Sulzer AG (SUN) Earnings Call Transcript & Summary

Good morning, and welcome to Sulzer's H1 2022 Results Conference Call. Today with me is our CEO, Frédéric Lalanne; and our CFO, Thomas Zickler. For this call, we have prepared a presentation, which you can find on our website. [Operator Instructions] And as always, I want to draw your attention on the safe harbor statement on Slide #2. The call may contain forward-looking statements containing risks and uncertainties. These statements are subject to change based on known or unknown risks and various other factors, which could cause the actual results or performance to differ materially from the statements made in the call. Having said that, it's now my pleasure to hand over to Frédéric for the presentation.

Good morning, everyone. Thank you for joining this morning call. Sulzer has delivered a solid result in the first half of 2022, despite numerous challenges that we had to overcome and that have not yet disappeared. Order intake was not so much impacted in fact. And on the contrary, order intake has shown a very strong growing 11% year-on-year in H1 and 8% in the second quarter, driven by Flow Equipment and Chemtech division. Our sales growth of 1% was driven by positive developments in Chemtech and services. However, a lower energy business within Flow Equipment logged down on our factories in China, which were closed during 5 weeks, delaying projects on our customer side as well as continuing uncertainties in the supply chain had a negative impact on our sales in H1. Although we produce in the region for the region, Sulzer had some components which were in shortage. Example, some control modules for our compressors in the water market, which have delayed some sales. Altogether, nevertheless, our sales were up 1% on H1 compared to the same period of last year. While the mentioned effect had also a negative impact on our margin, we were still able to increase operational profitability by 50 basis points up to 9% compared to 8.5% last year. Operational excellence, mix effect contributed to the positive development. On May 24, we communicated that we decided to exit the Russian market. And on July 1st, we announced that we will write off most assets in Russia and Poland, and the largest part of this write-off will be booked in H1. Order intake had the write-off had a negative impact of 119 million on our net income in H1. And Thomas Zickler, our CEO, will give you more details later in the presentation. Supply chain and logistics continue to be challenging and still lead to some delays here and there. But we see the problems easing in the second part of the year, and we would expect, sorry. And as I said before, it's mainly producing in the region for the region, and therefore, we are not that much impacted. However, if older are impacted and therefore, projects are in delays, we might see also some impact. Finally, we have published a separate sustainability report on July 12. The highlight is that we have been able to reduce our carbon footprint impact by 25% in 2021, mainly through a fivefold increase in the adoption of decarbonized energy for our factories. Let's move now to Slide #5 about order intake. Our regional order distribution has not changed a lot. We continue to be very balanced regionally, but thanks to strong business in the U.S. and in Brazil, the America have gained a bit in weight on the expense of EMEA, while Asia Pacific remained unchanged. America, 36% in H1 2022 versus 33 last year and EMEA versus 40% last year. We a also seen a very strong development in our new equipment business, mainly in Chemtech and Flow, resulting a smaller share of our aftermarket this half year or 47% versus 49% last year. Let's turn now to our Flow Equipment division on Slide #6. We have seen a strong development in all our markets. Orders have increased by 14% year-on-year in H1 and by 12% year-over-year in Q2. All segments have grown double digit in H1 in 2022. Energy developed very well in H1 and the pipeline of projects continues to be very strong, both in upstream and downstream. In the industry, we have seen continued strength in pulp and paper and very strong momentum in mining and metals. And finally, Water continued to grow double digits. This market is less cyclical and therefore, the growth rate is somewhat lower there in Water than in Industry and Energy. Sales were down 4% as guided for at the beginning of the year. The decline in order intake in Energy last year, 2021, results in lower sales this year 2022. Additionally, the lockdown in China, which stopped production completely in our Sulzer factory during 5 weeks and some project delays on the customer side did not help to realize the sales. But despite this [ sales ] very strict control on our cost and the positive mix effect with more Water and Industry have increased our operational profitability by 30 basis points, up to 5.3% to be compared to 5% last year. In Flow Equipment, logistics remain a challenge in some countries, mainly in Asia and might cause some delays in projects on customer side. Flow Equipment is also mainly a project-based business, an increase in the raw material and labor cost has been passed on so far to our customers. To limit the risk on our side, we have decided to shorten the validity of our offer at time of tendering. When not possible, we also have price adjustment formula in our contracts. And in 2021 and 2022, we are able to pass this adjustment for standard products to our customers. Here, overall, we can see that we have been able so far to pass these higher costs to our customers, both from labor and raw material, and this can be seen on the margin on order intake. On Slide 7, I just want to highlight one innovative project that we have supported with our pump technology. In U.S., we supported the company named Fulcrum BioEnergy to complete the world's first commercial scale waste-to-fuel plants in Nevada. We have delivered highly efficient and customer volume of equipments [ boiler fuel pumps ] condensate, extrusion pumps and other process pumps crucial to the plant energy generation circuit. This plant, in fact, will convert 159,000 tons of municipal solid waste into 41 million liters of synthetic fuel area. At further, we believe that this waste-to-fuel process will help to reduce the carbon footprint of transport systems and also reduce of the volume of waste going to landfill. This revolutionary new plant is the first in the world to achieve commercial scalability, and it will be the first of many in the rest of the world. Let's turn to services on Slide #8. In our Service division, we have seen a rebound in Asia Pacific and continued growth in the America, while EMEA suffered from our decision to exit the Russian market. Therefore, order increased by 3% year-on-year and were down by 3% in Q2. But overall, H1 plus 3% year-on-year. Looking at the product lines, Pump