Sulzer AG (SUN) Earnings Call Transcript & Summary

Good morning, and welcome to Sulzer's H1 conference Call. Today with me is our CEO, Greg Poux-Guillaume; and our CFO, Jill Lee. For this call, we have prepared a presentation, which you can find on our home page. As always, I want to draw your attention on the disclaimer on Slide #2. Please read it through carefully. Having said that, I hand now over to Greg for the presentation. Thereafter, you have the opportunity to ask questions. Greg, please.

Thank you, Christoph. Good morning, everyone. Jill and I are happy to be with you today. Let's go straight into the presentation. Starting on Page 4. In Q2, our orders were up sequentially, but also year-on-year. This was supported by significant growth in our Chemtech business, in our Applicator Systems Division, as well as strong momentum in Pumps Equipment's Water and Industry segments. This commercial momentum and a strong opening backlog allowed us to grow our sales by 6% organic in H1. The higher sales volume, strong execution and savings from our structural cost actions boosted our operational profitability by 250 basis points to 10%, the highest we have ever been in H1. Our free cash flow also hit a new record for H1, tripling from the previous year's period to CHF 117 million. In February, we closed the acquisition of Nordic Water, strengthening our position in the water treatment market. Today, we offer the broadest portfolio of equipment for wastewater treatment, a market which is expected to grow steadily 4% to 6% a year. In May, we announced our intention to spin-off our Applicator Systems Division, creating an independent company called Medmix. Subject to shareholder approval at an extraordinary general meeting to be held in September, Medmix will be listed on the Swiss Stock Exchange this autumn. The split will allow each business to fully express its potential -- for Medmix, increasingly in health care, but backed by strong positions in industry. And for Sulzer, firmly steeped in flow control with the portfolio evolving towards sustainable applications. On Page 5, we see how Sulzer splits out in H1 by business and by region. We saw positive trends in all divisions and services. Our momentum continued trending up quarter-after-quarter, and sales and profitability were already above last year's level. Pumps did well commercially in water and in industry with water now our largest Pump segment. Together, Pumps and Services make up about 2/3 of our volumes and about 60% of our profits. Chemtech performed well in Q2 on all indicators. We're particularly pleased with the strong trend in the division's renewables business. Last but not least, Applicator Systems, the division that will soon be spun off under the name Medmix, saw a particularly strong recovery in its dental and industry segments and signed a first customer for its newly launched D-Flex platform, a U.S. biotech. So that's an important milestone for our new platform. And as always, although it's not shown on the slide, aftermarket activities account for about half of Sulzer. Moving to Page 6. In Pumps Equipment, orders in water were up 7% organic in H1. And in industry, we were up 6%. Including Nordic water, which contributed CHF 37 million, water grew by 25%. Energy orders settled at around half of their pre-pandemic levels on a combination of soft markets and [ order ] selectivity. We've adjusted our capacity and are focused on preserving backlog quality. Sales were up 4% organic, also driven by water and industry. Our operational profitability increased from 3.1% to 5% on higher volumes, good execution, a favorable mix and faster than anticipated realization of savings from the structural cost actions we announced in Q2 last year. We closed the Nordic Water acquisition, as I said, at the beginning of February. And with that strengthened our position in the wastewater treatment market. And once again, water is 40% of our orders in this division in H1. So it's really a very different Sulzer Pumps business than what you've been used to in the past. Very much water oriented these days, water and industry. Moving to Page 7. Our industrial pump segment won a major project for a new wood-based bioproduct mill in Finland. We talked a lot about water, but our industrial segment is very exciting, and it's very exciting in part because it has a strong leadership position in pulp and paper. And as you know, the world is seeing the development of a fiber-based economy, where increasingly plastics to name just one example, are being replaced by fiber-based products. And Sulzer has an important role to play in this. Metsä Fibre is building the largest wood-based bioproduct mill in the northern hemisphere with a production capacity of 1.5 million tonnes annually of softwood and hardwood pulp. The plant is expected to be operational in 2023 and will be a global leader in environmental energy and material efficiency. They'll operate completely without fossil fuels. Many people call these plants biorefineries as they generate the feedstock of the fiber-based economy. And as I said, Sulzer is at the heart of this. For this plant, we signed a framework agreement to supply more than 400 pumps and agitators and mixers. We were selected not only because we're familiar with our long-term customers' processes and needs, but also because we offer the most technically advanced solutions, fulfilling our customers' targets on material, energy and environment. Let's now turn to Rotating Equipment Services on Page 8. In RES, orders continued the uptrends seen in Q1. In Q1, they were up 10% sequentially. In Q2, they were up again 7% sequentially. And also 3% compared to Q2 of last year, which you may remember that Q1 and Q2 last year in Service for us were really high. Q1 was the highest ever, I think, and Q2 was also very strong. So it's a high comparison base, but we're still 3% higher in Q2 than we were last year. We're still down 6% organically for H1, but that's really a factor of big orders in Q1 2020. But H2, as you know, the H2 compare is much easier. The H2 compare 2020 is much easier. And we're well on track to be up by our announced 2% to 3% for the year in Service. Sales increased in H1 by 1%. All regions were positive. So a consistent picture here. There's still temporary headwinds. In many Asian countries, for example, it remains complicated to move service teams around the country and to have access to customer sites, but we're heading in the right direction. Operational profitability increased from 13.4% to -- I'm sorry, increased to 13.4% from 12.1% as the division showed strict cost discipline and good execution. This was achieved despite having less high-margin retrofits, high-margin -- the retrofits, they depend on intense customer interactions. And those interactions have yet to recover because it's hard to get people around even a virtual table to make decisions on these complex jobs. They're high margin, they're a bit lagging currently, but they're picking up, and this bodes well for margin improvement for the rest of the year and onwards. Going to Page 9, we give you an example for RES of an interesting project that illustrates the fact that retrofits have important environmental positive impacts. We won, in the second quarter, a large order in Australia to upgrade a shore to ship solution for Sydney harbor. The project includes the upgrade of 2 rotating frequency converters from 3 MVA to 5 MVA, and it lasts until the middle of 2022. The rotating frequency converters are part of the harbor's shore to ship electricity supply system, converting 50 hertz electricity from the onshore grid to 60 hertz to power the ships while in the harbor. And this avoids having the ships use their diesel generators. If you do the math, which the customer did of what the environmental impact of this retrofit is, we're actually saving more than 5,000 tonnes of CO2 annually. So these things, they look minor, but they're actually significant. And it's another way in which Sulzer contributes to improving the environment. Moving to Page 10, Chemtech. Chemtech performed well on all metrics. Orders are up almost 13%, 1-3, 13%. Sales were up almost 8%, and profitability is up 70 basis points in H1. Our Renewable segment is doing well, delivering H1 2021 orders close to those achieved for the full year 2020. Renewables encompasses, as you know, sustainable applications like biopolymers, recycling processes for plastic and fibers or biofuels. We first flipped that segment out in our full year 2020 presentation and said that Chemtech generated close to CHF 50 million in renewables in 2020. In the first half of 2021, we achieved CHF 44 million, so good momentum. We're also seeing continuing momentum in chemicals in Asia, with China remaining dynamic and other Asian countries joining in. We also saw a rebound in field services as travel started to normalize and outages resumed in the U.S. Page 11, we give you an illustration of what our renewable segment is about in Chemtech. Sometimes it's implementing our proprietary end-to-end processes. And sometimes it is other innovative process developers that seek us out to help them clear a technical hurdle that they're facing. The example on this page is the latter. We partnered with Blue Planet, a U.S. company, which is developing a carbon capture utilization and storage system that captures CO2 from a variety of emission sources. They include power, steel, cement, refining and other applications for CO2 emitting industries. The system minerizes -- mineralizes, I'm sorry, the CO2 to form carbonate rocks that can be used instead of natural limestone for concrete production. So it's a big deal for the cement manufacturers. Limestone, as you may know, is 70% to 90% of the -- is with 70% to 90%, the main component of concrete. And therefore, it's the most used building material worldwide. Chemtech is developing for this application an efficient carbon capture unit that will be a key enabler to Blue Planet's process. This will be installed in Blue Planet's pilot plant, which is being constructed currently in California. Moving to Page 12. We'll talk about Applicator Systems, soon to be known as Medmix. Applicator Systems saw a pronounced upswing in the first half of the year. Orders rose by 53% organic year-on-year. Dental and industry performed particularly well as demand recovered. Beauty is also recovering a little bit slower though, as continued lockdowns, less travel and the masks that we all have to wear are continuing to impact makeup sales in the first half of the year. Our 2020 acquisition of Haselmeier, a leading drug delivery device manufacturer, is off to a strong start. As I said, Haselmeier won its first customer for its newly launched D-Flex platform. It's an injector pen platform, for which we have hopes, and we're very excited. And those -- that excitement is shared by a U.S. biotech company that chose us for their products and give us a multimillion order -- multimillion-dollar order in the first half of the year. And the D-Flex platform will be one of our engines for growth in drug delivery devices for the coming years. The strong volume recovery, together with a favorable mix had a very positive impact on margin, which increased from 11.8% to 19.3%, close to pre-pandemic levels. As I said, we plan to spin-off our Applicator Systems division, creating an independent company called Medmix, subject to shareholder approval at an EGM tentatively planned for mid-September, Medmix will be listed on the Swiss Stock Exchange this autumn. We believe that Medmix's value creation story is just beginning, and the split will allow current Sulzer shareholders to continue the adventure. On Page 13, we show you that Medmix like Sulzer is increasingly driven by sustainability. We talked in the past about our patented ecopaCC collapsible cartridge. In earlier presentations, it won the world's most prestigious packaging innovation award in the resource efficiency category. Now it has won two new customers, both of them in the Chinese construction market. They will use the system for tile grouts. The advantage of the system is that it can be transported in a collapsed state, then filled. Once used, it can be collapsed again. This minimizes cost and it reduces waste by 80%. Chinese construction companies get this, and they are willing to pay for this, shattering another cultural stereotype. With this, I hand over to Jill for the financial presentation. Jill?

