Welcome to the Dürr Conference Call. Ralf Dieter, CEO, and Carlo Crosetto, CFO of Dürr AG, will present the Dürr Group's figures for the first half of 2018, followed by a Q&A session. I will now hand over to Mr. Dieter, CEO of Dürr AG.
Yeah, thank you, Mrs. Moore, and good afternoon, ladies and gentlemen, and welcome, everybody. It is our pleasure to present to you Dürr's figures for the first half of 2018. And as always, I'm joined by my colleague, Carlo Crosetto.
Good morning.
As already mentioned in the last call, first-time application of IFRS 15 and 9 did not have any material impact on the Dürr Group's net assets, financial condition, and results of operations. So most of the figures for the second quarter and the first half 2017 in this presentation are therefore adjusted only slightly. Let me summarize, as always, the key highlights in the first six months of 2018 on page three. Our incoming orders and sales developed in line with our expectations. Incoming orders basically remained at previous year levels, while sales were up by 6% on a comparable basis. That means adjusted for FX and the Ecoclean sale. Book-to-bill reached a strong 1.1, and the project pipeline increased by about 40% compared to last year due to some extraordinary large projects.
EBIT before extraordinary effects and adjusted for Ecoclean's operating EBIT contribution and FX effects declined by just 12%. This decline was caused by the expected margin contraction in Paint and Final Assembly Systems. Unsatisfactory were also the results in Clean Technology Systems due to a lower order backlog at the end of 2017, as well as Measuring and Process Systems due to temporary supply and production problems in dealing with a significantly high backlog of orders. On the other hand, service and application technology performed pretty well. Let's turn to page four. Incoming orders nearly reached the EUR 2 billion mark again, despite the absence of the Ecoclean order intake of EUR 36 million in the first quarter last year. Order backlog increased by EUR 0.2 billion to EUR 2.8 billion, ensuring high capacity utilization in 2018.
Incoming orders in Asia and Germany were encouraging and made up for the decline in North America and the rest of Europe. In China, we increased incoming orders by 4%. And this was particularly underpinned by strong performance in our automotive business. The proportion of orders generated in the emerging markets reached 44%. Let's turn to page five. Gross profit fell by 5% to EUR 404 million in the first half due to the already described performance of the divisions. Gross profit in the second quarter was steady in absolute terms compared to the second quarter last year. At 23.1%, the gross margin was still at a good level. The lower gross profit and the absence of the extraordinary income from the sale of Ecoclean and the missing EBIT contribution from Ecoclean caused our EBIT to drop by 31% to EUR 101 million.
Personnel costs alone in the second quarter were EUR 3 million higher than planned due to the wage settlement in Germany. FX had a negative effect of EUR 4 million on EBIT in the first half, and the operating EBIT in the group came in at EUR 110 million in the first half with an EBIT margin of 6.3%. Carlo Crosetto will now take you through our financials.
Thank you, Ralf. Ladies and gentlemen, let me now continue on page six of the presentation. Our operating cash flow came in at minus EUR 60 million in the first half of the year. This decline can be mainly explained by the increase of EUR 82 million in net working capital, as well as the higher tax payments of EUR 49 million. One key factor for the higher net working capital was, of course, the postponement of payments by automotive OEMs the second half of the year, which we have already mentioned in previous calls. At the same time, we have increased our materials and supplies to avoid the risk of short-term delivery shortfalls of some key suppliers operating at high capacity utilization levels. But notwithstanding these measures, in the second quarter, we were able to reverse the cash flow trend, indicating that the measures implemented are starting to show their impact.
Operating cash flow was positive and clearly above the levels of the previous year period. We expect this trend to continue in the next two quarters. That's why we confirm our forecast of substantially higher cash flow in the year 2018 as a whole compared to the previous year figures. On page seven, you can see the individual components of net working capital in more detail. As I have already mentioned, inventories and prepayments to suppliers rose sharply to safeguard delivery capabilities. We expect a decrease in inventories and prepayments made in the second half of 2018. Especially HOMAG reduces machines on stock. Annualized days working capital declined from 50 days at the end of Q1 to 47 days. This, of course, is still not satisfactory, but we are moving in the right direction.
