Welcome to the Dürr conference call. Ralf Dieter, CEO, and Carlo Crosetto, CFO of Dürr AG, will give you a short introduction followed by a Q&A session. I will now hand over to Mr. Dieter, CEO of Dürr AG.
Thank you, Mr. Benner, and good afternoon, ladies and gentlemen. Good morning to those of you in the U.S.. We are presenting to you today our preliminary first-half figures and also the background of our revised outlook as we did last night. To start with the summary, we have our sales by 8%, and the incoming orders nearly were on the same level like last year, although we have challenging market conditions, as you all know. The book-to-bill ratio at one, and the order backlog still at EUR 2.6 billion, which is slightly above the end of last year. We're positive in our service business, which was growing 15%, which is a strong growth. The earnings were moderate in the first half, so we show on the EBIT side a minus of 6%. The increased competitive pressure in all divisions. We are also implementing cost-cutting measures.
We are working heavily on productivity improvements, and in particular, our extraordinary costs we had last year, we have significantly reduced as well. The cash flow was disappointing in the first half, mainly due to some further delays in customer progress payments, but it has also the effect that we had no large-scale order in the second quarter, which you can see in the PFS group, which normally gives us a decent amount of down payments, which we had not in the second quarter. The Paint and Final Assembly Systems, Application Technology, and Clean Technology Systems are well on track to reach their 2019 targets as published, and the order intake at Measuring and Process Systems, after a slow start in the first quarter, improved in the second quarter and should lead to higher sales in the second half of this year compared to the first half.
But higher R&D costs, mainly for digitization and increased competition, and particularly weaker demand, actually very low demand in the powertrain business, we'll comment on that later, are weighing on the results. On the OEM side, we have a strong decline in the high-margin business in China. We had in the second quarter again a 50% reduction, which we didn't anticipate so far, and therefore the outlook is reduced to a lower business volume in the second half of 2019. On page number four, we have an overview, as usual, for the key figures. On the EBIT side, as already mentioned, operating EBIT is down minus 5%, on the level of EUR 107 million, and the net profit is down around about EUR 4.5 million to minus EUR 6 million. On page five, we show the order intake in the regions.
We have in China a weak development, but this is mainly due to two facts. First of all, OEM market, as I said again, 50% less than last year. And also, we had no larger-scale order in the paint or on the APT side in China in the second quarter, but this will change for the second half. We will comment on that later. North America up, mainly influenced by large-scale order we had in Mexico. Germany, more or less, and development, yeah, it's slightly below last year. And Europe, quite stable, and Asia with a nice growth, which is China excluded. And yeah, in particular, we had, since many years again, a larger interim order in India. Now I would like to hand over to my colleague Carlo, who gives you more insights on our figures.
Yes, thank you, Ralf, and good morning and good afternoon to everybody on the call also from my side. I will now walk you to the next few slides, and I will start by giving you a quick summary of our key P&L profit figures. As you can see in chart six, our gross profit on sale was up compared to the previous year, to the first half of 2018, but less than it should have been, mainly because our gross margin was only 22% instead of 23.1%. That's mainly driven by higher cost of goods sold. So, as it's stated here, higher production costs, which is material costs, and as Ralf already mentioned in the beginning, it increased competitive pressure on some of the divisions. The EBIT number looked pretty good with EUR 150 million.
I have to highlight here that we have the so-called IFRS 16-related effect, where obviously it's impacting depreciation, and this is why it's a little bit higher than it was the previous year. The extraordinary effects that we have in our P&L are similar to what we had for the first half of last year, about EUR 11.7 million. We have a bit more extraordinary effects related to PPA in the Clean Technology division with the acquisition of B&W MEGTEC, and that is compensated by lower extraordinary effects in the Corporate Center due to costs that we had last year that we didn't have this year. But in total, extraordinary effects remain the same. What is worth highlighting in our expenses, our selling expenses were up significantly compared to the first half of last year.
And the main reasons for this is that we had significant and quite important exhibitions like the LIGNA and the Open House in the first half of 2019, which we didn't have last year. So we do expect that selling expenses should decline in the second half of 2019. If I move on now to page seven, I would like to show you the so-called cash evolution or the development of the net financial status. What is known is the impact of IFRS 16, so we have adjusted that compared to the previously reported number and brought the adjusted NFS number down to EUR -66.5 million. And then we have the usual walk, as you see in every call.
