Earnings Call: H1 2018

Jul 25, 2018

Ladies and gentlemen, good morning. Welcome to the Solter Half Year Results 2018 Conference Call and Live Webcast. I'm Sherry, the Chorus 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 and A session. 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 Solsys' H1 results conference call. Today with me is our CEO, Greg Puglione 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. Also, I would like to draw your attention to our Safe Harbor statement, which is shown on Slide number 2 of the presentation. Please note that this statement applies to any statements in the webcast and on the call. So this is enough from my side. I hand over to Greg. Thanks, Christophe. 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 23 of the presentation, you've got a few pictures that you guys will recognize from recent news. And 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 over the last few months. But as John Lennon said, life is what happened was while you're making plans. And while we were working on all these things, the world continues to unfold. And Solzer was very pleased to be part of a touching and important story. You all followed the wild boars, the football team in Thailand. And Solsys is not always very good at marketing itself. We don't do the mini submarine thing. But actually, most of the pumps, most of the dewatering pumps that were involved in taking the water level down in the cave in Thailand were actually solar pumps. And 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 they're light aluminum structure and the challenge was that you needed pumps that could take out huge volumes of water, but that were light enough to be transported by people into a remote place. And this is what you see on Pages 23. So once again, a very touching story that ended well, and Sulzer was happy to play a small role in all of this. Okay. So let's go to highlights. Let's go to highlights on Page 5. 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 3rd party order intake and sales for divisions. And therefore, there's no inter company 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. But I think we set 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 3 columns in the key figures tables. The first column shows H1-eighteen according to IFRS 15 new standards and the second one shows H1 according to the old method. Without getting too technical, IFRS fifteen is around the revenue recognition from contracts with customers and how much and when you recognize revenue. Applying the new standard for H1-18s means for us that we recognize less lower margin projects in H118 lifting profitability. And this will revert in H2 and in 2019 depending on the timing of the projects. But what you'll see in this presentation is not IFRS 15. We've kept it to comparable to the old method. So once again, the numbers in the presentation that we'll run through today are old method, but you also have the IRFS 15 new method numbers available. Hopefully, that's clear. Okay. So 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 percent including acquisitions and 6.5 percent organically. Sales also increased organically, although they are typically trading orders by 9 to 12 months, and this effect is most visible when you look at pumps equipment. UP EBITDA margin, so UP ROSA 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 Q2. Our performance in the U. S. To use that as a proxy. In the USA, our order intake in Q2 was 15% up organically. So it tells you that our business continue humming along, our customers remain supportive, and we really minimized from an operational and commercial perspective any disruption to that adventure of a few days in April. Now 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. So orders and sales guidance up for the full year. All right, let's go to Page 6. 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. And the acquisition of JWC, the grinder screen wastewater business that we bought early this year further strengthened our position in wastewater. And 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 CHF1 1,000,000,000 secures the continuation of this positive trend in H2 and will carry into 2019. So 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 EBITDA of $6,000,000 for pumps dollars for pumps equipment for H1. So 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 7. 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 know, as you see in the donuts on that page, our business is really 3 product lines. It's pumps, it's turbo and it's electromechanical. So pump 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. Now 7% is a good performance in the market context because you know that the gas turbine market has been down in the last couple of years, resulting in more competition on the installed base. And 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. But 7% down, but we're resisting very well and we'll continue to do so. Operational EBITDA 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. And 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 12.8 percent. But once again, RES performing well, turbo services under a little bit of market pressure, but everything else trending up and recovering. But turbo, it's the power market. That power market will continue to be tough in the next couple of years. ChemTek, to go to the next page, so Slide 8. My page numbers look funny. Slide 8, ChemTek. ChemTek 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. So we're up 5% organically and 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 we were