Sulzer Ltd (OTCPK:SULZF) Q1 2020 Earnings Conference Call April 21, 2020 5:00 AM ET
Company Participants
Christoph Ladner - Head, Investor Relations
Greg Poux-Guillaume - Chief Executive Officer
Jill Lee - Chief Financial Officer
Conference Call Participants
Jorg Schirmacher - Baader-Helvea
Fabian Haecki - UBS
Andre Finke - HSBC
Alessandro Foletti - Octavian
Charlie Fehrenbach - AWP
Armin Rechberger - ZKB
Christian Arnold - MainFirst
Operator
Ladies and gentlemen, welcome to the Sulzer’s Q1 2020 Order Intake Conference Call and Live Webcast. I’m Andre, the chorus call operator. I would like to remind you that all participants will be in listen-only mode and the conference is being recorded. The presentation will be followed by Q&A session. [Operator Instructions]. At this time it’s my pleasure to hand over to Mr. Christoph Ladner, Head of Investor Relations. Please go ahead sir.
Christoph Ladner
Thank you, Andre. Good morning and welcome to Sulzer’s Q1 order intake conference call. Today with me is our CEO, Greg Poux and our CFO, Jill Lee. For this call we have prepared the presentation which you can find on our homepage. As always I want to draw your attention on the Safe Harbor' statement on slide number 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, I hand now over to Greg for the presentation. Thereafter you have the opportunity to ask questions. Greg, please.
Greg Poux-Guillaume
Good morning everybody. Jill and I are happy to be on this call with you this morning. We hope you and your families are safe and healthy and we have taken the unusual step of having a presentation for this Q1 results, usually it's a press-release and that's that but given circumstances we thought that it deserved a bit more substance and we want to give you the opportunity to ask questions. That's what we are going to do today. We have got 11 slides. I will try to move through them quickly and then we will open it up for questions.
Starting on slide 3, on Q1 2020 Performance, I will start by saying that our first priority at Sulzer is to keep all our employees safe and healthy. We've done pretty well on that to-date. We've got three corona cases, three COVID-19 cases out of 16,000 employees worldwide despite the fact that almost all our sites are operational and our plants are running and we've done that through the right processes, the right social distancing procedures and also availability of PPE which has been important in this pandemic.
If I focus for a second on our Q1 orders we are quite pleased with our Q1 order intake. Order intake rose to CHF 994 million, up from CHF [984] million, the previous year. This is significant forex impact, so this is actually 6.5% growth adjusted for negative currency impacts and the 3.2% organic growth. In most countries, Sulzer is categorized as a provider of the essential services and we provide essential services because we ensure the maintenance of water and energy infrastructures. And because of that we are allowed to continue operating and to continue serving our customers.
The slide says that over 90% of our employees worldwide are working. It's actually more than that. It was 90% until a few days ago when India was still closed for us as it is for all other companies but at the end of last week we have got dispensation to reopen our India facilities as a provider of essential services. We have got the authorization to reopen with 45% of our people. So a bit less than 50% capacity and our pumps facility is already back up and running. Pumps and Service and our Chemtech facility is still working through some regulatory constraints but will be back up and running at some time this week. So the 90% is probably closer to 95% today.
We only have one plant worldwide that's closed today, it's our Elgin plant for APS in the U.S. It's in Illinois and it's governance decree closing all the facilities. Everything else as I said is up and running and if I refer back to China which was the forefront of the Corona virus, as we recall in February all five of our plants were closed. While I am happy to report today that all five of our plants are running and they are running at somewhere between 95% and 105% of capacity, which means that essentially the Chinese market is quite active and we are making up for losses. The closures in India and China had even larger impacts on sales and orders, we usually don’t report sales on a quarterly basis but to give you an indication and these exceptional times our Q1 sales are down 2.2% adjusted for 4x and 4.3% organically. And once again this has lot to deal with the closure of China in February and the closure in India in late March.
On the other hand, free cash flow in Q1 is CHF 15 million above the level of last year 15, we will give you more details on that in minutes. We decided to go ahead with our dividend and it was paid actually I think this morning CHF 93 million of cash out for the 2019 dividends.
Moving on to page 4, slide 4, an outlook slide, before I go into the Q1 details let me share with you what we expect for the next couple of months and what actions we have already launched to cope with the situation. Q2 will be more challenging. We will be more impacted by the enhanced CapEx costs in the oil and gas by the limited site access for our service business by the confinement and measures in most parts of the world, that are, for example, slowing down the Dental and the Beauty market if I use the example of APS and by the general economic slowdown.
Our execution will be tested by the lockdowns and by supply chain disruptions, although we have managed actually to keep our supply chain quite stable to-date and we will put a lot of focus on cash collection. What helps as a continued strong order backlog at CHF 1.9 billion at the end of Q1, which is about 80% tradable in 2020.
We also have the very comforting liquidity cushion. Our liquidity at the beginning of 2020 was CHF 1.6 billion. So CHF 1.1 billion of that was in cash and CHF 500 million was a revolving credit facility that was undrawn at the beginning of 2020. So therefore, we have got significant liquidity in whatever scenario we may think of.
We are convinced that two thirds of our business that we consider to be low cyclical will recover with the economy as it restarts after COVID-19. The other third is combination of different things as we will see later in this presentation and these are mostly new equipment businesses that will rebound too but we expect that within that there is about 14% of Sulzer which is evolving that we generate a new projects in oil and gas and that 14% will suffer for longer period of time as the oil market rebalances over the course of 2020 and part of 2021. And we all understand what this is due to its high stocks, lower demand.
We have already launched decisive measures to adapt to the new reality. We will reduce our CapEx by CHF 60 million down to CHF 70 million on plant and equipment maintenance levels. So we're taking our CapEx down from the CHF 109 million that we spent last year to CHF 70 million this year. And it's CHF 60 million lower than what we had flagged to the market at the beginning of the year and that's already done. And that's the lowest level of CapEx for Sulzer in the last 10 years.