What is obviously disappointing and what is obviously not in line with our expectation is the development of the net working capital, as I will show you later in the next slide. That's mainly related to customer payments and less advance payments received. But I'll get to that later. So you see the rest of the positions are in line with our expectations in terms of CapEx or depreciation and taxes and so on. The net financial status as of June is at the level of EUR -310 million. And as we have also highlighted in the top of the slide, we do expect cash flows, operating cash flow, free cash flow, of course, net financial status to improve towards year-end in the second half of the year. Page eight, you will see a breakdown of the key net working capital positions.
What is pretty obvious is that the big deterioration is coming from the reduction in total contract liabilities of a deviation of EUR 139 million reduction, which means in a bottom line or less advanced payments received. If you look at the total inventory and prepayments, which includes materials, work in progress, finished goods, and of course, prepayment to suppliers, the numbers are roughly at the same level as it was for the same period last year and slightly higher than it was year-end. It's clearly a problem that we have in net working capital is related to the position of total contract liabilities, which is getting smaller than it was a year ago. Work inventories obviously has an impact on the total net working capital number that you see on the slide.
If we move on now to page nine, you can see that the total balance between total contract assets and total contract liabilities has become a positive number, which means that basically we are developing in a situation where we have less advanced payments in excess, and we still confirm or we haven't changed the target that the balance should be between zero and EUR -100 million. Although, given today's numbers, I have to say that we probably need to guide you towards the lower end of this range based on today's numbers. But we are still assuming to remain within this range. On page ten, we have the key equity and balance sheet figures. What is certainly worth highlighting in positive terms is that the equity ratio is improving and is moving towards the 30% range, but we still have as an objective.
It's currently at 28.2%, but it's up 11% year-on-year basis. Net financial status, I've already explained the walk with -310. And as you will see later, the expectation is that we will have at year-end a net financial status between EUR -180 million to EUR -130 million. Cash in July is actually higher than it is shown here at the end of June. That's mainly driven by the fact that we have issued a Schuldschein of about EUR 200 million. So cash balance, let's say a few days later, is about EUR 600 million. Return on capital employed is clearly not at a satisfactory level with 14.5%. And we see the return on capital employed expectation for the full year 2019 to be in the range between 15% to 20%, which is lower than the previous year's period, but it's still above our cost of capital.
I would like to pass back to Ralf Dieter on the divisional presentations.
Yeah, thank you, Carlo. And I'll start with page 11 on Paint and Final Assembly Systems. The order intake was in the first half on the same level than last year, although we had a weaker quarter, second quarter. But as I always mention, a quarterly view on order intake and Paint and Final Assembly Systems is not the right view. On the sales side, we had an increase. In the EBIT side, also more or less the same level, but on the margin point, we are a little bit behind last year, 0.65 points. But this is mainly due to that we still have some orders in execution, which were on a very low margin level, which we acquired in the last year, as we already mentioned in the last call. This will change over the course of the year.
We will see in the second half improvements out of also our FOCUS 2.0 program, and we will improve our cost position. We have a healthy pipeline of potential projects, in particular in China, particularly also with these new EV players, where we see in the second half of the year more orders and a nice order intake to come. On the Application Technology side, we have a drop in order intake of 11%, but this is mainly due to some service business, which is slowing down because the service business or the spare part business of APT is heavily linked to the planned utilization of our customers. If we have not such a good utilization, the wear parts aren't used so much, and we see that in the numbers. On the sales side, we have for other slight decrease.
On the EBIT margin, we could keep the same level as last year, first half, which is the effect of improved positions and profitability in our gluing and in our industrial product side. So here we make progress, and the book-to-bill is still at 1.1. On page 13, we look at the Clean Technology Systems. The number is difficult to compare because, as you know, we have now the B&W MEGTEC and B&W Universal business fully in our numbers. And so therefore, the sales is nearly three times more than last year. We have a strong book-to-bill rate. And in the second quarter, also the earnings strongly improved. Therefore, we see the integration of B&W MEGTEC and B&W Universal in a successful path and is progressing as we planned. On page 14, we have a look on Measuring and Process Systems.
