Earnings Call: Q1 2018

Apr 19, 2018

Ladies and gentlemen, good morning. Welcome to the Solsys' Q1 Order Intake 2018 Conference Call and Live Webcast. I'm Cher, 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 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 Lautner, Head of Investor Relations. Please go ahead, sir. Thank you. Good morning, and welcome to Solsys' Q1 conference call. Today with me is our CEO, Greg Guillaume and our new CFO, Jill Lee. This conference call is also being webcasted. The link to the webcast can be found on our corporate website. During the conference call, we refer to the presentation that can be downloaded from our corporate website. 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 these statements applies to all statements in the webcast and on the call. So this is enough from my side. I hand now over to Craig. Craig, please. Thank you, Christophe. Hello, everybody. It's a pleasure for Jill and I to be with you today. We've got some good Q1 results to discuss with you and we will explain to you the transaction that we went through last week, the consequences and take all of your questions on anything that may be crossing your mind, anything you might be concerned about. Solsys is fully back to normal. We'd like to put all of this to rest and this call is an opportunity to address anything that you might be concerned about. But part of being back to normal is to take the time to introduce our new CFO who had the interesting experience of resigning well, dropping off the Board on April 4 after 6 years on the Board, becoming the CFO on April 5 and being hit by sanctions on April 6. So Jill has had a trial by fire and I'll ask her to introduce herself. Jill? Thank you, Greg. Good morning everyone. Very happy to meet all of you in my new role as the CFO of SULSA. As you know, I have been on the Board of SULSA for 7 years and previously the Chair of the Audit Committee. And meanwhile, as Greg mentioned, this is the 14th day of my being with Dozer in my new role. A bit about myself, I've worked the most of my career with Siemens and ABB. And in the past 3 years, I was leading the transformation programs for ABB. Background, I'm a Singaporean and have worked several years in China, in Switzerland and in Germany. And with that, I'd like to pass it back to Greg. Thanks, Jill. With no further ado, let's get into the numbers. So if we go to Page 3 of the presentation that you guys have access to, you see that our Q1 orders are CHF900,000,000 which is a record level for Solsysor. It's 18.6% up on an adjusted basis and almost 13% up organically. What you see on this page is that all divisions and all regions contributed to the growth. We were double digit organically in 3 of the 4 divisions. The growth was in large part driven by rebound and some good success on our part in oil and gas and also in general industries. Acquisitions, as you see on the page, contributed to the growth by $44,000,000 So once again, 18.6 percent adjusted, 13 percent, 12.8 percent organic, dollars 44,000,000 from acquisitions, half of that coming from JWC, which we closed in early January. In pumps equipment, Q1 order intake increased by 25% on an adjusted basis and by 15.2% organically. This increase was driven by a rebound in orders from oil and gas upstream, which were admittedly on a very low level in Q1 2017, but still 25% on an adjusted basis. We also saw larger orders than we'd had in recent past in that area. In Rotating Equipment Services, orders were up by 9.1% on an adjusted basis and 4.8% organically. The growth came from general industry and oil and gas, which more than offset the decline in power. In Chemtech, orders were up by 21%, both adjusted and organic, driven by oil and gas upstream and chemical processing industries. Finally, in Applicator Systems, orders were up in all segments. You see that we were up by 10% organically 16% adjusted, and all segments grew but particularly Dental and Beauty. So very strong start to the year for us. I know we'll have some questions as to whether our order guidance may not be conservative for the rest of the year. If you guys do the math, it would essentially mean the high end of our guidance at this point would essentially mean that we'd be flat organically versus last year for the rest of the year. Look, we were a little bit busy last week, so we didn't really spend much time trying to revise the guidance. But we'll come back to you guys at the end of Q2 based on the performance in Q2, and any comments in that direction would not be misguided. But let's focus on the rest of the presentation at this point, which is what happened to us last week and how can we convince you that we're fully out of harm's way and back to normal. So if I go to Page 4, the summary of the timeline. On Friday, April 6, the U. S. Treasury imposed sanctions on a number of individuals and companies, including Victor Vexelberg and Renova. This information got to us same time it got to all of you through the newswires. We were never notified of anything by OFAC because OFAC had never the intention to sanction Soldier. We were collateral damage, certainly an unintended consequence. And when we started calling OFAC over the weekend and trying get in touch with them, they I think they were as probably surprised as we were of the consequences on a company like Solsys. We worked very diligently over the weekend, had a deal signed fully binding with Renova by Sunday night to buy shares from Renova, 5,000,000 shares. And the deal was crafted in a way that made it fully compatible with OFAC guidelines. So OFAC has never asked for anything because OFAC never actually directly post sanctions on us. But what we did with our U. S. Councils is we OFAC would be looking for. Essentially, Renova below 50% of the capital, no cash flowing to RENOVA and a long term undertaking for RENOVA to stay below 50%. I'll get to that in a minute. But fully signed by Sunday night, fully binding, we applied for sanction relief for license to operate essentially from OFAC on Sunday night and had some very active discussions with them in the early part of the week. And essentially by Wednesday end of business day U. S. Time, OFAC had approved the transaction that allowed us to transfer the shares and essentially bless the fact that the transaction that we had proposed would take us out of sanctions. The way OFAC works is they give you the license to execute the transaction. You execute the transaction, which we did by the morning of Thursday, which was April 12. By the morning before the opening of trading, we had executed the transaction. We were the proud owners of 5,000,000 of our own shares. And by OFAC rules, we were no longer under sanctions. The second part of what you have to do with OFAC is you have to get your U. S. Assets unblocked, and we have to apply for a second license once the deal had been executed and we owned the shares, we had to apply for a second license for the full unblocking of our U. S. Assets, which we got by Friday end of business day in the U. S. Again. So anybody who's an observer of OFAC and of the sanction process will tell you that this was done in record time. It is really an indication of the fact that OFAC was essentially working with us to allow the company to resume normal operations. And it's also important to state that the two licenses from OFAC do not come with conditions. So we're unblocked. There's no additional requirements from OFAC. There's no conditions on what we do with the 5,000,000 shares. There's no nothing essentially. So it's a very clean deal. It's a very thorough deal. And as we told you last week, it allowed us to fully resume operations. Pretty much on Thursday, we were back up and running. And the last remaining impacts, things like some of our accounts were still blocked