Welcome to the Dürr conference call. Ralf Dieter, CEO and Carlo Crosetto, CFO of Dürr AG, who will present the Dürr Group figures for the first nine months of 2019, followed by a Q&A session. At our customers' request, this conference will be recorded. I will now hand over to Mr. Dieter, CEO of Dürr AG.
Yeah, thank you very much, and good afternoon or good morning, ladies and gentlemen. Thanks for joining us today, and Carlo Crosetto and myself will now go through the presentation which we have sent out. We would like to start on page number three with a summary about the third quarter. So the headline increase in order intake stated in EBIT. Our sales was up 5%, and incoming orders up 4% in nine months, and I think that's pretty good in terms of the challenging market environment we have, and HOMAG's incoming orders in the third quarter were also above the relatively weak second quarter level. We won a large system order in China, which was the first sign that in China the downturn of order intake seems to stabilize now, still on a much lower level than two years ago.
But it seems to be that's the bottom of that development. Up to now, the order backlog is with EUR 2.6 billion unchanged and is a very good high level to give us a visibility on sales in 2020. Very good was the service business, 12% up and well on track, which is very important for our margin, as you know, and EBIT and net profit unchanged year-over-year. The cash flow improved in the third quarter, and it was also better than the third quarter for itself in last year, and we expect that it will further progress in the fourth quarter. Paint and Final Assembly Systems, Application Technology, Clean Technology, and Measuring and Process Systems are well on track to reach their 2019 targets. We expect a stronger quarter in all divisions, so fourth quarter.
We announced yesterday measures for structural adjustment and efficiency program at HOMAG, which will need EUR 37 million one-offs in the fourth quarter to improve the cost basis, but also the efficiencies. And we expect from 2021 onwards here a relief on the cost basis of EUR 15 million. And we have no change of the operating earnings guidance for the Dürr Group in 2019. On page four, we have, as always, the key figures in one picture: Incoming orders, sales and EBIT and the net profit, as I commented already in the summary. So page number five, we look into the regions. Just check whether the presentation here on the screen is the same. So in China, we still have a decline compared to nine months last year. For the HOMAG side, we are on the same level like last year.
After we got this big order, that's about EUR 100 million is HOMAG of this number here. And we have a very strong pipeline in China for paint shops, which moves into fourth quarter and also maybe first quarter, second quarter next year. In Americas, we had a very strong order intake, mainly driven by three larger orders for the paint shop business for EV car manufacturers. So that's a very good development. And here also further projects. So for example, Americas looked at the first quarter, we were not sure about this year in America. We thought it would be very weak in order intake, and it was just the opposite. That's why I always say to look at the quarter is very difficult in this business. Germany, down compared to last year. I think we have here some less revamped shops, but there's nothing to worry about.
Europe, quite stable. And what I think is a good sign of our strategy also in Southeast Asia to increase our business with Japanese OEMs and in Southeast Asia overall, we have an increase of 13%, but it's mainly fueled by a larger order we got in India already in the second quarter, and I mentioned that already. So then I would like to hand over to my colleague Carlo to go through more numbers here.
Yes, good morning and good evening also from my side. If we now move to page six in your handout, I'm pleased to announce that our Q3 numbers were pretty good, and we had the strongest quarter so far for the year. Gross profit was up nearly seven%. Also, the margin was up over 120 basis points, EBITDA, etc., which led to a strong EBIT development. What is probably worth highlighting is the fact that we had pretty big differences in extraordinary effects last year versus this year. As you may recall, last year we had the adjustments in the Clean Technology systems division with the termination of the micro gas turbine and other adjustments, whereas this year extraordinary effects really are mainly related to purchase price allocation. So that's probably the big explanation why we saw extraordinary effects in margin after extraordinary effects had this swing.
What is also worth mentioning for the first nine months of this year is that with the integration of MEGTEC, of course, our expenses, especially also our selling expenses, were obviously not very comparable to previous years, and they were up also because of various exhibitions that we had last year, like LIGNA or Open House. So we do expect especially selling expense to start normalizing in the final quarter. Obviously, we didn't have such a strong start in the first half of the year, so we still have a way to go. But what is promising is that we are seeing a positive trend in the third quarter, which should continue also in the fourth quarter. If we move now to page seven, so away from EBIT cash evolution, I'm also very pleased to see that the third quarter cash development was also improving.
You see on the top right side of the chart the comparison of Q3 2018 to Q3 2019, and you see that operating cash flow and free cash flow was also not just positive, but also slightly better than the year before, which is again another sign that the financials are moving in the right direction. Clearly, we were coming from a very weak start with regards to cash development in the first six months of the year, and it will obviously take some time to reach the territory that we are obviously striving for. So in any case, we do expect a strong fourth quarter development, which would bring us the guidelines that you will see later. On the walk itself, I think what is most of the deltas or deviations are pretty normal.
The only one that sort of strikes out, obviously, is the deterioration in net working capital, which shows a deterioration of over EUR 200 million compared to the net financial status that we had at the end of 2018. So that's something that is still a focus area, concern areas that we are making sure that we improve and that we have really our most attention on. All the other deviations from capex dividends and taxes are somehow in line with what we had the previous year or what we were expecting to achieve for this year. IFRS 16 also plays a role in these numbers, like every company that is reporting according to IFRS, and we have already communicated this impact to be about EUR 100 million in terms of impact on the NFS curve.
If we now move to page eight, we can see that basically the development on the net working capital, and while we see slight improvements on inventories compared to the same period last year, the big focus area is obviously the development of total contract liabilities, which is at EUR 550, significantly lower than what it was at the end of the year or what it was for the same period in the previous year. That is something that is obviously a little bit impacting the work in progress balance. If we move now to page nine, you can see that our total balance, basically the difference between contract liabilities and work in progress and contract assets, you see that we have per September 2019 a positive number, and we have given ourselves a goal for the end of the year to be between zero and minus 100.