From the incoming order side, we could pick up in the second quarter because the first quarter was quite weak, and at the end, we could slightly improve compared to the first half of last year. On the sales side, we had a strong drop of 12%, which means in that case more than EUR 20 million , EUR 26 million , which has a direct effect on our EBIT, which was adequately lower. Also, the EBIT was influenced by higher than planned costs for digitization, but we basically didn't stop that cost because we think that this is very strategic and important for us and will take on a middle and long term. Yeah, that's the main point here. One is to mention we have a business area in the balancing side for turbocharger and crankshafts, which is about EUR 40 million per year. That business has really dramatically decreased.
We have projects in a pipeline, but no decisions, and this mix is also a bit helping us because it's very profitable, but here, at the powertrain side, we see the effects of the discussion we have about combustion engines and electromobility. On the page 15, we have a look at HOMAG. Incoming orders minus 16% roughly compared to last year. We already mentioned there is a significant problem again in China, and the whole market, as we already have said, the whole market of the woodworking machinery business has a drop of more or less 20% compared to last year, so we see here a situation where this market is really calming down, and the earnings decline is also therefore affected. We have stronger price competition because there's less volume out there. Therefore, the competitors have become more aggressive.
We have high production costs, which is an improved cost that has an impact on the EBIT margin. We have a lot of cost reduction programs in place. This would improve, therefore, the situation in the second half on the cost side. That's about HOMAG in short words. The service business on page 16, as I already mentioned, has shown a nice growth of 50%. The margin is slightly below last year, but this is mainly due to the mix of the revamped shops and spare parts. So nothing significant, but in terms of development here, very positive. We expect that this also continues to be not at that growth rate, but on a growth rate for the second half as well. Finally, on page 17, I would like to comment on our changed outlook.
We have yesterday published, as you know, a new guidance for 2019, which is not changed in terms of order intake. Here, we are still convinced we can reach the target between EUR 3.8 billion and EUR 4.1 billion. On the sales side, we are also still optimistic that EUR 3.9 billion-EUR 4.1 billion is a feasible number to get to. The EBIT margin, we had lower through the effects we already mentioned from 6.5%-7%, now to 5.5%-6%. And in consequence, also the ROCE is now 15%-20% instead of 20%-30%. Also, the earnings after tax are influenced by that. So it's not anymore EUR 175 million-EUR 190 million. It's now EUR 145 million-EUR 160 million. And the cash flow side, as Carlo already mentioned, therefore we are here on a guidance which is not up to previous year, but now more down than compared to previous year.
Yeah, I think that's the main numbers here to mention. And we also provided you on page 18 the targets for the divisions to be very transparent here on page 18. Unchanged guidance and targets for Paint and Final Assembly Systems and Clean Technology Systems, as already mentioned. Measuring and Process Systems now 10%-11% because we are confident we can pick up in the second half. And instead of 11.5%-12.5% on the HOMAG side, now 5.5%-6.3%. And the original guidance was 6.7%-7.5%. I think that's the main parameters of our outlook. And this was our introduction. And I would like to hand over to Mr. Benner to receive your questions, and then you will get our answers. Mr. Benner?
Thank you. Dear ladies and gentlemen, we will now begin our question and answer session. If you have a question for our speakers, please dial zero one on your telephone keypad now to enter the queue. Once your name has been announced, you can ask a question. If you find your question is not the perfect time to speak, you can dial zero two to cancel your question. If you are using speaker equipment today, please put the hand up before making your selection. One moment, please, for the first question. The first question we received is from William Turner from Goldman Sachs. Your line is now open, sir.
Hi everyone, thanks for taking my question. I have a couple actually. The first one is on working capital. And you state that you expect to see a clear improvement in customer payments. Can you give us some more details here? Why do you expect that? And what divisions and regions are these net working capital issues occurring in? And then my second question is on the free cash flow guidance, the technical one. When you say it's supposed to be down in the future, do you mean lower than the EUR 78 million in 2018, or could it possibly be negative? And then my final question, that was on HOMAG. Can you just explain what you internally are thinking about the Chinese woodworking market and when you expect there to be a recovery there? Has the shortfall in orders been a kind of pause?
