Ladies and gentlemen, thank you for standing by and welcome to the GEA Group third quarter 2020 conference call. At this time, all participants are in a listen only mode. There will be a presentation followed by a question and answer session. If you'd like to ask a question at this stage, please press star then one on your telephone keypad. I must advise you the call is being recorded today, Thursday the 5th of November, 2020. I would now like to hand the conference over to our first speaker today, Oliver Luckenbach.
Hello. Thank you very much. Good afternoon, ladies and gentlemen, and thank you for joining us today for our third quarter 2020 earnings conference call. With me on the call today are Stefan Klebert, our CEO, and Marcus Ketter, our CFO. Stefan will begin today's call with the highlights of the third quarter 2020, and Marcus will then cover the business and financial review before Stefan takes over again for the outlook 2020. Afterwards, we open up the call for the Q&A session. As always, I would like to start by drawing your attention to the cautionary language that is included in our safe harbor statement, as in the material that we have distributed today. With that, I will hand it over to you, Stefan.
Thank you, Oliver, and good afternoon, everybody. It's my pleasure to welcome you to our conference call today. I hope you and your families are still doing well in this extraordinary time. Considering the continuing extremely challenging environment, I am pleased to say we have also achieved a satisfying third quarter with significant EBITDA margin expansion, despite COVID-19 related declines in order intake and sales. This shows once again that the efficiency measures we introduced last year are bearing fruit, and that our new organization is well-established, enabling us again to specify our guidance for this fiscal year. I will come back to that later. Let me now focus on a few key financials. Order intake and sales were down 15.9% and 7.2% respectively, mainly related to delayed order placements and lower activity due to COVID-19.
It needs to be considered that Q3 2019 was a record quarter in terms of order intake and sales for our third quarter. Our EBITDA before restructuring measures increased by 1.6% to EUR 145 million, and EBITDA margin went up by 109 basis points to 12.7%. Both figures benefited from a higher gross profit margin as well as lower overhead costs, in particular, lower travel costs due to COVID-19. We have substantially improved ROCE by 580 basis points to 16.3%. This strong performance was based on a significant improvement of both EBIT before restructuring and capital employed. Last but not least, we turned our net debt position of EUR 263 million a year ago into a net cash position of EUR 213 million this quarter. We have added chart five to show that we have made sequential progress from Q2 2020 on a number of KPIs.
For example, we have grown order intake by 2%, EBITDA before restructuring margin by more than 60 basis points, and ROCE by more than 140 basis points. This development is a clear sign that we are stabilizing or even slightly improving our performance despite the ongoing difficult environment. On chart six, you see the development in the first nine months of 2020. Order intake and sales are only down 3% and 4%. When adjusting for currency translation effects, order intake only declined by 1.5% and sales by only 2% in the first nine months. In addition, we have delivered very strong improvements in terms of EBITDA before restructuring and EBITDA before restructuring margin. With the EBITDA before restructuring margin of 11.5%, we have already achieved the lower end of our targeted range of 11.5%-13.5% for 2020.
Chart seven provides you with an overview of the status quo of the operational efficiency measures, which we have presented at the Capital Markets Day in September 2019 in London. With regards to our Headcount 800 program, we are well on track and have achieved savings of around EUR 20 million in the first nine months, 2020, out of the EUR 25 million originally targeted for 2020. Just yesterday, we announced the signing to sell our barn equipment and milk cooling businesses. These are the third and fourth transactions following the disposal of the Klokslag and the signing to dispose of compressor manufacturer in GEA Bock. In other words, we are well on track with our strategic portfolio planning despite this difficult corona times. The new procurement organization has started and is on a good path to achieve the announced savings of around EUR 25 million in 2020.
In the first nine months 2020, we have achieved savings of around EUR 17 million. In August, we announced the first optimization of our production network. In this context, and as a first step, we will discontinue our production site in Germany and investment in a site expansion in Poland. As part of the production strategy, production is supposed to become more international in order to increase customer proximity and leverage cost advantages. Earlier this year, we started a strategic partnership with SAP to drive forward our digital transformation. The ultimate aim is to implement one global ERP system, allowing GEA to establish full transparency on group-wide company data. This is the foundation for significantly simplifying, accelerating, and harmonizing the company's business process, and thus leveraging further synergy potential. With that, I hand over to Marcus.