Well, thank you, Greg, and good morning, everyone. Let me highlight the most important numbers on Slide 15. While orders in H1 were still down year-on-year by 3% organic, they were up growing again by 7% year-over-year in Q2 and were also up 8% sequentially, showing continued good momentum from the first quarter. Our order intake gross margin expanded significantly, mainly driven by a better mix, but also by our continued selectivity in PE energy. Order backlog did not change much in the year-over-year comparison, but has increased once again since the end of 2020 as orders continue to exceed strongly growing sales. Sales were up 9% FX-adjusted and 6% organic, supported by a strong order backlog at the beginning of the year and the continued market recovery. Higher sales, a favorable mix and earlier-than-anticipated savings from structural cost actions that we activated last year, lifted operational profitability -- or operational EBIT divided by sales -- by 250 basis points from 7.5% in H1 2020 to 10% in this half year. Even more pronounced was the uplift in EBIT margin, in addition to the uptick in operational profitability, we recorded only a few nonoperational expenses this year. Free cash flow hit a new high for H1 as it tripled from the previous year's figure. And now let us move to Slide 16, and I will show you the operational profit bridge. Here, you'll see the bridge in more detail for Sulzer, excluding APS and APS as a separate column. For Sulzer, excluding APS, 4% organic sales growth led to a positive volume impact. The reduced energy business had a minor impact on mix, a positive one. The savings from structural cost actions were partially offset by the reversal of last year's OpEx squeeze. If you recall, we had around CHF 60 million of OpEx squeeze effect in 2020, and we are expecting around CHF 40 million of this to reverse in 2021. Impact from the hard stop on travel accelerated [ lease ] days consumption and hiring freeze last year will partially reverse in this year. APS shown here with CHF 24 million is the delta of what they contributed this year and have contributed last year. The fleet [ would review ] pretty much a similar picture than the ones shown on this slide. We have positive volumes from the rebound, better mix from higher [ dense ] and acquisition effects from Haselmeier and also some reversal from last year's OpEx squeeze. Now moving on to the next slide. Going down from operational profit to EBIT, there's not much to highlight because it's pretty straightforward. Amortization has increased by CHF 4 million as we have acquired Haselmeier and Nordic Water. The nonoperational items are almost negligible in H1 2021. While you might remember that we had a massive negative effect of CHF 53 million in H1 2020 from our structural actions. Now moving on to the next slide, further going down the P&L, as you can see on Slide 18, there's not much to report as everything has normalized. Maybe noteworthy, the effective tax rate is again at normal levels as no large restructuring charges have been taken in this year where we don't have the corresponding tax impact. Now moving to Slide 19. I'm thrilled, in particular, to present this Slide 19. Over the last couple of years, we have put in a lot of effort into managing our net working capital. As the chart shows, these efforts have paid off. When I took over in April 2018, Sulzer used to have an extreme seasonality in its cash flows, being negative in H1 and very strong in H2. While our cash flow still has and still will have some certain seasonality due to certain payments being made in the first half of the year, it is less pronounced today. In H1, we generated CHF 117 million of free cash flow, amounting to 6.8% of our sales, backed up by the good profit conversion as well as well-managed working capital. Now on to the balance sheet on Slide 20. Our balance sheet remains solid. Our net debt stood end of June at CHF 557 million, resulting in a net debt-to-EBITDA ratio of 1.3x, unchanged from H1 last year. As such, our balance sheet continues to be well placed to make selective, small- to mid-sized bolt-on acquisitions. And with that, let me hand back to Greg.