We've also decided to reuse our OpEx by about CHF 60 million this year through a combination of temporary and structural measures. Furthermore, an anticipation of a longer downturn in oil and gas, once again oil and gas in U.S. is 14% of Sulzer. We will reduce our capacity in our energy business by about a third. This means structural cuts, mostly in pumps equipment with some ramifications in our service network and in the global functions that serve the energy business. We'll give you more details on our plans with the H1 results on July 24.
As for role in fighting the pandemic, we have a unique role as a provider of essential services which allows us to offer support to health services. Around the world we have a very comprehensive service infrastructure and we jump in whenever we can to help maintain equipment for hospitals and other emergency services and our people are quite excited to be able to do that and to contribute in their own way to fighting the pandemic.
Moving on to Slide 5, Q1 order intake overview. So 3.2% as you see, organically 6.5% on a Forex adjusted basis and it's mostly driven by the good performance of our Service business and also by the performance of our Pumps Equipment division. We've prepared a slide for each of the divisions. So I'll give you details there. I'll just point out on this one that we have a significant negative 4x impact of CHF 55 million. Acquisitions contributed CHF 33 million in total and GTC in Chemtech CHF 20 million, Alba and RES CHF 13 million.
Moving on to slide 6, Pumps equipments. In Pumps equipments, we were up 4.5% organically in Q1, driven by a silvery active oil and gas market and a strong underlying municipal Water market. Orders from oil and gas were up 52% despite the cancellation of a $20 million U.S. pipeline order. So significantly up despite a 20 million cancellation which has already been taken out of the numbers.
We've seen suspensions of orders also in the amount of $30 million, suspension of $30 million. If we adjust for two large Water infrastructure projects that we booked in Q1, 2019 orders from our water business grew by 22% on a very good performance in municipal water. Orders from chemicals from the Chemical market grew by 4% and the orders from the Power market were down 11% on higher selectivity.
Finally, in industry we were down 5% as a consequence of lockdown in China but also impacted by the general economic slowdown. Our order intake in China was impacted in February by the lockdown but as you see on the right of the slide we had a strong rebound in March and that rebound continues in April.
Moving on to page 7, Rotating Equipment Services. In Rotating Equipment Services, we saw strong growth across all regions and product lines, as you see 12.7% which is a very significant number for Service business. I want to highlight in particular our Turbo Services business which was up 24% helped by strong markets in the U.S. but also in Southeast Asia and large orders for Gas Turbine Services in Russia. Pump services and spares were up 8% against a very high base in 2019. We stood by a 15 million retrofit order for third party pumps.
RES, our Rotating Equipment Services business saw a limited COVID-19 impact in Q1 as China and India together or less than 3% of our order intake. However, Q2 is likely to be more impacted are not because the service business is not resilient but because part of our service business relies on site access.
We have field service and we have our people that go to customer site and we have customers that come and inspect the work that we've done for them in our facilities and as you can understand right now the market is less mobile, sites are less accessible, customers travel less and this is going to slow our business in Q2.
If I try to see, if I try to comment on what's happening currently in current rating for the RES business in Q2 because of that site access, in April we're roughly down 10% versus where we would have been otherwise and the 10% is mostly due to the fact that once again there's less site access and that's going to be temporary but it's going to be visible in Q2.
I should also point out I didn't when we were talking about on Pumps Equipments but if I look also at current trading in April, we see the water and the industry segments continuing to do well in April and we see the energy business which is really two separate markets. There is the U.S. market which is pretty much idle at this point and then there is the rest of the world and actually we're doing okay in energy in April because Saudi, China -- Saudi and China are quite active and essentially supporting our activities over that period.
Moving on to Chemtech on page 8, China's not relevant for our RES. It's not very relevant for our RES but it's very relevant for Chemtech. China in 2019 was 30% of the Chemtech order intake. Chemtech had a difficult start in Q1 because of that -- because of the Corona virus and the impact in China, you can see that on the bar-chart on the right of the page what you see is that we were impacted in January and February in China but we had a very significant market rebound in March in China and that rebound is continuing in April.
For the entire first quarter, just for reference Chemtech still grew 8% in China. So down in January, February, we more than made up for it in March and we're continuing to do well in April.
Europe, Middle East and Africa and the Americas were down mainly because of delays in larger projects and temporary restricted access to customer sites. This is something that we'll also see in Q2 for Chemtech around the world. The tower Field services business which is about 20% of Chemtech as its name implies is a Field Service business. We do outages on customer sites and what we see is that a lot of customers are delaying outages because they don't want to give access to their sites because they want to keep people confined and segregated but we also see an interesting development which is that a lot of these same customers are trying to lock up slots for September for these outages because they know that the outages are necessary. They just don't want them to happen now and they also are anticipating that there will be a boom in outages when confinement stops, when the lockdown stop and therefore they want to make sure they're not left out. So it will be slow in Q2 for TFS but there will be a recovery after the summer.
Overall, the Chemtech order intake was up 2.1% adjusted for 4x but down 12% organically compared to Q1 2019. GTC the acquisition that we made last year had a very strong Q1 and contributes at about 20 million of order intake to Chemtech.
Moving on to Applicator Systems on page 9. Applicator Systems was down 3% organically in Q1. Our Adhesives business resisted well, staying level, staying flat despite challenging and markets like automotive and aerospace. Beauty, actually demonstrated a clear rebound. You can see that on the bar-chart on the right of the slide. Our order intake really picked up in January and February and we were doing quite well until the market essentially stalled in March and the market stalled in March not because of anything linked to Sulzer obviously. It stalled because most of the Beauty retailers actually had to close their doors and for those of you who were in Germany for example, if you went to your supermarket locally you had the Beauty aisle that was actually coordinate off in these supermarkets.