on Friday and we got them unblocked with the OFAC license. But having a few blocked accounts was not preventing us from serving our customers, from taking orders and from executing. And we were allowed to receive payments again. We just had to essentially do the housekeeping associated with unblocking everything and putting all of that behind us. So all of that was contained in last week and essentially most of it was contained in the 1st 3 days of the week. So for the avoidance of doubt again, Sulzer is no longer subject to U. S. Sanctions. Sulzer hasn't been subject to U. S. Sanctions since Thursday morning last week. All their assets were unblocked, all of them. Solsys owns 5,000,000 shares of its own shares that Solsys bought from Minova for CHF546 1,000,000. These shares are not attached to any conditions. There is no restrictions to what we can do with them. There's no restrictions to who we can sell them to. There's no This is fully in the hands of Solsysr and it doesn't involve going back to OFAC for anything. It certainly doesn't involve going back to Renova for anything because Renova doesn't own the shares, Solzer does. The pricing as per the mechanism we explained to you last week came to a price of CHF109, CHF109.13 if you want to be precise. And we've got full downside protection and full downside protection forever. So forever means there's no time limit on that. It means that we don't pay the money to Renova for 180 days. And even when we pay the money, we don't pay it to Renova. We pay it after 180 days on a blocked account in the U. S. And by the way, we don't even pay the whole amount, we pay 80% of the amount because we keep 20% of the amount to settle any price difference linked to reselling the shares. If we were to resell the shares at a lower price, this would come out of Renova's pocket, not Sulzer's pocket. Now I have no intention of selling the shares at a lower price. And if you see where we're trading today and hopefully what we'll be trading tomorrow, we're well in the money. But this is a good protection for minority shareholders who had to essentially digest a deal that happened pretty much over the weekend. It was important for us that we were very clear that there is no downside to shareholders. There's only upside. As I said, there's no funding requirement for the 1st 180 days that comes after that. And the funding requirement is for the 80% of the proceeds that we have to put in an escrow account in the U. S. After 180 days. Renova is now a 48.8 percent shareholder of Solsor. They're blocked from going back up. There's an undertaking, a binding undertaking by Renova as part of the deal that we signed with them where they can no longer buy soles or instruments of any kind, to be clear on this. Let's go to Page 5. Page 5, we try to give you the main terms that we think are relevant to the market's main terms of our agreement with RENOVA. So first bucket, dividends. Dividends are were due the 2017 dividend was due on was payable I think on the Monday of the right after the sanctions. So on 9th, I think the dividend was due. What, sorry? Tuesday. On Tuesday, I'm sorry, on 10th. On 10th. So the dividend was due on 10th. Now we paid the dividend to everybody but Renova. RENOVA, we did not pay the dividend. The share of the dividend from RENOVA, I mean, the dividend was about CHF120 1,000,000. Renova in 2017 was a 60 some percent shareholder. So you can see there was about CHF100 1,000,000 that was I'm sorry, my math is not very good, dollars 76,000,000 about $80,000,000 going to Renova that did not go to Renova that stayed with the company. And the dividends going forward on the remaining shares held by Renova, so the 48.8 percent of our capital, dividends going forward are not payable to Renova as long as Renova is under sanctions. So what that means is that the company, Sulzer, keeps the proceeds of the dividends that would have gone to Renova. We keep them in house. We don't have to segregate them on any special account of any type and we can fully use them for financing the company. So this is actually a good source of very cheap financing for us going forward as long as Renova is under sanctions. As I said, it includes the 2017 dividend. So if you do your math, it's about $80,000,000 that we kept in the company for 2017. And if you adjust for the fact that Renova will be is at $48,800,000 And if you adjust if you keep the dividend constant going forward, that's about $60,000,000 every year that stays in the company that would have gone out of the company. So if you try to figure out what it means for Sulzer's liquidity and ability to finance itself, it's actually quite advantageous for Sulzer. Now if I go to the proceeds of the share purchase, as I said, we don't have to fund anything for the 1st 180 days. What it means is that for the 1st 6 months, it's actually a payable. It's as if Renova had been a supplier, they delivered shirts to us and we pay them 180 days and we have a payable on our balance sheet. It's not interest bearing, it's not debt. That's the situation for 180 days. Then afterwards, we fund 80% of the proceeds to put them on an escrow account in the U. S. So we'll have to raise financing for 80 percent of that $546,000,000 if you do your math to put that in an escrow account, but this is in 6 months. Then if I get to the 3rd bucket, which is price and restrictions. So the price I told you it's CHF109. All the upside is for Solsys, all the downside if any is going to be for Renova. Now I don't expect that there's going to be any downside because I expect that we should recover once we give you guys confidence that all of this is behind us, which I hope to be able to do on this call fully today. But once again, it's a very advantageous and a very protective mechanism for Solsys and its shareholders. Renova is blocked from purchasing financial instruments related to Solzer going forward. So there's no possibility for Renova to go back up. There's no flow back to Renova. All of this is fully covered and fully binding. If I go to Page 6, there is this is more look in the rearview mirror. It tells you what happened to the share price, what happened to our volume. I'm sure you guys were following that quite actively. But we're still before all of this hit, we were trading at 126. We're still not recovered. I think it has to do with the market waiting for us to put a number on the impact and also to give you some view as to whether there's a long term impact for Solsysor, which there is not, and also to give you full transparency on this transaction and how it works. So let's continue and go to Page 7 and try to answer those remaining questions. So Page 7, Sulzer is no longer under U. S. Sanctions, all assets are unblocked. We're no longer in no fact discussions. This is all behind us. To be very clear, this is all behind us. We've resumed normal operations globally. We're going full speed. Our business activities were impacted last week and there were some questions as to what's the impact. And we put a number out there on the press release, which says that we expect a one off cost impact of CHF10 1,000,000. Now is that a precise number? It's not a precise number. It's a ballpark estimate because essentially we fully believe that the impact is going to be a single digit impact. We try to give you guys an envelope so that you would not fear that we would be talking about anything larger than that. If you try to do some math to do a sanity check on the 10,000,000 our U. S. Business is about 24% of our sales. It's about CHF 700 and some 1,000,000 of sales every year. If you take a week of our U. S. Business, it's 15,000,000 of orders. Now, even if you say that we were stopped for the full week and we lost $15,000,000 of orders, which has not happened, we were not stopped for the full week, we