in ChemTek, we've got 2 businesses. Historically, we've got the separation technology, which is the products business, which is about 2 thirds of Chemtech. And 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. Now 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, which 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. So we discontinued that activity and therefore Tower Field Services is trending down in terms of volume. It's in H1 this year, it's closer to 20% of ChemTEG than the 30%. And I think you'll see that continuing going forward, Tower Field Services being more closer to 20%. Now what that means is that we're Tower Field Services in terms of order intake is down double digit. I mean you can do the math going from 30% of all of Chemtech to 20% is healthy double digit decline, which means that 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. And 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%. And this is also the reflection of that mix effect, less tower field services and a lot of growth in separation technology. So ChemTek 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 CHF10 1,000,000 linked to the discontinued activity within TFS tar field services. If you excluded that discontinued activities impact of $10,000,000 then the profitability of Chemtek for all of last year was 7.3%. And in H1 this year, we're at 7.5% and continuing to go up. So we're pleased with the development of the operational profitability in Chemtech and you will see that that business will continue going from strength to strength in the next quarters. Now let's move on to the applicator systems division on Page 9. So applicator systems developed well in the first half of twenty eighteen. I think there's only there's really one number that will jump out at you if you're trying to figure out if everything is going according to plan. And I'll make it clear now, everything is going according to plan. But if you look at the organic order intake, you see that order intake in the first half of the year is up 6.3%. But organically it's only up 1.3%, which is unsettling at first glance for a business which is in 3 markets, dental, adhesives and beauty that are really GDP, GDP plus types of markets. So we've been growing at 6% or 7%. The markets have been growing at 3%. Why are we suddenly growing at 1.3%? Well, it's actually a tale of 2 different things. If you take dental and adhesives, in the first half of the year, we're up 7.5% organically. So twice the market rate, very healthy, continuing on the momentum that we had last year. Now what it tells you is that it tells you that beauty is down. Now why is beauty down? Well, beauty as a market is going well and it's a GDP, GDP plus type of market and our business is performing well, but we have an isolated event, which is that we have a large customer that represents significant volume for us on one product. And it turns out that this one customer has decided to this one customer had a 1st generation product into the market and we were manufacturing that 1st generation product. And the customer, for commercial reasons, decided to withdraw that 1st generation product from the market ahead of plan. So somewhere between 6 12 months before he was due to do it commercially and decided to move to the 2nd generation product ahead of plan also. Now it's not a negative over time for Sulzer because we had the 1st generation product and we also won the 2nd generation product. So actually that volume is also going to us. But in terms of immediate revenue and in terms of load plan, essentially what we had to do is we had to stop manufacturing that 1st generation product, which was part of our load plan in Q2 and Q3. And we will only move to manufacturing the 2nd generation product and actually in Q4 according to the customer's plan because he's working down the inventories that he had of the 1st generation and he's only launching us for commercial release in Q4. So 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. So by next year, we'll be back to business as usual with this customer. But this year, we have this little disruption that is very manageable, but it's taking the volume of Beauty down. And therefore, orders and sales in Beauty are essentially the same thing. So that volume is down and that's something that you're seeing in H1 because it impacted us in Q2 and that you will see it in H2 because it will impact us in Q3. Once again, we'll be manufacturing the 2nd generation in Q4. Hopefully, that's clear. So it's a negative impact this year, but it resumes according to normal program in Q4. So the operational EBITDA was higher in H1 2018 compared to H1 2017. We generated 49,000,000 of EBITDA versus $45,000,000 But the margins lower were 40 basis points lower at $22,200,000 And 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 and 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. But once again, we're down impact on our margins. But once again, we're down 40 basis points and none of that is a structural issue. It's 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 oh, I should say Transcodence, our last acquisition in APS In dental, Transcodent is progressing well and the integration is going according to plan. Let's now move to the slide, Page 10. It's the SFP summary. So SFP, SFP, we extended SFP at the end of last year. We think we can get an additional $30,000,000 of benefits, cost saving benefit without jeopardizing our ability to rebound with the markets. Now, turns out we told you guys that we would achieve $25,000,000 of incremental savings in full year 2018. And it turns