Thanks, Jill. As you've seen, the positive trend in order intake continued in Q2, with all divisions again seeing sequential growth. While Q3 is likely to be seasonally lower as it usually is in our business, we expect a strong improvement compared to the previous year, driven by continued growth in Chemtech, in water and industry in Pumps, driven by re-acceleration of Rotating Equipment Services and the ongoing rebound in Applicator Systems. We also expect a gradual market recovery in energy in Pumps Equipment, but we do not anticipate much volume boost for Sulzer as we will remain selective. We confirm on Page 22, the improved guidance from our Capital Markets Day in June. For the full year 2021, we expect orders to increase by 4% to 6%, sales by 8% to 10% and to reach an operational profitability of 10% to 10.5%, a range of 10% to 10.5%. Without Medmix, Sulzer expects 2021 orders to be up by 2% to 3%. Keep in mind, by the way, that without Medmix, Sulzer's orders were only down 1% in 2020. So Sulzer, the flow control activities of Sulzer are actually highly resilient, didn't drop by much, only 1% last year, and they're going to be up 2% to 3% this year. So once again, Sulzer without Medmix expects 2021 orders to be up 2% to 3%, sales to be up 6% to 8%, and we expect an operational profitability for Sulzer without Medmix at around 9% above pre-pandemic levels. Medmix itself expects 2021 sales of around CHF 450 million and an adjusted EBITDA margin of 25%, which corresponds to 19% operational profitability. Allow me to remind you again that we will do -- what we will do in the fall, subject to shareholder approval. Let's move to Page 24. Sulzer intends to spin-off the Applicator Systems division under the name Medmix. The spin-off will technically take the form of a symmetrical split. Each Sulzer shareholder will get one Medmix share for each Sulzer share held. Sulzer will, therefore, not hold any residual stake in Medmix. In parallel to the split, there will be a capital increase of CHF 200 million to CHF 300 million with no preferential subscription rights. The intent of this capital increase is to fund growth initiatives to increase the free float of Medmix and to provide new health care-focused investors with an opportunity to invest in Medmix at the time of the listing. Medmix has leading positions for high-precision delivery devices in all its end market -- markets, healthcare, industry and beauty. Sulzer itself has made significant progress over the last few years in shifting its core flow control portfolio away from oil and gas towards more sustainable sectors like water, biopolymers, recycling and so on. We have strong positions in chemicals and in industry and an unrivaled coverage of our customers' aftermarket needs, where we believe we are the largest and certainly the most technically advanced independent service provider. We expect the extraordinary shareholder meeting to take place in the second half of September, and we expect the listing to happen a few days later towards the end of Q3 or early Q4 or said differently last week of September to first week of October, give or take. Page 25 reminds you of the transaction rationale. Sulzer will be a pure-play in flow control, flow control specialist for water, for chemical, for industry and for energy, with global coverage of its end markets. The company will continue to shift towards water and industrial applications and pumps and focus on its renewable technologies such as biopolymers and polymer recycling in Chemtech. And digital advances will build our unique offering and technical know-how to accelerate growth in our service segment. Digital is a key differentiator in the service segment, both in terms of data analytics and in terms of additive manufacturing. Medmix itself will be a leader and is a leader in innovative high-precision delivery devices with leading market positions in dental, pharma, adhesives and beauty. In all segments, the company owns its own IP and is not a contract development manufacturer organization. So we are an IP-intensive player. We do our own R&D and product development. We're not a CDMO. Medmix is active in markets that are driven by strong mega trends that allow for significant differentiation based on technology and that have high entry barriers and limited price fluctuation. Medmix is increasingly shifting towards high-growth health care end markets. Health care is already roughly 40% of the business today. Page 26 is the snapshot of all of that. In the medium term, Medmix expects sales to grow at an annual -- average annual rate of around 8% and targets an EBITDA margin of around 30%. And as the health care business is expected to grow faster, Medmix will move from being 40% health care to being more than 50% health care in the medium term. From a leverage perspective, Medmix will have a net debt-to-EBITDA ratio of 1 to 2x EBITDA, really depending on the size of the capital increase with all likelihood that the leverage number will be the lower -- towards the lower end of the range, closer to 1x net debt-to-EBITDA really based on what we're seeing today. Final slide before we open up for questions, I'll summarize what we tried to cover, Jill and I today. Our orders continued to trend up sequentially in Q2 in all divisions, and they were also up year-on-year, except in Pumps, where water and industry were up, but energy was divided by 2, as we expected, once again. We expect Q3 to show the same trend. Keeping in mind that, as I said, Q3 in our businesses is always a bit lower because of seasonality, but we expect that Q3 will be significantly higher than Q3 last year and that Q4 is then expected to be stronger again. Following approval by Sulzer shareholders at an EGM, we'll spin-off Applicator Systems as Medmix, end of Q3, early Q4, via a separate listing on the Swiss Stock Exchange. The capital increase in Medmix will happen concurrently. We believe that the split will empower both Sulzer and Medmix to accelerate their value creation and reach their full potential. On those words, let's open it up for questions. Operator?