Standing in front of you or being part of this conference call, I would say that today we mostly, let's say, we feel more comfortable to be more close to zero than to the minus 100s. And we still have a long way to go in the fourth quarter. Based on some of the projects that we are concluding and some of the agreed advance payments and expected payment schedule, we should have a strong fourth quarter in terms of cash. This is why we are confident that we can bring this number down. But as I said, at this stage, we're probably more comfortable to be close to zero than to minus 100. If we now move to Page 10 of the handout, you will see that basically there has been hardly not much change in the way we handle factoring and forfaiting.
We've actually dropped about EUR 4 million compared to the end of the year or let's say EUR 7 million compared to the same period last year. So it's staying basically in what we call normal ranges, and let's put it this way, there's not been any window dressing in terms of adjusting the cash flow numbers. If we now move to Page 11, which is somehow addressing the equity and the ROCE numbers, we're very happy to see that our equity value has increased over the EUR 1 billion mark, exactly EUR 1.031 billion. And the equity ratio is still solid at 27%, but let's say 0.4% lower than the previous year.
This has got to do basically with the fact that our balance sheet has obviously got bigger with IFRS 16 or the inclusion of the leasing contract, and we've also issued a Schuldscheindarlehen of about EUR 200 million, so obviously, this has increased the total balance sheet size. So even though equity has improved, the ratio has basically stayed at 27% or has dropped by 0.4%. Asset financing status, I just explained it in my previous slide, and gearing is still pretty low, and the return on capital employed is obviously at a level which we need to work on improving, and we do expect, given the measures that we have announced, to be at a different range than what we had indicated before, but we'll get to the guidance later, but obviously, these measures affect the return on capital employed.
I'll pass back to you, Ralf.
Yeah. Yeah. Thank you, Carlo. And I would like to continue on page number 12 with the look on our service business. We had a 12% increase, as already mentioned, although in the APT service business, we have a decline. I will come back to that in a second. We are now at a 28.3% level of contribution to the group sales. And do you remember, always we said 30% should be the long-term goal? We're pretty close to that. And I think in these market conditions, that's a very good sign. But we do also a lot of things to improve and to grow the service business by new offerings. We are working, and we have improved our spare parts process and delivery process. And we also now have started the first sales of our digital products.
That's us more in the one-digit million area, but for us, it's quite a good success because we are pretty early on that. And so that's a whole mix of activities here. And we expect by the activities around the globe, also in rebrand business, that this service business development will continue. Now on Page 13, we have a look at Paint and Final Assembly Systems. Strong order intake increase, nearly 9% to EUR 831 million. Also sales increase of 5%. EBIT is on the level of last year, and the EBIT margin is at 4.3%. In the first half, I think it was at 4.1% roughly. So we see now what we said in the last call, that we should have reached the bottom of carrying through older orders with low margins now improving, and we see further improving here coming.
In the third quarter for itself, the EBIT margin was already 4.8%. I think we can see here the upward trend as promised and as guided in the past. Also the Q4 here should be strong. We have some large orders ahead of us. This is also a question about do we get in-time down payments? That's as Carlo mentioned, has an impact on our net working capital, but also the question of the timing. Maybe some of them will flip into next year. We will see. Very promising, which is surprising, as you know, when you read the newspapers about the automotive industry here. The next page is Application Technology. Here we see a decline in order intake and sales, and this order intake decline is mainly due to a lower level of spare part order intake and sales. Why?
Because this spare part business here is very much linked to the production utilization. So the more the equipment is in use, the more they need spare parts. And when they reduce shifts from three to two shifts, whatever, they need spare parts less. And that's what our customers do. And particularly in China, where you know we have a downturn production, but this is a temporary effect. I think it should be next year better when hopefully the utilization of the plant is increasing. But as you can see from the EBIT, in particular from the EBIT margin, we could keep the 10% level, although we are missing quite significant sales on the spare part business, which is highly profitable margin.
And the reason is that we see that the measures we have taken in those areas, like industrial products, including which we are loss-making, we have the turnaround is working, and we have quite decreased that losses into a situation that overall it neutralizes the loss in margin in spare parts. On page number 15, the Clean Technology systems, the number not comparable to last year, as you know, for the reason Carlo already mentioned, MEGTEC Universal is in the numbers now fully. But also in the, let's call it old business, we see a very nice increase in order intake. This business is very much driven by the, in particular in countries like Asia, but also in Europe for stronger regulations in environmental protection.
Also, the combination of the MEGTEC technology with our technology has given us opportunities which we had not before, and it's resulting in some larger orders, also in, for example, the battery production area, where we have also air pollution, which has to be cleaned. The EBIT is now at EUR 4.4 million. Alone in quarter three, we made EUR 3.7 million, so we are on good track here. We also see here a good Q4 coming ahead of us. Measuring and Process Systems on Page 16. After we had a weak start in order intake, I remember in the first quarter and even in the first half, we have now an increase. We are above last year 7%. The sales is still below last year.
The reason, as in the last conference call already mentioned, is that in the second half of 2018, we had a very weak order intake, which does not give us enough backlog for turning that into sales, but anyway, it's now only minus 10%. The gap was bigger in the first half. EBIT has strongly increased in the quarter alone, EUR 11 million, and so the total margin is now at 8.2. In the quarter, it was already 10.7, so we are very confident that by year-end, we reached the target level of 10% for this division here. Coming to Woodworking Machinery and Systems, or better known as HOMAG, on Page 17. In HOMAG, you can see that the incoming orders is now minus 12%, so that has kind of stabilized. The sales revenue is still above last year due to the backlog we had.