out that we achieved the $25,000,000 in the first half of the year. So we're continuing to trend ahead of plan. And what we're doing is we're bringing some of the 2019 savings into 2018. So we said we'd do $25,000,000 this year. We're actually doing $25,000,000 in H1 and we'll do the second another $10,000,000 of savings in H2. So $35,000,000 for the full year. And the remainder to get to the $230,000,000 which is another $10,000,000 is going to happen in 2019. So 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. So the obligatory sanction slide, I have to continue talking about sanctions, hopefully not for too long. But the slide Page 11 is a reminder of the timing. It was a disruptive event, but it was a 3 day event, 3 days 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. And what you see in our financial results is that we continue to run really hard even when we were under sanctions and we minimize disruptions short term and we have no disruption long term. Now a reminder of the main highlights, we were free from sanctions within 3 days. There's no conditions associated to our unblocking by OFAC. There's no reporting obligations. There's no monitoring. So this is not a continuing story. This is we were blocked 3 days, we got a license, we move on. We own 5,000,000 shares of our own shares acquired from Renova at CHF109 per share. And as you know, we have a full downside protection for share price. All the upside is for us and you see today that we have latent upside. And the proceeds of the transaction CHF546 1,000,000 are payable in October into an escrow account as you know. RENOVA is a 48% shareholder of Solzer now. They're blocked from making any further acquisitions of any Solzer Financial Instruments, shares, bonds, options, whatever, they can't 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 can't buy. They've actually dropped off a member of the Board that was representative Renova representing Renova, sorry. So our Board has minority Renova representation. We've got 4 independents and 3 Renova representatives on our Board. In the time that we had after the sanctions, we leveraged the good relationship with that we have with OFAC to do something that we haven't announced yet, but we're informing you guys of it today because I think it tells you it highlights the good relationship we have with OFAC. In some of the investor meetings I've 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 Solsys. And it got us thinking because we thought that, well, one day we'll take the shares to market and when we take the shares to market, we'll get this question. So 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. And 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. And we haven't made it public because there's no point in making the license public until we're ready to sell the shares. But you should know that we have a license from OFAC that says very, very clearly, it was the only purpose of the license, that U. S. Investors have no restrictions whatsoever in taking part in bond offering, share placements or anything related to Solsys. I don't know if it's important to you guys, but I thought I'd mention it because it was important to some of our investors. So short term impact, I continue to get questions about the famous CHF10 1,000,000 that we highlighted as the cap of the short term impact. I don't have a final tally for you guys. My guess is that the final tally will be closer to half of that, so closer to 5 then closer than to 10. I think today we have the tally today, I don't know if 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 CHF3 1,000,000. And we think that when the meter stops, we're still looking at some of the under absorption we had related to that disruption. We may and some of the legal costs in continuing to have support in the U. S, I think at the end of the day, we'll give you a final number at the end of the year and I think it'll be something like half of the initial envelope that we talked about. So 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. And as I said, but 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. So on those words, I'll hand over 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. So and I'm talking about Slide 13. So let me go over that quickly and then going into the details. Order intake increased by 11.6% or 6 point 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 orders new equipment orders in pumps equipment that carry a lower margin. Order backlog increased by roughly RMB200 1,000,000 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 Op EBITDA, Op EBITDA was disproportionately higher resulting in an operational EBITDA margin or OP ROASER of 8.5% compared to 7.4% last year. The increase is the effect of higher volumes, SFP 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 Op EBITDA. And I will give you more details on free cash flow later. But 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 as due to the acquisition of JWC. Now let me go to the next slide, which shows you the quarterly order development. Looking at the and 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 percent organically. Acquisitions added RMB38 1,000,000 and the foreign exchange impact was a positive RMB 20,000,000. The ones of you on the call who are calculating quickly would probably have found out that some of our divisions only pump equipment and rotating equipment services had positive organic growth in Q2, whereas ChemTec 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 fuel services business. Additionally, Chemtech is mostly some project business and the quarterly order intake can be lumpy. Now let's go to the next slide, Slide 15. On the next slide, you find the Op EBITDA bridge whereas 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 Op EBITDA of $11,000,000 And let me now move to the next slide, which shows the development from Op EBITDA to EBIT. And that is slide 16. Now on slide 16, you can see that our amortization have increased compared to last year due to the acquisition of JWC and Transcoden. SSP cost shown in restructuring, impairment of assets and other non operational items amounted to RMB22 1,000,000. 