First question comes from the line of Aurelio Calderon with Morgan Stanley.

The first one is a little bit on your guidance for profitability and kind of the moving parts in the EBIT bridge in the second half. And this is, obviously, this historically been a close to 200 bps seasonality in margins. And given the strong trend in the first half, it's implying that, that is an idea is not going to be that strong in margins in the second half. So if you can help us with that and maybe on the EBIT bridge. Obviously, I noticed that your savings are coming ahead of expectations. I think you only have like CHF 18 million from the CHF 70 million original program in the bridge and it's come at CHF 23 million. So do you think there's more to go? Could we see further upside there?

All right, Aurelio. Jill, do you want to take that one?

Yes, sure. I think you have it right that we will continue to see positive effect as we expect our sales to grow, like we had in the first -- probably slightly less, but with the -- if you kind of compare against our overall full year guidance, it's still a very strong high single-digit growth in the second half. So on the back of that volume, we will see positive volume effect. Mix, I think, would stay around the same ballpark. And we continue to see the savings from our structural cost savings. Last year, we told you around CHF 40 million. We've been faster in terms of taking the savings from that. And so far, it's 23. You can expect, therefore, the remainder to come in the second half year. And I think -- as I've mentioned earlier, some of the one-offs last year in terms of OpEx squeeze -- that will reverse. And actually, it's good too because with the easing of travel, which we hope to see as well, we'd like to see -- that's actually a good sign. When we see that, we'll see the growth actually even accelerating from that point of view. So overall, there will be some reversal of that, but we intend to still maintain our prudence in terms of the discretionary spend. So as mentioned, CHF 20 million of what we have communicated last year of the CHF 60 million will stay intact. And yes, that's bolted, so that's where you can work out your bridge to come to around 9% for the full year.

Aurelio follow-up question, or does that answer -- was that what you were looking for?

No, that answered my question, but I do have a follow-up question. On the strength on the Chemtech business, especially when you look at the order intake, it's been quite solid for quite some time now. And I know that you are seeing big investments in Asia, but it's surprising that you also mentioned that aside from renewals, which you touched on, but what are the main drivers driving investment, maybe not in China but in Americas? And any areas you mentioned were recovering?

The -- I mentioned that America was recovering, particularly in terms of the service business of Chemtech, where the U.S. is one of the first countries that started opening up again in terms of travel. And there was some pent-up demand in terms of outages because outages involved having a lot of people on-site and customers were reluctant to even last year. The U.S. currently is quite active from that perspective, and that's a positive sign. In terms of product and equipment sales, it's really Asia that's sort of driving the charge. I mean we did well in all regions in the second quarter. But China has been strong for an extended period of time. And when we project ourselves, and we see the level of tendering activity that we have and the projects that customers are flagging in China, we see that trend continuing. And we also saw a pickup in some of the other Asian countries, which is a good thing because we were very happy with the strength of China, but we also want to make sure that our business keeps a level of balance that allows us also to distribute the volume around in a way that makes us efficient. But if you map out the order intake of the Chemtech business, it pretty much resembles the distribution of the chemical spending worldwide, chemical market worldwide. So we're not -- we're stronger than average. We are the market leader in China, and sometimes that gives the impression that we're unbalanced. But actually, the reality is that if you break down Chemtech, you see that China is roughly in Chemtech of the same proportion as China in the chemical market worldwide. So quite healthy from that perspective and the momentum that's continuing. And once again, Chemtech is mostly chemicals. It's more than 50%, the chemical market. So that's the driver that you have to look for as you try to understand where the business is going. Did that answer your question, Aurelio?

Yes. That's super helpful. And maybe if one -- if I can squeeze one last question. And I think you briefly touched on this. The -- I think you used a bit -- a nice chart showing the margins in the incoming orders in the Pumps Equipment business. How is the gross margin developing there? Because you mentioned that you're obviously being very selective in projects in energy.