Is there anything a bit more long-term that we need to think about?
Okay, before we answer one, I would like to ask everybody who asks questions that we do one by one. Otherwise, it's getting difficult for us. Is that possible?
But Carlo starts with the first two questions, I think.
Yeah, I will take the first two questions. I'll start with the first one, working capital, what makes us so confident? I mean, first of all, it's obvious that if we execute the project based on project execution and delivery execution, we know what we expect to pay. The big difference really has been that if you look at the Q2 order intake, especially on the PFS, has been quite low. And within the second quarter, there has been hardly any real big project with big advance payments. So this is, to a certain extent, it is unexpected that the working capital, meaning the advance payment side of the working capital, was so negative in Q2. But these projects, if we do achieve those revenue numbers, will ultimately transform into cash. So we do see basically a delay in the second quarter, sorry, in the second half of the year.
So it's just that the percentage of advance payments is lower than what we had originally expected. Your second question regarding free cash flow, yes, we do expect it to be lower than the 78 that you were referring to. It's probably going to be close to zero, slightly positive, so lower than what we had originally assumed.
Okay, so I'm just speaking for your third question regarding the China market and HOMAG. So for HOMAG, when you look at the Chinese market for HOMAG, you have to look at two parameters. First of all, the system projects for customer ordering for designs, so even for total factories, which was very, very strong business in 2016, 2017, and also parts till the first half of 2018, and the single machine business. The single machine business has also dropped, but not so significantly. This is slightly dropped, but the system business is really dropped absolutely, I would say, to nearly nothing. And the reason is that the top 50 furniture manufacturers in China, they have bought lines and factories. They have still a growth in the market of 15% in China in the furniture market. But they all bought these new lines and first want to utilize those plants.
And they are careful for further investments because of the trade tariff war with the U.S.. So there is a moment and a situation in China where they are watching what's going on and what's happening and not investing. We expect that this will continue this year, and we see that maybe to recover second half of next year, not before.
Great, thank you.
My next question received is from Alexander Hauenstein from DZ Bank. Your line is now open, sir.
Hi, this is Alexander from DZ Bank. I have also a few questions. Let's begin with the first one. With regard to your guidance on page 17, you're commenting that there's a new operating margin guidance on the safe side. What are the underlying assumptions here in terms of this on the safe side, and how conservative is it? Or to put it differently, how confident can you be that you do not need to cut back your PFS and APT outlook within a few months' time here? I understand that automotive is doing quite well comparatively, but maybe you can share some views here about potentially the risk of, i.e., Chinese new e-car players scrapping orders or also some established OEMs on the Western Hemisphere. Thank you.
Okay, Mr. Hauenstein, thank you. But the answer is very short. We are very confident that we will get this guidance into the range of the guidance.
Okay, so it seems to be a conservative one from your side, right?
You can call it conservative. I would say it's reliable.
Okay. And on HOMAG, with regard to the wages and also material costs, but also on the production cost side, how do you think about further potential structural measures to be taken in the near future? Are we talking here more on the European side or on China itself?
We are working on our manufacturing structure all the time, and we have moved already some parts of production to, for example, Poland, which we increased very much. We are continuing that process because, as we also said some years ago, that we have a very large footprint still in Germany with plants, and that will not be, let's say, for the future, the right model to do. This will be taken step by step.
Okay. And a technical one. Could you quantify the LIGNA and the open house effect here, please?
I can quantify that roughly with, I would say, minimum EUR 5 million, EUR 5 million-EUR 6 million.
In total?
Yep.
Okay.
It's expensive, but we have to do this.
Yeah, yeah, sure, sure. Understood. I just wanted to have a quick idea here. And last question on MPS, with regard to these digitalization costs and also on the F&E side, research and development side. How long do you think this investment needs to be done? How long will this be seen in the numbers? This is probably not something which will stop in one or two quarters.
You're right. I mean, we had a little bit of overrun. We have a plan. The main reason is that we are developing a whole new generation of measuring software, which is a core of those machines. The machine itself is quite simple, but the measuring software, that's the key and the differentiator, and this software development, we decided end of last year to undertake, and we have decided also to make it faster because it's really a big differentiator. Therefore, we had higher costs than in the first half than anticipated, but the overall cost is budgeted for the next two and a half, three years.