The EBIT is 11% less than last year. Reasons are various. First of all, that the higher margin business, China, is about 50% less than last year, so that we have to swallow. But also we had here a stronger competition because the market has a little bit of a decline. Also some underutilization, which has also led to the measure we will talk about in a minute, and so overall, we see here an EBIT margin increase from 6.3% last year now to 5.4%. But also here for the outlook for 2019, year-end, we see an unchanged outlook for orders, sales, and EBIT before extraordinary effects. So talking about that, we have taken several measures on the HOMAG side, which are basically measures we knew already basically since we bought the company because we knew that we have a little bit too many plants in Germany.
It was then not possible to execute in 2015-2016 because, as you remember, we had strong, strong order increase, 30%, I think, only in 2016. We were so fully utilized that there was no way to think about changing the production structure at that point in time without damaging the ability to deliver the orders. We had priority to take the business and to deliver the orders. I think the development of HOMAG in 2016, 2017, and also 2018 has underlined that. Now it's a time we are using in a position of strength the opportunity of lower utilization to do now those homework stuff we already outlined some time ago. The whole package is about EUR 37 million affecting 2019 and another EUR 3 million next year. We expect out of those measures about cost savings, about annual EUR 15 million from 2021 onwards. Why 2021?
Because the measures we take, for example, the plant closure, this will not take place before end of 2020 due to the preparation of it and still the work we have in there, and also the capacity reduction program in other German locations is something which needs time to negotiate with the social partners and to get the right solutions here. Therefore, the effects will be then more in 2021 than in 2020 to see. Also, we've merged two business units, systems and automation, because the downturn in the HOMAG order intake is mainly on the system business side, so the complex orders, which are some millions and sometimes even 20-30 million, that's where the main downturn is. On the normal standard machinery business, it's not so much, and we use the same opportunity also to reorganize our sales.
We have, for the reason of the upturn of the market, also increased the sales infrastructure, also headcount-wise, which we have now to adopt and to streamline a little bit. Spare part logistics is another subject which is part of that measure. I think also beside that, we are working on HOMAG on a major change in how the company works in the order fulfillment process. And this is also an opportunity, a huge opportunity for the company for the years to come and the future time. And I also want to say to you all that we have to give HOMAG the next one and a half, two years to do this all, to really then develop the opportunity and the EBIT margins what this company can deliver. And our plan is, and I say it here again, that we have 8%-10% EBIT in 2023.
That's our goal. When I'm saying we change the process, it's very complicated to explain. I'll try to do it in some words. We have, from history of HOMAG over many, many years, we have a very silo-wise working with the companies. The sales teams, they bring in an order, then they give it to the order engineering group, which is also different wording and different part numbers. And then out of that, we bring it to the production plants, and then we have another, let's say, world there, and we don't have a seamless, for example, that's a backbone, is an ERP system, in our case, Dürr's SAP. Also there, we have some parts SAP, but basically, we will now introduce into HOMAG the same processes we have at Dürr, how to work efficiently in a modern machinery company of today.
And this was a lot of convincing work for the people to change 20 years and more working style and way of working. And this will be implemented. This will take two years because, first of all, we have to implement, we have to prepare SAP. Implementation of that system will be 2021, starting 2021. And I think the real gains will happen then 2022 onwards. By the way, the same we did 2005, 2006, and 2007 in APT. Application Technology had the same problem in those days. And so we are using our expertise out of this change to do it now in HOMAG. And in my opinion, it is difficult to calculate, but I think that will really give us a big boost in terms of efficiency.
Also, to be prepared because we expect the market to become stronger again in 2021 by all the signs we have, that we are prepared to be much faster in order execution, shorter delivery times, lower costs as well, to also not just to be in the market with our market share. Now my expectation, we want to grow our market share, and for that, we are preparing. That's the goal here. Aside of that, we're still working intensively on product standardization. We have a very complex product portfolio in HOMAG, thousands of machines, many hundreds of different types, and we have maybe 50% of that standardization work is gone through, and we need the next two years to do the rest. And we have also a very competitive modular product portfolio in that group.
For the German manufacturing footprint, we have now announced to close that plant in Hemmoor, which is producing automation components, which are mainly conveyors, which is really stuff, something we should not do anymore in Germany. So that's a no-brainer, more or less, to do now, but still, it's also quite complex. And we are also reorganizing the whole, let's say, the whole cooperation between the plants, who does what in the future. We call it production strategy, and we will announce that next year. It's basically optimizing the factories to their strengths and that we have too many mixed products in the factories today, working on that.
We're also introducing, at the moment, the HOMAG production system, which is the way how to produce machines from the old-fashioned way of putting a machine in one and then start assembling in a flow production, which is a modern way of doing machines, introduced already in some parts of factories, and this will continue the next two years as well. So the next two years is the time for a lot of homework in HOMAG, which we want to take the opportunity of this. I don't call it downturn, but we align in the market to do that. It's really now the time we do it.
Good. That's about HOMAG. The targets for 2019 on Page 19, more or less unchanged. What has changed is for sure the EBIT margin as reported, including the special effect or the special costs we are now taking in the fourth quarter. So we are now from 4.4%-4.9% as a new target. And the earnings after tax is also changing, but you can see that in Page 19. But the operating numbers are unchanged in regards. Good. That would be the presentation we would like to share with you. And I just get information we should ask first in the room, and then we ask you on the phone. Is that okay? So. Come on, forward, one more thing. Yeah, please. You need a microphone, sorry.
Okay. Thanks. Michael, I would have two questions on your HOMAG performance program. I think, first of all, you spoke about a certain market expectation for next year and the expectation of market recovery in 2021. I was just wondering, I'm sure you've discussed market scenarios and what market scenario you need to adjust to. What is really the underlying revenue volume of HOMAG for which this program is right-sized, is it EUR 1.1 billion, EUR 1.2 billion, or is it still another growth model? At the moment, it's right for EUR 1.15 billion for next year.