Yes. That's a really good question, and it's a really fair question, too. The reason why we're flattish, we're essentially hovering at the bottom at the trough for us in our energy business in Pumps. We said that orders have been divided by 2 in the first half of the year. But H1 orders 2020 were really high. I mean these were record levels. So actually, the level that we had in H1 this year was in line with the hypothesis that we took to re-dimension the business last year. So from that perspective, we're not surprised, and we're in line. And we positioned ourselves at that level because we felt that it was important to be able to continue to be selective. What I explained in the past and what we had on one of the slides in the Capital Markets Day's presentation, is we said that in pumps for energy, pump store energy was essentially a mid-teens gross margin business. I think I said in the past, anywhere between -- around 14%, 15% gross margin for that business. If you look at the -- if you look at the last significant oil downturn, the -- in 2015, '16, that -- the gross margin of that business bottomed in the mid- to high single digits. And we are at the bottom of where we think we will be right now, and we're maybe like 100 basis points off from where we were before the markets sort of correcting. So we're defending the gross margin in the backlog, very successfully at this point in tough markets, but our priority, you may have picked up on my cryptic comments about the fact that the market will pick up in energy, but we don't think this is going to lead to much volume upswing for Sulzer in the second half of the year. It really has everything to do with being able to protect that margin in the backlog. And if we have to sacrifice some volume, we're willing to do it because we've already taken capacity out. So we're not scrambling. Did that answer your question, Aurelio?

Yes.

Next question comes from the line of Patrick Rafaisz with UBS.

I got 1 question on Sulzer and a couple of questions on Medmix, if that's okay.

Fire away.

Super. And I'll start with a follow-up on just the previous question on the shape of the recovery in the energy segment. You've already given a lot of details, and you talked a bit about Q3. But would you anticipate, at one point, your orders to start pick up? Because I guess the current order volume is still below of your theoretical capacity even after the redimensioning? Or do you think this is now the level you want to continue to cruise at even if the market continues to pick up into 2022 and maybe beyond?

Very good question. We expect our orders in energy to start to pick up, I would say in the first half of next year. I think the market will -- the market is showing signs of picking up before that. But what we're trying to do in terms of protecting the margin of the backlog will mean that we'll be selective. And therefore, that market upswing or progressive rebound is not going to be very visible in our numbers in the second half of the year. We expect to be roughly for energy and pumps at the same level as the same level, a bit higher than the first half of the year. Your comment about -- so volume will -- orders will pick up, will pick up, though, in the first half of next year. Your question as to where we are in terms of how we are sized versus that assumption? We're sized roughly for that level. And when I say roughly, factories these days for pumps are different animals than in the past. It's a lot of engineering, assembly and testing. And therefore, a lot of your cost base is rendered variable by the fact that we buy machine components rather than to machine anything ourselves. So we can absorb volume variations much better than we were able to in the past, and this is what you're seeing in our numbers. If we stayed at the H1 levels, in the longer term, we would probably think about a few additional measures that we are always thinking about things that we could do to optimize our footprint. But at this point, it's not in the cards because we think that we dimensioned ourselves pretty well. And that the timing of that progressive market rebound will validate that. But regardless of where it goes, whether it stays flat for a bit longer than what I said or whether it picks up, as I believe, market-wise in the second half of the year and for Sulzer in the first half of next year, I think regardless of what happens, we're in good shape. We've got the flexibility, the variability built in.

That's great. And then on Medmix or Applicator Systems. The first question would be with Haselmeier you really doing well and you're seeing these D-Flex orders now. Can you update us from today's perspective, where you stand with Haselmeier, and how big of a contribution on sales and EBIT or gross profit will you expect from Haselmeier this year?

We're not giving guidance per segment for this year. And Jill can remind you of the H1 numbers.

So in terms of sales, they are around CHF 20 million in the first half, Haselmeier.

Yes. And I think orders were 25, something like that?

Orders is around 25.

Yes, orders around 25, sales around 20 in the first half of the year. You know, Haselmeier, we're not trying to avoid answering the question. But we'll start reporting the business in more detail, as you know, once it's spun off and it's part of Medmix, but we're still sticking to the current reporting structure in Sulzer. What I would point out is drug delivery devices, it's a long game in the sense that if you take, for example, the U.S. biotech win that we've just booked in, I think it was in Q2. For D-Flex, essentially, it means that this company is selecting D-Flex as the applicator for its drug. That they will run through the FDA approval process. So it's already a multi-million dollar order, but the commercial upswing of that is really when the product becomes fully commercially available, and that's a couple of years out. So Haselmeier, you really have to look at it more in terms of what are the products that we launch, and what are the customers that are selecting us because that's where the volume will come from and the margin will come from, but the lag is more significant than what you have in other businesses simply because anything that has to do with pharma has long approval processes. But once you're selected, you're in, because the drug and the delivery device are approved as one. Did that answer your question as well as I could at this point?

Yes. No, that's great. And the last question for me would be, again, on Applicator Systems. You mentioned that example of ecopaCC sustainable solutions. And so can you give us a number or a share of how much of your sales in Applicator Systems are currently from these types of sustainable solutions? And you also mentioned that the customers are -- at least the ones in China, you mentioned, are willing to pay a good price for this, right? Does that mean that if your sustainable solution share of Applicator Systems increases that there will be a gross margin benefit for you as well? Or is that still very competitive, and therefore, we shouldn't assume that?