Thank you, Stefan, and a warm welcome also from my side. When coming to chart number nine here, Stefan already mentioned our solid bottom line performance despite the top line headwind. In the third quarter, order intake declined by 15.9% on a year-over-year basis. This was due to two reasons. First of all, Q3 2019 was an extraordinarily strong quarter across all order size brackets. Division-wise, the strength came especially from Liquid & Powder, resulting from six large orders placed in Q3 2019, and to some extent, from Separation & Flow Technology. The second reason is COVID-19 related. Some of our customers are currently reviewing their business plans, especially regarding large projects. We are therefore experiencing a delay when it comes to putting a signature on an order. However, we have not yet seen many customers entirely terminating or abandoning negotiations.
Therefore, the pipeline looks very healthy and our sales force is confident that some volume of the pipeline will become orders during the current year. Continuing now with sales. Sales declined by 7.2% year-over-year in the third quarter, with all divisions being below prior year's level. Besides the lower demand due to COVID-19, also travel restrictions and limited access to customer sites are hampering our business. The latter two are especially visible in those divisions with an exposure to project business such as Liquid & Powder, Food & Healthcare, and Refrigeration Technologies. Our highly profitable service business is, however, way more robust and declined only due to unfavorable FX movements. Adjusted service sales were up by 1.1% year-over-year in the third quarter. Despite the lower sales volume of the quarter, EBITDA was slightly above prior year's level.
This increase is driven by lower overhead costs resulting from our cost savings initiatives implemented earlier, as well as COVID-19 related savings. The COVID-19 related savings are predominantly coming from lower travel and marketing expenses. The savings in Q3 amounted to a low to mid-teens figure. Gross profit in Europe was lower than last year. However, thanks to a higher share of service sales as well as better project execution, gross profit margin improved further. To sum it up, Q3 2020 was a good quarter in terms of profitability despite the drop in sales. Let's move on to chart 10 with our EBITDA bridge and the individual profit drivers. Despite the weak top line, our EBITDA before restructuring measures improved slightly to EUR 145 million. Three out of five divisions reported a year-over-year improvement in EBITDA. Two were down year-over-year.
I think it should be no surprise to anyone here that volume was a negative contributor for both new machines as well as service, although at service to a much lower extent. All divisions, except for Farm Technologies, recorded negative volume effects. Margin-wise, the entire improvement came from new machines, while service was flat year-over-year. The key driver here was better project execution, and therefore, the improvement is especially visible in our project-related divisions, namely Liquid and Powder, Food and Healthcare, and Refrigeration Technologies. SG&A costs were lower year-over-year for two reasons. First, due to the cost savings initiatives implemented earlier. Second, COVID-19 related savings, mostly in the form of lower travel expenses. To enhance transparency, we show the positive effect of lower special items compared to last year of, in total, EUR 3 million separately.
Coming to chart number 11, let me turn to the divisions, starting with Separation & Flow Technologies. Despite the decline in order intake and sales, the division's EBITDA margin remained stable at a very good 23%. Order intake declined from a very high level last year. Q3 2019 benefited also from larger orders in the business unit Separation, although large orders are in general unusual for Separation & Flow Technologies. Except for Pharm and Chemicals, all customer industries recorded an order intake below prior year's level. Dairy processing was leading the decline, this was exclusively driven by the extraordinary high volume of orders last year in business unit Separation. Sales were down by 9% year-over-year, driven by all customer industries except for food. Business unit Separation has the strongest decline as the business unit had very strong sales in Q3 2019.
Service sales were down by 5.6%, but increased their share in total sales to 41.8% from 40.3%. Compared to Q2 2020, service sales were slightly lower, predominantly due to FX effects. EBITDA was down, but margin remained with 23% on the same high level compared to Q3 2019. While gross profit was down due to lower volume, overhead costs were also down. Now let's move to Liquid & Powder Technologies. Order intake declined by 37.5% year-over-year and included just one large order amounting to EUR 19 million, while last year's order intake included a large order volume of EUR 105 million from the customer industries beverages and dairy processing. Our customers are currently preserving cash and are reviewing the business plans for large orders longer than they did before COVID-19.
For now, we believe it's no more than a postponement in orders, and as I stated earlier, the pipeline looks therefore very healthy. On top of the longer decision-making process of our customers, we are still facing restrictions to travel and to access customer sites, which impacts both KPIs, order intake, and sales. Sales declined by 4.7% year-over-year. The backlog at the end of Q2 2020 was 17% higher year-over-year and provided therefore a very good starting point into the quarter. However, the restrictions just mentioned were a too high obstacle to generate a higher sales figure. The decline was mainly driven by dairy processing. Sales of the customer industry beverage, however, even grew compared to prior year's level, given the currently sufficient backlog here.