So the rebound in Beauty for Sulzer is there but the market is going to be stalled for part of Q2 before it recovers afterwards and it's the same for dental. Dental had a really strong month of March because our dental customers were stocking up before what they expected to be slowed down activity because of lockdowns. And what we will see in dental is we will see a very soft dental market for us in part of Q2 because people are not going to the dentists. Dental practices are closed and the ones that are open are only taking emergency customers and I am sure most of you guys are delaying some of the usual sort of non-essential stuff because none of us are very excited about having somebody stick their fingers in our mouth currently.
So that's going to impact negatively our APS business in Q2 but APS is a business that will rebound as people start coming out again.
Okay. So moving on to slide 10, which is a variation of our donuts that we have often used to explain that we have low cyclical businesses. What we have done is we have given you guys more details. We brought down the, the third of Sulzer which is new equipment and you can see it's broken down in chemicals, pulp and paper, tower, downstream and upstream.
The message that we are trying to drive across is different businesses will be impacted in different ways. Our aftermarket businesses will be very resilient. Now as I said they will be impacted in Q2 because of the shear limitation of lower site access, less access to customers and customers' sites that these are very resilient markets where if you -- even if you take the oil part of that aftermarket, if you have a look at how we performed in last downturn that business actually held up very well in terms of volumes and margins.
So service parts and retrofits, everything that's aftermarket is actually 45% of Sulzer. It's the 40% you see in dark blue here and its initial 5% that you find that in water because in the light blue we haven't broken out this service and equipment part of water.
And our water business itself is a wastewater market. It's correlated to urbanization and population and as we know that is not something that the drops because people are confined.
Applicators I have already talked about a minute ago. Applicators will be impacted in Q2 because people don't have access to cosmetics and they don't have access to dentists, but that rebounds as soon as people are allowed to travel again and move around again.
Maybe there is a little bit of softness in dental for the rest of the year because people don't rush back to their dentists right away but if you look at the coverage of the dental world by some of the specialists out there, they expect that the dental market will progressively recover and they see an impact for the full year for dental in the magnitude of something like 10%.
So once again that two thirds of Sulzer is quite resilient. But still some impacts of short term because people can't leave their home. If I focus on the other 33%-35% of Sulzer, you have different segments are impacted in different ways. You have things like chemicals and pulp and paper and tower, new equipment that are impacted by the performance of the broader economy.
Pulp and paper currently is doing well and continuing to do well in April because yes people are using – may be less printing paper but they are using more toilet paper as we all know and they are also using more cardboard because they are buying off the internet.
If we have a look at downstream and upstream these are markets that will be impacted for longer period as much as pulp and paper and chemicals will rebound with the global economy downstream and upstream will bear the brunt of longer downturn in oil and gas which will be driven by high stocks and lower demand. What we are seeing currently and what we saw yesterday in the markets is that this rebalancing of the market is being forced by the market. Essentially it's no longer about OPEC, it's about the fact that there is no storage and that you have to put the oil somewhere and this is why you have got things like negative oil prices short term and WTI in the U.S. But at the end of the day what you have to keep in mind when you think about Sulzer is that we are not very exposed to shale.
We don't do fracking pumps. So our exposure to shale is minimal. It's really just related to pipelines and we sell pipeline pumps as you know. Most our exposure is in conventional oil and conventional oil is driven by the national oil companies and if you think back on things that were explained yesterday by people like Schlumberger and Halliburton when they came out with their results, I think they commented that they see CapEx in U.S. shale going down by something like 50% this year. But they see CapEx on the international market which is conventional oil, going down by 10% because the national oil companies continue to invest.
Their game is different there and therefore yes there will be a longer-term impact and this is why Sulzer is taking the initiative of reducing its energy capacity by 30% by third but you have to keep in mind that not everybody will be impacted in the same way and given Sulzer's portfolio that 14% that we have in oil and gas which is overwhelmingly conventional, we will be less impacted than anything that is significantly exposed to shale.
Moving on to the next page, which explains how we are adapting to short term and midterm impacts. Short term we mean 2020. We are taking the step of reducing OpEx and CapEx by CHF 60 million each. The CapEx decisions have already been driven through the business and everybody has their target and knows what they have to stop and what they have to continue. So that's CHF 60 million and the OpEx cuts are being affected by a curtailing SG&A through mixture of structural and temporary measures like travel and reduction discretionary spend, but it's some temporary measures and some structural measures in OpEx. And some additional measures will be driven just by the downsizing of our energy business which will also have an impact on SG&A but we'll talk more about that at the half-year.
The structural measures that we'll talk about at the half year in terms of resizing our energy business. I've explained that once again we're about conventional oil 14% of Sulzer it's less impacted at U.S. shale and so on but it's still exposure to oil and there will still be an impact that will go into 2021 and therefore we are reducing our capacities in energy by third. This mostly impacts the engineer pumps business within the pumps equipment division. Well to a smaller extent also impact certain group functions and part of RES rotating equipment services if there are things were we have facilities are linked to new equipment facilities but we'll give you more details about that on July 24.
Moving on to the next page, where we've tried to give you some elements to think about our liquidity. We started the year with an opening cash balance of [a billion one] and CHF 500 million of undrawn revolving credit facility. Our net debts at the beginning of the year stood at 347 resulting in net debt to EBITDA ratio of 0.8. And we try to give you some elements to think about how this has, this equality position has developed to date. Our free cash flow in Q1 is actually CHF 15 million higher than the free cash flow in Q1, 2019. So it's CHF 15 million up year-on-year.
Overall, we expect the similar seasonality in our cash flows in 2020 as in prior years. Free cash flow in H1 typically ranges from minus 52 breakeven and we don't expect that to be very different this year might be a little bit of tension in our supply chain as we support some of our weaker suppliers but roughly we expect the same pattern. And as a reminder we typically deliver a free cash flow yield of 4% to 5% of sales although in 2019 we were higher than that.