Okay. Thank you very much.
Yes, sir.
My next question received is from Daniel Gleim from MainFirst, your line is now open, sir.
Yes, thank you very much for taking my questions. First, I would like to dive in a little bit on your reliable PFS and PPP guidance for this year. Could you comment on the PFS sales first? We saw a little bit of slowdown on the second quarter versus the first one in 2018 overall. Have you seen any project slowdowns? I appreciate that you have contractual obligations with the OEM, but have you ever in the past received that these projects have been pushed out? So is there any risk that you could see some further slowdown in H2 following the trend we saw in the second quarter after Q1?
Okay, I understood your question. You always have the situation, and obviously, very often have the situation that projects have a delay, not because the customers are pushing them out, but just due to the fact that, for example, buildings, which are the first step before we can install our equipment, are delayed, and this we saw quite recently in some cases, but there's no effect where a customer asks us not to install or not to implement or not to execute as agreed.
Okay. And if we think about quite bullish margin guidance for PFS compared to where we stand after the first half, can we pinpoint year-over-year margin increase into the first quarter? Is that something you firmly expect?
In the third quarter?
For the rest of the year.
For the rest of the year, because of quarterly margins, we will have an increase, mainly out of the fact that our cost measures or the focus program are more and more showing effect. And second, because we are, let's say, getting rid of or finalizing orders which had a very low margin, which we still executed, taking orders last year and the year before.
Yeah, the drivers are.
Sorry?
The drivers are well understood. I'm just wondering because we're waiting for any quarter to finally see an increase in the margin and now in the second quarter, actually, the underlying win, though, over the first one. So I'm just wondering whether you firmly believe that in the third quarter of this year, we finally see a sequential increase of the PFS margin?
I don't like to do quarterly outlooks, but I would say for the year-end, you will see that. Maybe you have to wait a quarter, but we will see that to the year-end. And here, we are quite confident. Not quite, very confident.
Mainly on APT, you commented that there is a slowing growth in services at the moment, mainly because of the utilization rates in automotive plants. Yet for the full year, you're still quite upbeat on the total supply momentum. So what makes you think that the utilization rates will go up in the second half and hence the growth in the revenues and APT will resume?
Yeah, because first of all, we see an improvement in the margin which we don't see on the intake side, which is also an effect of our activities here. Second, that it's not only based on utilization, but we have every day more robots out there installed, which creates additional business, so we are confident as well. It's quite calculated. In a six-month horizon, we can see that quite clear.
Okay. Maybe one last question on routing. You have quite downbeat lower end at your order intake guidance. I understand that the lead periods are around six months for single machines. So if we see this EUR 250 million run rate in order intake in Q3 and Q4, which is in essence unchanged over the second quarter, we will see sales probably also go to the lower end of your guidance, which then means the sales declined year over year in the second half. Yet when I look at your margin guidance for the full year, it's rather at the level that we see in the second quarter. So I'm really wondering if the drop-through gets more negative of lower utilization rates in the second half, how you can sustain stable margins in the third and the fourth quarter. If you could help us, what would the offsetting factors be here?
True. First of all, we have also a single machine business, which is even below six months lead time, and don't forget, we also have quite a stock of built machines, which are ready to sell, which is also a significant number. I think it's close to EUR 60 million-EUR 80 million.
55.
EUR 55-60 million, which is basically all the intake and revenue four weeks later. And also, we have taken a lot of cost measures, which will materialize in the second half. That's why we are confident we can keep this guidance.
Can you provide us a rough ballpark of these cost savings?
How many million do we need to?
Okay. That's from my end. Thank you very much.
The number I give you is not correct, but it's definitely enough that we can see that we get there.
All right. Thank you very much.
My next question received is from Rodolphe Cebrian from AlphaValue , your line is now open, sir.
Hello? Hello?
Mr. Cebrian, we can't hear you. Your line is open. Maybe you are on mute. So we go on with the next question from Sebastian Growe from Commerzbank AG. Your line is now open, sir.