did not lose $15,000,000 of orders. But even if you were to take that as a very conservative assumption, you're talking about a $5,000,000 gross margin impact if our business in the U. S. Had been stopped for a full week. Now if you compare that, for example, to hurricanes in the U. S, which we've had recently, we never got back to you guys with any impact of that kind. We usually are very resilient and continue to work in tough environments and we did this time around too. If you look at it differently and you say, well, Sulzer has 2,400 employees in the U. S. If everybody had been sitting around doing nothing last week, which certainly wasn't the case because we were allowed to execute our backlog, but if everybody had been sitting around doing nothing, 2,400 people sitting around, what's the payroll impact of that? You're probably talking about something like CHF 4,000,000. So whichever way you slice it, this is an impact that will fit within the CHF 10,000,000 envelope that we gave you guys. We also have some legal costs associated to this obviously. But it's a one off cost. It will be within that €10,000,000 envelope and we haven't fully finished adding things up. We're quite confident that it will be within that envelope and we're very confident that it's a one off cost and it doesn't impact the reputation of the performance of Solsys going forward. Our customers were very loyal, we're very supportive. Everybody is compliance oriented. So when there's a fear that you're under sanctions, people stop working with you for a few days. But I'll give you the example of a large oil company in the U. S. I'm not going to name them, but they have a few Xs in their name. And we had 2 discussions with on the same day. The first discussion was we are putting you guys on hold while we understand what's happening on the sanction front. And then the second discussion we had with them is they have put together a team internally to gather evidence of why Sulzer was mission critical to the company, to their company, and they had the intention to lobby OFAC directly on our behalf. So these are the type of interactions we were having in the U. S. I think that all the signs that we see today are that customers are supportive of us. They're happy that we're back in business. They're happy to work with us and we're going full speed ahead. So this leads to our being very clear that we don't expect a long term impact to Sulzer from these sanctions that we expect a one off short term impact, which will be recognized in 2018, which we'll treat as non operational of CHF 10,000,000. And our guidance for 2018 is unchanged. So order guidance is unchanged, sales guidance is unchanged, operational profitability guidance is unchanged. Once again, the $10,000,000 envelope will be in this in the non op category, but all of that is unchanged. And as I said again, we have the support from our customers and we are back to running at full speed. The last page of the presentation is Page 8. It's a reminder of our guidance. Orders up 5% to 7%, sales 4% to 6%, operational profitability around 9.5%. Now before I open it up to take sections I've written a few questions of my own for myself. I mean, look, I don't presume to understand what you guys are sensitive to, but I think there's a few things that everybody is would be asking questions about. So I might as well address them upfront. I've already addressed the impact, the $10,000,000 impact, the one off and some back of the envelope sanity checks to make you guys comfortable that this is a reasonable number. I'll address a few questions on sanctions. We've gotten a lot of questions through Investor Relations about let me take them. What happens if there's more sanctions? What happens to Solsys if there's more sanctions? Now if there's more sanctions, to be clear, Renova, our largest shareholder is already under sanctions. We have already been cleared. There's more sanctions to more Russian parties does not impact Solzer's situation, does not impact the deal that we have in place and does not impact the license to operate that we have from OFAC. So we've been cleared and we don't anticipate that more sanctions would have an impact on Sulzer. Now you could say, well, what if it's not more sanctions, but it's thresholds being looked at differently? So one example one of the questions could be what happens if, I don't know, OFAC or anybody else came back and said 50% of capital that was before, tomorrow it's 40% of capital, for example. Well, we have a structure in place that we validated with OFAC that they blessed, that they allowed us to execute that is a conduit for our buying more shares from Renovitis if we had to. I don't anticipate that we'll have to because there's a very there's a lot of clarity from OFAC that the 50% of capital is the rule that they apply. But if we had to buy more shares, we have everything in place to do that. And I think Soldier is probably the company that can execute this the most speedily because we've blessed, we've had all of the structure approved already. So if the threshold were to be lowered, worry about everybody else, don't worry about Solsysr because Solsysr has a structure in place to execute anything that has to be executed linked to share transfers. Now your other question could be, well, what if instead of being capital, suddenly the doctrine changes and its voting rights? We have everything in place with Renova where if there ever was a sanctioned risk linked to voting rights, Renova would adjust its voting rights correspondingly. It's difficult to transfer shares because you need to get banks to be comfortable that transferring shares does not expose them to sanctions. Renova can renounce voting rights. Renova can renounce voting rights. And I don't want to get into the details of that because this is a confidential undertaking between us and Renova. But if voting rights were an issue, the voting rights would be adjusted automatically. So don't worry about voting rights. Voting rights may be a problem for companies, but voting rights are not a problem for Sulzer because this has been taken care of in the transaction that we signed with Renova over last weekend, actually 2 weekends ago. Ago. What else can I tell you? I mean essentially, I believe that at this point, Sulzer with the deal that it has in place with Renova, with the clearance that it obtained from OFAC, I believe that Sulzer at this point is essentially sanction proof. I mean, it's not for me to say these things because at the end of the day, it's for these governing authorities to decide how they look at these things. But what I'm trying to explain to all of you guys is that we've anticipated a number of things. We did we tried to figure out what could be the concerns of the market, what could evolve over time, and all of that we've tried to handle upfront, I think, in a very comprehensive manner. So my suggestion at this point was, you can ask me all the questions you want on this, but I think that Soldier is probably the company you should least worry about in terms of further sanctions. Because once again, we have everything in place we believe to address anything that could come up once bitten twice shy. The other question you may have is on overhang. What are we going to do with the 5,000,000 shares? Look, we're not in the business of owning our own shares. This is not what we aim to do long term, but we have no hurry. We have there's no timeline. There's no commitment to anybody in terms of doing anything under any type of timeline to OFAC or to anybody else. So we've got all the time in the world. We don't have a financing issue associated with those shares. It's quite straightforward for us to finance even after 180 days. We're not going to do anything that dumps the shares on the market in a