Services order have grown in H1 in Q2, while order in other equipment, I mean, [ CuboServices ] and Electromechanical Services were mainly impacted by our decision to exit the Russian market. The sales were up 3% year-on-year in H1, and this is mainly coming from the positive contribution and the strong momentum in America, in U.S. and in Brazil. Our operational profitability remained stable at a high level, above 13%. EBIT turned negative in services at this division has the largest asset to write-off in Russia and in Poland. So overall, the impact of this write-off for the service division in H1 were CHF 87 million. Here, I would like to highlight the impact of pump retrofit. And you find here a very nice example of what product can bring to our customers. But I will be a bit more technical. As you can see from this picture on this slide, while the were the retrofit pump will leave large part of this bump unchanged. We change and upgrade only the e-network of the pump and these parts which are colored in the picture. This advantage of the customer that it does not have to make a lot of modifications around the pump, such as the best plays and the piping. It can keep its existing installation. And the retrofit also had a very limited impact on the plant production. I would like to highlight this project. In Norway, this large pump made by a competitor and was in operation for the last 30 years. The design we made for the regional duty of the pump of around 600 cubic meters per hour. Over the year, the situation has changed, and the throughput of the pump has reduced to 150 cubic meters per hour. With this new operation, the firms were largely oversized and therefore, not efficient anymore. We offer to retrofit the pump adapted to the new operating conditions and were awarded this project in Q2, and the pump will be back in operation early next year. Overall, you can see the expected savings are significant, 900kW hour per hour and 4,500 tonnes of CO2 emission per year of savings just by retrofitting one pump. Customers take 30% on the pump, another 10%, 20% on the [ bay play ] and then overall. Fair to say that this new pump with all this installation will cost almost double than the rate profit price and would cause much more resent during installation. So here, we would like to highlight even it's a bit complex, the interest of requesting pumps. Let's move to Chemtech on Slide #10. Order intake was up by 21% year-on-year at Chemtech in H1 2022 and 19% in Q2 with all segments and regions growing at Chemtech. Particularly, Tower Field Services benefited from strong orders in America. But the traditional business in chemicals and renewable continued to develop very well. Sales increased by 9% year-on-year in H1 2022, mainly driven by the renewable business. Operational profitability was up 80 basis points to 9.9% on higher volumes in renewables and despite lower sales in China due to the impact on the local lockdowns like I explained for business. The development is even more remarkable as Chemtech margin in China are generally extremely good. Logistics were and remain a challenge leading to project details Material cost inflation is also challenging, but manageable. Overall, the renewable business continued to develop well. It's impacted by the timing of some projects can be volatile from one quarter to another. After a slow start in Q1, we have seen some orders coming in Q2, and the business is growing by 38% quarter-on-quarter. In H1, the renewal business for Chemtech accounts for 12% of all the orders. Let's have an example of what we have done on the next slide. Plastic to chemicals. Here, I would like to highlight how we contribute to the circular economy. Today, most of the plastics are mechanically recycled, meaning that the plastic is clean, shredded and then melted to get new plastics. However, there are many impurities. Usually, this process leads to down cycling to lower added value materials or to a limited number of recycling grounds. A lot of researching work is being done at present time at fuse on the chemical recycling of plastics. Here, it's a deep polymerization process is used to convert the polymer plastics back into the initial monomer or basic chemicals, which can then again, be used and serve as the feedstock for this industry. Chemtech has enabled a customer first plastic recycling plant, which is being built in Europe, and we expect to produce 24,000 tonnes of high-grade widely used chemical every year and can be reused year after year. And this is a good transition for our sustainability report. We have published our stand-alone sustainability report on July 12. It can be downloaded from our website. In there, you will find a set of targets that we want to achieve, mainly a reduction of our CO2 emissions by 30% by 2030 and the CO2 neutral by 2050. You also find in this report, many examples of what we do and how we do it. And I really would like to highlight the fact that at Sulzer, we are very proud that in 2021, we decreased our CO2 emissions by an impressive 25% compared to 2020 despite the higher sales volume. This significant decrease was reached in all monitored scope 1, 2, 3, thanks to our team actions and a decisive shift towards fuel non-fossil fuel electricity. We have also improved our energy efficiency at factory level through our coordinated approach between our lead and manufacturing teams. All our initiatives are governed by our newly created CO2 working group, which gathers multidisciplinary teams and meet monthly in design the program and is responsible for the completion throughout our factories and service centers worldwide. We are planning to further expand our reliance on non-fossil fuels and expect to get at least 70% of our site shifting to clean energy as a source of electricity by end of this year 2022. Another highlight in 2021 was we managed to increase the rate of recycling of our waste produced in our factories and service center. In 2021, 62% of the total waste produced by Sulzer was recycled more than 57% was achieved in 2020. We are on track to achieve our target of recycling all our weight by impressive 80% of recycling. But we are not only working on our side to reduce our own footprint, with our technologies. We are also enabling our customers to reduce their footprint. I would like to highlight major achievements in Canada to help a Canadian coal fire plant in Saskatchewan, that is using Sulzer technology to capture CO2 emissions. Since the beginning of the project 2 years ago, in 2020, more than 4 million tonnes of CO2 have been captured, which is up to 90% of the CO2 emission of this plant. So I repeat, 4 million tonnes of CO2 captured by Sulzer technology just in one plant in Canada. So from these great stories about sustainability, but also about our operational performance I would like to now hand over to Thomas that will present in detail the financials.