Other elements that you have to think about when you're modeling our cash flow, on April 21 as I said earlier, we paid CHF 4 per share dividend for a total cash out of CHF 93 million which is off the top of my head an additional CHF 9 million cash out versus last year because as you recall we don't pay the renewal part.
We expect CapEx to be at maintenance level CapEx which is CHF 17 million and therefore this is CHF 40 million lower than CapEx in 2019, which was CHF 109 million and 60 million lower that’s what we intended to do in 2020.
And at the half year, on July 6 to be precise we will repay a bond amounting to CHF 110 million and this is our only repayment before July 2021 where we have another bond that comes to maturity.
Obviously, there are some COVID-19 impacts as I explained, the country lockdowns but usually we stay open because we provide essential services and we might be put into squeeze between some of our customers, maybe delaying some payments and some of their suppliers that need the support. We don't see that in our numbers yet but it's not out of the question that this is something that we see at the half-year but as I said at this point not visible but we just want to flag that so that you guys can think about our numbers with as much visibility as possible.
Last page, I'll summarize our Q1 order intake was strong, I think higher than most of you expected and healthy in all the businesses particularly driven by our aftermarket activities.
Clearly, we like everybody else really we’re withdrawing our 2020 guidance. Despite the fact that actually we were within guidance for Q1 as you know but there's not enough visibility and therefore it really doesn't make sense to maintain that guidance which anyway excluded the impact of the Corona virus.
We're fully mobilized to provide essential services. As I said about 95% of Sulzer people around the world are working and our aim is to stay active, to stay busy and to stay mobilized for our customers. We mostly rely on self health. We haven't made significant use of short time work to date. We've mostly relied on things like reusing holiday accruals. We've asked people to take their vacations and we've asked people to do that across Sulzer because at the end of the day we believe that companies like ourselves should rely on self health before they rely on the government. So regardless of our comfortable liquidity position we believe that it's important for our people across the company to all contribute and taking your holidays early has been a way to contribute to that and we have done that quite effectively.
The impact on the Sulzer businesses in Q2 as we said will be more significant but will be resilient because 45% of Sulzer is aftermarket and 65% of Sulzer is low cyclical. We have a high backlog and we have strong liquidity. I talked about the CapEx and the OpEx cuts 60 million each. I've talked about the structural adjustment in energy by a third and beyond that Jill and I are happy to take any questions that you may have on Sulzer before we make wrapping comments.
I'll open it up for your questions now.
Question-and-Answer Session
Operator
We will now begin the question-and-answer session. [Operator Instructions] The first question comes from the line of Andre Finke from HSBC. Please go ahead.
Andre Finke
Yes. Thanks for taking my questions. I may be go through them one by one. The first one is related to the structural capacity adjustments in energy or mainly oil and gas. The one third, you mentioned is that roughly the market decline you would see over the next say one, two to three years or do we, I mean are you cutting capacities on a bigger magnitude than you would expect the market to go down?
Greg Poux-Guillaume
We are cutting capacity by bigger magnitude. It's easier to slow these things down than to accelerate them and therefore we believe that at this point it's not about half-measures, it's about taking the bull by the horns and being proactive and once again cutting capacity by more than we're anticipating the market to decline by is also a way to continue to be able to be selective which is important to us because price has never really recovered from 2019 and at this point it's pretty clear that prices are not going to recover in oil and gas anytime soon and therefore selectivity is important. Did I answer your question, Andre?
Andre Finke
Yes it does. Maybe it's follow-up on that. How quickly could you ramp up capacities again? I mean actually you mentioned that you expect the market weakness to persist at least until well into 2021, on the other side you mentioned in the past that you think reduced investment levels of your customers may curb production capacities on a sustainable basis at some stage. So if we assume that some sort of recovery will come through maybe in late 2021, 2022 to which extent could you build up capacity soon and a potential recovery scenario again?
Greg Poux-Guillaume
I think we could and we've been quite effective at doing that in the past. If you remember the last oil downturn which wasn't that long ago 2015 to ’17, we kept capacity, but we were able to ramp back up afterwards as needed. Cutting capacity for us and we say structurally, it usually involves some types of factory closures but what we've also learned from the last downturn is that we've become a lot more efficient in our manufacturing and therefore a lot more scalable with the assets that we do have.
So we believe that we'll be able to build back up if the market lends itself to that and we do expect that there will be a rebound sometime probably in 2021. I mean if you look at what some market observers are saying in terms of pricing they probably expect a rebound before that because of the sheer shock of the adjustments and the shut-ins that are currently happening. Being our job is not to speculate on when the market will rebound it's to take proactive actions and but scaling back up, I don't think will be the constraint. It's more about adjusting to be ahead of the wave.
Andre Finke
Okay. Thank you. And do you have any indication on potential costs for taking out that capacity?
Greg Poux-Guillaume
No. As I said we will be more forthright on that on July 24 when we announce our half-year results. We have got pretty clear ideas as to what the possibilities are and what the number should be, but there's a little bit of work to do and little bit of social consultation to do on this also. So bear with us until the half here which doesn't mean that we'll wait until the half year to launch measures but we'll wait until the half year results to detail the measures.
Andre Finke
Okay. Fair enough. The second question relates to the order backlog, which you've mentioned already. You're already talked about this pipeline cancellation in Q1 pumps equipment and do you expect or maybe already saw further cancellations in April and beyond? So is there risk to that order backlog nowadays. I think this is relatively secured.
Greg Poux-Guillaume
There aren't additional cancellations in April that I'm aware of. Actually we said, there's a 20 million order that was cancelled. It was, it was the Red Oak pipeline in the U.S. and I was in Q1. There was a, we said there's about 30 million of order suspensions and actually last feedback I have is there's an order within that 30 million which is another U.S. pipeline which is about 15 million of that 30 million and we got oral confirmation from the customer yesterday that it's not going to be canceled. It's just going to be delayed a little bit, which I think we've done most of the work, in terms of the manufacturing and we've got a very protective cancellation clause.