disorganized manner anytime soon. And when we do move, we will move in a way that doesn't create undue pressure on our share price and we will do that in a way that maximizes a long term shareholder base over a short term profit. We certainly anticipate that we'll make a profit on reselling those shares, but I think it's only one of our concerns. On those words, I'll stop trying to answer my own questions and that will actually move to answering yours. The floor is open. We will now begin the question and answer session. The first question is from Pascal Frogger, Von Toebel. Please go ahead. Good morning, everyone. Thank you very much for the detailed explanation. This is very helpful. Just some smaller remaining questions with regards to the sanctions. So first of all, if I calculate just roughly the cash out for this 80% you have to pay in like 6 months, I derived net debt to EBITDA is almost increasing to roughly 3 times. Does this mean for the time being that your M and A limit your M and A activities are rather limited? And then second question related to this. You mentioned you will not pay dividends to Renovo for the time being as long as they're under sanctions. Assuming this goes over several years, just an assumption, will you then have to pay the dividend at a later point in time? Or I just say like they don't want it, the dividend? So that's with regards to the sanctions, if you could just please clarify this. Thanks, Pascal. Good question. So the math of financing the 80% in 6 months, the math actually takes you to about 2.4x to 2.5x EBITDA in terms of leverage. So we're actually still pretty comfortable. You guys also have to develop a view as to how you treat that cash flow keep from Renova going forward also. But 2.4x to 2.5x is the debt to EBITDA multiple that we'll be at once we finance the 80% of the proceeds. It still gives us some room for M and A. And once again, it gives us room to do M and A in the short term, but we also go back down by about a turn the day we sell the shares. And we can sell the shares anytime we want. So I don't think it's really a limit either short term or medium term in terms of our ability to buy businesses that make sense for Solsys. That was your first question. The second question is, Renova remains the owner of 48.8 percent of our capital and they remain dividends are still due to a shareholder, but they're not payable. So if the sanctions last for a number of years, the corresponding dividend for Renova piles up within Sulzer, we have no obligation to pay that out at any time apart from when sanctions are lifted. So I'm not in the business of predicting when sanctions will be lifted, but until the sanctions are lifted on Renova and Victor Vexelburg, the money stays in Sulzer. If for whatever reason we ever decided that it distorts our balance sheet, we want to get that off our books for whatever masochistic reasons we decide we don't want to hold all that cash, then the obligation we have as per the agreement we have with OFAC is to put that on a blocked account in the U. S. But once again, we it's a really interesting source of financing for us and we fully expect that we will be holding that cash and not paying out the Renuva dividend over next over the period during which they're under sanctions. And I'm not going to speculate as to how long that's going to be. Did I answer your question, Pascal? Yes, perfectly. Thank you. Next question is from Fabian Hecke, UBS. Please go ahead. Yes. Good morning, Greg. A question. You stated that Renault cannot buy Sulzer Instruments. Is there also no time limit regarding debt close? Yes, I confirm. There's no time limit. Okay. Very clear. Then you're quite confident on your customers that you are supportive. Are there any fears that other competitors are trying to exploit the situation, telling the clients and their compliance departments you should diversify a bit your procurement strategy a bit away from shifting away from Solte? Or also in general, do you see any difference between your large accounts and small accounts in how they treat the whole situation, how they reacted? Can you give a bit of a feeling there? Yes. No, of course, Sabian, good question. The our competitors, boys will be boys and I think people use whatever they can against you. I mean our competitors are going around some of our customers saying, hey, are you sure that souls are safe? Are you sure that you shouldn't be diverse? Everything you said is correct in terms of what competitors try to do some competitors. But we anticipated that because human nature is what it is. And we also have all of our sales guys in the field going to customers and making it clear that we have these licenses from OFAC that we're fully in the clear. OFAC has been very supportive in terms of getting the news out there. They circulated the information directly themselves to some of the banks. And the more we get all of you guys on this call to say that you're confident that the company has given convincing answers and has everything all of that behind it, the less people will have an angle to try to get our customers to worry. But honestly, we've gone around our sales guys, I've done a lot of calls over the last few days to try to figure out whether there's some touchy situations where customers are on the fence and hesitating to give us an order because somebody has been whispering in their ears. And I haven't found any evidence of that. I'm sure there's some anecdotal stuff somewhere if you dig deep enough in the company. But overall, we're back to business and customers understand that these things happen. It was lifted very, very quickly and I don't think it's going to leave traces. So will I have a few sales guys in the next few months that will say, hey, I lost this order that I was supposed to get because the customers were worried. I think it's a convenient excuse, but it's not an excuse that we'll accept as a company. And it's not something that we think will be significant. Okay. Then maybe one question returning to the operational business. I mean, after the very strong Q1 and also driven by large orders in Oil and Gas and General Industries, is there I mean, what's your first view in Q2? I mean, was it Q1 a rather bit some one off? Can it continue at the level at least clearly above your guidance run rate? Look, I think that we certainly, we were anticipating that Q2 would continue to be strong and not necessarily at those levels because that's a record level that we don't want you guys to get used to every quarter. But certainly, we see strong momentum and we don't believe our momentum has been significantly impacted. I mean, the signs today are that we continue to have good momentum and we believe that the market will continue to be supportive in Q2. So if what I've just said confirms itself, then you guys will rightly beat me up at when we have the same call in Q2 to say that we were conservative last last week and this is not something we looked at in a whole lot of detail. But once again, I'm very upfront that if you take the higher end of our order guidance at this point, it essentially would assume that we're flat organically versus last year in the next three quarters. And I certainly don't expect to be flat organically. I'd be disappointed. But we'll have that discussion, if you allow me, at the end of Q2. Yes. And then just another one on that topic. I mean, you're still in the full process of executing on Solsys' full potential. Now orders come in stronger than expected. Are you ready now operationally even to digest the growth? Or you think higher orders could result in a significantly trailing revenues or your lead time significantly expanding? It's a really good question. It's actually the most important question for all companies that are rebounding after a period of