Thank you, Frédéric. And good morning to everyone, and welcome also from my side. Let's start with the overview on Slide 14. Frédéric has already given all the details on order intake, sales, operational profit and operational profitability. Therefore, let me focus on the other lines. Order intake gross margin was slightly down in H1, 2022 compared with the same period of last year. While the margin was up in Flow Equipment and stable in services, it was down in Chemtech, mainly due to mix within the division. Overall, the margin level proves that in general, we are able to pass on the higher input costs. Order backlog has increased by 10% to CHF 1.9 billion despite the de-booking Russia orders of CHF 71 million. As Frédéric explained, sales were up by 1%, driven by Chemtech and services, while Flow Equipment was mainly down because of energy. Operational profit increased by 5%, which is faster than sales and therefore, resulted in a positive margin development. The main driver here was mix with lower volumes coming from Flow Equipment and higher volumes from Chemtech coupled with the improvement of the margins in both divisions. On EBIT, you see the one-off impact from the write-offs of our Russian and Polish assets. I will give you the details later on. Just note that EBIT without the write-offs would have been CHF 107 million compared to the CHF 97 million a year earlier, so about 10% higher. The same is true for net income. Excluding the write-offs, net income would have been at CHF 70 million instead of the minus CHF 49 million, a 15% increase compared to last year. Also, earnings per share shown here as a negative 1.43 million would become a positive CHF 2.08 if adjusted for the write-offs. Free cash flow in H1 2021 still included CHF 34 million from net mix, which we spun off in September last year. Excluding net mix contribution, the basis of comparison becomes CHF 83 million. The negative free cash flow of CHF 78 million in H1 2022 stems mostly from increased working capital needs to cope with supply chain and logistics challenges. The decline in FTEs that you see at the bottom of the table is mainly related to the sale of our Chemtech Tower Field Services business in Brazil. Let's move to the next slide, where I explained to you the bridge from operational profit to EBIT. Below operational profit, we incurred CHF 29 million of amortization and non-operational items, which compared to CHF 30 million last year, leading to an adjusted EBIT before Russian and Polish write-offs of CHF 107 million, which is, as said, 10% higher than last year. Write-offs in relation to the exit from Russia and closures in Poland amounted to CHF 133 million, broken down to CHF 87 million in services, CHF 32 million in Chemtech and CHF 13 million in Flow Equipment. This resulted in a reported EBIT of minus CHF 26 million. Now let's walk down from EBIT shown on the previous slide to net income. Compared to last year, the financial income was a negative CHF 9 million, the positive CHF 9 million this year mainly comes from a CHF 21 million positive impact from unhedged intercompany loans to Russia, where from mid-March onwards, it became impossible to hedge any ruble exposure. Despite a negative pretax profit, we booked CHF 31 million of taxes as the write-offs in Russia and Poland are not tax deductible, and we have tax charges in all of our other profitable worldwide businesses. Excluding this impact, the normalized tax rate would have been 23.6%, which is on a similar level than the 24.4% a year earlier. All in all, this leads to a negative net income of CHF 49 million. Now let me explain to you the impact of Russia step-by-step on the next slide. On Slide 17, I explained the bridge from reported net income to adjusted net income. The sum of the 2 green columns issued the CHF 133 million impact on our EBIT broken down to the areas of the income statement, which are affected. In COGS, you have the write-downs of inventories and advanced payments to suppliers. While in OPEX, the major charges are for impairment of fixed assets and other operating expenses, while write-downs of contract assets and trade accounts receivables are separately disclosed in the income statement, the rest is in G&A. I just explained the CHF 21 million positive impact on net financial income on the previous slide. Additionally, we have CHF 8 million of tax assets, which also needed to be written off. The adjusted net income would be CHF 70 million, an increase of 15% compared to the CHF 61 million net income from continuing operations last year. Coming to Slide 18, I will give you more details on the bridge from reported EBITDA to free cash flow adjusted for the impact from Poland and Russia. If you take the numbers from our cash flow statement, you would calculate only a small increase in net working capital, which is correct accounting wise, but the write-offs for Russia and Poland masked the increase in underlying net working capital. Without the Russian and Polish impact, underlying net working capital has gone up by CHF 60 million. This is mainly caused by increased inventories and work in progress to cope with the global supply chain and logistic issues. Another big impact is tax paid. The amount is higher than last year, mainly due to higher payments in China and catch-up payment effects in the U.S. and in Switzerland. With all these effects, you get to a negative CHF 48 million cash flow from operating activities. Further deducting CAPEX of CHF 31 million is the free cash flow of negative CHF 78 million. Turning to net debt on Slide 19. Compared to December 2021, our debt has essentially stayed unchanged, and our cash position has declined mainly due to the negative free cash flow and the ordinary dividend that was paid out to shareholders, except for EBITDA in April this year. With that, our net debt has gone up to CHF 269 million, which is an increase compared to end of December 2021, but still an improvement compared to the end of June 2021. Net debt to EBITDA has gone up from 0.2 time at the end of December 2021 to one time at the end of June 2022. This is driven mainly by 2 factors. Firstly, net debt has increased. And secondly, EBITDA has been negatively impacted by the Russian write-offs. With that, I hand back to Frédéric for the outlook.