So I don't want to say that it's okay for us either way but it wouldn't be the most painful thing for us but the customer still intends to go ahead. I don't have any new cancellations that I'm aware of that I could disclose to you guys. I mean I expect that there will be some because at the end of the day people will adapt on the fly and I think that the cancellations that we will see will probably come disproportionately from the U.S. but nothing new to report at this point.
Andre Finke
Okay and the pricing pressure has recently already increased or are there customers coming back to renegotiate existing contracts?
Greg Poux-Guillaume
The pricing pressure, it's an interesting thing because if you refer to -- actually I was reading the transcript from Schlumberger or Halliburton I can't remember which one yesterday. They were pretty much saying the same thing. And one of the CEOs I can't remember which one said that in terms of pricing pressure he said, prices never really rebounded from 2016 and therefore the difference in terms of this downturn versus last downturn is that there is really not a whole lot to give in terms of pricing. So his view was that it was going to be really about volume but that companies like his didn't have a whole lot to give in terms of pricing and I think it's pretty similar in our case. There just hasn't been that much of a rebound which in terms of pricing which means that we are, I'm not sure many of our customers are expecting that there's an additional notch in the belt, but surely they'll be some pressure. But once again, I don't think this is what's going to be the story. I think what the story's going to be about volume.
Andre Finke
Okay, thank you. And my last question relates to M&A. You were quoted probably from a press interview. So that energy is arising, if the dust settles, maybe you can elaborate a little bit on that whether large scale acquisitions could become an option and whether you think 2020 would be already a year where you could look for some stronger and organic growth given the environment and probably some cheap assets or whether that's something you would rather think of with regards to next year?
Greg Poux-Guillaume
It's not a priority right now. It's not even a concern right now because -- I think the markets moved from focusing on opportunities to focusing on liquidity and I think our liquidity is a great asset. It gives us a lot of optionality in terms of what we do down the road. So at this point it's really about shoring up our businesses, riding out this incredible period and as I said earlier when the dust settles, if we feel good about the visibility that we have, we still have a very comfortable balance sheet that we can deploy. We just don't intend to do it now.
Andre Finke
Okay, fair enough, many thanks.
Greg Poux-Guillaume
Thank you.
Operator
The next question comes from the line of Fabian Haecki from UBS. Please go ahead.
Fabian Haecki
Yes. Thank you very much. I also go with my question one of you can answer. Starting with services, still the question a bit about cyclicality, I mean as you said short term it's more about the side taxes that is a bit of an issue in Q2 but it should recover, but if we think of non-performing assets in the oil and gas industries like refineries, oil fields, don't you see the risk that the services is being neglected, service intervals being stretched out or some assets are like mothballs where there is absolutely no service needed. This is my first question of services.
And the second one is if you exit some pumps applications that you seem are not profitable, can you still do or even grow the service partners, the independent service supplier like you do in the total services business or do you think you will also lose out on the service business when your installed base will start to shrink in certain applications in oil and gas?
Greg Poux-Guillaume
Okay. Thank you Fabian. Look energy Fabian we're not getting out of energy. We are just reducing our sales because of the storm essentially, if I can use metaphor. So we will still be in that market and we -- I pointed out that in the first quarter part of our service -- good performance in services a CHF 15 million service were order on other people's pumps. So yes, we can do third-party work. We do that today quite successfully and continue to do that successfully, but I think the question you were pointing to as you're trying to figure out whether service itself is also cyclical and what I would do once again as I would point you to the last oil downturn because really this your questions about oil. And if I point you to the last oil downturn in 2015 to 2017 have a look at our RES division performance. You'll find that it continued growing at 2%-3% a year and the margin was remarkably flat and off the top of my head. It was like 13.7% or 14.8% every year for four years during that downturn.
So I think there is resilience to the service business and that resilience has been demonstrated including in oil and gas. Now to your point of, will there be stranded assets in oil and gas, will there be assets that are shut down? Yes, probably but the demand will recover and people will need to run the refineries and will need to run their pipelines, if only to move that massive amount of oil around. So that's where the resilience of the aftermarkets business comes in. So once again the proof is in the pudding and the last time you got to see that pudding was 2015 to ‘17 and you can have a look at the numbers. I think they speak for themselves.
Fabian Haecki
Okay, thank you. And again here on your, okay you don't call it a partial exit of the oil and gas business. But when you reduce your capacity in the future, will you more focus like do more cherry-picking say okay, we just go for the tenders that have sufficient margins or do you say certain applications will never have satisfying margins and we will just leave certain product groups or this is not the case. How I understood – could you just --?
Greg Poux-Guillaume
No. We are going to continue being as full service provider to the oil industry. We have a very strong franchise and we have very good customers they rely on us. We just once again, we don't want our commercial approach to be driven by capacity. We want a commercial approach to be driven by opportunities. And this is why we're trying to get ahead of the wave essentially. I think I answered your question Fabian. Anything else?
Fabian Haecki
Yes. Maybe then a last one. On your new CapEx guidance, which goes down to the maintenance level, is the kind of your project of moving from [indiscernible] I think the building is built but probably needs quite some equipment, the machines to be treated with. Is that project kind of delayed or there is no impact on that transition?
Greg Poux-Guillaume
No, that project is not delayed and we're going full speed ahead on that one. It was in last year's CapEx and there's still some cash out this year. I think there's about CHF 20 million of cash out this year and we're not slowing that down one because we're well engaged in that transformation and we are closing Bemberg. Therefore we need the extension of Bechhofen, but two, as I said earlier our Beauty business really rebounded in the beginning of the year and we think that rebound is going to be confirmed when the market resumes. So it's important for us, if anything actually gives us a little bit of time to get set up before the market picks up again Beauty.