The overview of our net working capital balance on page eight has changed due to the new IFRS 15 rules. Due to these rules, we are no longer showing any prepayments received. So the total contract assets stand opposite to total contract liabilities. Billings in excess of cost on uncompleted contracts from small series production are included in total contract liabilities now. The balance shows that the payment situation with our customer was more favorable at the end of Q2 2018, at the end of March 2018. We consider a figure of around EUR 0 to EUR -100 million to be a normal level. So we expect no major cash outflow in the next few quarters. We could even exceed the EUR -100 million mark at the end of 2018. A very quick look on page nine at our factoring and forfaiting level.
These were in a very narrow range, as always, in the previous periods. But we reduced this level by EUR 50 million over the end of 2017. So if factoring and forfaiting volumes had been unchanged, cash flow would have been EUR 50 million higher. As you can see, we did not make any window dressing to uplift our cash flow in the second half of the year. Our cash stood at EUR 472 million, as we can see on page 10. Our total cash, including other liquid assets, currently stands at EUR 579 million. Our net financial status should turn into positive territory by the end of 2018 and reach between EUR 80 and EUR 120 million, which includes the cash outflow for the MEGTEC/ Universal acquisition. You will find a detailed outlook on page 29 in the appendix.
Our Return on Capital Employed for the group reached 22% in the first half of 2018, but we are confident of fulfilling a guidance range of 30%-40% in 2018. I will now hand back to Ralf Dieter, who will highlight the performance of the division and summarize our outlook.
Thank you, Carlo, and let's move on to page 11. Order intake at Paint and Final Assembly Systems fell by 11% to EUR 578 million in the first half. As part of the FOCUS 2.0 efficiency program, we have become more selective in the acceptance of orders and are paying even greater attention to project margins. The margin quality of the orders placed in the first half improved year over year. Among other things, we received the largest order in our history from a Japanese OEM, which is a proof of concept for our successful Japanese OEM strategy.
The recently established producers of electric vehicles also contributed lively to our business. We are building a paint shop, for example, featuring a small environmental footprint for the Chinese producer Future Mobility Corporation with its Byton brand. While sales rose by 7%, the Paint and Final Assembly Systems EBIT margin contracted as expected to 4.4% after 5.8% in the same period of the previous year and came within the forecasted range of 4% - 5%. Our cost-cutting and optimization program, FOCUS 2.0, is proceeding according to plan, with preliminary measures already implemented. The purpose of this optimization program is to help Paint and Final Assembly Systems reach the EBIT margin targeted of 6%- 7% again by 2020. In the first half, consulting costs of EUR 3.5 million were allocated to the corporate center in connection with the FOCUS program.
On page 12, Application Technology recorded growth in order intake by 6% and sales by 4% in the first half. We are heading to new record levels in incoming orders and sales in 2018. As with paint and final assembly systems, there was a slight improvement in the margin quality of the orders, and with EBIT rising by 4% to EUR 31 million, the EBIT margin remained stable at 10.3%. Order backlog increased again, and utilization is secured until next year. The proportion of service activities in Application Technology business was above the group average again in the first half. Page 13 shows the results for Clean Technology Systems. Order intake was strongly up by 53% in the second quarter compared with the same period of the previous year, rising by 22% in the first half.
The high orders were mainly generated in China, with Europe and the United States also contributing to the improvement in the second quarter. Muted demand in the second half of last year caused sales and earnings to decline in the first half this year. On top of this comes the ongoing loss situation of our small energy efficiency business. We operated at below capacity utilization in Europe and the United States. However, we expect sales to accelerate significantly as the year progresses, and this should result in substantial EBIT increase in the second half. Following the acquisition of Babcock & Wilcox Industrial Environmental Technology business, order intake and sales should climb by around EUR 70 million in 2018. At the same time, we project an operating EBIT contribution of EUR 3 million- EUR 3.5 million. The earnings impact after PPA and extraordinaries will be slightly negative.
However, consolidation from September 1st, 2018, is dependent upon receipt of all official approvals. The first half figures of Measuring and Process Systems on page 14 are not fully comparable with the previous year to the Ecoclean sales in the first quarter 2017. The Ecoclean group had contributed sales of EUR 46 million and operating EBIT of EUR 3.5 million in that quarter last year. In the second quarter 2018, which is fully comparable, order intake declined by 5%, but sales rose by 9% year over year. And compared with the first quarter 2018, business gained momentum noticeably in the second quarter, with the EBIT margin widening to 11.8% and thus substantially exceeding the Q1 margin of 10.5%. Ladies and gentlemen, let me continue on page 15 with Woodworking Machinery and Systems. That means HOMAG.