Thank you very much, Thomas. Let's turn to our guidance for the full year. We expect good momentum in our markets despite the prevailing macro and geopolitical uncertainties, increased volatility and inflationary pressures. But nevertheless, we decided to confirm our guidance for the full year, excluding the impact from Russia. When issuing this guidance in February, we didn't know what will happen in Russia, and that we will have to exit the market. We also did not account at that time for another lockdown in China, where our 3 factories in the South were closed during 5 weeks in April and May. While we believe to be able to catch up in China in Q3 and early Q4, the impact from Russia cannot be absorbed easily by other business and likely to be in the magnitude of CHF 50 million sales for this year. We continue to expect organic growth to be in the range of 3% to 5% in 2022 not so ambitious maybe compare after 11% growth in H1. But bear in mind that we have a much higher base line from H2 2021. And we also remain cautious due to external factors as just described. We will have a clearer view after Q3 and still could update at that time. We expect the organic sales growth in the range 2%-4%, as guided, but this is excluding the impact of exiting the Russian market, as I said, that most likely will cost us around CHF 50 million on the top line. And finally, we expect our operational profitability to continue on its upward trajectory to be close to 10% of the sales this year compared to 9.3% last year. Our midterm ambitions remain unchanged. We target an average set growth of 4%-5% year-on-year and an operational profit margin in the range 10%-11%. And let me summarize now this conf call on Slide 2022. We have navigated well in a difficult market environment. We had and we still have to cope with this inflation issue that it already before the war in Ukraine. But this war clearly aggravated the situation. In addition, the renewed lockdowns in China have put another strain on the supply chain and logistics that only start to recover at the end of this year. But despite all these negative developments, we have been able to increase our order by 11%, our sales by 1% and our operational profitability by 50 basis points. We had a massive one-off impact of the write-off of our assets in Russia and Poland. But underlying business is doing well, and we have shown you with adjusted figures throughout this presentation. And finally, we confirm our guidance that we have set at the beginning of this year. We are just excluding the impact of exiting the Russian market. We have now reached the end of the presentation. And are going to open the floor for your questions. Operator, please let's start with the questions. Thank you very much for your attention.

The first question comes from the line of Patrick Rafaisz from UBS.