Yeah. Thanks for taking the questions. Good afternoon, everybody. I'm asking over here, the question is on the MPS business. The second one would be on working capital MPS. And Mr. Dieter, eventually, you could just refresh memory as you always guided for a better margin development over time at MPS, while increased competition and a rather high exposure to combustion engines might rather suggest that margins come under further pressure. Maybe you could just give your thoughts on the various thesis. And then the other question around MPS I would have is if you would rule out at this point to eventually also consider selling balancing or other parts of the MPS business after the overall successful development versus the successful investment of Ecoclean.
To answer the second and the last question, we are not intending to sell balancing business. That's absolutely clear. On the margin side, yes. We know that the markets of the balancing business have a big variety, and we see an improvement also in order intake in the airline business and the overhaul business, which has also a very good margin. And that's why we see that during the course and the orders we have on hand, when we got at the end of the first, end of the second quarter, make us confident, and we can calculate that we will have an improvement to the year-end in the guidance, in the revised guidance we gave today.
So there's no structural element at any point at this moment, at least, that margins are coming under pressure because of the mixed effect on combustion, eventually pushing and seeking more pressure on the overall development here?
No, because we always call this balancing business like a 12-cylinder engine because one is down and one is up. And we see now the down in the powertrain side, and we see an improvement in the second quarter on the aircraft and high-speed side, which makes us confident because it's also high margins.
Okay. Understood, and the other question I would have is for Mr. Crosetto on the working capital. I heard your comment on the overall better contribution of the higher prepayment activities for the positive outlook on working capital development into the second half of the year. But beyond that, can you just remind us also of what measures you are undertaking to improve cash conversion over time? So is there any change to systems, processes, contracting guidelines, or that you would also consider changing personnel because people are eventually simply not delivering on what they expect to deliver?
I mean, I just want to be clear that the measures to improve working capital cash flow have already been implemented since quite some time. So it's not that this is something new in terms of urgency. I mean, if you don't get orders in at the level before, if you get orders without a certain amount of advance payment, then it's obvious that you can have all the measures in place you want, but it's a fact that you also have a customer who has a different opinion. And that's currently the situation in this case. And as you know, one of the measures that we have implemented is that the management is also paid in terms of variable compensation on his ability to meet his working capital.
So obviously, at 56 days that we are today, it's not satisfactory, and we, of course, need to bring it down below 50 all the time. So that is clearly something that is being addressed, and we also have to realize that we are facing a bit of headwind, and we are struggling to meet those goals. But we're quite confident that ultimately, the cash is coming in. Ultimately, we will be working on not just projects with bad advance payment ratios, but also with projects which have a higher advance payment. And as we execute those projects, we will also have cash coming in, reduce work in progress. So we actually track this business on a project-by-project basis, and we have a pretty good understanding of which projects generate what cash, once we have them and once they're agreed at certain conditions.
Okay. That's helpful. Thank you.
And the next question received is from Christoph Laskawi from Deutsche Bank. You can start, sir.
Hi. Thank you for taking my question. Sticking with free cash flow and working capital flow, we are hearing from other suppliers that OEMs currently are switching payment terms quite a bit, and I see them willing to move back to paying fairly promptly, obviously managing the cash in the downturn with a very focused approach. My question will be, do you see the same in the sense that they're holding back payments to some degree and are, in general, not willing to provide the same prepayments as they have been in the past? Resulting from that, are we going to a phase then of a structurally impaired free cash generation for a couple of quarters before we see the OEMs coming back with more confidence on their cash position?
To answer the question together, I answer from the customer side. It's definitely the case that our customers, also in the big venture projects, are less willing to give us the amount of down payments as we have seen, for example, two years ago. Two years ago, we were spoiled three years ago because sometimes, in some cases, they gave us much more advance payments than even normally as normally they used to because they had excess of cash. And now they are much more careful with that. Absolutely. And that's what we are facing.
Yeah. I think it's really related to advance payments more than receivables. To be honest with you, once we agreed on the payment terms, they usually pay us, so we don't necessarily have a concern about not getting paid. I have to admit it, obviously, as we do more business in China, we're much more careful in terms of which customer we accept for payment terms and if they're willing to, for a short period of time, to have cash not in excess of work in progress. We only tend to do that with players which we know are quite solid or have been doing business with them for quite some time. So it's really all about advance payment.