Fabian Haecki
Okay. Thank you very much for answering question. And thank you very much for the very comprehensive presentation here for Q1. Thank you.
Greg Poux-Guillaume
Oh! Thanks for saying so. Other questions?
Operator
The next question comes from the line of Alessandro Foletti from Octavian, please go ahead.
Alessandro Foletti
Thank you for taking my question. I have a couple as well. One on the order backlog conversion basically, 1.9 billion seems to me quite a high level of order backlog. You've mentioned that as well. But then in Q1 your sales were down and so modestly there must have been -- maybe you could actually delivered more from the order backlog. And I was wondering, is it due to the fact that your customers are in lockdown and how do you expect that to move for the rest of the year? That will be my first question.
Jill Lee
Let me answer that Greg. So we have 1.9 billion of backlog that we opened with and if you look to the tradable stuff that goes into our sales this year you can use about 80% that we have. What you see in Q1, the reduction in sales is pretty much driven by the fact that we had the China lockdown, shutdown and we have in the last week of March as well in India. So this is for sure going to come later since China is now open. India is in the process. We have 45% of our capacity of workforce already working. So from that perspective this is just a question of time and overall you can say 80%, yes.
Alessandro Foletti
Okay. So basically what you're saying is you will be able to catch up everything you plan to deliver.
Jill Lee
Yes.
Greg Poux-Guillaume
When we look at that backlog we've analyzed it and as long as our facilities remain open, which should be the case and as long as our supply chain continues to hold up which has in the case to-date. We believe that we could deliver 80% of that backlog. There's a -- there's a few caveats. You can always have a situation where you finish the work and the customer has to come and do a final inspection the customer doesn't show up for whatever reason because the customer may be trying to delay the invoicing. These things happen in downturns but all things being taken as equal we think that 80% of that backlog is tradable this year.
Alessandro Foletti
All right. And then a similar question related to the commercial activity obviously that was less impacted because you still had good growth in orders. But now it's more lockdown in Q2 i.e. maybe not lockdown for you but more for your customers, the fact that you do not have access to customer site and some will that slow down your order intake.
Greg Poux-Guillaume
Yes, it will, as I explained it will. You will see the full impact of the COVID pandemic in Q2. If I have taken one by one, I try to do that during the presentation but if I kind of summarize what I said, what you will see is you will see, if you take our pumps equipment business what you will see in Q2 is you will probably see Water business that continues to perform quite well because it's about water utilities and essentially it's an essential service. Industry is doing well in April to-date but industry will be disrupted by the economic cycle and will be disrupted by some customers being less available but if I look at how we're performing in April, we are not seeing a slowdown at this point and if we take our energy business in pumps equipment you'll see that, I think I highlighted that the U.S. will be very slow in part of Q2 but we see a lot of activity in Saudi Arabia and China and to some extent in Russia also.
So that's kind of puts pumps equipment. For RES, as I explained we have part of our activity which is linked to field service, linked to having access to customer sites to go inspect the equipment, to go provide services on sites and that will be impacted by the lockdowns and therefore Q2 will be slower and I think I highlighted earlier that if I look at April, how April is performing versus Q1 we're about 10% down in terms of run rate and that's mostly due to customer site access.
And I explained that APS was a link to people being trapped at home and therefore not going through a dentists and not being able to buy cosmetics mostly and I think I also touch quickly upon Chemtech. Chemtech is also a tale of two stories. You've got the Chinese markets and strangely the Indian market despite the fact that we're on lockdown which are commercially active and you've got the rest of the world which is disrupted with larger projects being shifted out and customers being a bit more confused as to how quickly they want to go ahead with things or not. Did I answer your question Alessandro?
Alessandro Foletti
Yes. Thank you. Can I ask you one last one, I know it's a little bit of crystal ball thinking but do you think after all it's going to be a V-shaped recovery or U-shaped recovery?
Greg Poux-Guillaume
I have no clue and I try not to speculate on shapes. What we try to do as Sulzer is we try to be ahead of the curve in terms of taking action, so that if you've already taken action and you've already rained in spending and you're already maximizing cash flow and you're already doing the capacity cuts were they are needed, then you have more opportunities that if you're still scrambling and running after the market. So that's our approach and I certainly have a personal view as to the recovery but I would never dare to venture on a call with guys like you that also have your own view and at the end of the day nobody knows.
Alessandro Foletti
All right. Thanks.
Greg Poux-Guillaume
Thanks.
Operator
The next question comes from the line of Charlie Fehrenbach from AWP. Please go ahead.
Charlie Fehrenbach
You cannot give any details about the structural measures in the energy business but you may have an idea or could give us an indication of how many people could be concerned in the overhead of the group level in Switzerland, Winterthur, respectively. Thank you.
Greg Poux-Guillaume
No. I really don't want to get into that as you, I'm sure you understand, it's a sensitive topic and impacts employees. There's social law considerations and therefore it's really not the right thing to speculate on these things or to send out trial balloons. We have a clear view of what the opportunities are for us and we'll handle them thoughtfully in full consultation with our social partners and we'll start doing that right away. We've already started and we will detail that for you guys on July 24. I apologize but I really can't get into that.
Charlie Fehrenbach
Okay. Thank you.
Operator
The next question comes from the line of Armin Rechberger from ZKB. Please go ahead.
Armin Rechberger
Yes. Hello gentlemen. Well, most of my questions were already answered but still I am a little bit confused for a definition. In earlier days you were referring to oil and gas business and now you are referring to energy business. Is it the same? It covers exactly the same area or the differences?
Greg Poux-Guillaume
The reason why we use energy is that if you take our pumps business which is about half of Sulzer, as I explained in the past, the pumps for oil and gas and the pumps for power are very similar and they're made in the same factories and therefore we call that the energy business. In prior days, it was called the engineer pump business but now we have a tendency to define that by the end market. So therefore when you take action on that you take action on the plants and the infrastructure which targets both power and oil and gas hence our name for it which is energy.