I would have 3 questions, please. The first one is on the one-off charges related to Russia and Poland. You had already mentioned that the majority is being booked in H1. How much do you expect for H2? How much is potentially left here? That's the first question. The second one is a couple of quantifications and specifically the impact of the China lockdowns on H1 sales and also the impact of the component shortages that affected Water? Yes, if you could just quantify that. And then number 3 is on cash flow. Wondering about your expectations here for H2. Do you think you can work down some of the inventory and work in progress? Can you catch up on what on the outflow in H1 or are we looking at more or less neutral break even free cash flow year in 2022? Thank you.

Thank you for the 3 questions. Let me start. Coming to the one-offs and how much you expect or you're asking us, we expect H2. So here, I can't really answer the question. As of today, we do not believe that there are material additional impacts above those communicated today. So I think with these one-time of impacts, which we have shown in our H1 balance sheet. That's it. Yes, there will come additional [ FX ] impacts, but only minor ones. We are talking here about single-digit numbers. So to answer your question, it's clearly we are not expecting any more impacts coming from Russia or Poland. And then maybe, Frédéric, let me give it to you with the next one.

Yes. On the second one, your question was about China lockdown. So in China, we do have 4 factories one in Dalian in the north, which was not so much impacted. And we do have 3 factories in the South, one for Chemtech in Shanghai, one for Water in Kunshan and one for Energy in Suzhou so the South of China. So these 3 factories have been completely closed during 5 weeks. We did have some people living and working in the factories to try to mitigate a little bit during these 4-5 weeks. So overall, with the impact we had on the sales during this part is around CHF 40 million to CHF 50 million of sales, which were delayed for the 3 factories. And we are now catching up in Q3, and we have good hope that in October, this delay will have completely disappeared. So which is a very, very positive development. and in Dalian, in fact, a minor impact. On the component shortage, we had some issues on electronic cards printed board, which came from our suppliers in China to be integrated in our corporates business. And the sole supplier is in China today, has only factor there. So we had some inventory ahead of us, but we have been impacted. And now it's back to normal. So I have to say this is behind us, and these were a few millions on something not so much important in terms of sales, but more on the delivery time of the goods, which were delayed for our customers. But this now is we can say, is behind us. And we also see some improvement on the reliability of the transportation. And here, it was not only a China issue. It's also a problem in the state to find truck drivers. We had massive issues to find drivers just to ship the goods out of the factories in North America. So overall, this pain is still there. We still have a positive pressure on the logistics, but this is improving. And in our perspective, and it's a little bit also your question about inventory and [ WIP ] Yes, we have increased the [ WIP ] work in progress and the inventory during H1. This is helping us now to deliver ourselves in the second part of the year. So maybe, Thomas, you would be more precise on the figures?

Yes. On the cash flow, let me add the following, coming back to your question. Yes, we have a high net working capital, especially inventories. And you all know this is because of the supply chain constraints, the logistic problems, which we are. And when one part is missing, we cannot deliver, we cannot send out the invoice. And this is the whole story. So expecting in H2 that the situation is getting a bit better than in H1. Yes, I think we can work on our net working capital, especially on the inventories to get this down and then finally turned in cash flow and free cash flow. However, comparing it with last year where we had more than CHF 200 million free cash flow at the end of the year, I don't think that we can reach this target this year. But I think that we can really improve our cash flow in the second half of year.

So you think you can overcompensate the cash outflow as you work down a bit inventories and work in progress?

Yes.

And also more deliveries, right, et cetera? Okay.

So to be clear, the priorities for our teams for the second part of the year is clearly delivering the backlog because we did not give that figure in the presentation, but we have a historical high backlog to deliver close to CHF 1.9 billion for Sulzer in this format. So it has never been so high at CHF 1.9 billion. So a big part of it, of course, will be traded in H2, but also now we start to have a decent backlog for H1 2023. And at the present time, all our factories are full.

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

I would have a few questions. First of all, I would be interested to know what was the price effect that you saw. So what is kind of the split between price and volume? That will be the first one. And the second one would be on Chemtech where the demand is really striking? I would be interested to know kind of what kind of projects are we talking there? Is it really new plants? Because so far, I think it was quite concentrated in Asia, China. So now it seems to be more broader regionally. So what trends are you seeing there? And also in the near term, is the momentum still strong? Or do you see any slowdown there?

