• Order Intake Growth: Increased by almost 9% in H1 2024.
• Sales Growth: Sales increased by approximately 11% in H1 2024.
• Profitability Increase: Operational profitability rose by 130 basis points to 11.4%.
• Gross Margin: Improved by 140 basis points to 33.7%.
• Order Backlog: Increased to CHF 2.4 billion, up CHF 450 million from the end of last year.
• Flow Division Profitability: Operational profitability increased by 250 basis points to 9.5%.
• Services Order Intake Growth: Grew by 12.6%.
• Chemtech Profitability Increase: Improved by 150 basis points to 13.2%.
• EBIT Increase: Approximately 20% higher than H1 2023.
• Free Cash Flow: Lower due to higher net working capital, tax payments, and CapEx.
• Updated Guidance: Order intake growth of 9% to 12%, sales growth of 9% to 11%, and EBITA margin around 12% for the year.

• Warning! GuruFocus has detected 6 Warning Sign with SULZF.

Release Date: July 26, 2024

For the complete transcript of the earnings call, please refer to the full earnings call transcript.

Positive Points

• Sulzer AG (SULZF) reported a strong order intake growth of almost 9% in H1 2024, despite a high baseline from the previous year.
• The company achieved a significant increase in profitability, with operational profitability rising by 130 basis points to 11.4%.
• Gross margin improved by 140 basis points, attributed to better pricing strategies and operational excellence.
• Order backlog increased to CHF 2.4 billion, providing strong visibility for future operations.
• Sulzer AG (SULZF) updated its guidance, expecting order intake growth between 9% and 12%, and sales growth of 9% to 11% for the full year.

Negative Points

• Negative foreign exchange impacts affected both order intake and sales, reducing nominal values by approximately 4%.
• Free cash flow was lower due to increased net working capital, higher tax payments, and increased capital expenditures.
• The services division did not see an increase in profitability due to significant investments to meet growing demand.
• Return on capital employed remained stable due to increased asset values from currency remeasurement, despite higher EBIT.
• The company faces challenges in repatriating cash from countries like Brazil, China, and India, which incurs higher effective tax rates.

Q & A Highlights

Q: You have increased your profitability despite a negative product mix. Have you booked more services or aftermarket business into flow divisions instead of the services divisions? A: No, there is no rebooking done to make figures look better. The improvement is linked to operating excellence, strict cost discipline, and strong pricing. (Thomas Zickler, CFO)

Q: The order backlog margin is higher than the reported gross margin. Is this a good proxy for future expectations? A: Yes, as we focus on operational excellence, the gross margin should always be better than the order intake margin. However, short-term projects may incur costs that are recorded as operational costs. (Thomas Zickler, CFO; Suzanne Thoma, CEO)

Q: Services orders slowed down in Q2. Were there any specific events, and what is the expected run rate for the rest of the year? A: There is no fundamental slowdown in the services division. We expect an acceleration in APAC, and a slight increase in margins towards the end of the year. (Suzanne Thoma, CEO; Thomas Zickler, CFO)

Q: Working capital increased, impacting free cash flow. What are your expectations for the second half of the year? A: We aim to reduce net working capital by around CHF50 million by year-end, similar to our performance in H2 last year. (Thomas Zickler, CFO)

Q: How many months of visibility does the current order book provide? A: Overall, it provides about six months of visibility, varying by division. Large orders in energy and industry will be executed over 18 months, while services have shorter visibility. (Suzanne Thoma, CEO; Thomas Zickler, CFO)

Q: Do you have any refinancing plans for the CHF250 million bond due in October? A: Yes, we intend to refinance the bond fully to maintain flexibility and liquidity, despite having cash in countries like Brazil, China, and India. (Thomas Zickler, CFO)

Q: How has order intake developed in July? A: We see no slowdown in order intake in July, with strong pipelines for major projects across divisions. (Suzanne Thoma, CEO)

Q: What percentage of cash is trapped in China or other difficult jurisdictions? A: We have more than CHF100 million in China, but it is not trapped. We can repatriate it, though it incurs a cost. (Thomas Zickler, CFO; Suzanne Thoma, CEO)

For the complete transcript of the earnings call, please refer to the full earnings call transcript.