Service sales were down 2.7% year-over-year, but their share on total sales increased to 22.6% from 22.2% in Q3 2019. The EBITDA before restructuring measures was slightly above the level of Q3 2019, and the according margin improved by 60 basis points to 7.4%. Gross profit was stable, thanks to better execution of projects. The increase in EBITDA was therefore exclusively driven by an improvement of overhead costs. The headcount reduction contributed to this improvement, but also COVID-19 related savings. Coming to chart 13, let me talk about Food & Healthcare Technologies. Order intake declined by 2% year-over-year. Business units Pharma and Healthcare, and Slicing & Packaging were up against prior year, offset by declines in the other business units.
It is worth noting that the business unit, Pharma & Healthcare Technologies, received a larger order related to the production of vaccine against COVID-19, and that we are currently seeing some more activity in this market segment. Sales were down by 7.3% year-over-year, as also this division was affected by delays in the execution of orders due to COVID-19. Once again, as we have already stated in Q2 2020, especially those legal entities which are in Northern Italy have not yet fully returned to normality. This impacted especially the business unit Pasta, Extrusion, and Milling in Q3 2020. Let me share a quick word on our service sales. Also at Food & Healthcare Technologies, the share of service sales has increased and stands now at 27%. The nominal sales figure was flat year-over-year due to FX movements. Adjusted service sales were up by 1.1%.
EBITDA increased year-over-year as gross profit and margin improved and overhead costs declined. Gross profit benefited from better execution of projects and overhead costs were lower due to cost savings initiatives and COVID-19 related savings. Moving to the next chart, to Farm Technologies, the only division in this quarter with an increase in order intake on a reported basis by 6.2% and on an adjusted basis by even a very good 13.8% year-over-year. This very positive development is a result of a solid demand for automated milking systems across all regions, but also conventional milking equipment sold very well. While China and Russia developed nicely, North America, namely the United States, remained weak. Here, the pressure from COVID-19 is still more visible, and farmers are still a bit cautious given the weak milk price development here.
Sales declined by 3.6%, but were up by 2.8% year-over-year on an adjusted basis. Again, North America was the driver behind the weakness. Furthermore, the discontinuation of our barn equipment business had also a slightly negative effect. Service sales were almost stable compared to last year's Q3, and the share in total sales increased slightly to 42.7%. EBITDA increased year-over-year, driven by improved overhead costs due to cost savings initiatives as well as COVID-19 related savings. Finally, we are now turning to Refrigeration Technologies. Order intake declined by 8.1% year-over-year, but was significantly better than in the prior quarter. Some demand has shifted from Q2 into Q3, which has led to a good development in the region Western Europe, Middle East and Africa. However, we experienced also some order postponements in Germany, Poland, and the Czech Republic, which were especially impacting food-related applications.
Sales declined by 10.5% year-over-year, which makes this division the most impacted by COVID-19. Given the weak order development in the prior quarter, the starting backlog was therefore significantly lower than last year. This resulted in lower sales, especially in food-related applications. Our operations in Italy, Spain, and South Africa are still impacted by the measures implemented by the government. As a consequence of the lower sales volume, gross profit declined. The combination of cost savings from our measures implemented earlier and COVID-19 were not able to compensate for the decline in gross profit. EBITDA declined slightly, but EBITDA margin was almost on prior year's level. Let me now continue with net working capital on the next slide. Once again, we were able to improve our net working capital further.
On a year-over-year view, our net working capital position improved substantially by EUR 360 million or 690 basis points compared to sales. All divisions improved their net working capital. The improvements were especially strong at Liquid & Powder, as well as Separation & Flow Technologies. While payables were stable, trade receivables, net contract assets, and inventories improved strongly year-over-year. We are way ahead of schedule with the intended net working capital reduction. As you know, we aimed to be between 12% and 14% by the end of 2022, and we are now already at 12.3%. The new organization with responsibility allocated where it belongs to, new incentive schemes for the sales force, and regular Cash is King conference calls to track performance are the main drivers for sustainable reduction of net working capital.
We are therefore very confident that we can do even better and target to end the year with a net working capital ratio of already below 12%. Coming now to the most important topic these days, cash generation. Despite all the operational challenges related to COVID-19, we generated an operating cash flow of EUR 169 million, a significant improvement to last year's EUR 118 million. This increase in operating cash flow was achieved despite a higher cash outflow related to restructuring measures of EUR 13 million compared to prior year's Q3. Higher contributions from net working capital more than compensated for the outflow. As a result of our strong net cash flow, our net cash position at the end of Q3 2020 improved by EUR 121 million. This strengthened our financial position further, which I will discuss on my next slide.