transformation and restructuring. It's how ready are we for the upswing. And a year ago, we launched a program. We've been talking a lot about SFT because we had a commitment to all of you to fulfill our targets and to give you regular reporting on that. But about a year ago, we actually January 2017, we launched a program internally called Faster and Better. And the whole point of differentiating factor is going to be lead times essentially. It's our ability to ramp up and execute. And we think that we're ready. I see hiccups left and right in the business because the order upswing in Q1 was quite significant and that forces us to step up our game. But I don't anticipate that we will drop the ball on this. I think that we've done a lot of preparation work. We're still re staffing in some areas like the early engineering, what we call order related engineering, which is right at the beginning of the execution of the contract. We're re staffing in some places and tendering because we shrunk the teams and we see an inflow of inquiries that leads us to ramping up. But we've been executing a plan linked to this for about a year now. So if we get it wrong, it's not going to be for lack of preparation. And once again, I don't expect that we'll get it wrong. Good. Thank you very much, Greg. Thank you. Next question is from Zlan Shipansky, MainFirst. Please go ahead. Yes, hello. First of all, congrats to the great intake numbers. Three questions from my side. First one is on the order intake. The oil and gas up stream you mentioned were also responsible. And I think this is the first time since many quarters that this market has come back. How do you see that going forward throughout the next three quarters? And given that these great numbers of intake clearly came a little bit as a surprise maybe also to you, it's one of the reasons that power was more resilient than you anticipated before. And can you elaborate on the gross margins you were taking in with these orders? Are those given power is better than anticipated also becoming better? And the third question is regarding your statements on the one offs. You mentioned the €10,000,000 is a rough number. It does look quite high if you just look at the legal costs we should expect? And also, you mentioned the €5,000,000 gross margin impact. Is there any chance that those $10,000,000 will be revised down? Okay. Thank you, Sven. Three questions. I'll take them starting from the last one. Yes, the $10,000,000 we felt that it was important for you guys to have something to sort of hang your head on in terms of what would be the envelope. And it's I tried to express that we believe that the impact would be a single digit number, and I gave you some orders of magnitude. And you rightly say that based on those orders of magnitude that's probably a number on the high side. I'll call you Sven to help me negotiate with our lawyers because U. S. Lawyers are very expensive. But it's I'm not sure that it's a very significant number in terms of understanding where Solsys should be trading today. It's a one off and it's within that envelope of $10,000,000 It's We'll update you guys sort of midyear when we will have had time to kind of tally things up. But yes, I mean your comment is a reasonable comment. I wouldn't dispute it necessarily. Although I don't have the bills for the lawyers yet. So once again, I'll ask for your help on that. The comment on power, power is the market the power market is down. So we were expecting to suffer a bit more than what happened in Q1 in power. The gross margin comments, we have 2 businesses that have power exposure. We have our pumps business and we have our rotating equipment service business. Rotating equipment service business, it's on the essentially it's a lot of turbo service. It's servicing turbines, gas turbines, compressors and the likes. And our margins have held up pretty well. They're a bit lower than they were in the recent past, but we've kind of held up pretty well and we continue to execute quite well. So we're comfortable that we have that we have a good grip on that. The margins that are depressed are on the pump side, the power market has always been the low margin segments of the pump industry and that continues to be the case. But once again, it's relatively it's much smaller than oil and gas exposure. But yes, there is a lot of price pressure on the power side. But I think maybe to answer your question differently, we are I think we've crossed the tipping point in terms of fighting for load. We are still fighting for load, but we're taking very careful looks at pricing and margins. And we are increasingly willing to let things go and to lose an order because we believe that the market is supportive going forward, and therefore, we don't have to sort of cut off an arm to fill the factory at this point. I don't mean to give the impression that this challenge is behind us because we're at the beginning of the upstream recovery. The downstream recovery is about a year old. But still, we're past that point and we're already in a mind frame, we're already at a moment where we arbitrate and we are willing to lose more than we were willing to lose in recent past because we feel comfortable that the market is developing the right way for us, which takes me to your the we see oil and gas with good momentum versus anything we felt over the last few years. We don't anticipate that the bottom will fall out later in the year. So I'd say that we were cautiously optimistic that the caveat I'd bring to that is we had some larger orders in Q1 in oil and gas throughout the year. The one caveat I'd bring to that is we had some larger orders in Q1 in oil and to that is we had some larger orders in Q1 in oil and gas. The stuff that we're seeing that's a bit larger in oil and gas is a lot of stuff that's been on the shelf for 2 or 3 years that oil companies have been dusting off and taking to market. I'll feel better about the continuing momentum once I start seeing new projects, things that were not in discussion 2 or 3 years ago, and when I start seeing things that are actually getting awarded that are new projects. And I think this will be the certainly this will be the telltale sign for me for the second half of the year. But yes, we're cautiously momentum will continue in oil and gas. Sven, did I cover your questions? Thanks very much. Appreciate it. Thank you. Next question is from Alessandro Folletti, Octavin. Please go ahead. Yes, thank you very much. Good morning also from my side. I have two questions. One on the oil and gas rebound. Can you give a bit of an indication where it came from, if it was, I don't know, only U. S. Or only Asia, if there was some sort of skew there? That was the first question. And the second one is again related to sanctions. Let's say going forward, I understand that obviously now with the share buyback, you sort of had have a blueprint on how to deal with these sanctions. Should they come back again, Let's say, because they reduced the level from 50% to a lower level. But I was wondering what is your take here on this side? You have a few board members that are clearly related to Renova. You have bought a company Rotech that did belong to Renova before. Are there any spin towards in your view, towards the U. S. Coming back and sort of reinstating sanctions because of that, because of, I don't know, domination of the company and the Board or because of you bought a company that belonged to the NAR before? Okay. Alessandro, I'll address your two questions. The oil and gas we had some we had positive signs everywhere. If I look at the larger orders that we booked in Q1, let's see, there's one which is in Northern Europe, this one which is 2 in Asia, 1 in the U. S, one in Eastern Europe. It's a little bit all over the place and the market