Of course, we have in China customers who pay us with bank acceptance bills as well, but that is, in my opinion, better than a simple receivable because I could discount that amount with the bank. So that's how I would see the whole picture. Now, the question, how long will it last, it's a bit of the million-dollar question. I mean, but I think it's fair to assume that it's not going to change overnight. We're going to be facing this battle for a few quarters. Nevertheless, it is our objective to improve this and to sharpen those measures to make sure that we get into a negative territory, meaning that we have cash in excess of work in progress, maybe not at - 100, but hopefully at least on the lower side of this range.
Thank you. The second question will be on hold. You commented that you see low utilization for some products resulting from customers basically having set up the capacity they need and now being a bit more cautious. Is that already having negative impact on pricing because the industry is underutilized and essentially you see competitors pushing for projects through price? And do you expect that to be present for, say, one to two years, or would you see a recovery rather quick? Because in the end, it also weighs on the overall paint business quite a bit, and hence the recovery might be taking a bit longer than initially thought.
I mean, first of all, pricing is always under pressure in times when the market volume is shrinking. But as you know, we are working now since years on improvements and cost reduction, new designs of machines to basically face that. So that I would call normal business. And in particular, in China, on the large system business, we have a very strong competitive situation. We have a very high market share. So when that business picks up again, I think we are, as I said before, we don't expect it before the second half of next year to pick up. We will invest again. And I think that's the most important motive. Everybody, when you talk to our customers, they expect for China stagnant development for even next year and then maybe 2021 again, an increase.
I think that's the situation in China, which is influencing all of us here.
Thank you. And the last question, actually, on the 2020 targets. You put in the ad hoc line that the targets are currently under revision. I was wondering, do you have a certain event in mind when you will update those? Will it be Q3, or will you probably wait until Q4 communication where you would provide some new guidance for 2020 anyways?
The new guidance for 2020 we will bring out when we have our preliminary numbers in February next year. And up to then, we will have a much better look on what's going on. Also, we will then publish our Strategy 2025 because at the moment, we have an official strategy which ends 2020, which is next year. And since the company will not stop, we continue with the next five years strategy.
All right. Thanks a lot.
Pleasure.
Thank you.
We received a follow-up question of Daniel Gleim, MainFirst, the line is now open again.
Yes. Thank you very much for taking my follow-up question. Apology for belaboring the point, but I wanted to follow up on woodworking again. If I read the lower end of your order intake guidance right, you assume in essence at least stable order intake after the EUR 200 million, around about EUR 250 million in the second quarter, also for the third and also for the fourth quarter. Now, you thankfully mentioned that China is not expected to come to a rescue. So you would expect that from somewhere else outside China, you would see a resumption of demand. The first question is, is that observation correct? Secondly, where do you think this is coming from? And lastly, do you have any signs of evidence that this is already happening? We appreciate that June was not a very good quarter for HOMAG. Do you see July current trading already picking up sequentially?
Okay. July figures, I don't have it, but first of all, your assumption is right. Second, yes, and other regions, and in particular, the U.S. is still strong, and in Europe, we have a mixed picture. Some countries are below last year, and some are stable, some are a little bit higher, so overall, that's why we are confident that we can get to this EUR 250 million.
How does July fare so far? I assume you have checked with your sales force before articulating the revised guidance.
No, because I don't do sales meeting now. But it's in line. Don't worry.
All right. Thank you very much.
The next question we received is from [audio distortion] from [audio distortion] . Your line is now open as well.
Hello. My first question is also regarding HOMAG. Could you give us an indication what operating leverage we can assume for HOMAG currently?
Sorry. [audio distortion], can you repeat the question? I didn't know what operating leverage.
Yeah. What do you mean by operating leverage? So the margin you earn on the change of your sales volume.
I still have difficulties to understand this question.
So if your sales drop and you are guiding potentially on the lower end, you're guiding a drop for the second half compared to the first half of, let's say, some EUR 60 million-EUR 70 million, then I'm interested in seeing what is the negative impact on your EBIT. And then compare it to your lower end of the forecast, which is assuming a pretty stable development of the EBIT. So I'm wondering why are you still.
Are you referring to the potential impact of underabsorption?
Exactly. Yeah.
What is understanding underabsorption?