Let me talk about our financial headroom, a key topic in the current environment. As always, let me start on the upper left. We have a total committed lines of around EUR 1.4 billion, of which we have utilized just about a third, EUR 416 million. Considering our cash of EUR 629 million, we increased our net liquidity to EUR 213 million in comparison to a net debt of EUR 263 million a year ago. This is an improvement of EUR 476 million. Even if we take into account that we plan to pay the second half of our dividend of EUR 77 million this year, it is still an improvement of EUR 399 million. Furthermore, our financial headroom now amounts to EUR 950 million in committed credit lines.
Despite our strong financial position, we decided to take precautionary measures to secure our funding situation by increasing our credit facilities by, in total, EUR 300 million. On top of that, we have the option to participate in a commercial paper program with a volume of up to EUR 500 million. As I said, this is just an option when necessary. I can only repeat what I said in the past calls. GEA is very solidly funded on a diversified financing structure. With that, I hand back to Stefan.
Thank you, Marcus. Let me now come to our outlook for the fiscal year 2020 and some other topics. Let me start and share with you the latest value-added output forecast for our customer industries and industrial production in 2020 based on the latest data from Oxford Economics and IFCN. The last call, the chart on the left showed a declining value-added output for all customer industries, but dairy farming and dairy processing. This picture has clearly improved. Now all customer industries, except for beverages and chemicals, are expected to report an increase in value-added output. The data shows that the expectations for our customer industries are improving stronger than for the industrial production as a whole. Expectations for industrial production have improved by less than a percentage point and are still negative at 4.7% output decline.
In the current environment, we are very happy with the exposure to the dairy, food, beverage, and pharma customer industries. Following the overall solid first nine months, especially the EBITDA before restructuring performance, we have decided to specify parts of our guidance for the 2020 fiscal year, despite the fact that due to COVID-19, the overall situation will remain very challenging in the last quarter of 2020 and difficult to predict. We still expect sales to be slightly down versus last year's figure of EUR 4.88 billion. Due to the strong first nine months and our efficiency measures bearing fruit, we are now forecasting an EBITDA before restructuring measures of more than EUR 500 million. For ROCE before restructuring measures, we now expect to be between 15%-17%, up from the previous guidance of between 12%-14%.
In the light of the daily rise of COVID-19 cases and the announcement of partial lockdowns in many countries, I want to assure you that GEA is well prepared for the second wave. We are confident to overcome this challenging situation, as we can build on our learnings from the first wave earlier this year. Our highest priority was, and still is, protecting the health and safety of our more than 18,000 employees. Therefore, necessary measures have been aligned and implemented by the local crisis management teams. In addition, we secure our supply chain by introducing safety buffers where needed, and second sources to secure supply, and we want to keep our production sites up and running. So far, our production was not materially impacted by COVID-19. On the service side, we continue to focus on spare parts and remote service tools.
The latter being very helpful to facilitate cooperations with our customers when site visits were not possible. Last but not least, finance. Here, we will continue our efforts on net working capital management, and we have access to committed free credit lines of around EUR 1 billion if ever needed. Before I close with our roadmap for the remainder of this year and 2021, let me share my thoughts on Q4 with you. Following the overall solid performance in the first nine months, we will keep focus and momentum in the last two months to deliver on our targets for 2020. First and foremost, the entire organization will further put emphasis on driving order intake, sales, and profitability. Second, we want to conclude our Headcount 800 program. Third, we will continue to increase our operational efficiency.
Fourth, as explained earlier, cash generation and net working capital management remain on top of our agenda. Fifth, we will continue our path to divest earmarked low-margin businesses in order to focus our efforts on the remaining operations. Let me finish with our roadmap for 2020 and 2021. Next is our annual general meeting 2020 on November 26th. On March 4th, 2021, we will publish our full year 2020 figures. With that, I hand it back to Oliver for the Q&A.
Thank you very much, Stefan and Marcus. We can now start the Q&A. I hand it back to the operator, and at the same time asking the participants to limit your number of questions to two at a time. Over to you, operator. Please start the Q&A.
Thank you very much. As a reminder, if you would like to ask a question, please press star then one on your telephone keypad. Wait for your name to be announced. You can cancel the request by pressing the hash key. Once again, star then one to ask a question. The first question we have today comes from the line of Max Yates from Credit Suisse. Please go ahead.