is overall quite active. So I can't pinpoint to any particular area that is driving the growth. I think it's quite spread out, which is reassuring to us because we need that balance. Sorry, can I just intervene here? Can you make one statement on the midstream? Midstream, no, I don't really have anything specific to tell you on midstream. It's yes, I don't have anything thoughtful to tell you on midstream. I should, but I don't. So not because there isn't anything interesting, but I'm just drawing a blank. I apologize. Okay. But nothing new so far in this sense? No. But there's a lot of if you see what's happening in the U. S, for example, and you see that if you look at areas like the Permian Basin, you see that probably China has ramped up and the challenge becomes how to get the oil to markets. So there will be midstream investments there. We were expecting for 2017 midstream to be quite low. And it turns out that we haven't seen really big projects getting sanctioned, lots of things still on hold. But we've been getting smaller business throughout the world in midstream. So this is not going to be what's going to drive a rebound this year, but it's not as low as what we'd had anticipated. In the meantime, I'll try to dig out a more intelligent answer to your question. I apologize for not being more precise. The second part of your question on the blueprints and the sanctions, I think your question was a very elegantly phrased governance question, which is you've addressed the capital, you've addressed the voting rights, because once again, we've addressed the capital to the satisfaction of OFAC. And we've addressed the voting rights preemptively because we have something in place that leads to the automatic adjustments of voting rights for Renuvah if that were to be an issue. And I think you're saying, well, there's a third element, which is governance. Your Board still has 4 Renuvah representatives. Is that an issue for anybody? And is it going to remain that way? I'll give you 2 answers. The first one is, I'm the CEO. I don't get to decide the Board composition. I think everybody understands these things are sensitive. Our AGM happened to be 2 days before the sanctions. So our board members were all recently elected actually 2 days before the sanctions hit. So there isn't anything coming up that leads to a fast adjustment of anything. But certainly, we're sensitive to that and we continue to ask ourselves questions as to what's the right level of representation. But also to be very clear, this was never a request by OFAC. This was never a condition. And shareholder representation on our Board was never in the scope of sanctions either by the U. S. Or by anybody else that I'm aware of. So it's a valid question, but not a question that's been brought up by any sanctioning authority, certainly not the U. S. And I can tell you we had extensive discussions with the U. S. All right. Thank you very much. Thank you. Next question is from Johannes Brinkmann, AWP. Please go ahead. Good morning. Did you lose any orders following the U. S. Sanctions? Not that I'm aware of. I answered this question a little bit differently earlier. What I said is orders, you win some, you lose some. You have a hit rate. If you win everything, it means that you're pricing too low. So in any in all our businesses, we follow what our hit rate is. And I don't anticipate that our hit rate will be different. So I don't anticipate that there will be a specific sanction impact. There might be a few hiccups left and right, a few isolated cases left and right. But as I said, hopefully very clearly, I don't anticipate that this is a longer term impact. I believe this was potentially a short term impact last week linked to if you're a customer and you have you need spare parts for I don't know or you need something with a very short lead time because your plant is down and you have to get it in 48 hours. Would you have placed this order with Sulzer in the U. S. When Sulzer was under sanctions for 3 day last week? Probably not. So we probably lost a few $100,000 of orders left and right because somebody had a really, really short lead time order. But once again, if you go back to the numbers, our weekly order intake in the U. S. Is about $15,000,000 Our daily order intake, if you divide by 5, is about $3,000,000 I was struggling with dividing by 5, but about $3,000,000 So the likelihood that in that $3,000,000 times 3 because sanctions were in place for 3 days, that over that $9,000,000 there's something very, very significant that had a really short lead time, that's a low likelihood. So if anybody in the company tries to use as an excuse, I have a baseball bat handy that I intend to use quite convincingly. Look, I mean, people will claim whatever they can claim as an excuse, but we don't believe that's the mentality at Solsys and we don't believe that's a significant impact. Certainly, this is not something that we'll use as an excuse for anything. Thank you. Next question is from Dominik Celgis, End of Ziet. Please go ahead. Yes. Thank you for taking my question. Hello. Well, after the annual results conference, you were quite passionate about the business opportunities in Russia that would be opened up and especially by Renova that you would get some help there if you had to deal with authorities there. I mean, I also know, I mean, you've had some construction, I think, in outside Moscow and got some help systems there by Renova. I mean, what's going to happen now to your strategy in Russia? I mean, how is Russia now off the table for you? Or what are you going to do there? Hi, Dominik. Thank you for your question. We're passionate about Russia. We think Russia is an interesting market, but our strategy on Russia hasn't changed. We've always respected all applicable law, always. That was the case before. That's the case today. That will be the case tomorrow. So that hasn't changed in any way. We don't have anything else to build in Russia. We had an extension of our Chemtech factory a year ago. That's over and done with. So yes, Renova helped us with managing the construction, but Renova company, but we don't have any needs related to that going forward. In terms of commercial support, I mean, Renova was helpful in helping us set the meetings and having contacts. And I think we can still set the meetings by ourselves and Renova can also still help us set the meetings as a courtesy. But our business in Russia was never operationally involved with Renova. It was never run by Renova. It's run by us. And once again, it's always been run by us respecting Russian market impacted by the sanctions? Certainly. Will some of our Russian customers be less bullish or will they have some issues financing themselves and placing orders? I think most certainly given the reach of the U. S. Sanctions. But what you're describing is more of a Russian market impact that will potentially lead to less business open for us and everybody else, but not specifically Solzer and Renova impact because once again we run our own show in Russia and we don't need anything from Renova. It would have been helpful, but it's not a necessity, certainly not at this point. Dominik, anything else you want to ask? Thank you. That concludes it. Thank you. Thank you. The next question is from Ritu Amstahlen from Baader. Please go ahead. Yes, good morning, a few. Things from my side. 1st on the U. S. Sanction and the business normalization, how far is this normalization of the business? Is it already back to about 100%, especially when you look in the U. S. There, you have quite a few or many blue chip companies with larger compliance departments and they move normally a bit slower. Are they still a bit of a bottleneck for you to be back to 100% or is this already solved? Hi, Retho. It's also a good question. I