Okay. Got it. And also after the plant closures and so on, you don't need growth in 2021 to achieve the targets that you set yourself for HOMAG?
To get to 8%-10%, yes.
No. Yeah. No, no. Go ahead. No, just to get to a higher performance level or margin expansion, let's say, I think maybe 8%-10%.
No, let's assume at the start of the market would not grow. For sure, we should these measures are meant to keep the level we had before because to stop a down decrease of margin level. But we are preparing because the market will not stay there. If the market has a very good growth opportunity in the next years, we are preparing to do more volume with the same kind of people, same amount of people, then the margin will also increase. Okay. And I think you were talking about sort of hard cutting measures, headcount reduction in Germany, and so on. I think on the slide for HOMAG, you were still showing very modern rebranded AGVs and a very, very modern product portfolio. So is it right to say that sort of on the growth investments you've done, marketing, sales, digitalization, you're not cutting costs? Or should we also think that those expenses are a bit lower next year than this year?
It's a very good point. We don't stop expenditures on new products and R&D. We have decreased R&D in areas where we thought this is maybe at the moment not the focus for digital, and so on. We continue. It's absolutely mandatory. And you show in the picture, HOMAG is a market leader, is a technology leader, is a leader in digitization. That's what the market says, and we don't want to lose that.
Okay. Thank you.
Thank you. Okay. At the moment, we don't have a question in the room. Then we give you a break, and we ask on the phone, Mr. Weier, any questions on the telephone?
Thank you. Ladies and gentlemen, we will now begin our question-and-answer session via the telephone. If you have a question for our speakers, please dial zero one on the telephone keypad now to enter the queue. Once your name has been announced, you can ask a question. If you find your question is answered before it's your turn to speak, you can dial zero two to cancel your question. If you are using speaker equipment today, please lift the handset before making your selection. We receive the first question. It's from Philippe Lorrain from Berenberg. Your line is now open, sir.
Yeah. Thank you. Thank you very much. Just a quick follow-up. Did I get that right that you are implicitly guiding for EUR 1.15 billion of sales at HOMAG in 2020?
That's correct, yes.
Okay. Is it the midpoint of a range, I guess, or?
Is that the m idpoint of a range? Yes, the midpoint, if I would know that in detail, I think that's by far the minimum. I think it will be more, but at HOMAG, it's the minimum.
Okay. So more of a low end. Great. And then the second question was, what sort of measures that you want to implement at HOMAG is actually part of the focus program versus what is really completely new?
The focus program we had for the final assembly systems division, HOMAG had several programs which are still continuing. And the closure of a plant that has no name, we call it future securing activities. It's not like so many program names.
Okay. Yeah. But versus the integration plan then, I mean, it's just like the closure of the plant that goes on top.
Sorry, I have difficulty to understand in the room. Can you repeat it? I'm sorry. It's a little bit difficult.
I was just asking what was compared to this integration plan that you were setting up when you at the time you bought HOMAG, and that you needed to stop. What was actually really incremental now?
Okay. That's good that you asked that because we have to clarify. The integration project we had to buy HOMAG was mainly on the financial reporting side, purchasing some technical exchange. The whole plant structure stuff, we knew that we had too much capacity in Germany, but that was then obsolete because we got so many orders that these plants were more than utilized, and there was no way to think about changing here the structure without killing the business. And now we took the opportunity where it's a little bit less business that we can do that now. It's still a very risky and difficult operation, to be honest, but that has to be done now. But it's not part of the original integration program.
Okay. Great. Yeah. That would have been something that you would have done then further down the road, honestly.
Yeah. Yeah. We knew it, but we just had to find the right timing for it.
Okay. Perfect. And the last one is just because you were touching on the reporting and financial system. Do you believe that the reporting system between HOMAG and Dürr, I'm not speaking about what happens now at HOMAG, needs to be improved because the past profit warnings were taken by HOMAG, and it seems like you've had very, very good control over the rest of the group. Perhaps the information flow between HOMAG and Dürr had just taken some more time to actually come through.
I answer that before my colleague Carlo gets too much blood pressure. The reporting system in Dürr is very good. The problem on the HOMAG side is the complexity, which is difficult to explain here on the phone, but HOMAG is really complex in its inner structures.
And I think for them, it's very difficult to gather their information about all the plants and products on the worldwide basis. And so their visibility, what's going on, is not as good as we have it in the Dürr and Schenck side. And that was for me the biggest reason. And second, that's part of the process. When we talk about new ERP system, we talk about everything, not only order fulfillment. We're also working on the financial side to have a better insight. I think that will be fixed in two years. Then we will be as good as everywhere else in Dürr. And in Dürr, we are pretty good compared to the companies I know.
Yeah. Yeah. I would agree on that anyway. But that kind of strengthens my view. Okay. Thank you.
Thank you very much for your question.
Next question, Rizi. The call is from Eggert Kuls from Warburg Research. Your line is now open, sir; please go ahead.
Yes. Thank you very much. Good afternoon. First, also on HOMAG and in combination with the outlook you have provided, the guidance for the net financial status 2019 has not changed despite the EUR 37 million one-off expenses you have mentioned. Does this mean that the EUR 37 million will be all non-cash, and the cash out will then be next year? And can you also maybe provide the EUR 40 million restructuring cost in total? How much of that is actually cash effective, like severance payments, etc.? Or are there also any non-cash effects, like impairment for the Hemmoor side, something like that? Secondly, just a clarification point. Also, in your new guidance, you have slightly increased the CapEx budget. Can you shed some light on it?