Well, another good question. We don't break out -- we don't break out sustainable solutions in Applicator Systems because there's a moment where -- it really varies significantly from business to business. And there's a moment where everything will be more sustainable. But I'll try to answer your question differently. I'll start by saying that the business, which is the most advanced in terms of sustainable solutions and mix is actually the beauty business because across all our businesses, we've been offering solutions with bioplastics or recycled plastics. All these products are made out of resin, essentially a form of plastic. And we've been offering these more sustainable solutions, bio-based and once again, recycled plastics. And what's interesting is that really, at this point, the only place, the only segment in which we've had a significant take-up of that has been beauty. And the reason why it's been in beauty is that the beauty companies, they're facing the customer, and they're trying to differentiate. And if you're a beauty company, it's really part of your position in your marketing to say that your product is green or more sustainable. Therefore, in beauty, there's a lot of pull. We have customers that say, we'll consider you, but we'll consider you only if you can provide new solutions. And that's very favorable to us because we're the market leader from that perspective. If we take the other segments, it's been more of a push thing. If you take ecopaCC, ecopaCC is a wonderful product. We -- it's been commercial for 2 years -- 3 years now. And it's won all sorts of awards, but the reality is that selling ecopaCC has been an uphill battle, and it's been uphill battle because it's a more sustainable product, 80% waste production, but it's also a more expensive product. And to your point, I mean, we're -- I'm not going to comment on margin, but I think you can reach your own conclusions. And as much as there's pull in the beauty market, there's a lot less pull in things like construction for these more sustainable products. And the reason why we're pointing out the Chinese construction industry and these 2 wins is that people often think that the pull for sustainability will come from Western countries. And interestingly enough, in this case, it really isn't. It's -- the customers that are leading the charge for us are Chinese construction companies, which, I mean, I'm not sure you would have expected it, but that probably would not have been my guess. So it's -- yes, different between pull and push. I think as this becomes more prevalent, we'll probably break it down in more detail for you guys to form a view. But at this point, those are the explanations I can give you. I hope that helps.

It does.

The next question comes from the line of Arben Hasanaj with Vontobel.

I would have 2 questions, if I may. The first one will be on China. So we've been hearing from some industrial companies that they are seeing, especially for the second half year, kind of a quite a steep slowdown in investment, especially in the infrastructure area. So I would be curious to know your view on this matter?

Well, I'll start with that. I'll take that despite the fact that Jill might be more culturally attuned to answer the question, but let me have a go anyway. China for us is -- we're present in all our businesses in China. The part that's particularly dynamic is the Chemtech business in China. And in Chemtech, what we do is we have a look at the tendering volume, and we have a look at our pipeline, and the pipeline in Chemtech is interesting for China because there's -- the way the Chinese market works is that there's quite a few projects where you get a letter of intent. And you're still negotiating the terms and conditions. And therefore, we don't book these projects, but they are already won essentially, and it's only subject to our reaching agreement on things like payment terms and some guarantees that we give. So that gives us quite good visibility, certainly, 6 months out, if not more, in China. And all those indicators are green. We don't see a slowdown from that perspective. So that's a Chemtech answer. I'm not aware of any slowdown in service in China. If anything, I think we're expecting a pickup. We had a slow-ish start of the year in Asia in RES. I mean slow-ish is an exaggeration. We grew, but we grew less than the other regions, and we think that's going to accelerate. And I think -- I don't have any specific comments or reason to believe there should be a slowdown in Pumps. But as Chemtech is a big part of the answer, anyway, that was -- hopefully the details I gave you are helpful.

Absolutely.

I'll add one thing, where there's a really interesting question as to, at which point the rest of the world starts building new chemical plants to balance the competitive forces at play, if I can put it that way. I mean, China has been building big chemical plants. And these big chemical plants, they're very modern. They're based on the newest and most efficient processes, and they're large, which means that they have a scale advantage, which matters in a lot of chemical markets. And I think there's going to be a moment where other countries start being nervous that their plants are maybe on the small and outdated side of things and that where maybe the investment profile will be balanced, maybe a bit less in China, maybe a bit more elsewhere. We don't really see it at this point, but that could be a trend in the future.

Yes. And if I may just chip in on more a general comment regarding China. I think it's also not unusual that when China has come up with a 5-year plan that is very recent, the new 5-year plan from 2021 onwards to 2025, it's usual that the country tends to activate the infrastructure rather more in the year after. So I think if you look to the 5-year plan, China continues to expect to improve to expand that economy, but also to move into the sustainable type economy. So I think what you'll see is just a phase of time when the new infrastructures are being activated. So it's not a general thing. That's just a kind of past experience ahead.

See, Arben , I told you, I should let Jill answer questions. That was interesting insights for you guys, I hope. Another question, Arben?

Yes. My second one would be around the FX impact that you expect for the -- originally, it was minus 2.2%. So whether that is still valid?

Well, I think the way it stands and looking at where we stand today versus how it evolved last year, I would say that we expect it to be neutralized by the end of the year.

The next question comes from the line of Alessandro Foletti with Octavian.

I will have a couple of questions. Maybe going back to the operational profit bridge, your Slide 16. I was wondering if there are any pricing effects from your side and raw material impact effects that you maybe -- maybe they are washed out in the margin mix line there where you only have a 2, but maybe these 2 is the result of 2 components, I don't know. Just interested because we heard a lot on these subjects from other companies. Then I have a follow-up.

Okay. So maybe let me start and Greg can chip in. So on the EBIT bridge, we have not seen too much because we've been able to manage some of the cost increases. For example, the logistic aspect of the freight, I think that's affecting different -- other companies. Some of the supply constraints -- but we've been able to manage that. So we have not seen the effect on the operational bridge. And going forward, I think most of our new orders and quotations, we've been able to -- as it is a general market thing, we've been able to adjust that or we would have escalation clauses that allows us to have that -- readdress with the customer.