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 $78,000,000 giving an EBIT margin of 4.9%, which compares well to the 3.9% in H1 2017. Now 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 $400,000,000 in total to refinance the revolving credit facility that we had used for the acquisition of Transcoden and JWC. So 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 percent 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 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 RMB37 1,000,000 in H1, 2017 to RMB55 1,000,000 in H1, 2018. And core net income to shareholders has increased as well from RMB75 1,000,000 in H1 2017 to RMB99 1,000,000 in H1, 2018. Now we are at Slide 18. Next, 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 inventories, as all the other items net out to 0. Now 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. And now the slides on our balance sheet, Slide 19. And 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 cash free cash flow, our net debt position increased to RMB522,000,000 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 RMB 400,000,000 in the Swiss Capital Market via dual trench bond issuance as of July 6, 2018. The first tranche of RMB 110,000,000 has a term of 2 years and carry a coupon rate of 0.25 percent and was placed at a price of 100%. The second tranche of RMB290 1,000,000 has a term of 5 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 positive one. It is actually the 3rd largest in the Swiss bond market so far. And with that transaction, our debt once again has a longer maturity with RMB850 1,000,000 out of the RMB881 1,000,000 shown on the chart covered by bond that are mostly maturing 2022 or later. And let me now hand back to Greg for the outlook. All right. Thanks a lot, Jill. Okay. So 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. The market outlook on Page 21, all our markets are trending positively except power. Power will Everything else is trending positively. Oil and gas, I would say that, Everything else is trending positively. Oil and gas, I would say that the volume recovery is underway. Upstream sort of I'm sorry, downstream started last year, upstream this year, but the pricing recovery is not in 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. So it's still pretty much a buyer's market, but I think that will start shifting in 2019. So once again, don't expect a price uplift this year, just a volume uplift, but I think the price uplift is will come about a year later. Okay. And the guidance slide, as you see on Page 22, we expect our order intake to increase by 7% to 10% for the year, up from the 5% to 7% that we had given before. So we're up from 5% to 7% to now 7% to 10% for the full year. Sales were also going up to 6% to 8% versus our previously guided 4% to 6%. We're not changing our profitability guidance at this point, 9.5% as per the previous statements. And note that this guidance adjusts for the currency effects and includes the acquisitions announced in 2017, namely Transcendent and JWC. So to wrap this up, summary on next slide. The oil and gas market recovery is underway. Once again, volume at this point, hopefully pricing next year. All the solar markets are healthy apart from the power markets, which is about at this point about 13% of our volume. Sales are the volume is improving. There's a lag of 9 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. And we've raised our target for 2018 for SFP to $35,000,000 up from the $25,000,000 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. And 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. And 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. The first question is from Ritu Amstelden, Baden LVA. 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? Then also in this oil and gas business, what is currently the capacity utilization in your pump 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? And then also in Oil and Gas, when we look at the backlog, what is here at the remaining share of low margin, low priced orders 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. But 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. I mean, we closed a bunch of factories, we restructured heavily, but we also debottlenecked. And if you take our business today, I mean, we could double the size of our pumps business probably without building a single other factory. So 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. And the backlog, we're coming out of 2 years of well, almost 3 years of a very difficult oil and gas backlog oil and gas market. So our backlog is at 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. But my message was not there's more downside. My message was there is upside, but the upside is not in 2018 because the pricing has not rebounded commercially yet. And 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 like 9 to 12 months afterwards. So 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, Ritu? Yes. Thank you. Thank you. The next