What is your feeling about the CapEx, the CapEx budget going into 2020, 2021? Is this going to come down a bit? Lastly, your rival, Eisenmann, has filed for insolvency. Have you noticed any material change in your paint shop business, especially with regards to pricing and with regards to being awarded with orders? Have you been able to pick up some Eisenmann pieces of incomplete products, etc.? Some answers here would be helpful. Thank you.
Okay. Many questions. Please also for the others on the phone too, we would like to go back to the idea to have only one question at the same time because we can't write so fast, and the acoustics here is not easy. I'll start with the last question, then Carlo can give you all the financial one. Eisenmann is at the moment in the process to be sold.
Whether this will materialize and go through, we will have to see, but I think we will know in the next weeks. Yes, we have a short-term benefit. We got an order, one in America, which was already, let's say, geared for Eisenmann. And because we can't fulfill, we got the order, and that's another one. So we have a benefit of two projects and supporting in some projects or helping the customers to finalize things which have been started and not finished from Eisenmann. Yeah.
Yeah. I'll answer the other, I think, two or three questions at the beginning. If I forget to answer one, please remind me again. You correctly noticed that the net financial status outlook has not changed, and that is because we don't expect that these measures will have a cash flow impact in 2019.
They are just basically provision for things that we're going to start doing mainly in 2020. So the cash impact will be one, maximum, EUR 2 million, if at all. So it's all going to be in 2020 or, let's say, the majority of it. How much of that is going to be cash impact of these EUR 40 million? We think it's going to be in the range of about EUR 32–EUR 35 million. So not all of these measures that we have announced will have a cash flow impact. Of course, most of it will, but not all of them, not the whole amount. Then you asked a question, why have we changed our CapEx? Basically, there is a small reason, which is more investment in IoT.
We did mention about measuring process system, but to be honest with you, the major reason for this change is because we have included the impact of the IFRS 16. That's about EUR 20 million, which you may argue we should have probably done at the time when we announced the old target, but this is an adjustment that we felt we had to make to be more precise. So again, apologies for that. So the fundamental CapEx investment of the group has not really changed in terms of our expectation for the year. So it's mainly IFRS .
Okay. And thank you. And just this CapEx going to be flattish in the years to come? Is it going upwards, or are you peaking, actually?
Yeah. We don't talk about 2020 or following years right now, but we do expect to stay roughly at the same level as this year. So we're not expecting, as I said, I don't want to say what I will be saying in February next year, but the assumption we should be using now is that they will stay flat.
Okay. Thank you. Very helpful.
Thank you. So we have no questions in the room again. Yeah.
Thank you very much, Tim Rokossa from Deutsche Bank. I have a couple of questions, but I do it one by one now.
Thank you very much.
Okay. If we come back to Eisenmann, maybe. Why do you think there have only been two projects? Only, and I put those in quotation marks, right? Because obviously, there can be quite big already, and it's probably very solid. Why don't all your customers, why don't all the Eisenmann customers just drop Eisenmann and go with you?
And what do your OEM customers actually think about losing someone like Eisenmann potentially as a means to compete on pricing?
I'll try to make it short, yeah. First of all, there have been projects where Eisenmann was close to be finished, and it would not make sense to give to somebody else, and some of them he is finishing. Yeah. You see also projects which were 75% finished, like one even in Stuttgart, and here the smaller competitors of us are just doing final commissioning and stuff, which is, let's say, not a very good business. For us, that would not make so much sense. The risk is much higher than some EUR 1 million, EUR 2 million, or EUR 3 million revenue.
And the other so in all projects where he was not yet started to execute, yeah, and where he declared not to execute because he had the choice, it's very complicated with his insolvency law, yeah, those projects where nothing has happened yet, then they basically went to us. We could have gone back to the market, but because those projects, we were number two in terms of price, yeah, so they came back to us. And because also the time pressure was high for those customers not to start, yeah, there was no opportunity for us to jump on. And yeah, Eisenmann had not so many projects. And for example, one or two of them which they were taking on a low margin even was canceled. So there were not so many to take, yeah, and we didn't have smaller ones. So mainly the bigger ones.
Are your customers trying to intervene in the selling process? Is that your impression? So that they can still keep selling and execute with you?
As far as we know, two of our customers are sitting even in this insolvency board because they have claims against Eisenmann, so they're interested in what's coming out of it, yeah. Your second part of the question is, for sure, our customers, the Automotive customers, they love competition, and they don't like if it's too little. They always think that we are a monopoly, which is bullshit because we are not. We have a lot of competition. At the same time, Eisenmann has become weak. Other competitors, particularly international ones, have been given the opportunity to also show their capabilities, let's say. Overall, the competitive level is the same. There's no change, yeah.
Do you think if a Chinese company would buy Eisenmann, that your OEM customer on the automotive side would have some hesitations to actually work with them? Would that be to your benefit?
There is. We have a very strong Chinese competitor now, which is now starting to expand worldwide. It's already done in some cases a little bit. And I think they're pretty advanced. We know them since 15 years. The question is, what would Eisenmann bring them that we don't already have? And I think this question they are asking themselves, so that's what we have to see the outcome. But our customers, most of them, I guess, are hesitating to give them a product. Obviously, it is the case. When we supply them, they have to prove they can do it or not, yeah.
When we think about HOMAG, you make it sound as if you had those plans already on the table for quite some time. Now, the order intake of HOMAG wasn't just bad in Q2, right?
It was also now a string of disappointments for a couple of quarters already.
If you had it on the table already, why didn't we have this conversation already in Q1 or the very latest during the summer?
Before we started here, I was asked the question, it must be difficult to tell the HOMAG people to do those measures in times when things are still looking at the 80 million EBIT. That's the answer a little bit, and I can only say, when we called HOMAG, for me, this was a paradise of opportunities, this company. Yeah. People said, "This is a problem.