Yes. I would add, Alessandro, that we're subject to the same forces at play as everybody else. So we're seeing the commodity cycle high. We're seeing logistics and container prices going through the roof. We're seeing whether it's metal, resin, I mean everything has gone up. But it's a combination of price increases. It's a combination of efficiencies that we've developed in terms of our ability to manage our costs. And we don't make a big deal out of it because I think you guys hear it everywhere. And at the end of the day, we all have to manage. And I think that what you're seeing is that despite the fact that we're impacted in H1, we managed quite well and hence the positive margin evolution. But yes, it continues to be complicated. Although in some areas, we see light at the end of the tunnel. As we approach the summer, we were really struggling, for example, in our Medmix business with some of the resins. Some of these -- the products that we make because they're for pharma or for dental, you have to have a specific type of resin so that you don't have a chemical reaction with whatever the slurry, the drug that goes into it is. And we were seeing some grades that just were not available because there were capacity issues. A lot of it has to do with customers that had ramped down during the pandemic and that were struggling to ramp up. But we're seeing some of that alleviated as we head into the second half of the year. And that gives us hope that we'll see a little bit of relief from those very tight supply chain conditions that we've been facing. But to Jill's point, sometimes we make these offers, you make an indicative offer to a customer. And if the customer waits around for too long before giving you the green light, then you have to come back and say prices have moved. That leads to unpleasant discussions, and sometimes, it slows down order intake a little bit. I certainly have an example in mind in the U.S. recently where we were working with a U.S. chemical company. And I think there were 3 iterations. And every time we went back to them, the price was higher, and they were frustrated. But at the same time, they saw the same thing in their business, and we did come to an agreement in the end. So we're -- it's not easy, but we're managing.

Okay, that's great. Now I have another 2, 3 very fast understanding question for you guys, if I may. I'm not sure I understood exactly what you said in the call. Remaining on this slide, Jill, did you say that if you would include APS, the chart would look similar?

If you include APS in terms of the components and when you bring it apart, that means that you would see a huge volume uptick. Because of the rebound, you would also see positive mix coming from the fact that we have higher dental business. And you will see positive acquisition effect because of the Haselmeier integration. And a little bit of cost squeeze reversal, but that's really like CHF 4 million to CHF 5 million.

And you'd see no pricing impact because what's -- one of the things we demonstrated again, even in the pandemic, I mean Medmix APS is a very resilient business in terms of volumes. These are not markets that fluctuate much in normal times. With the pandemic, dentists were closed, retailers were closed and so on. So volumes really dropped, but the pricing really didn't move at all. So it was one of these things where volumes were divided by a factor for a while. It was painful, but the pricing never budged. So it's really more mixed than anything related to pricing in APS, hence Jill's comments.

All right. And then another one on the free cash flow, probably again for Jill. You obviously pointed out a very good free cash flow in H1 that reduces seasonality. But what should I understand out of it that with your actions, you reduce seasonality in general or that [ although ] on a full year basis, you can generate more cash for the whole company?

Good question. As I pointed, it's -- we have improved the seasonality. And I think if you look to the full year, you probably should anticipate that full year we are around 5% to 6% of sales, a little bit lower than H1 because H1 is like 6.8% to sales, in terms of free cash flow correlation to sales. I expect that in the second half year, as you've seen, we -- our investment, typically, we do an investment CapEx of around the same level as our depreciation. So our depreciation is around CHF 110 million. We have close to CHF 40 million in first half year. And that's because we've been quite cautious in activating too quickly our Capex. And in the second half year, you can expect that, therefore, the remaining of our CapEx would come in. We would have, of course, a little more positive, the contribution from our profit, but we also have some payout of our restructuring costs, in the second half year. So all in all, that's why you can derive around 5% to 6% of sales. And if you compare to the past trend, there is still quite a significant improvement from the time that we were rather below 4.5%.

Yes. Understood. I did not expect you to be so precise. Maybe if I can add here, looking in the crystal ball, do you think that this sort of lower seasonality remains like that also in the future?

Well, it is my aspiration to. Yes. I think what we have is certainly a lot more operational measures that we've taken -- put in place. I think the fact that we have also simplified our footprint with the reduction in the past year. So I think all this plus, hopefully, the market will not surprise us with different liquidity development like we have seen. We didn't see too much of that in the COVID-19 times. So hopefully, that's not going to spring back after some of the supportive measures from the government. But yes, with all this being in good place, I think we can expect that seasonality should continue to be much better than before.

Other questions?

May I ask -- squeeze in another one? Still on...

Yes, go ahead.

I mean, we hear from many, many companies that particularly in China, payment terms are basically not up for discussion, they tell you what the permit terms are, and they are typically super long. Are you doing a better job than others? Or maybe it doesn't apply to you guys, or whatever?

Well, I think that there are different ways you can -- you have. I think we have, from my recollection, the payment terms of China compared to the rest of the world has always been a little bit longer. And if it is shorter, it is also practiced in a way that it's more like the norm. So some of this you'll see rather that they are formalizing it, but they practice, maybe they improve their practices. But in the past, they were also late in the payment even if the payment terms is a little bit better. So that's one trend. The other thing is, I think you have other kind of terms and conditions when -- for project type business where you can work into advances and stuff like that. So yes, I think so far, we haven't seen that, but we remain watchful, as always, across the world to see how the payment patterns develop.