question is from Charlie Ferenberg, 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 wanted to hear a short comment how you see this and where do you see the biggest dangers for seltzer if the conflict is escalating? Thank you. Okay. So 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. So 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. So they either want to have production in their country or production in their region. It's certainly the case in the engineered pumps business. But if you look at our water business, it's also very much like that. And it's also valid for ChemTek. So when you look at these businesses, what you have to understand is we have factories in multiple geographies capable of producing the same products. So 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. So what that means is that usually have a very competitive, 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 complicates your life. So 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 be to have as low impact as possible. But it's disruptive to the business and it makes our life a little bit more complicated. But at this point, it's manageable. Does that answer your question, Charlie? Next question is from Armin Rechberger, ZKB. Please go ahead. Yes. Good morning, gentlemen and lady. Guidance for operating EBITA was not listed even though because you changed standards to IFRS 15, you gained 70 basis points in the 1st semester. So there is to be expected such a positive factor in the second half as well. So why didn't you lift the guidance for operating EBITDA? And my second question is in the beauty of application 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. I mean, are the products meanwhile not needed? Or is it just they have such a big stock? Or why do you experience a gap? And then is it the brush for the electrical cigarettes, this project or what is it? All right. Thanks for your questions, Armin. So the first question on guidance. Our guidance is old method. So 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. So you can theoretically, you can assume that the IFRS 15 method has an uplift. But what we said earlier is that actually between H1 and H2, it actually it pretty much balances itself out. So I don't know if it exactly balances itself out. I mean, frankly, I haven't looked into it and maybe Jill can answer that question. But the 9.5% is in the old methods. So there's no IFRS bonanza in there. Okay? Now the second question on Beauty. It's tricky to answer your question without pointing out to who the customer is. And you speculated as to who the customer could be. And I'm sure you can understand that I can't answer that question. But it's a customer that had a very aggressive commercial push on a product in multiple geographies and did built inventory to sustain that push. And as they decided to shift to the next generation product a bit earlier, they're working down That's really That's really all I can say about that. I apologize for not being able to be more explicit. Okay. But I commend your investigative skills. So anyway, let's move to the next question. The next question is from Fabian Hecke, UBS. Please go ahead. Yes, good morning, everyone. Three questions from my side. So the first one is, why again it is quite an H2 loaded years, particularly at pumps, turbo and to some extent at Chemtech. So to me, it seems officially, there does not 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 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? And then my third one is on the SFP program. So you executed fast through 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 well? Thank you. All right. Thanks, Sabine. So why is our business H2 loaded? It's a really good question. There's some seasonality in parts of the business. I mean, 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. But I think it has a lot to do with the market recovery. People 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 2nd part of the year. And so we're getting a little bit of that commercially. Now From a sales perspective, we're ramping up. So we're growing and there's a lag time between orders and sales. So essentially when you have a commercial push in the second half of 2017, then you have a sales increase in the second half of twenty eighteen. So I think it has more to do with it has a little bit to do with seasonality on some of our businesses and it has a lot to do with how people or 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. So essentially, we bid for projects at a certain price, which includes a certain view on raw material and wages. I mean, the commenting this time really on raw materials. And 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 derisk from a raw material perspective. As long as we keep that window small, then we're mostly mitigating the impact. And because that whatever is in our price is still representative of what we're buying at the time of what we're buying. You also have to understand that with our supply chain, we have purchase agreements that we usually have prices that are guaranteed over a period. So it's not like when we're buying casings, 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. And SFP, we've gone faster on a lot of the indirect procurement aspects. About half of our SFP increase was the additional $30,000,000 that we put on the table. About half of it was in direct procurement was we continue to save on a lot of things like insurance, facility management and things like that, that we that were back loaded 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. And 