Following the rapid increase in the first half of last year, order intake declined by 4% in the first six months of 2018. Even so, new orders exceeded the EUR 700 million mark again. We have been more selective on new order intake due to the high order backlog. Contrary to our expectations, sales rose only slightly by 1% and this was due to the rollout of an ERP system in the first quarter 2018 in Germany. Moreover, output was insufficient due to the production shortfalls and delivery problems from suppliers. We have increased capacities to generate higher sales, and we are strongly focused to increase the output in the second half. Moreover, costs not relevant to achieve sales are being reviewed to improve operating efficiency. Our positive outlook remains unchanged for 2018, so we expect a very strong second half at HOMAG.
The EBIT margin came to 6.1% in the first half, down from 7.3% in the same period as the previous year, and the EBIT margin before PPA effects narrowed from 8% to 6.9% in the first half. Let's move on to page 16. As you know, our service business is a key driver of both customer satisfaction and value creation. Service sales grew strongly in the second quarter, year- on- year, by 10% after a moderate start in the first quarter. Margins continue to be on a high level. We expect an ongoing positive trend in our service business in the next quarters. Let's turn to page 17. Despite the somewhat muted first half 2018, we are reconfirming our outlook. We should generate approximately 55% of our total expected sales in the second half. Our operating EBIT margin target is unchanged at between 7.4% and 7.8%.
But realistically, we do expect to reach the lower end of the targeted range. Ladies and gentlemen, before inviting you to ask questions, I would like to draw a short conclusion. First, margins on order intake improved slightly in the first half at Paint and Final Assembly Systems. The project pipeline has increased by about 40%. Second, due to a high and better balanced order intake at Clean Technology Systems, we expect a strong second half 2018 in that division. And third, HOMAG sales and earnings are expected to improve strongly over the next quarters. And fourth, the cash flow improvement emerging in the second quarter 2018 should continue in the next quarters. And finally, we confirm our 2018 guidance as sales and earnings are much more back-end loaded this year. So, ladies and gentlemen, thank you very much for your attention so far.
We are now happy to answer your questions. I would like to hand back to Mrs. Moore.
Thank you. 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 answered before it is your turn to speak, you can dial zero two to cancel your question. If you're using speaker equipment today, please lift the handset before making your selection. One moment, please, for the first question. The first question is from Sven Weier of UBS. Your line is now open. Please go ahead.
Yeah, good afternoon, gentlemen. Three questions from my side, please. Maybe we can go through one by one.
The first question is on HOMAG and the China business situation that you see currently and your order pipeline. Do you see any negative impact in the decision-making from the slowing down of the housing market and potential tariffs for the U.S. market? That would be the first question.
Okay. First of all, in China, in the first half, we had a relatively strong decline of orders in HOMAG. And the reason is not so much the actual housing situation. It's more that last year, all the major furniture manufacturers have all ordered a lot of equipment and machines and complex systems. And they are now busy installing and using them, and they are waiting to have their production up and running to be utilized before the next investment wave is foreseen. So we were expecting this slowdown, but it's quite a significant one.
And in your conversations with your clients, do you note that they are or are your clients, the ones you serve, exposed to exports in general? Or are they producing mostly for the domestic market?
It's both. They're also exporting, and for sure, they are all a bit more careful about their future investments. So we have to wait for that, yeah. But overall, you could see that we could keep more or less the strong order intake level of last year, and we have other regions which also nicely picked up, which were weaker last year. So it's quite balanced across the world.
Thank you. The second question is regarding your commentary around the automotive CapEx pipeline that has improved 40% year- over- year. To what extent are you there seeing any delays in the decision-making because of the tariff situation?
Is that one of the reasons behind the increase in the pipeline that the decision-making is being delayed?
No. The pipeline increase we saw at the end is, and as I said in my speech before, there are some very large projects out there, let's say exceptionally large. There are three, four of them, two of them in the U.S., one is in China, and one is even in Germany, which are brownfields or replacement of old ones. So that's why the pipeline has increased so much. And overall, the decision that we don't see delays, really.
And the last question is just on the situation here at HOMAG you've been mentioning, because I remember you obviously had quite a high backlog situation at HOMAG for quite a while.
I was just curious what exactly had changed in Q2 that this was causing them so much trouble in comparison to the previous quarters?