So in pumps equipment which is mostly concerned by these adjustments, it's actually called the energy business. There is three businesses in pumps equipment. You've got the water business, the industry business and the energy business and in RES whenever there's – there can be an extension to RES because we also have these pump service centers that service these pumps and sometimes they're on shared facilities with the manufacturing facilities. So instead of finding a complicated name for it, we used energy which has intent, which mostly refers to our pumps equipment business but then again the actions are mostly related to our pumps equipment business not solely related to pumps equipment but mostly.
Armin Rechberger
Okay. Then China, you explained that you're running up 90% to 95% again there and that's really capacity utilization, so the demand is already back at that level? Is that the case?
Jill Lee
Yes, the demand is actually, we mentioned that in fact, we are working in a number of the factories actually beyond a 100%, so in 105%, 95% to 105%. So from a utilization perspective, we are full and we are -- we have enough backlogs to work on. That's the reason for that, so yes.
Armin Rechberger
Okay. An important production area for you is also Texas and the surroundings there. And the situation there seems also be to be quite dramatic but so far you don't have any closures there but looking forward in one to two weeks time, I mean difficult to say but do you assume you have to close down some plants there?
Greg Poux-Guillaume
So I think what you said is partially true, but deserves to be detailed. When you mention Texas, I think you're mentioning Texas and the shale area in general for oil and gas or at least that's the way I understand the question and well you have to keep in mind is that this is not a significant market for us for new pumps for example.
Armin Rechberger
No. I was rather referring to Houston and the likes, really big cities, which are really hit -- also affected by the virus.
Greg Poux-Guillaume
Well, but you're trying to, are you trying to, would you like to know whether we're locking down some other facilities because of virus or whether we're closing -- we plan on doing restructuring because of less business. Which is the question?
Armin Rechberger
Because of the virus, rather yes.
Greg Poux-Guillaume
Okay. Houston, we are operational. We've got pumps equipment commercial and engineering office. We've got the GTC business. We've got a huge service facility and report which is a Houston suburb. We've got almost a 1000 people and all three of them are operational. We have got a pump service center in Houston also. All of that is operational. The people are working, we have very stringent measures in terms of health checks as people come into the plant. We take temperatures. We do social distancing. We do all these things but we are continuing to work to be active and actually these guys had a very, they had a very good first quarter and certainly on the service side which is a big facility that we have there. We continue to be quite active in April.
Armin Rechberger
Okay. Thank you.
Operator
The next question comes from Christian Arnold from MainFirst, please go ahead.
Christian Arnold
Yes. Good morning. I have question on the Applicator systems, actually two questions. On the one side the Beauty business, you have shown there this significant start, there is a nice rebound. I wonder if you have observed that differences among your customers? So the traditional large houses versus the independent e-commerce related customers and have you seen the different pattern in terms of the development Q4, Q1, and then going forward do you expect and the second question would be actually on the development of the different segments.
So I am a little bit puzzled by the fact that the Adhesives in the Applicator system was flat. I would have expected a much larger negative impact here and definitely going forward. I would assume that -- I mean looking at this chart maybe in one year time we probably see that the Adhesives business is much more down than the other two segments. Is that fair assumption?
Greg Poux-Guillaume
So you are puzzled about these but it's a good puzzle. You are surprised that's not more impacted. Yes. Look, the Adhesive business, I think had a larger correlation certainly than Beauty and Dental with the economy at large and our customers are, the customers of our customers because our customers are the Henkels and Sikas and 3Ms of this world but the customers of our customers are and aeronautics, automotive, electronics, construction all sorts of applications which are impacted by the current crisis.
So yes, we expect that the Adhesives business will be under more pressure in Q2, but we also expect that this is a business like Dental and Beauty that will rebound as the world reopens sometime this summer and as people start buying things again and start being able to leave confinement.
So there'll be more impact on Adhesives I think in Q2 but once again we expect that that market will also rebound as the world reopens. Your question on Beauty, I mean frankly I haven't spent a whole lot of time analyzing Beauty in Q1 because the rebound was a good one. It was clear but right now the market is kind of stalled just because people can't buy cosmetics.
I think we had a combination of the number of things. The fact that we changed our commercial approach to be able to serve better some of these more nimble e-customers if you want to call them that way, part of the effect was also that some of our traditional customers had product launches that they want to head within Q1 and actually quite a few of them have product launches that they intend to launch this summer because our cosmetics customers have quite a high level of confidence on the market recovery. So I think it's a little bit of everything but it's, I expect that rebound to continue. I'm just not really in a position at this point to give you that much more insight.
Christian Arnold
Thank you.
Greg Poux-Guillaume
Thanks.
Operator
There are no more questions from the phone.
Christoph Ladner
Now we take the questions from the webcast then. We have a question from Jorg Schirmacher from Baader-Helvea.
Jorg Schirmacher
So what kind of seasonality should we expect in 2020? Is it all more backend loaded? First question.
Greg Poux-Guillaume
I mean honestly anybody that can predict the seasonality for 2020 deserves an award. I think you have to predict how long the lockdowns are going to last. What’s going to be the success of the deconfiments? Whether there is going to be secondary wave? There is so many things coming into play that, I really would like to stay away from trying speculate on that. What I would say is that we had a strong Q1. Our weakest quarter of the year will be Q2 and we expect the rebound to be progressive in Q3 than Q4. But how that translates into our numbers this year it's really too early to say.
Christoph Ladner
And the next question is, the good order backlog it should help the topline at least for 2020. How should we think in terms of households could be able to secure profitability in 2020, given the high backlog but temporary production shutdowns on one hand and then on the other hand the cost measures on the other hand?