This government here looks problem." Every problem HOMAG has is, for me, a big opportunity, and I always said this will take five, six years to exploit this all, and then we will find new ones, but I think HOMAG has in many areas to catch up to the modern machinery business. We fixed a lot of them already. We have now one HOMAG Group. When we bought the company, it was different brands, even competing. This was the first big, big change in the company, and this working together also creates, let's say, process constraints because before they each were working for themselves, now they have to work together to make it simpler, and to work together without the right infrastructure of working together is a complicated thing.
So when we do one after the next, I think this what we are doing now in the next two years are the major key points. And after that, it's optimization, which we do every day in Dürr, and frankly, every day we do something better, which we find to improve, yeah. The major change is the change the way how HOMAG is working. I call it the DNA of the company. And later after, I can explain a bit more. And this is a fundamental change.
I have two more questions, if that's okay. I already took a lot of time. Okay. Then when we talk about the order intake, as you said, when one reads the press, you'd be very surprised how strong that actually is. I think the press is way too negative, but that's clearly a very strong result that you're showing here in terms of order intake after nine months. Can you split it a little bit into green and brown field? Are we still continuing to see CAPEX expansion among your OEM customer, or is most of that actually a bit of maintenance, refurbishment, and these kinds of things?
Without having the detailed numbers, just from my gut calculation, I would say it's still a strong part of green field, and some green field is a brown touch. What I mean is, we have example of a project where we built part of the paint job with an existing building that we call brown field, and we did a new process part of the paint job with a new building, so it's difficult to say.
But I would say we have a lot of opportunities of greenfield or capacity expansion, let's call it, yeah. Maybe that's easier to differentiate between brownfield, greenfield is a long-term thing. And Mr. Dieter tries to find the number, but I would say maybe more greenfield than one year ago. That's my - and he's not in greenfield with everything, so that's I was right. Thank you very much.
You're absolutely right. I'm fully right. Good. Carlo, maybe for you. I had the opportunity to present at your previous employer to the board level, yeah, Daimler, a couple of weeks ago. And I can tell you this company is shifting its focus completely on free cash flow generation. VW is already doing the same for two years now. BMW has traditionally anyway been more free cash flow focused than the other guys.
Your payment terms are still quite generous. You still get quite a bit of down payments when you do the paint jobs. Is this something you really see materially changing? Because I know that, for example, for parts suppliers, German OEMs are thinking about structuring the payment terms. We're not just talking about two or three days, right? We're talking about a month, two months. I've even heard one company saying that they were requested they could do it for 12 months, not be paid for one year, which is obviously complete nonsense, right? But do you see these changes in your payment terms as well?
Yeah. Unfortunately, the big changes we see are with the bigger customers. Let's say the handbag or the normal mom-and-pop shop who buy the HOMAG machine, honestly, they're pretty solid pay when you say.
It's really the big significant changes with the big OEMs that you are probably referring to. And as you know, they have a massive investment plan ahead of them, and they're looking at all possible measures to improve their own cash flow in order to make those investment plans. Obviously, they're talking to their suppliers, they're talking to Dürr, and the discussions, to be honest with you, in the last few years have not been easy. And honestly, I don't see how this will change in the next months to come. I think that there's going to be pressure on Dürr still to come. It doesn't mean that we can just sit there and do nothing. Obviously, we are looking at all possible ways of improving the cash flow and the payment terms. We're also not dealing with the traditional OEMs with new customers.
We tend to have better opportunities. We tend to have a much stricter project management focus. Remember, it's not just about advance payment. It's also about collecting a progress payment, and you always have to game that all the checklists have to be completed before you get it. And this is something that we also need to put pressure. I think what is significantly different today at Dürr is that there is much more awareness within the organization, meeting with the customer, negotiating with the customers to making sure that cash flows are as a priority, I would say, as needed. But I don't want to paint a positive picture that everything is fine, everything's going to be great. I think the reality is we are dealing with gorillas and King Kongs, and we are the smaller supplier in a way.
Even though we have a decent market share, we have to somehow work with our customers, make sure that they can meet their goals so that they can keep using us, and we can somehow do business together in the future. So it's always a bit of a trade-off. Before you get no deal, you sometimes accept meaty conditions that you don't necessarily always like. But sometimes we also turn down, we turn down some jobs because we feel so unfavorable that the payment conditions are a bit in the way. It's too much risk, yeah. Yeah. Also, we have had a situation, and I won't mention the name of customers in China, where they threatened not to pay us. We have decided for the first time, maybe a long time, to start suing our customers.
And that is something that we don't do lightheartedly, obviously, because it has long-term repercussions. But there is a change in mindshift. And with the social scoring system in China, also our customers don't like it if we threaten to do that. So this seems to have a positive impact. And they pay. Oh, it's too good. But yeah, as I said, it's something which has been a priority. And of course, you have seen the numbers. You can say, well, the numbers don't show that, but in the last few years, but they could.
We can see that because our net working capital discussion we have since 18 months, that's the effect what you just mentioned. It's now at that level now. You don't see intensifying. It's just one account to another.
No. I think that should be the, how you call it, the bottom line of their development, yeah?
I mean, intensify would mean they would have to start financing the factories of our customers. And I don't think we're in that situation. So I think it's going to be very tight, and the gap of advance payment is going to stay between zero and minus 100, hopefully more close to minus 100 in the future than we are indicating now. But that would be a significant change. And also, you have to understand that we're becoming also more of a machinery company, which obviously there's a different payment pattern in terms of how to do the advance payment, let's say, when you're building a paint shop. Thank you very much.
You're welcome. So I don't know if should I still, yeah, I asked Mr. Perniger our questions on the phone. I think I have to decide what you're doing. I have to. I'd like to. Okay.
Yes. Wonderful. We have some further questions on the phone. The next one is from Daniel Gleim from MainFirst. The line is now open, sir.