Okay. Good one. I have to say two things that I think that's important to understand. The HOMAG business, you have on one hand, you have the machine-by-machine selling to smaller shops, and on the other hand, you have the large system sales where we have orders EUR 5 million one piece or 10, even more orders of EUR 20 million and EUR 30 million. And this system business, just for your information, when we took over HOMAG in 2014, in that year, the system business of HOMAG was EUR 120 million. So complex systems which need a lot of time on the shop floor, all the integration, and also programming. This year, the system business will be about EUR 400 million.
It's quadrupled in a short time frame, and basically, that's also our bottleneck because those systems also need a lot of space to build up the machines and all the automation. We are managing basically a nice problem on a high level, but it has to be managed. We have rented a lot of workshops around in shop floor and other places to be able to do that. This bottleneck has hit us quite harder than the second quarter, particularly also supported by the ERP implementation, which also has kind of lamed the company for some weeks. We take a lot of measures and task forces to overcome that. There are some short fixes, but there are also some long, middle-term, and long-term fixes to overcome that, including changing the whole production model in HOMAG, which we are now doing.
And also the system side, the one side, and the order intake that you are now slowing down.
Exactly. That was particularly in China the effect, because we had a lot of larger system orders in China last year.
Okay. Thank you, Mr. Dieter.
But even so, it's increasing because in other regions, it's going on. So that's why we are managing that.
Okay. I'm good. Thank you.
Thank you.
The next question is from Philippe Lorrain of Berenberg. Your line is now open. Please go ahead.
Yeah. Good afternoon, gentlemen. Philippe Lorrain from Berenberg. A couple of questions as well from my side. The first one would be on the margin quality of the order intake in PFS. Is it resulting from an improving pricing, or is it due to the measures that you have implemented with the FOCUS 2.0 program? That's the first one.
The answer is both, yeah. First of all, we have first effects of our FOCUS program in lowering our costs, but also we have not increased the prices, but we have basically target margins for the projects which we basically don't want to go under. And due to the lively pipeline, it's also from the competition, the pressure less in a way that everybody hunts for the same project. You know what I mean? So we can be more selective.
So you mean that the clients basically are starting to realize that it's not anymore like a buyer's market?
That's exactly what's happening now. They don't like it, but it's the case.
Okay. Great. The second one is just a housekeeping question. You mentioned a headwind of about EUR 4 million from FX on the EBIT line. Is that a transaction effect, or is it just translation?
I mean, we have a, as you know, we hedge all our transactions, so we are basically 100% hedged, but ultimately, it's impossible to hedge 100%. So the 4% is basically not translation, it's actual EBIT impact. Sorry, what was your question? It was translation effect, or?
Yeah, exactly. So that's basically a transaction effect you're mentioning. And the last question is actually on the HOMAG guidance for the year. I've seen you've not changed anything with regard to that. So with the delays that you are observing on the project business, could that result in margin pressure? And what's your view right now just on the guidance for HOMAG? Is it likely that you reach, let's say, rather the bottom end, or do you feel still comfortable, let's say, towards the upper end in terms of sales?
Well, first of all, you're right.
We need in the second half round about EUR 150 million more turnover than we had in the first half, but we are optimistic that we can catch up due to the measures we are taking now. And also, as we mentioned already, we have quite a decent volume of stock machines we are upselling now. So we are confirming that our targets. And as I said, the lower end or the middle end, that's difficult to say now, but I would not say the upper end.
Okay. Great. Thank you very much.
The next question is from Jack O'Brien of Goldman Sachs. Your line is now open. Please go ahead.
Hi. Good afternoon, Jack here. So just the first question on your full-year margin guidance. I think you're guiding to 7.4%-7.8%, having done 7.6% last year.
So, kind of at the low end, 20 basis points lower, but the first half, you're 120 basis points lower. So, I guess risks to that full-year guidance is my first question.
So, did you say what is the risk of this guidance?
Yeah, it feels quite sporty.
Yeah, we are back-end loaded, as we mentioned in our opening remarks. So, of course, the performance the second half of the year has to pick up. What we've indicated in our EBIT margin is that we are, at this stage, targeting more towards the lower end, so around 7% rather than 7.5%. That's universal, of course.
Just thinking about, you mentioned you've been building inventories because to safeguard delivery with some suppliers struggling to keep up. Can you just give a bit more color on what's actually going on here?