think we're I would say we're at 100 percent. If we're not, it might be 97%, I don't know. But we're pretty close to where we were before the sanctions hit. I'm aware of one customer that was still asking questions on Monday, And this wasn't a customer that was about to place an order. This was a customer that we fit to them on a larger project. They don't intend to award this project for certainly not for a few weeks or a few months. And they were just dotting the I's and crossing the T's and said our compliance department still has a few questions. We haven't blocked you guys, but we just want to make triple sure that everything is okay. And we gave them the text of the license. We had them talk to our U. S. Lawyers and I think they're quite comfortable now that everything is okay. But this is an example of a large account being cautious, but not being cautious in a way where they wouldn't give us business. A lot of these customers, they didn't necessarily have an order to place last week. And the guys that don't have an order to place, they have plenty of time to essentially be inquisitive. Answer your question, Did I answer your question, Retho? Yes, thanks. Then another topic, the business performance and recovery in oil and gas, here and what kind of projects are driving and let's say these bigger order items? Are these more, let's say, greenfield projects with a multiyear duration and potential for follow-up orders? Or are these more, let's say, brownfield project with upgrade character? There's a little bit of everything, but the I think the industry as a whole is cautious on large multiyear projects at this point. The stuff that they're sanctioning, the stuff on which they're placing purchase orders at this point, it has a tendency to be more on the extension of existing fields and upgrades of existing facilities, still new equipments, but the large multiyear investments, the big projects where oil companies were sanctioning something that was a multiyear investment that led to first oil in whatever 7 to 10 years. There's less appetite for that currently still. So I would think the mix I'll give you a better answer next time when I look at that in detail. But from what I've seen at this point, the mix is more towards extension of existing fields. If I do the splits Jill, do you want to answer part of the question? I think Jill has a few numbers. Go ahead, Jill. So on the regarding the oil and gas, I mean, at least in terms of the split, there was a question about how much was midstream and upstream. Essentially, the midstream piece is still relatively strong. It's above 30% compared to previous year. We certainly have a lot more projects in the upstream and Greg has also mentioned to you some of the larger projects that is relatively well spread across the geography. And downstream is the one where we have seen in the past a stronger growth. So it's relatively more stable on a low percentage growth. Yes. So hopefully, you guys got all that. What Jill rightly said is downstream was rebounding last year already. So it's a continuation. We're at normal growth rates for downstream because the rebound was already ongoing last year. Upstream is a big jump, but it's a big jump from a low base last year. And I think Jill is giving a little bit of meat to the midstream question that was asked earlier. Midstream was it's a quarter to quarter comparison, right? It's a Q1 to Q1. I mean the actual number that Jill has is midstream is 30% up in Q1 versus last year. But I advise you against extrapolating that in any way, shape or form because you're talking 1 quarter versus another quarter. It's not really relevant, but it's an indication. Okay. Thank you. My last question is regarding the pricing in oil and gas. We know normally the pricing is following, let's say, the recovery in the volume recovery, right? 1st year volume recovery. And now that's happening pretty significantly in oil and gas. Do you see already also some signs or now indication that the pricing is following here? Not really. I agree with what you said, pricing, trails, volume recovery. And whenever I'm asked a question, my answer is usually that my own personal theory, which may not be very scientific, but is based on experience in oil and gas, power and energy related businesses is that whenever you have a volume recovery, the trigger for pricing recovery is when people start feeling that they have visibility on load in their factories. So when you're feeling that for the next year, you kind of see how you're going to load your factory and you keep your people busy, then you start being more selective on pricing. I think that's the way the market behaves overall, and I don't think we're at that point yet. So I don't anticipate much of a pricing upswing for Sulzer this year. I think the impact for Sulzer this year, the positive impact is going to be volume. But I think pricing is a 2019 story, not a 20 18 story. Thank you. Thank you. Next question is from Patrick Lager from Credit Suisse. Please go ahead. Yes. Good morning, gentlemen. I'm very sorry for stretching the Q and A session. Just two questions here. We were talking a lot about your oil and gas business. But how is your business in the water and especially in APS developing? APS, let's say, had an okay performance, but wasn't that super strong. How do you see the business developing in APS going forward? And especially here, how about margin? The same question is for your water business. That's my first question. And then a more general question. I mean, I'm happy to see your oil and gas business now picking up. That's definitely good news for you and your shareholders. I'm seeing the share price going up roughly 4% right now. But this part of your business is very, very likely to remain very, very lumpy going forward. So personally, I would prefer to see Sulzer expanding its business outside of oil and gas. Is it still part of your strategy to expand outside of oil and gas? Or are you now just refocusing your efforts and your attention on oil and gas simply because the industry is picking up? Okay. Thank you, Patrick. So water and APS, you're being a bit tough on APS. APS is 10% up organically from last year. All these businesses are really delivering. APS is beauty adhesives, dental, I mean these are GDP plus type of businesses. When you're delivering 10% organic, you're essentially beating the market growth by probably a factor of 3. So, APS is doing well. Water is also doing very well commercially. Our order intake in water is very solid. The margins on both APS and water are not eroding. They're at the same levels or up. So I'd say so far so good on both of these fronts. The main challenge for us in order is at this point is not really the momentum on order intake because we've got good momentum. The main challenge for us is that we have a record backlog and we have to transform that into sales. And that means that we really have to ramp up the production in our facilities for the water business. But yes, we like both of these segments. Both of them are doing well in a volume perspective commercially, and both of them have margins that are holding up. Your comment on oil and gas, saying that oil and gas remains lumpy and oil and gas remains cyclical over time, I think this is correct. And our strategy hasn't explicitly been to move away from oil and gas. But if you look at these 7 acquisitions that we've made over the last 2 years, not one of them has been oil and gas related. Now it doesn't mean that if the right move in oil and gas came along, something really synergetic that we wouldn't consider it, but that hasn't really been what we've been focusing on. We still think that oil and gas is a great market to be in over time. We think that we've made our footprint more flexible and that we will be