Okay. Thanks a lot for your question regarding the price and the inflation. Overall, we estimate that in the price effect that we see, and we have been so far able to pass in our order intake is in the range of 3%-5%, depending on the product, depending on the nature of activities. As you know, when we have pure services, it's only manpower when we have a product is a combination of raw material and manpower. So depending on the regions and the type of activity, we say that we estimate because it's not easy, we estimate a price impact in the range 3%-5%. And so far, we have been able to pass this cost increase or mitigate them by efficiency or passing them to the customer. And we can see that. I repeat that also since the last time, the very strong indicator for me is the margin on order intake. And we are seeing that margin on order intake remains flat. Our cost increased, but the margin, we are able to book on top of this cost remain flat or stable. And when we see the execution of the project, the margin on projects being executed is also very solid. So during execution, we have no impact or so from the cost increases. And when we do have some impact, we are able to mitigate or to pass to the customer. So it shows that our business model on Sulzer on that front is quite strong. And again, to counter that, the cost discipline here is absolute priority of myself, but also all the teams have to have this cost discipline well in place. So that's the first to answer broadly your first question about the price. Your second question was about Chemtech and the demand? And you're right. I think you used the word striking, and this is quite impressive. And it's true that the big part of this demand is coming from Asia and mainly from China. So far, we do not see any slowdown in the demand of activities in China in the chemical and petrochemical activity. But we all know that this slowdown will come. And that's why also we have decided to focus on more our teams in the rest of the world, and we booked large projects in H1 in Europe and also in USA, where we were not so used to have this large project. And now we will see the impact on the sales as well for Chemtech in H2 2023 of these large projects, some of them being in the chemical sector, but some of them are also being in a very large process and water treatment or solvent treatment where we offer solutions to our customers, mainly in Europe. I was thinking about that to help also their processes in terms of energy efficiency impact on their processes and the title is Solvent Recovery Unit. So in fact, we're helping the customer when they use solvent in their process to recover the solvent and reuse them in their process. So creating then [ a virtuous circle ] on the use of this highly policing components in their processes. And we have won 2 projects of this type in Europe and to be implemented in most likely end of '22 and the sense will be in 2023. So this is clearly a shift, not a shift of focus, but knowing that the slowdown will come in China but pushing our teams of Chemtech focus on Europe and North America. And as you know as well, there will be a wave of investment to come in Europe and in America and maybe less in Asia because after all, what happened during this year on the logistics disruption. So the fact that most our customers reinvesting locally or originally, and we will benefit from that in Chemtech, but also in Flow Equipment. So that's to answer your question. And the momentum is there, the momentum is both in renewable on clean technologies and in the traditional business, chemical and petrochemical of Chemtech. So a good perspective for this activity for this year and most likely in 2023 as well.

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

Can you hear me?

Yes, absolutely.

Yes.

Okay. Great. A very quick one first. In Russian [ acid ] CHF 133 million will be speaking about impairments and write-offs, et cetera. There is nothing cash effective there. Did I understand you correctly?

Yes. Yes, I can confirm this.

All right. And then the second one, maybe surprising for me, but these exits from the tariff service in Brazil, you mentioned that this is what caused the reduction in personnel. That's about 1,000 people. So it was in a way bigger than I thought. Can you explain what's the background of that exit? And how big of an impact it has, if at all, in terms of sales?

So it has a big impact in number of personnel, but a very low impact in numbers of revenues because this activity was, I would say, a bit abnormal for Sulzer that we are depending on the project up to 1,000 people. But sometimes it was down to 100 because, in fact, it was bringing manpower to the petrochemical industries. And this is not the business of Sulzer to provide manpower to our customers in Brazil. So in fact, it shows a significant reduction in personnel, but in terms of impact of the sales, it's maybe less than CHF 10 million. And this was not at all a core business for Sulzer. And we found a contractor really active in maintenance activity for [indiscernible], and that took over the employees and really was for him, this activity was his core business. And for us, it was clearly non-core. So that's why we decided to divest this business.

Okay. Understood. If I may, I have a couple of more general business-related questions, starting from the examples that you gave in the presentation. Can you say how relevant this waste-to-fuel business is or it can be both for you and for the clients? I mean when you say, I don't remember how many tons you produce, but is it big?

Yes. So in fact, so far, for us, it's is an excellent reference project, and you have plenty of technology now under development. We just mentioned or highlighted here the waste-to-fuel. You do have also all these biofuels technology. We announced a few weeks ago that we were part also of some project in the Netherlands working with Shell on recycled. We had also plenty of projects on biofuels. So today, there is not one technology that will emerge. They are a large portfolio of technologies being under development worldwide in America, in Europe, mainly. And we aim with our pump and compression solution to be part of this technology. But to be very clear, and in one view, all these projects are start-up now they come from the lab to commercial scale. So that's the one that we highlighted in U.S. in Nevada, so which is commercial scale. And you can imagine that many of the municipalities not only in U.S. but also in Canada and the rest of the world are watching because here, we are really converting municipal waste. It can be from whatever garbage you have can be solid for water treatment or can be solid from all the garbage into fuel. And if it's successful and if it works, this has massive opportunities around the world. But today, this is the first project in U.S. It will take a few years for them to make the assessment. But I believe that at Sulzer, we have to be part of all these projects, either on the pump side, but also Chemtech. And Chemtech also, as I explained, is part of all these projects now. You can see where the energy efficiencies and the impact on less affluent to be released and more reuse of all the affluent is a key topic. So yes, it's growing. It's slow, but we are present in all these technologies.