Because I've heard this from one or two other OEMs recently.
Yeah, you will hear this from every machine-building company at the moment because they all have the same problems, because I know many of them, as you know, and they're all struggling with the same suppliers. I don't want to name the names, but there are famous names among those suppliers, and they have not increased the capacity as would have been needed. That's a fact, so whenever we can catch some stock, we take it to be sure that we have these parts when we need them. That's not very good for our cash, but it's necessary that we fulfill our timeline for the customer,
and if I may just add, Jack, if you go back to page seven, net working capital increase from the end of last year, EUR 45 million.
I would say a big portion of that is just to handle the, let's say, the potential shortfall to making sure that we get the machines out on time. But that is also done on purpose to make sure that we can start pushing out those machines. We think that that was normalized again, but we are on purpose increasing this to make sure that we avoid supply problems as much as we can.
Okay. Thank you. Just something from the financial accounts. Noticed that in the first half of this year, I think there's been about EUR 15 million of provision releases, which obviously would have helped your margin, whereas last year, I believe you were provisioning, setting provisions aside. So is there anything there that we should be aware of, or is that just normal sort of run of business?
I think it's, I mean, fluctuation, the size of a business of EUR 10 million, EUR 15 million, EUR 20 million, I would say it's rather normal to expect. I think the reality is that most of the provision improvement are also driven by the fact that we're taking in orders with slightly better margins. So in terms of provisioning for potential losses on a project, it is declining. So I would say it's not necessarily measures to window dress. The result is really driven by our expectation on how the projects will improve. And this is also why we're seeing an improvement in our margin. And that's partly because we're getting orders in at slightly better margin, and therefore, there is less number of projects which require some provision for that.
Okay. Thank you. Thanks very much.
The next question is from Christian Cohrs of Warburg Research. The line is now open.
Please go ahead.
Yes. Good afternoon. Thanks for taking my questions. Actually, a couple. I assume you want to take them one by one. Maybe coming first back to the previous question regarding the margin in the project pipeline, where you experience a small uplift so far. And you think the current level is sustainable, or do you expect even due to the lively project pipeline that there's even scope for more in the quarters to come?
We try for more, to be for sure, yeah. But I think the situation we know is positive that the project pipeline is as such and lively as such that we don't have out there a fight for every piece of bread, yeah, and that makes it easier. So we are optimistic that we can keep that through the course of the year.
Okay. And then a question.
Yeah, a pretty famous automotive OEM recently was cited in the press asking the equipment suppliers for rebates from an export perspective. And well, you were among the equipment suppliers to this OEM, and I assume that you want to qualify also for future orders. So is this something which could be implemented alongside in the industry, and are you willing to accept those types of terms and conditions?
You mean the one in the U.S.?
Yes, correct.
Okay. This kind of behavior, we don't support. And we don't accept, by the way. And we did not accept. By the way, we are mostly paid, and it was just a small amount left. And so, I mean, it was not even worthwhile to mention, but we told them that we don't accept this.
Okay. Great. And then just two further questions.
First, your net financial status guidance for the full year also implies a sharp improvement in working capital in H2. I wonder whether this will be more driven by lower inventories and trade receivables, or do you expect a pickup in the prepayments? So maybe can you shed some more light on how this, yeah, working capital improvement actually will look like in the remainder of the year?
Yeah, sure. I can do that. I mean, we have indicated that we expect the net financial status to end up at about EUR 80 million-EUR 120 million. That is, of course, without including MEGTEC, excuse me, as a transaction. There are different measures to achieve that. Of course, we've been keeping saying that the payments have been postponed, and so sooner or later, they have to come in.
So it's basically the nature of things that sooner or later, you're going to get paid, and we do expect that more in the second half of the year. And this is going to help. But it's also driven by different measures that we have implemented. Of course, we have strengthened internal communications in paying more or, let's say, raising awareness for days working capital, net working capital, more than we used to do in the past. We're also stricter with our salespeople in terms of not accepting what we call pre-financing, which we're starting to see in the second quarter also to get stronger in terms of our negative working capital with regards to the Paint and Final Assembly Systems division. We're also focusing more on on-time execution of projects, so making sure that we deliver the projects stricter and also immediately invoice to the customers.