Yes. Good afternoon, gentlemen. Can you hear me well? Very well, yes. So the first question would be on your HOMAG sales outlook for 2020. If I understood you correctly, you would see revenues at the lower end of EUR 1.15 billion. My question would be, what is the corresponding margin to that level? You mentioned you're implementing the measures now to protect the margins. Is it the right way to think that the underlying margin in 2020 should be flat year-over-year? What I mean with flat is the old ballpark balance of 5.5%-6.3%. Or are there any inefficiencies as a result of the measures that you're implementing that should lead the underlying margin to go down 20 over 19? That is question number one.
I think we step in the territory which we didn't want to. We didn't want to give guidance for 2020 today. Our objective is to do that in February, and then also we would guide you for the divisions. And please give us the opportunity. Because of the machine development, particularly, we have to see how these measures will take place. And we would be, let's say, more confident to give this to you in February if you would understand that.
Then maybe on the qualitative side, do you expect any inefficiencies from these ongoing processes, or would you expect business as usual because you are implementing them in a very cautious, let me put it this way, method?
Let me answer like that because we try to avoid inefficiencies out of that. I can't promise yet because it could be also the opposite. But normally, when you change complicated changes in such a company, in a machinery company, that does not avoid efficient, let's say, inefficiencies. And also to close a plant is if you don't close tomorrow, you say we want to close, and people have been informed today that it will be closed end of next year. So we expect them to work another year in the modification level, which ensures that the output is coming out. So that could be also inefficiencies if they don't do this. So it's really complicated and not so easy. But I would say from the trend, I would either expect some inefficiencies.
Very clear. If I understood you correctly on the elaboration on the PFS statement, we're expecting some stronger order momentum entering into the fourth quarter. Could you share with us if there was already something major signed in the months of October and maybe in November, and whether there's something coming up you expect in the very short period?
So I think we had already a strong order momentum so far in PFS, and I'm just saying that it will hopefully continue to improve our few—it will continue. And the answer is yes. We have signed two major orders in what is now November. In November. So it will be in Q4, and some of them will be moved close to Christmas, and maybe they are happening then after Christmas or New Year. But there's good momentum there. And the answer is yes, two larger ones we have booked just recently. Very clear. Thank you very much. And maybe on the bigger scheme, how do you see the EV transition going into 2020?
Are these the first signs that this transition also on the plant CapEx side is getting momentum? I know I asked this question, I think, 12 months ago already, but I just wanted, I'm curious to learn what your sense of the situation is. Is this going to sustain or to accelerate? What is your gut feeling after discussions with customers?
It's not so easy to answer, but I'll try to share my thoughts here. First of all, we have this category of new OEMs, let's call them. We have in America and mostly in China, but we also have got a lot of orders from continuing to collect orders, hopefully in the next six months. And I think that is a trend which then comes next year to some situation because they first have to be built and used and produce the cars and sell the cars.
Not all of them will be successful, for sure. I think it will be a shakeout process in the next step. And then you have the traditional, let's call it, traditional OEMs also either preparing plants to have a mixed production of normal vehicles or traditional ones and electric vehicles. And those transformations in those plants is business fast. It's not huge business, but EUR 10 million, EUR 50 million, EUR 20 million, EUR 30 million. And so then we will see both. And we will see some maybe additional plants for just EV cars. But I think everybody at the moment is looking at how the market is taking those products and is consuming. I think we have to wait for next year to have a bigger instrument. Also, the Western OEMs come with their new products out there. How the demand will be, I think that will massively steer their expectation of what will happen in three years from now because when they give us next year's order, it reflects some expectations they have for the year 2023 onwards.
Very clear. Thank you very much.
Oh, i t's a pleasure.
And the next question we received is from Sven Weier from UBS. Your line is now open, sir.
Yes. Good afternoon. Thanks for taking my questions. There would be two. The first one is on your prepared remarks. You said you expect a stronger Q4 in all divisions. I was just wondering, did that refer to order intake, and was that kind of order intake year-on-year? Just maybe some more color on that one.
So order intake, I think we expect to continue to be strong in the fourth quarter, whether it's much stronger or less stronger.
One deal can make a difference, so difficult to say, but year-over-year, because last year, I think we had a very strong fourth quarter, so if you like to compare quarters, which I don't like, but if you do it, so I think maybe not the same level like last year's fourth quarter, but yeah, that's what we see today, but as I said, one order is EUR 100 million, less or more. That makes a big difference in the numbers but it doesn't change anything for Dürr because whether it's coming in December or January, no difference there. Also, I think in the margin improvements on the EBIT, we'll continue to show the upward trend.
Stronger than Q3 this year, but maybe a bit below Q4 last year.
It's a good summary, yes. Okay.
Thank you. And the second question is also on Eisenmann because I remember you said that part of your intention was to hire key people from the company. And I was just wondering how that has worked out so far.
We did hire from Eisenmann in the last years. I would say roughly 150 people worldwide. And the latest, how should I say? When Eisenmann came into final trouble, most of the good people were gone already anyway. So we took some people recently in special, not in management, but in special technical skills. And we also, because Eisenmann has not only they sell the automotive business, but they have also sales processes started for business they had in addition. And one of them will also participate in a smaller business, but interesting one.
And you said that you expect the sales process to be concluded in the coming weeks. I have to say we hear little about it at the moment. In terms of a shortlist of buyers, I guess you must be a bit closer to what you are hearing. Can you share that with us?
Not more than I can share with you, but I can only say that it's not clear yet how that process will end and who will take it or if somebody will take it.
Okay. Thank you.
The next question we received is from Peter Rothenaicher of Baader Bank. Now, please go ahead, sir.
Yes. Hello, gentlemen. Coming more towards a longer-term outlook for your Paint and Final Assembly Systems business, you mentioned you're close to closing some more orders. You have already been successful, obviously, in recent months. But what is your view about now new project requests? Is this slowing down to some extent, or do you see here no slowdown in business?