better able to flex as the market fluctuates in the future because oil and gas will always have cyclical fluctuations. But we think we're in a better shape to handle those fluctuations and we also think that we've by the moves that we've made over the last 2 years, we've diluted that. So do we intend to make a large acquisition in oil and gas? No, we don't. Do we are we explicitly trying to move away from oil and gas? No, we're not. But I think the last 2 years confirm your view that we've diluted that and we'll probably continue to dilute that by the acquisitions that we make. But the rebound of oil and gas will push us in the other direction, I. E, our the relative share of oil and gas business compared to everything else in Sulzer is going to start to go up in 2018 and will continue in 2019. Okay. And then just a quick one coming back to Renovo. So just to make sure that my understanding is correct here. Currently, there is absolutely no obligation to pay out dividends to Renovo. So that's for sure. But once the sanctions have been lifted, the dividends, which actually pined up, will be paid out to RENOVA. Is that correct? At the end, the question is, will you be forced to pay out RENOVA once the U. S. Sanctions have been lifted? Well, RENOVA as a shareholder, if you're a shareholder and you're not under there is the obligation that they Renova and Victor Vexelberg are no longer under sanctions. There is the obligation of pay that dividend out. When that happens is anybody's guess. And in the meantime, the money stays in Sulzer. But yes, it's not they haven't forfeited the right to dividends. Economically, there's no reason to do that. And yes, we maintain the obligation sometime down the road to pay the dividend. But when that sometime is, your guess is as good as mine. Okay, good. Thank you very much. Thank you. That was the last question. But we have some questions in the webcast. So let's take the questions from the webcast. So Thomas Baumann is asking, could you please comment on pricing, in particular in oil and gas upstream? I think that we have already responded. Read the ones that we haven't already answered. Have down payments policy remained the same or had you had to make concessions here? Down payment policy, down payments, it's really driven by the markets. When it's a seller's markets, you get big down payments. When it's a buyer's market, they take the down payments away. Right now, the pendulum is still firmly favorable to the buyers and therefore the down payments have not been at historical levels and that continues that will continue to be an issue for the industry in general until the pendulum swings back as the market recovers. So there's no Solsys specific issue. It's just an industry balance of power, an industry leverage issue, which is that the customers essentially dictate rules right now. And when they dictate the rules, they don't give a whole lot of down payments. But nothing's changed versus before. It's been like that for the last couple of years. Other questions, Christophe? Yes. A question from Walter Volgemut. A question regarding dividends payable to Renova. If Renova would sell shares itself, thereby reducing its stake in Solso further, would the historic dividends kept that Sulzer be payable to the new shareholders immediately? That's a very it's Walter. That's a very clever question, Walter. It's a complicated one because to sell shares and once again, I don't speak on behalf of Renova and I certainly don't speak on behalf of OFAC. But the positive consequence of last week is that if this CEO of Sulzer gig doesn't work out, I can be a consultant on sanctions for the rest of my life. Let me try to answer your question on this. For Renova to sell shares, because Renova is a blocked party, they would have to get OFAC approval. Even if Renova found a buyer that wasn't worried about OFAC and was willing to buy the shares without getting OFAC approval. The shares are held by an international bank. And what we saw last week is that international bank was not willing to transfer the shares unless they had the approval from OFAC to do so. So just getting the shares transferred from that international bank into another account, even within that same international bank, necessitates an OFAC approval. So essentially, you guys are not going to be taken by surprise. If Renova were to sell shares, they'd have to get OFAC approval for that. I really don't think that is the objective of Renova at this point. Certainly, we could have offered to buy more shares and the balance that we came to of 5,000,000 shares was what Renova was willing to do at this point. So I don't think this is my understanding of what Renuvah is trying to do is that this is not a priority for them. My understanding of the workings of the sanctions is that it's a complicated process because you'd have to get OFAC approval. And my understanding of the answer to your question is that if shares are held by an investor that is not under sanctions, we pay dividends. This is going forward. But all the dividends that have been held back to release that, we would have to get comfort as Sulzer. We would have to get legal opinion and probably some sort of discussion with OFAC, not an obligation that we have, but we'd have to get comfort that that does not expose us to secondary sanctions. And frankly, that threshold is a challenging one to clear currently. So I think the it's a really long answer to a simple question, but I think, 1, I don't think Renova is trying to do that at this point, my understanding. 2, I'm pretty convinced that you have to get OFAC approval if only for the bank to transfer the shares. And 3, I don't think it impacts the dividend that's already due but hasn't been paid. It only impacts the dividends going forward that will be paid to any shareholder who's not under sanctions. Other questions? There were no more questions from the webcast. And I guess also no more questions in the call. Okay. So to try to wrap this up, I really appreciate your time today. I appreciate all the thoughtful questions. I appreciate the opportunity to convince you guys that this is all behind us. I hope that we've done that, Jill and I, convincingly. There's our business is running full speed ahead. We don't anticipate a commercial impact of this, certainly not a medium to long term one, maybe minor things short term, but not anything that we can measure having been asking questions around the business for a week. So that really tells you that we're confident that the business hasn't been hurt and that we're confident that any impact that we have linked to the sanctions is going to be contained within a $10,000,000 envelope that will be treated as a one off this year. We're confident enough at this point to tell you that we are sticking to our guidance. We understand your questions that our order guidance might be on the conservative side and we'll address that at the end of Q2. And once again, we've tried to be really transparent as to what was in our agreement with Renova, binding agreements, and what was in our discussions with OFAC. And hopefully, I've convinced you that we have anticipated various things that could evolve, voting rights, anything like that. And this is all something that we have in place. So I would think you can worry about a lot of companies related to sanctions, but I think Sulzer at this point is probably the company you should worry least about because once again we've tried to anticipate, we've tried to be thoughtful and we've tried to make sure that we wouldn't be taken by surprise a second time. So that's it for us today. Once again, thank you very much and thank you for your thoughtful questions and your support during this unusual period which is now behind us. 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.