, you can see that on our balance sheet currently we are at 1.75. We basically are still within the industry among the companies with a better level of leverage. From that point of view, I think that as Greg mentioned, we will be able to continue, like in the past to get our bolt-on acquisitions. Financing will not be an issue on that front.
As Jill said, we've got small to medium size stuff. We've got at least two years of investment capacity available on our balance sheet. You had a question in there about larger deals and Renova. There's a few businesses, larger businesses, more extensive businesses that we're interested in. There's always, we've been focusing on small to medium size acquisitions, but there are businesses closer to the CHF 1 billion range that we would love to get our hands on. Maybe the difference between before and after the sanctions is that before there was a question as to whether Renova would support, whether Renova would there be a capital increase? Would Renova be diluted? Would they participate?
If anything happens that leads to the necessity to go to the market for a capital increase, the only difference today is that Renova no longer is a minority voter at our board, and Renova is not able to participate in a capital increase. I think that anything that we would do that would be a larger acquisition would stretch our balance sheet, might necessitate our going to the markets, and would mechanically lead to a dilution of Renova. At the same time, there's not anything like that on the horizon. We have good cash generation capacity, and I think that we will continue to demonstrate our ability to buy businesses and then improve our balance sheet through our cash flow generation. Your question on the guidance.
First of all, the CHF 10 million, which is now probably more half of that for the impact of the sanctions is non-op. We said that we treat it as non-op, it doesn't have an impact on our 9.5% guidance. Whether it's 10 or five or zero is not reflected in the 9.5%. It's a non-op number to keep the business readable. We haven't changed our guidance because we think that 9.5 number is a good number. We think it was a challenging number, and the additional volume helps us a little bit solidify that number. You have to keep in mind that we are continuing to evolve in an environment with price pressure. As I said, the price rebound will not happen before 2019 in oil and gas. I'm pretty convinced of that.
You see some isolated cases of things that we get at higher margins, mostly it's still a buyer's market. The 9.5, in our view, I wouldn't qualify it as a conservative number. I'd qualify it as a good number, and we'll see how our business evolves for the rest of the year. Anything else, Pascal?
No. Thank you very much.
Thanks, Pascal.
There are no more questions at this time.
Okay. I think we're pretty much on time. It's 10 o'clock. I know you guys have a really busy day ahead of you. Jill and I wanted to thank you for your attention, your thoughtful questions, and your support of Sulzer. As we told you today, we've had a good H1, we've mitigated the impact of the sanctions, and hopefully, we've demonstrated that all of that is a thing of the past. We look forward to continue to fight hard in a market that is showing signs of life and hopefully continuing along a similar trend the second half of the year. Thank you very much for your attention and good luck today.
Thank you.
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