Thank you. Good afternoon. My first question is around thinking about the temporary cost savings that you've benefited from. I think you had EUR 15 million in Q2. I would've thought you had about EUR 10 million in Q3. Are those numbers sort of broadly correct? How do you think about 2021 for these temporary cost savings? Do you view most of them coming back into the business? Are there further procurement savings and savings related to the people program, the 800 people program that can offset these as they come back into the business? That's my first question.
We had cost savings actually in the low to mid-teens. With our Headcount 800 program, we are well on track. We have even more people in comparison which are no longer there. We have further personal expense savings there.
On the temporary savings, would you expect sort of short-term savings related to less travel, less discretionary spending, management bonuses to come back into the business? Or do you think a large part of that will be sustained?
Well, it depends on the COVID-19 situation. Right now as it looks, I think we're probably going to have less travel also in Q4, definitely. With vaccination, what might be going on, there's probably also some more savings actually then in the first half of next year, even though travel probably might pick up there. It's also our goal now with the new mindset in the company, that overall also after vaccination, we're going to travel less and do more with digitalized tools. I think our strong goal is really to have less travel expense going forward out there. A part of that will hopefully stay
My second question was just on the SAP unification of the ERP system. Could you give us a little bit of color around the sort of timeline to getting all of the different entities unified on the system? Obviously, this is something that we've heard discussed in the past and came with quite substantial additional cost in the past. I just want to understand, do you see the spending levels on IT as sufficient to support this or will this come with additional cost?
First, to the timeline. The timeline has not changed. It's going to be still progressing till the end of 2025. As you know, we have 67 ERP systems, and that would mean on average, I should replace one ERP system per month. That is on average, of course. In some years we're going to do more, in some years we're going to take less, but the timeline doesn't change. We're going to have some specific costs for implementing the global SAP project. That will go up in the next year. That's going to be separate to the IT budget.
Will that be an exceptional cost or taken above the line? If you could quantify that would be great.
No, that will not be an exceptional cost. This will be part of our operating expenses because when we said at the Capital Markets Day, we're going to have a negative effect just looking at the cost. We're going to keep this as part of a slightly offsetting effect to all the other positive measures we are doing. We can actually advise then also of what we see as expense. So far it's in the low one digit, what we have spent this year, because we are still in the conceptual phase.
That's very helpful. Thank you.
Thank you very much. The next question today comes from the line of Akash Gupta from JPMorgan. Please go ahead.
Good afternoon, Stefan and Marcus. My first question is on pricing situation. Maybe if you can talk about what is happening with pricing in some of your key markets, given order intake for you as well as some of your peers, listed ones which we can track, is tracking down high single-digit to low double-digits. Maybe if you can say if you're seeing any signs of price pressure in the market? That's question number one.
Thank you, Akash. Let me first start with a positive element of your question. This is, of course, that we are running various price initiatives, especially also in the service businesses, where we try to find rooms for price improvement and to have a chance to increase prices. There are a lot of programs underway. On the other side, we clearly have to say that meanwhile we are seeing that there is a price pressure in the market. This is especially valid for SFT and also in LPT when it is about the larger projects, FHT sometimes as well. If you compare us with our peers, you also will see that many of them have an even much bigger decline in order intake, and therefore they are fighting for orders. That is what we also see at the moment.
Thank you. My second question is for Marcus on working capital. You are targeting net working capital less than 12% by end of the year, and in your medium plan you were targeting 12%-14% by 2023. My question to you is that, shall we expect working capital to grow when order intake grows and sales grows maybe in the second half of next year? Or can you continue with less than 12% working capital for going into 2021?
That's something we're really going to take a look now for next year. We have received, of course, an LPT advance payments for bigger projects. We're going to take a careful look actually, if that changes slightly, what kind of effect that could have on the net working capital. On the other hand, I still see that we can do more efficiency in net working capital management. Even advanced payments could be less. I still see the possibility of further increasing efficiency here. The goal definitely will be to stay around or below 12% also for next year. As I said, we have to evaluate that also with the advanced payments for next year projects.
Thank you.
Thank you very much. The next question today comes from the line of Sebastian Growe from Commerzbank. Please go ahead.
Good afternoon. Thanks for taking my questions. The first one would be just a quick one on the LPT development in the third quarter. You had roughly sequentially stable sales. Nonetheless, you have seen that the EBITDA did decline, for what it's worth, comparatively, significantly by EUR 6 million. Can you just give a bit more color around it? It seems like SG&A has been up because in your commentary you said that gross profit has been okay. What is behind that, and this is here to stay? That would be my first question. The second question is on the demand side of things and also on the pipeline comments you made before.