And can you say if you put in a ton of garbage in that process, how many kilograms of fuels are coming out?

Really, this, I don't know, but you put me a good question. But I will try to give you a feedback on that. But I prefer to stay silent rather saying stupid thing on the efficiency of the process. But that's a good point.

Right. And maybe also the CO2 capture that you mentioned wasn't aware of that? Are you using Chemtech technology for that and [indiscernible]

So CO2 capture here is something which is super interesting. It's not new technology. This CO2 Capture exist more than 20 year or 25 year. And they have been developed by companies like Alstom, Siemens at that time. And Sulzer has always been a partner for this CO2 Capture. So what we are doing, in fact, we are in the output of the CO2 of the [ chimney ] of the plant. All these guys go through equipment, which are provided by CAPEX, so within the columns. And thanks to that, we are able to capture the CO2, and then the CO2 is liquefied. So this is here, in that case, it's one technology. And once liquefied, it is either reinjected in the ground in reservoir, which are empty or it can be stored or used in some industrial processes as well. And you see it's quite impressive, just this factory, one plant for million tonnes. So today, the highest level of CO2 emission comes from the coal power plant in the world. You have seen that due to the crisis in Ukraine. Germany is reopening coal plant. U.K. will extend the lifetime of their coal plant [ about ] 10 years. China is burning highest level of coal in the history. They are even reopening old plant and commissioning new plants. So coal is there to remain for decades. And we have to be present in this to capture technologies, and Chemtech already for more than 20 years is present. This technology were never able to take off because considered as too expensive. But when we see now the cost of electricity, if all what could have been done 20 years ago would be in place, I think it would have a massive impact on the CO2. So yes, we are there. And I think it's a potential great development for the power plant, but also for the cement industry, which is also one of the largest CO2 emission. And we are also active in CO2 capture with partnering in California with a company named Blue Planet, where we are part of this venture, along other famous names here in Switzerland, [ Alstom ] the oil industry with [ Chevron ] and we are the technological partner of Blue Planet in California, different technology, but we are there as well.

Fantastic. Thank you very much. May I squeeze in a last one on the service side. If I exclude [ Chemtech ] basically, let's say, 50-50 split of sales, CHF 50 million, CHF 25 million in H1 that you lost. Does it mean that underlying service has been growing as well, almost double digit? And if yes, can you give a little bit more color where it came the growth from, et cetera?

Yes, your maths are correct. So in fact, we grew the pump service business by more than 10%, which is a line, in fact, with the new business, which is growing at 14%. But the pump service business grew at 10% plus. And it is clear that the impact is mainly coming on turbo activity because of Russia, which was very important for our turbo business. And electromechanical services are, I would say, flat this H1. But pump service grew by 10 plus percent.

The last question for today comes from the line of Christian Obst from Baader-Helvea.

Yes. Just coming back to costs. So you're talking, of course, about cost discipline and we have seen that in the numbers of calls so far. But nevertheless, going forward, personnel costs will come in with some kind of a delay, especially also in America. And now going forward in Europe, the same is true for energy costs. And this normally you cannot pass on directly to customers, but you have to mitigate within your organization. So how do you think you can mitigate these increasing personal energy costs going forward like you have done it in the past because it's increasing?

Yes, you're right. So first of all, we are not so much energy intensive in Sulzer. We do not have any foundries anymore. So when you look at the cost of energy for us is mainly electricity and heating as well for our factories, heating or air conditioning in summer time, but it's mainly energy, electricity. So it's not a lot in the total cost for our products, where we might see an impact is clearly on all the castings that we receive on all the pieces, which need a lot of energy with ovens and so on. And a big part of our business today [ in mitigate ] on cost plus because we are on projects. And this is not only impacting user. It's also impacting our competitors. So far, we have been able to pass this cost. When we look at our own cost, how we mitigate, it's very clear that we have, of course, discipline on the recruitment. We have, of course, discipline on all what we do in the consumption of energy in the waste management. So it's a sum of plenty of small actions. There is no miracle in this business. So that's why all the guys and all the operation teams, and you know that we have more than 40 factories that closer and 130 centers. It's their daily task to be cost conscious. And it goes for everything. And when you put all these actions, altogether, we are able to have this mitigation plan. On the labor costs, it is true that we see some cost increase in Europe, in America, but not everywhere. We have less inflation in China, for example. In China, the inflation is under control. We do not have this type of pressure on the cost. We don't have the same pressure as well in India. So people are focusing on the labor cost increase, 5%, 6%, 8% that might happen in Europe and in North America. But there are other places in the world where we do not have this type of labor cost in pressure as well. So overall, we are navigating to tell you that it is simple, no, not at all. It's really very hard work from all of us. But so far, and also what's very important when I look at the margin and execution versus the margin on order intake, there is no deviation. So we are clearly able to manage that altogether there is always a small size difference, but there is no deviation at all over the last 12 months between what we do and what we sell.