Greg Poux-Guillaume
2020 is a year of huge disruption and huge uncertainty and our first level of focus as I said is safety for our employees. Our second level of focus is to be able to continue serving our customers which we manage to do quite well to-date. We have got this backlog. We will execute as much of the backlog as we can because it's about serving our customers and keeping the economy going and keeping our people busy. I am not sure that the, I am not able to give you forecast for this year because I think as I said there is too many factors that come into play. But what we hope to do is to be able to mitigate the impact on order intake in Q2 and to show rebound in Q3 and therefore to finish 2020 in a world which is healthy and operating again with the backlog that is not too depleted and having demonstrated the resilience of Sulzer. And if we do that I think we will be in good shape and hopefully that will allow you guys to continue supporting what we do.
Christoph Ladner
And the third question from Jorg, Sulzer have had a very positive cash flow development in previous crisis. And can we expect the similar development in 2020, for example driven by lower networking capital
Jill Lee
As we have communicated in the past, we put a strong focus on working capital. We started and we are still running improvement projects on inventory management, on collections, on vendor management, on DSO and we therefore expect that despite the challenges caused by COVID-19, we will able to large extent mitigate that. I have given you an indication that our full year typically is in the past 4% to 5% of sales in terms of free cash flow generation. We expect that with the assets that we drive internally we will be able to keep through the same profile. Yes.
Greg Poux-Guillaume
But to add to what Jill said, I mean I think mechanically the question is correct. In a business like ours when orders start going down and you are executing your backlog you deplete your working capital and therefore you generate cash. I think the caveat in the current situation is nobody has ever been in a world where there is a lockdown and people are not allowed to leave home and there is an additional 22 million people unemployed in the U.S. in three weeks and so on.
And what opposite effect may that could put pressure on our cash is once again the ability of our customers to pay us on time and whatever support we may have to provide to our supply chain in order to protect some of the weaker companies in our supply chain. Once again this is a temporary crisis and therefore this is not about blowing up people. This is about making sure that the guys that have been serving us well continue to be able to serve us and therefore there will be some trade-offs that we will have to make, but as Jill said I think there is pluses and minuses but we don't expect free cash flow to be the biggest concern this year.
Jill Lee
Yes. I mean I think we have the strong balance sheet. We have a good track record of generating positively on our cash flow. And yes so in spite of the COVID-19, we will continue like all fronts on the cost and CapEx part to do our self-help measures to mitigate and if everything happens in a good way then your assumption would be a positive one but on the other hand at the end of the year we might have also a higher execution level. So if you are looking to the full year, I think we are working towards having a similar pattern like in the past.
Greg Poux-Guillaume
And at the half year so that you guys don't all flip out when our half year numbers come out. I mean we perform better from a free cash flow perspective in Q1 than last year but at the half year we are usually flat, we're usually somewhere between minus 50 and zero usually flat so slightly negative in free cash flow as you know our free cash flow is usually back loaded and given the pressures that we're seeing in the market it's probably more likely to be slightly negative than this is to be slightly positive but I don't think this is indicative of anything. I think it's only indicative of the fact that Q2 and especially the current period is going to be the most unusual quarter any of us have ever lived through but once again, we feel pretty solid about our liquidity position and pretty solid about our free cash flow for this year. Other questions?
Christoph Ladner
Yes, there are two questions from Eugen Perger of Research Partner. First one might also be some midterm opportunities arising from a lower for longer oil price such as crowding out of other forms of energy or more water desalination or such things.
Greg Poux-Guillaume
The desalination market continues to be quite active. It's driven by, mostly driven by the Gulf region. The crowding out, I don't really know. I think that the, this industry continues reducing capacity, the oil industry and therefore as you continue to reduce capacity and as demand recovers because the demand will recover, you end up in a situation where the balance between the buy side and the sell side is probably a little bit better over time for the sell side than it's been in the past which probably lends itself to some pricing rebalance over time but as in terms of crowding out anything else, I think ESG is an important thing for the world. I think sustainable energy is important for the world and I don't think governments will allow lower oil prices to crowd out other renewables, other types of energies especially renewable ones. So that from a political perspective I don't expect that to be the case.
Christoph Ladner
Then the last question -- of the two questions are you aware of any Corona related infrastructure support programs initiated by governments which might boost the Water business in the midterm?
Greg Poux-Guillaume
Not yet.
Christoph Ladner
Okay, and Saudi Arabia because of the oil price collapse cancels some planned Water Engineering projects.
Greg Poux-Guillaume
It's hard to read Saudi Arabia. What we see to-date is that the country it's tightening its belt because it will have more trouble balancing its budget obviously but the commercial activity level continues to be quite high. So I wouldn't speculate but I would say certainly from our perspective so far so good.
Christoph Ladner
Okay.
Greg Poux-Guillaume
Other questions. I think we are done. Thank you very much for spending the time today. Jill and I really appreciated your attention, your time and your thoughtful questions. Once again this is all about resilience. I think what we're going to show you guys and what we're hoping to show you guys is that our diversified model is proving to be resilient. We see that in Q1 and we think we'll see that throughout the year. It doesn't mean that we won't be significantly impacted like everybody else but once again it’s diversification in different businesses and that diversification will really show its positive impact. I'd like to point out once again that new oil projects are small part of Sulzer. It's 14% of Sulzer. It's not insignificant but it's not the main driver of Sulzer today and keeping in mind once again that within that 14% of new equipment for oil, most of it is conventional and less impacted than what's happening in shale, which is really the story of the day and the story of the year, I think.
And finally we have got liquidity. We have demonstrated the agility in the past. We have had to adapt Sulzer to a lot of things in last few years and hopefully you guys see that those muscles of ours in terms of agility are quite exercised and will serve us well in this crisis. Thank you again for your time and stay healthy, stay safe and talk to you soon.
Operator
Ladies and gentlemen the conference is now over. Thank you for choosing Chorus Call. Thank you for participating in the conference. You may now disconnect your lines. Goodbye.
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