We have now seen two quarters with orders for the tickets above EUR 1 million order size at only around EUR 300 million in a quarter two, quarter three, that is. Differently do you think there's EUR 100 million or more improvement quarter-on-quarter when it comes to Q4 2020? Is it a fair assumption to think of, say, one time book to bill when you exit the year?
To your first question, good catch. We had a write-off of accounts receivable at LPT of EUR 5 million in the third quarter. When you take a look here at our quarterly report, you find that we are showing on page 13 results from impairment of accounts receivable of EUR 7.2 million. Out of that, EUR 5 million was at LPT. You need to actually take this out as an operating expense. This was a one-time adjustment we did there.
I take the second question, Sebastian, about the order pipeline and the outlook for the Q4. We expect that we will not achieve the level of order intake of Q4 last year, which was a very high number as well, but we expect to be significantly above Q2 and Q3. Somewhere in between. This is how we think about and what the indications the pipeline gives us.
That is helpful. If I may really quickly follow up on pricing and then Akash's question earlier, and the comment you made there. I wouldn't assume that you are just sitting around and wait and then take those prices, but you are rigorously, I think, and contemplating potential countermeasures. Could you give us a sense of what you have in mind in terms of eventual step up in cost savings, et cetera?
You mean overall for the whole group, or you mean now for LPT?
I leave it up to you.
Thank you very much. The next question today comes from-
No, wait. [crosstalk]
Wait a moment. Wait a moment, please. The main savings in LPT, for instance, are coming from better execution and from our cost savings. For the whole group, we expect to have procurement savings for the full year in the range of EUR 20 million-EUR 25 million.
There will be a situation then for 2020, but considering that pricing, as you said before, is not getting any easier at this juncture, especially on the large projects. I would assume that, as I said, you wouldn't just simply accept those very lower prices, but eventually think about incremental efforts to just kind of weather the storm, adjust the cost base, et cetera. Is that a fair assumption, at least, without providing too many or too much color?
Even if I made the clear statement that we feel a much higher price pressure meanwhile, it's that so far we have been able to close our projects on a comparable level. It's not that we see a strong impact already on our intake, and we also have a clear direction that we don't go for growth and, by doing so, killing margin. We are noticing that there are some price wars going on around us. So far, I would say the impact on our backlog is still limited.
That is good to hear. The very final question on this one, which particular areas would see the strongest price pressure?
Normally, as bigger the projects are, as higher the price pressure is. Therefore, as I said, we see it in LPT, of course, and we see it also in Separation & Flow Technologies. That has also something to do that, in SFT, the share of industries, food, beverage, pharmaceutical is lower than the average of GEA. We also have marine business in SFT, which is really down. We also have oil and gas, which is down, and therefore we see a bigger impact here.
Thank you very much for the color. Thanks.
You're welcome.
Thank you. I can only apologize, I've cleared the queue. Can everyone who was wanting to ask a question, please press star and one again? That's star, then one to ask a question. The next question comes from Sven Weier from UBS. Please go ahead.
Good afternoon, gentlemen. Thanks for taking my questions, mostly rather housekeeping ones. The first one is when we think about Q4 EBITDA relative to Q3. I appreciate you have also done the sequential look in the presentation for Q3. I was just wondering about the biggest moving parts for Q4. I guess obviously you will have somewhat higher revenues than in Q3. What about further bad debt write-downs, additional cost savings potentially, currency, those moving parts, again, Q4 relative to Q3?
What we see in Q4, of course, it's still operationally, it's still a COVID-19 environment. We need to see actually how the delivery of new machines are going to be performed. We need to access sites of customers. There are still travel restrictions, definitely in November. Let's see about December. We also need to see actually where service is going to end up. We have, of course, the majority of our service business spare parts, so that should be fine. Also a big chunk of the service is actually that we have to also go to customers' site. That keeps us a bit careful operationally for the fourth quarter.
Additionally, as I stated in prior calls, we're going to take a very thorough look again at the accounts receivable, which we are having, and I said that we could have a write-down of up to EUR 25 million in accounts receivable. We already did a write-down, in that regard, of EUR 7 million in the second quarter for unspecific, just a reserve for our accounts receivable. That is unrelated to the ones I just mentioned at the LP T. These are specific accounts receivable. There would be still to go up to EUR 18. I would say, currently, we would say it's probably a bit lower than EUR 18 million for the write-down, but it's still there. When you look at FX effects there, we saw that so far, transactional and translational effects was a headwind of EUR 13 million in the first nine months of this year.