And also, we have strengthened what we call receivable management, making sure that we collect quicker our receivables. So it's just, I would say, a combination of sooner or later, those payments have to come in because we have the orders and we're executing them. But also, I would say a stricter focus on net working capital than we probably should have had. So a combination of these different elements. So it's become as important as EBIT, so for us.
Okay. Okay. Good to hear. And lastly, many companies are not just complaining about their suppliers, but also about higher input prices.
Is it something which you actually have also on the radar screen, or is there any special things you have to highlight how you're going to deal with them and whether this impact will be going to materialize in future, or is this something which you have fully addressed already?
So higher material prices, whether we are facing that challenge, you say?
Yes. And whether this could lead to margin erosions longer term?
I mean, normally in procurement, you have a strategy to actually reduce material costs year on year. So somehow, material price increase will do happen on certain commodities have to be offset. So actually, we do expect every year more of a savings than increase, but we do have price increase.
Yes, increases, we put them into the calculation because everybody else also puts them into the calculation. So I think that's also to consider positively.
Okay.
That's clear. Thank you very much.
Pleasure.
The next question is from Christoph Laskawi of Deutsche Bank. Your line is now open. Please go ahead.
Hi. Thank you for taking my question. The first one would be a follow-up on the pricing environment, which I appreciate improved, and certainly, that is good news. But on the project pipeline, you mentioned there are several very big projects. My question would be, could that put pricing at risk to some extent since you cannot risk on losing out on those projects, or would you say if the pricing on those projects is not right, you will still say, "Look, we go for other orders that might be out there in the market, and actually, we don't have to participate in this very big project" as a first question?
Okay.
First of all, our FOCUS 2.0 program, as well as the FOCUS program 2005, FOCUS 1.0, if you like, they all have the objective that we don't take orders below a defined level of margin and that we are able to be selective. So the answer is these large orders, they are nice to have, but we will not take them for any price. And we will have also on those orders, not on those orders, on those projects, in winning them a minimum margin level. Otherwise, we would step back from it. And the other good news is that those large projects, not many companies can execute. So the competition is less in terms of number of suppliers. And the customers are very aware because those projects are also complex, and I would not call them risky, but very complex.
We are famous in the market that we are the best in execution. I think we are in a good position for that.
Okay. So in general, for those kind of projects, the pricing would be better compared to smaller ones anyways and..
No, maybe not better, but not worse.
Okay. Okay. Understood. The second question would be on the visibility of fallback revenue generation in H2. Are execution issues basically done in Q2, and now you can focus fully on the revenue generation and fixed costs should be utilized to a better extent, and hence the margin goes up? Is that something that you have good visibility on, or could there be shifts also into Q1 next year simply because you have to get the execution on track again?
I think the program in HOMAG for the production system has short-term effects, which will help us to achieve the target this year, but it's a program which will take also most part of next year and which will allow us on a next three-, four-year level to further increase efficiency, and that's mainly targeted on efficiency that we can, with less people, produce the same revenue or more revenue with the people we have. And so we have two effects. The short-term one, which will help us to get through the year in our targets, and then to increase further the next years.
If I may add to Ralf's comment, I mean, we have said that we're going to be more loaded in the second half of the year, and as we are keeping the fixed cost relatively constant with the exception for R&D on IoT activities, I mean, this should help improve the margin by bigger output with the same infrastructure in place. So we do expect, and that's why we are holding on to our guidance for HOMAG, should be able to catch up.
I think one point has to be added for you all is that we always said that HOMAG has a five, six-year plan to improve. We did a lot of changes in HOMAG already, and we did a lot of programs. For the next two, three years, margin improvement and revenue increase is majorly responsible.
The program we are now really focusing on is that's the production system of HOMAG, which is changing in how we assemble machines, how the machine designs are. It's very complex, and it basically brings every day and benefit, but we will benefit out of the next two, three from it to lead HOMAG to the target margins, as we always said we want to have in the year 2020.
Okay. I have a last one, but probably it's quite easy to answer since you said revenues will come in certainly in H2. The working capital that you build in H1 is then expected to close to fully reverse for HOMAG in the second half, right?
Well, the increase in raw materials or finished machines will normalize. So those elements will go down. So yes, the improvement will come from the working capital side.
All right. Thanks a lot.
Pleasure.
The next question is from Alexander Hauenstein of DZ Bank. Your line is now open. Please go ahead.