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 pending out a bit quicker. There's not going to be more SFP, the 230 is going to be the 230 because there's a moment where we have to stop talking about SFP. And also the market story is the market recovery. It's really dangerous to continue to be too focused on taking structural cost out because there's a moment where stores playing against you. So we are continuing because we will do everything that we can do that doesn't impact our ability to rebound and to benefit the market rebound. But there's a moment where it's going to become business as usual. So end of next year when we will have achieved the 230,000,000 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? Yes, I think that's totally in line here. Okay, Fabian. Follow-up questions or did we answer? So, it was all answered. Thank you very much. Thanks a lot. The next question is from Pascal Frogger from Vontobel. Please go ahead. Good morning from ILSI 2. So just again, sorry to insist a follow-up question on the guidance. And this time, we're talking about IFRS 15. So we see higher volumes. You mentioned the SFP savings, euros 10,000,000 ahead of initially scheduled. And then also, we see a lower impact of only like CAF of the initial €10,000,000 related to U. S. Sanctions. So this brings me just back in conclusion. Is it fair to consider your €9,500,000,000 percent EBITDA margin guidance as rather conservative? And then second question, just on Evon Day. You have a track record of like 2 to 3 deals. Is the pipeline still full? And now in terms of financing and also taking into account for the whole like sanction, Renova situation, what kind of size do you think it's still possible for this year? And then last question, JWC, I mean, we saw a strong performance of like €77,000,000 order intake in the first half year. Is this 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 GWC question. The business is doing really well. It's got great products and it's being driven very dynamically and definitive answer on this. I would say that what you're seeing is more a reflection of the strong commercial momentum that they have than any seasonality. But 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 and A, we yes, you're right, our pace has been like 2 to 3 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 7 or 8 businesses. And I think only one of them was part of a formal process. Everything else, we 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. So 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 Soldier family. But all of that is behind us now and we're back to normal business in terms of M and A. We've got a few things that are more advanced than others and the pace should continue to be those 2 to 3 deals a year, maybe a bit less this year because we've had a little gap. But there's a couple of things that could happen before the end of the year in the small to medium sized range that we've been in. We've bought things anywhere between $30,000,000 of enterprise value and $300,000,000 of enterprise value and that's where we'll probably Yes. I Yes. I mean, in terms of financing, you can see that on the balance on our balance sheet currently, we are at 1.75. And we basically are still within the industry among the companies with a better leverage level of leverage. So 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. And financing will not be an issue on that front. So as Jill said, we've got small to medium size stuff. We've got like at least 2 years of investment capacity available on our balance sheet. You had a question in there about larger deals and Renova. There's always there's a few businesses with larger businesses, more expensive businesses that we're interested in. There's always we've been focusing on small to medium sized acquisitions, but there are businesses closer to the $1,000,000,000 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 has is a minority voter at our Board and Renova is not able to participate in a capital increase. So I think that anything that we would do that would be a larger acquisition would stretch our balance sheet, would might necessitate our going to the markets and would mechanically lead to dilution of Renuvah. But 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 $10,000,000 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. So it's not it doesn't have an impact on our 9.5% guidance. So whether it's 10% or 5% or 0% is not reflected in the 9.5%, it's a non op number. It's just to keep the business readable. And 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. But 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. So, I mean, you see some isolated cases of things that we get at higher margins, but mostly it's still the buyers market. So, 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 in time. It's 10 o'clock and I know you guys have a really busy day ahead of you. So Jill and I wanted to thank you for your attention, your thoughtful questions and your support of Solsysor. And as we told you today, we've had a good H1, we've mitigated the impact of the sanctions, demonstrated that all of that is a thing of the past. And we look forward to continue to fight hard in a market that is showing signs of life and hopefully continuing along a similar trend in the second half of the year. Thank you very much for your attention and good luck today. Thank you. Ladies and gentlemen, the conference is now over. Thank you for choosing Chorus Call and thank you for participating in the conference. You may now disconnect your lines. Goodbye.