I think that also in the fourth quarter, there's some headwind to be expected in comparison to Q4 2019. All in all, we still expect a good Q4, but we need to see actually how that ends up, which keeps us a bit careful and which also you saw in our guidance where we set the provisions going up this year to over EUR 500 million. Perhaps not as bullish as some might have expected, but as I said, we're going to stay careful for Q4.
Well, over 500 is a broad definition, right? This can be different numbers, I guess. In terms of the cost-saving run rates, that's essentially the same run rate as you had in Q3, because I think I remember the procurement savings were a bit more back-end loaded this year, or the same run rate as in Q3.
It's a bit more back-loaded, and I said this in the first half of the year where we have seen halfway in the Q1, we see none in Q2, we have seen some, and in Q3, we have seen now more. It stays back-loaded. As Stefan has said earlier, we expect to see between EUR 20 million and EUR 25 million this year in procurement savings there, definitely. Of course, we have the additional savings, which comes from the Headcount 800 program, which is strongly progressing.
Thank you for that, Marcus. Just the other question I have, probably also for you, regarding your D&A guidance, which remains at around EUR 200 million, but I can see after nine months, you're running almost at EUR 180. How should we think about total D&A? Maybe you can also give us some guidance on the total restructuring costs for [audio distortion]. Thanks.
The guidance, I hope I understood your question correctly. The guidance we gave is EBITDA before restructuring. Of course, before depreciation, amortization there. Perhaps, could you clarify the question with me once again?
Sorry. If I look at the slides right on page 39, you have a depreciation amortization guidance of EUR 200, including PPA of EUR 30. I realize that after nine months, you're already running at EUR 180 in total. I was wondering if we should not model a higher number than the EUR 200.
Now I got your question. Sorry. This is without the restructuring expenses. We are having in D&A. With the sale of Bock, there was additional restructuring expenses in D&A. That was EUR 50 million for Bock. That's why this is the run rate operationally. Then, of course, we have the restructuring expenses which go also partly then into D&A.
The restructuring expense line itself, where do you see that for the year in total?
I see around EUR 50 million there.
Thank you, Marcus.
All right.
Thank you very much. The next question comes from the line of Felicitas Bismarck from Deutsche Bank. Please go ahead.
Thank you very much. Just one quick. Did you say EUR 50 million for the restructuring expense? That would imply almost nothing in Q4, right? Is that correct?
That would be correct.
Okay.
Right now, it might change, then we give that out, but from that perspective, yes. Thank you very much. Thank you.
Sorry. That was just acoustically. It doesn't count, okay? The other question I had, I really think your margin momentum is actually quite impressive. You mention quite often better project execution. I was wondering if you could give us an example of the measures that you were actually doing that to improve those project executions, and if there's further room to go in 2021, 2022, or if you think now everyone is on a good level here?
Let's start with the basics, or with the first most important thing that we have in our organization with clear responsibilities. If you compare how projects were managed in the past, there were no overall responsibility for one project. It was simply divided to different legal entities, and everybody did its best, and nobody was responsible for the overall outcome. This has changed. We have also people who are doing project controlling then for the projects now again, and we also just started in introducing other rules and milestones with clear kickoff meetings of projects and binding milestone meetings, things like that. It's a whole bunch of let's say, professionalization of project management.
Do you think there's more room to go in terms of profit upside from this, or is that basically on a good level now?
A bsolutely. This is a journey as well. It's not that we are changing everything within one or one and a half year. Let's say, I expect that it takes two or three years until we are really best in class or on a really leading edge organization in terms of project execution, project management.
T hanks. The other question I had is, when you think about your midterm margin guidance and basically the timing of the step-up still to come. Because you've had very good progress in both the efficiency and restructuring measures, but the bulk is now basically in 2020, and there are some of the other measures probably going to take a little bit longer, and services is probably not going to outgrow new equipment again. When you think about the trajectory, do you think it's more 2020 weight in terms of where you want to be, just from a timing, or 2021 could be taking somewhat of a breather in the margin step-up, or do you think it's more gradual?
First of all, now let's close 2020 and let's see where we end up. We give the guidance for 2021. However, we are very happy with the achievement so far because, as you see, we are already at the lower end of our guidance range we gave for the year 2020. What will be different or what do we expect to kick in? Of course, even more procurement savings than this year. We are also improving project execution furthermore. Last but not least, it also need to be considered that we are achieving this margin level despite a declining volume. If you would imagine that we probably would have made EUR 200 million more turnover this year, then it really kicks in margin-wise. This, I would say, is the path we need to go.