Okay. And do you have, going forward, any kind of problems or rising problems to get the employees you need for your growth, especially in service?

Finding the right talent is difficult. It's difficult in all segments and all countries and not only for Sulzer, I think, for overall industries. And we have difficulties to find low labor skills because here, it's highly competition with Amazon Warehouse or whatever. But we do have also difficulties for highly qualified people in the mechanical industry. When you have very large mechanical companies saying that they want to hire thousands of technicians and engineers, then, of course, it creates some pressure on the market. And we do need to find a permanently specialists in all our operations in mechanical engineering, in electrocoagineering, in control and implementation in welding. But we consider that Sulzer is a good employer. And so far, it's a hand, but we have a decent number of jobs opened at present time, but Sulzer is always considered as a good place to work. And this is not only true in Europe where we have this reputation, but also in America, in Brazil, in China, we are able to attract people, but not only attract, retain them. So I think and it's part for our objective for all our human resource teams is not only attracting people, but also retaining them, and we take a lot of care also about that. So yes, nothing is easy at the present time. But can we say that we are more impacted than the rest of the traditional industry, I would say no. We are at par with the rest.

Okay. And last but not least, I have a question concerning your factory that you said you have approximately 40 factories around the world and numerous service stations. So do you plan to change anything in this kind of setup in the next 2-3 years?

So first of all, we have done already a major change. You know that before being the CEO, I was running the pump division and I still run the pump division, by the way, so I'm double-hat. But we have done 2 major change, in fact, during the last 2 years was the closing of our historical factory in Portland in Oregon, which was dedicated to the pipeline market in U.S. And this pipeline market completely disappeared. So this factory now is completely closed. It was closed completely in June. And we had also quite a large factory in Belgium coming from the acquisition of [indiscernible]. And we closed that, we even sold the property, and now the production has been transferred to Germany, France and U.K. And we have no intention to do more footprint adaptation. But what it is clear in our future industrial investment, if we need to invest in industrial capacities, we will invest as close as possible from the place of consumption and the place of the customer. So our quality at Sulzer was always regional for regional, and we will keep that. I can just give a highlight what we are doing now in Finland. In Finland, it's where we have the factory for production of industrial pumps mainly for pulp and paper and mining, and we are investing in a fully automated manufacturing line and testing line, and that will help us to improve the efficiency and the throughput time in the factory as significantly. And this factory, is not factory. It's already in our factory, but this line will be available beginning of 2023, and it is one of the largest industrial investment further is doing at present time, and this is in Europe, and this is in Finland. So we do not have a large investment plan in China or in India, if you want to be very clear. But I do not have also intention to reduce the setup. The setup will be mainly used for the domestic market in China and India, a little bit of export, not more than 10%, 15%. But if we do have to invest now, we will invest more in Europe and in America to be as close as possible from our customers.

So I think there are no more questions. If you want to do some closing remarks, Frédéric?

So again, thanks a lot for your attention and the quality of your questions. I believe that I tried to picture you situation of Sulzer, which is objective. So we have done great results in H1 in view of all the uncertainties and the challenges we had to face. We have to navigate the company through many crises over the last 3-4 years, starting mainly in 2018. And since 2018, it's one crisis after another. And despite that, we have been able to grow the business to develop the profitability to create perspective to reinvent our sales for the energy transition to be part of the circular economy. We discussed that before, also to benefit from the renewed momentum in the energy sector, while being on track with our strategy to grow in water and industrial segments. So many clouds in the sky today, what would be the impact of inflation, recession to come in Europe, in U.S. when for how long? We don't know. But we have proven that the user has a very resilient business model. We had an impact on Russia this H1, no impact or very limited impact on our operations. We will be able to swallow that. And we are now, again, up and running once we have digested that to really focus on the real market and growing and developing in the company worldwide. And we are close to 13,000 employees in the world. And again, as we said, it's a big word of thanks for all these guys because they are super strong, dedicated and committed and it's because of them that we are delivering these results. So thank you for your time, for your attention and hope to talk to you soon. Thank you very much.