Yeah. So we just use different terminology. Honestly speaking, it's very difficult to, I mean, of course, calculate that by factory, but we, as Ralf Dieter was mentioning, we have triggered already at the end of the second quarter some significant cost measures and reduction of temporary workforce and overtime and whatever. So it's not comparable to what was the underabsorption ratios that we were using in the first and the second quarter. That's why we are confident that even though some of the volume for some factories, depending on the volume, mix of course, and utilization of different factories, will come and we can manage that in order to achieve those goals. And we don't disclose underabsorption numbers with the plans.
Okay. Second one is, in that when you are referring to the China market might revive in the second half of next year, does that imply that we should more or less forecast negative growth for the next four quarters, or is that too negative approach?
That's too negative.
Okay. So we are more optimistic on all other regions, and it was only referring to China then.
China is a main point on this decline, and a lot of regions like the U.S. are growing.
Okay, then MPS, you are pretty bullish on your backlog and execution for the second half. I think you had a good visibility also for your backlog at the end of last year, and still you have now downgraded your margin guidance. So what makes you this time so sure that you can leave those expected margin improvement? Because then you also guided for a decline in the margin, and it was even weaker than anticipated.
That's the effect from the end of last year, the order intake, which was very weak in the second half of 2018, and the effect of it, we had in December very strong book-to-bill ratio. Therefore, we were in the first quarter, let's say, still stable, but in the second quarter, we were running out, let's say, of machines to deliver, and therefore we had to stop.
Okay. But I think the backlog was known, right? So you had already a view into the margin quality of the orders back then, and still you have adjusted your guidance downwards. So why are you so confident that this time you will reach the significant improvement in the second half?
It was for the numbers I have, and I look at. I am confident, and also that we have an order intake is nicely picking up. I said also in some areas where we have higher margins, we can handle high-speed business, and therefore we are more confident.
Okay. Thank you. And then also on PFS, as you said, there is a good pipeline on the market, and you think that this should revive the order development. Could you be more precise in what regions are those markets that are currently very strong? And is it only China, or are more regions positive?
We have opportunities for sure also in the U.S. Europe is quite slow, but China is a very strong pipeline.
Okay, and China is it.
Including also Southeast Asia, but China is the focus point.
Okay, and I suppose that is also mixed with combustion and electric mobility projects. Is that right, or?
Let's say it's new EV players, but it's also known EV players who are expanding further and also traditional joint venture OEMs.
Okay. But there's no risk that those weaker prepayment terms of those new players or difficulties in getting financing for them, that those projects could be pushed further into the future?
I think before we start spending a lot of money for proposals of these guys, we have a very clear check on the capability to pay for those factories, and for example, we are talking to one of them about not one of them, but we talked with three or four factories, and he's one of the richest guys in China, so we check that out.
Okay. And then the final one is on your work in progress or the current situation that the OEMs owe you money. Can you remind us when was the last time that it was the case that the OEMs owed you money?
That's a very good question. Since I'm for many years here now, but I would say difficult to say, was it 2009, 2008, 2007? I don't remember that. Maybe never really.
Okay, so it could be a new situation currently.
Exactly. Yeah.
Okay.
So for us, as I said, the last years, I have not seen that.
Okay. That's for my question. Thank you.
But don't just because we are all picking on this point. But don't forget, we had times three years ago where we got orders for EUR 250 million with a down payment of EUR 160 million, and those times are over. Yeah. Definitely.
Okay. Thank you.
Ladies and gentlemen, as a reminder, if you would like to ask a question, please press zero one on the telephone keypad now. If there are no further questions, I hand back to the speakers.
Benner, thank you very much. And ladies and gentlemen, thank you very much for your questions and your interest in our results. Just to remind you, when we publish the final first half figures, I think that's on the 7th of August, then we will not have a conference call because we touched everything on our opinion today. If you have any questions, please feel free and call our department if there are further questions. But the numbers are very stable, so I don't expect you to have to study numbers again, which you don't have already. Good. Thank you very much for joining us, and then talk to you when is next time, Günter, in November then? 7th of November. Oh God, it's winter again. Thank you very much. Bye-bye.
Thank you very much, Benner.
Ladies and gentlemen, thank you for your attendance. This call has been concluded. You may disconnect.