That's a good question, and if I would have all the answer, I would be more happy about that. We can always look at a pipeline of projects, which is a view of one year, roughly. Sometimes projects start very fast and very sudden, but when we look at the next, let's say, till mid of next year, we have a good pipeline, which would give us enough order intake in business to continue the level we have at the moment. For the second half of next year, I have not, let's say, sufficient outlook. Never had also in the past. My personal gut feel is that there will be a slowdown of these new EV OEMs because there are many out there. I think this will not continue like that.
The question is how optimistic the existing OEMs or traditional OEMs, let's call them, are about the success and future of their EVs, as in E cars. They are not just launching this year, but mainly next year and the future of that. I think that we will know better next year. It can be stable, can be less, and could be also more, but that's difficult to say.
Okay. M&A in this environment, I think it might be easier to find some targets, particularly, I think smaller players are getting into trouble. Do you see here now some new opportunities for M&A?
Yeah. Not for a whole kind of opportunity in that size, but we are working on several smaller ones. We will, let's say, we have some results whether we are successful there or not in the next few months. But also, one is in the HOMAG area as well where we are working on.
Okay. And my last question on MPS. So you had, let's say, a tougher time with order intake, particularly in the second half last year. Now it's somewhat improving. What is your view here? So is there to fear that the weakness in the automotive industry will impact demand in 2020, or do you have here support from new products? What is your view?
Yeah. The somewhat improvement is nearly EUR 25 million to what was last year, and this is a small machine, so there's quite a lot of machines. I think it's promising. I can tell you what I see. We have a very strong business in order intake and testing and in automotive filling.
On the balancing side, we have a mixed picture up to the second half, the first half of this year. I told you last time that the powertrain part of that balancing business is really missing EUR 30–EUR 40 million of order intake, turbocharger, crankshafts, and stuff like that. This has changed recently, not in the third quarter. It will be booked in the fourth quarter, so we got orders again even in the turbocharger business, so that's quite nice to see that we are, let's say, recovering a little bit on the powertrain side, but we have a very strong demand on the aerospace, on the engine part, balancing of jet engines, particularly in China because China has a program to develop their own engine, jet engines, and they are working on that heavily, and they need a lot of machines for that.
But if you see the overall business, as an overhaul business, repair business of jet engines is strong demand. And so here we have very positive things. So we are pretty confident and pretty strong for next year's plan in MPS.
Okay. Thank you very much.
Stable. Stable on high level.
And we received the last question from Alexander Hauenstein of DZ Bank. Line is now open, sir.
Hello, gentlemen. Thanks for taking my last question here. I'll come back a bit to the public, one of my former colleagues already. I'm wondering, I mean, if uncertainty in the auto industry is further increasing, I mean, where's the risk for your classic auto-related paint business from 2021 despite your decision to fill the order? We talked already about the conventional and the E car players, but also looking at maybe into the different regions. Especially my question is, what is the risk that OEMs' delay projects and/or margins will get down due to more aggressive negotiations or even renegotiations? Maybe you could comment a bit more on this margin impact here, eventually. Thanks.
Yeah. As for renegotiations, we don't know. This is only for parts suppliers. I think they have this. We don't. We have an order, we negotiate, and that's done. Yeah. I think.
T here's no risk of a devaluation in order book or some cancellation?
Sorry?
There's no risk of a potential, let's say, revaluation of the order book? This is another part. Maybe some cancellations, maybe some deferrals, but also maybe some, let's say, yeah, that customers are coming back to you and try to renegotiate the overall margin level?
No, never. I mean, this job since many years never happened. We wouldn't do it. I mean, we could try, but we would not talk about it. Okay. Contract is contract. No. I mean, maybe that's the next step or next level of negotiation practices, but at the moment, it has not started that yet.
Okay.
Okay. Pleasure. I understand that there are no more questions on the phone. Is that correct, Mr. Perniger? Hello? Mr. Perniger?
Yes. We received one last question. It's from Andreas Ruf. Line is now open, sir.
Good afternoon. I would have another question regarding HOMAG. You announced that you are going to eliminate 350 positions in the HOMAG group. 150 positions will be at the Hemmoor site due to the closure, closing of production there. How is the split of the remaining 200 positions in the HOMAG group to the other sites or to the other companies within the HOMAG group?
Oh, at various locations. There's shop floor. There are some people affected of it, and where do you come from, Mr. Ruf? I have not understood.
From EUWID. Sorry?
From where?
From EUWID. We are publishing a newsletter for EUWID, a panel for the wood industry.
Oh, okay. I understand. But yeah, this I know, but this is not. I think I don't have more of the details here to share now, but I think you know the plans, but it's mainly Hemmoor and it's parts of shop floor and maybe in the other locations. But it's quite split over.
Okay. One question regarding investments in the HOMAG Group. How are the investments or is the CapEx affected by this restructuring?
CapEx is not alre ady. In the HOMAG Group. We continue to invest in the future of the company.
Okay. You mentioned that you are negotiating one acquisition within the HOMAG sector. Could you give more details on that?
No.
Okay. Thank you.
Sorry, I can't because the process is quite confidential. But you have not to be too long-patient. Within two months, we know.
Okay. Thank you.
It's a pleasure.
If there are no further questions, I'll hand back to the speakers.
Yeah. Thank you very much for everybody to join on the phone. And here in the room, we stay for a moment. And again, thank you very much for joining us. In the next conference call, we have middle of end of February, 28th of February, where we then finally give you the guidance which you are expecting and waiting for 2020. And look forward to that. Thanks again for your interest today and for the moment. Goodbye. Good afternoon. Thank you.
Ladies and gentlemen, thank you for your attendance. This call has been concluded. You may disconnect.