Hello. It's Alexander Hauenstein from Deutsche Bank. I missed the opening remark, so maybe you have asked the question already, but I was wondering, you made a comment on the Japanese OEMs, U.S. order. Maybe you could give us some more color here. Is this kind of start of a new trend here that you get these kind of orders from the Japanese OEMs also going forward, or was there a specific reason why you got them, and is there more to come? And my next question would be on HOMAG. You mentioned to be—
Can we just go one question by one question? It's easier for us. Yeah, sure. If you don't mind. Thank you.
First of all, as I said, as you know, since years, we are invested in our presence and our sales activities in Japan and Southeast Asia because Southeast Asia today is an 80% Japanese OEM market. We always knew that it would take some years. We see now a lot of activities are taking place also from a technical discussion point of view. Now, the Japanese are really interested in working with us, and this order we got in the U.S. for one of the major Japanese OEMs is just a proof point that we are now, let's say, positioned for more businesses. Yes, that's the objective to get more business.
And so this year, maybe we will, if I calculate a little bit in my mind, all the small orders and this one and some others, maybe EUR 100 million- EUR 150 million we get out of Japanese OEMs this year. And we want to increase that number because, as you know, the Japanese OEMs are representing one-third of the world market for us. And we have here potential we want not to leave to others.
Okay. Thank you. That sounds interesting. And on the other side, on Warburg, you mentioned to be more stable on orders intake due to the high backlog. Does that mean that these new orders have also higher margins so that when you will have fixed your current supply and production problems in H2 2018, we should see also from this point of view a clear margin step up in 2019?
I hope I understood you right because your words are hacked up by whatever. I don't know what system you're talking in because after every word, it's a break. But I understand that you're asking whether the system orders in HOMAG have a better quality of margins because we are more reluctant to take orders. We have increased the system margin in HOMAG since we took over. It was negative. Now it's positive, and it's further increasing. And the more we fix our production system, the more also those orders can be improved in margin. That's part of the improvement, yes.
Okay. Thank you. I hope it's now a bit better. The last question is with regard to M&A.
You recently have done an M&A deal, so I was wondering whether you are still thinking about doing something opportunistic on short term, or do you for the time being focus on what you have in your portfolio? Thank you.
M&A is part of our strategy to increase the company. And we are now doing a transaction with MEGTEC/ Universal, which I think we are well advised to concentrate on the integration of this company during the course of next year, but we keep our eyes open for further opportunities, definitely. Yeah.
Okay. Thank you.
Pleasure.
The next question is from Benjamin Amrin, K&R from Deutsche Bank. Your line is now open. Please go ahead.
Yeah. Hello. I would actually like to follow up on your last comment that you just gave, namely that M&A is clearly part of the company's strategy to enhance the value.
With the automotive sector currently coming under pressure, and I would believe it becomes more likely you find something interesting also in terms of the price you need to pay, which you could maybe turn around like you did with HOMAG. I would be interested in how you look at it. If you see a healthy pipeline and whether you think it's better to realize some gains first, maybe after bringing HOMAG to the target level, because the balance sheet wouldn't stand such a large deal again without realizing some gains first. How do you think about that?
It was difficult also to understand you, but I think what you asked is whether we would consider to sell one in our portfolio, something to make a next acquisition. Is that correct?
Sort of. Yes. Yes. Exactly. Where you find something. Exactly.
Okay.
That's not our intention today, but I don't know whether it could be an intention tomorrow, to be honest. But we don't see at the moment one in our portfolio we would not like to keep.
Okay. Okay. And on the pipeline, maybe a comment lastly?
Yeah. Also, what should I comment? What I didn't—
Do you see an increased level of interest in companies you would consider to acquire?
Sorry to interrupt. Sorry to interrupt. As I said, we are always screening things when we also had discussions here and there. But as you know, there's nothing actual now which would be so active to be able to talk about.
I think what Ralf also mentioned is that if this MEGTEC acquisition goes through and we get the right approvals, it's going to be also an effort for the management to make sure that this integration goes well.
So we want to make sure not just that we buy the right companies, but we also integrate them well. So we all hope that the approvals are going to come, but we'll have enough on our hands to make sure in the next months that this is integrated well because it's basically doubling one of our divisions.
Okay. Okay. Thank you very much.
There are currently no further questions. As a reminder, if you would like to ask a question, please press zero one on your telephone to be cut now.
So Mrs. Moore, I think no further questions?