I would add to what Jill said that if you look at our businesses and you try to break them out historically the area in which the payment terms have been really dictated by customers more than anything, has been in energy, particularly in Pumps and Energy. Because it was a capacity game, when you have overcapacity and you have customers who are struggling, oil and gas customer or power customers that were struggling, they became really, really harsh on payment terms, and we suffered from that. But if you look at how much pumps for energy represents in order intake in H1, I mean -- it's in the low teens. So it's a more marginal impact on Sulzer than it's ever been. And then if you look at other businesses like, for example, China, China is a lot of Chemtech and a lot of service. And in Chemtech, we are usually a chosen provider, where our customers in China want to work with us because what we bring is unique and performs better than their other options, which gives us a little bit more leverage. The Service business also usually has much better payment terms because it's a fast cycle type of business. And it doesn't have these kind of trophy orders where the customer kind of blackmails you into accepting that payment terms because it makes your order intake and your growth look better. So it's really -- also the point I'm trying to make, it's also a reflection of your business type, and how much leverage you have and whether you have overcapacity or undercapacity, and how much product differentiation you have. And once again, the part that was most difficult for us in the past is a part that's become -- energy pumps. They lead to a lot of good service business, but as an upfront business in terms of equipment, it's a tough business, but it's a business that's smaller these days.

All right. I don't know if I'm the last one in the pipeline, I would have a very final one for you, Greg, again.

Shoot. And I think there's another question after that, but go ahead. Ask your question.

Okay. We discussed about it in the past already, the Nordic Water business. Yes, remember, it did not have such a great profitability, and you said no, no is going in the right direction. Can you confirm that?

Yes, it's going really well. We're very pleased with how Nordic Water is developing. And we're -- what's great about Nordic Water is that we're being -- Nordic Water is being considered for larger projects than it was in the past because it's got the backing of Sulzer. And essentially, the wastewater customers, they -- before they were addressing a small company, and now they're addressing a much larger company that they know because they also buy their pumps and their grinders and their screens from us. So that's been very beneficial. And we're pleased with how the business is performing since we've acquired it. So far, so good.

The last question for today comes from the line of Rolf Renders with Helvea.

Apologies if this has been communicated already, and I didn't pick up your comment. But on the separation with Medmix, which you plan to do, what is the idea on the strength of the balance sheet you want to give that company? And how do you take the Tiwel cash effect into account?

How do we take the Tiwel cash effect into account? Well, Medmix not going to have any Tiwel cash because the Tiwel cash is staying with Sulzer. So there's about -- I think it's CHF 306 million of Tiwel cash now that's in Sulzer. Keep in mind that it's not debt. It doesn't have -- it doesn't bear interest. It doesn't have a maturity. It's really a payable, and it's a payable that can't be paid. And it's not sequestered either. We're allowed to use it for normal business reasons. But all of that Tiwel cash stays in Sulzer, the Tiwel cash is linked to 2 things. It's linked to the final part of the payment for shares, the shares that we bought from Tiwel when they were put under sanctions. And the rest of it, that's about CHF 120 million, the rest of it is the accumulation of dividend payments. So you'll continue to have an accumulation of dividend payments within Sulzer, and you'll continue to have these -- that Tiwel cash essentially accruing. And if you have a look at Medmix, Medmix we said will pay about CHF 0.5 per share of a dividend. And therefore, Medmix will not be able to pay a dividend to Tiwel, same as Sulzer, but you're talking about a much smaller amount, and therefore, we'll never have that discussion with you guys with Medmix because it will not be material to the cash that we're talking about. The capital increase will be used to finance the -- to finance the development of the business and essentially give it firepower to -- for its growth and also for further acquisitions that we have in mind. Keep in mind also, and Jill has a slide in other presentations that there's a CHF 400 million intercompany loan that Medmix has, that has to be paid to Sulzer. That loan will be refinanced by Medmix on the bond markets once it becomes separate. And on the basis of the size of the capital increase, we think that Medmix will be somewhere between 1 x and 2x net debt-to-EBITDA of debt. But as I said earlier on the call, it'll be closer, I think, to 1x because the 1x to 2x corresponds to the CHF 200 million to CHF 300 million range on the capital increase that we gave. And on the basis of the interest that we're seeing, we believe at this point that it's more likely that the capital increase will be at the higher end of the range than the lower end of the range. But at this point, we're still communicating a range because it's market dependent, and we'll see in September. Does that answer your question, Rolf?

Yes. I can now calculate it. So that's good. No more questions.

All right.

You could have given the absolute number, but you...

I mean, I'm sorry, what absolute number were you -- I wasn't trying to avoid your question, Rolf. What was the absolute number you were looking for?

So what is the net debt the company is going to have? 1x to 2x...

Yes, it would be 1x to 2x of...

He wants the number in francs. I said 1x to 2x.

Ah, the number in francs...

EBITDA -- 2022 EBITDA is roughly like -- we said around 100 -- well, we said...

About 25%.

About 25%. And you do the math, it's about like about 130 something. So 130 something, 1x to 2x, it'll be -- take the net debt, take, I don't know, take 150 to 220 or 2-whatever...

If you want to, 100 to 200 times.

It will be -- we weren't trying to avoid your question. I just didn't understand that you were looking for a number in francs.

So you can work on 25%, which is also what we have communicated.

Yes, yes. But take my math and assume there will be 150 to 220, and you'll be in the ballpark.

Yes. Sorry.

Great. Thanks for that.

Sorry, we just misunderstood what you were asking. We went to a long explanation. I wasn't trying to show off. I was just -- I thought I was answering your question.

I wouldn't have asked if you didn't push me for, [ it covers ] something else. Thank you. Good luck on the second half.

Thank you very much. Any other question from anybody? I think we're done. So we wanted to -- Jill, Christoph and I wanted to thank you again for spending time with us today. We know it's a busy day in terms of companies reporting. But we do believe that we have an exciting story to tell, an exciting story because all our businesses are doing well in H1 and are poised to continue to do well in the second half of the year and beyond. And as you know, that we have the spin-off coming, which we think is coming at the right time and will enable both businesses to reach their full potential. So on those words, thanks again, and we look forward to talking to you guys again soon.