We've received two more questions. If you'd like to take them.
Yeah. Sure.
The first one is from Daniel Gleim of MainFirst. Your line is now open. Please go ahead.
Yes. Thank you very much for taking my question.
It's actually on HOMAG, and apologies for belaboring the point, but you spoke about a second-half volume uptick. Have you already seen that inflection point for HOMAG , i.e., if you look at the current performance in August, is that already reassuring with regards to higher volumes, or are you still waiting for the inflection point to come?
No, we are not waiting. And we saw already this improving in August. And as I said, it will be a tough ride to go through, but we are still optimistic that we can manage that level of sales to the end of the year.
Thank you very much.
Pleasure.
And the next question is from Peter Rothenaicher, of Baader Bank. Your line is now open. Please go ahead.
Hello. Peter Rothenaicher. One question on MPS. Here, the margin was relatively strongly down versus last year level. It's slightly improved versus Q1.
That's true, but what is the reason? Is it the product mix, and what do you expect here for the rest of the year?
You gave already the answer. It's mainly a product mix. We had some large orders last year with a good margin on it, and so it's nothing unusual. MPS for us runs very well, and we see also further improvements during the course of the year.
Okay. Thank you, and next question on non-Application Technology. I think in the Q2 report, you mentioned that your non-automotive business is still making some startup losses. So are you not making progress here? What is here your expectation?
We are making progress because we doubled the sales already compared to last year, but we have not reached yet the break-even point.
But we are sticking to that business because it's very important also for differentiation reasons, and we expect that to happen next year. But anyway, even though we are investing in this strategic business line, the APT will have a historic record year this year in all figures.
Okay. Thank you.
And we've received another question from Sven Weier, UBS. Your line is now open. Please go ahead.
Yeah. Just a small follow-up question, please. And that is referring to your guidance on order intake and revenues, including MEGTEC. I just realized that it has reduced this little bit over June by EUR 30 million each on orders and revenues. Is that due to the fact that you are assuming a somewhat later consolidation of it, or what's the background to that?
Yeah.
I mean, we are—I mean, the question is when is MEGTEC going to be integrated in the group results, and we're expecting this to happen in September, and
well, it could be also delayed to October.
Yeah. It depends on the CFIUS approval, and so this is also why we're also a bit uncertain in terms of when it's going to have a certain impact on our numbers. If we do take it over, we're also going to have what we call PPA effects due to the acquisition, and this will, of course, impact our reported EBIT results, and this is why we have adjusted it slightly to consider that, and the amount of PPA, again, will also depend on the date of integration.
We do expect that it's going to, on average, basically increase our revenues, but on average, bring down our profitability due to the fact that we will have initial restructuring, PMO, and PPA effect. That's why we wanted to be a bit more conservative in our guidance, including MEGTEC than without.
And is it mainly the CFIUS you have to wait for, or Department of Justice?
Yeah. We are. It's basically CFIUS the one that we are missing. Okay. And just one comment I would like to make in the including MEGTEC/ Universal. In the numbers, we have assumed that we would take it over in July, which is, of course, not going to happen.
Originally, now that you're correcting now.
So when we announced those targets, we were assuming it. So CFIUS is 30 or 30+- 45 days.
And depending also on the questions that the authorities will have and how fast we're able to answer those questions will probably determine if and when this closing can actually happen. So we're sort of in a variable mode right now in terms of what the exact impact will be.
I mean, I hear you saying if a lot. I mean, have you become a little bit more concerned about that process after the Linde situation, or is there no grounds at all for the CFIUS?
I think you know that CFIUS in the meantime is also politically used. And so the outcome is, let's say, not clear. So we have to expect everything. Yeah. So on that point of view, we are very careful, so
we're just cautious, basically.
Yeah.
Okay. Thanks for the follow-up.
Pleasure. So Mrs. Moore, now we are done?
Yeah.
We haven't received any further questions.
Okay. Great. Then, first of all, thank you very much, ladies and gentlemen, for raising those questions. As always, it was good talking to you and discussing with you, and for today, I say thank you, Andy and Carlo, for joining us, and when do we talk to you again? In November. Somewhere in November when it's cold and not so hot anymore like now. All right. Thank you. Bye-bye.
Thank you, ladies and gentlemen. Bye-bye.
Ladies and gentlemen, thank you for your attendance. This call has been concluded. You may disconnect.