Y ou also have some counter effects, right? Pricing, for example, would be one which was coming down a little bit. Also that service is no longer outgrowing your equipment in terms of mix effects. That's why I'm asking if it's maybe rather 2022 when you really have a lot of revenue coming through. That's very helpful. Thank you. One last question I had was on the headcount. Just from an acoustic, did you say you had EUR 25 million left, you have EUR 20 achieved, so EUR 5 million left for Q4, or was that just a calculatory thing, that EUR 25 was originally planned, but there's actually more upside in Q4?
We have, until today, after nine months, around EUR 20 million savings. In packs, and we expect to be at around EUR 25 million at the end of the year.
The EUR 5 million really is the number you would expect in Q4, not more than that. There's no upside to that?
Yes.
Thank you very much.
[audio distortion] thank you. That everyone here on the call actually, for the EBITDA, I said EUR 50 million for restructuring expenses. I was on the EBITDA line. Okay? It's EUR 50 million on the EBITDA line, because on the EBIT line, we're already above EUR 50 million. Perhaps that might have been a misunderstanding between us. I said EUR 50 million, but on the EBITDA line, and therefore there's EUR 23 to come on the EBITDA line there. Okay? That's what I was talking about when I said EUR 50. Okay?
Thank you. Next question comes from the line of Denise Molina from Morningstar. Please go ahead.
Thanks for taking the question. I actually wanted to ask a question about China, just looking at some results from some of the end markets. Danone had some comments about China being pretty weak for them because of the closure of the border. My question is really about your positioning in China with domestic customers. If China has shifted towards consumers willing to accept Chinese products, given that they were deprived of import products for a while, what is your positioning in China? If you could look at it from a division level, which ones do you have the strongest positioning with domestic producers?
When we look at our numbers in detail, I can clearly say that China is a strong region for us right now, and also picking up. You can clearly see that China got, let's say, rid of the virus very quickly, while Europe is heavily struggling, or Latin America as well. China is a region where we are quite happy with the development. We see also no structural changes at the moment that we would expect that they are not buying machinery coming from European companies anymore also, if that was a question.
The question was more on the consumable products, because Danone had low sales in China because they weren't able to bring in their products into China. The Chinese market was consuming, basically, food stuff from Chinese producers, some people that would've gone for export premium products, for Western products. I guess my question is really, I noticed that the SFT results were pretty good on the China side. Do you supply to domestic Chinese companies in SFT and other divisions?
We are also delivering to Chinese customers. On the other end, of course, we are also supplying a lot to multinationals, which are also producing in China as well. It's a mix of both.
Okay, great.
We especially, I'd say, in the pharmaceutical industry, we are also delivering to pure Chinese player because they, of course, appreciate very much European equipment because they want to always be on the safe side. It's a mix. We have both.
Can I ask one last question? This is actually related to acquisitions, which you talked about last quarter. In your long-term plan, is there any idea to move into software, like simulation software, something that could be integrated with your equipment?
Digitalization is an important issue for us, and we are also working heavily on this issue with our new global technology organization. If we find a right companies, which would fit to us and would be available for digitalization and software, we would not exclude that.
Great. Thank you.
Thank you very much. The next question comes from Lucie Carrier from Morgan Stanley. Please go ahead.
Hi. Good afternoon, gentlemen, and thanks for taking my question. Apologies if you've already mentioned that. I had some connection problem. I wanted to discuss or ask you about your backlog, which is a little bit down so far year to date. I was hoping you could give us some indication, first, around the profitability you have currently in this backlog compared to your current business. Also secondly, at which pace do you expect this backlog to kind of transform into sales, i.e., should it be relatively quick and support quite nicely 2021 in terms of a revenue stream? Do you also have more kind of long-dated type of project in there, which could suggest maybe you will need to generate relatively quickly new project to support the 2021 top line?
Yes. Concerning the backlog and the quality of the backlog, it's always a mixture of product mix and so on. As I said before, we see that price pressure is becoming bigger, especially for the large project and in SFT and LPT, especially. So far, we feel quite comfortable with the order backlog and the margins in the order backlog, and we do not expect a significant negative or positive impact for next year's profitability coming out of the backlog.
Thank you. Regarding the duration of this backlog that you currently have?
This comes from the declining order intake. It is clear. If we are declining in order intake, also backlog goes down a little bit. This is how it is.
Any perspective from your standpoint in terms of the pipeline you are currently seeing that could suggest that you could have, in the short term, a pickup in this backlog dynamic?
We expect that Q2 and Q3 are the lowest quarters in the COVID situation we see. We are very optimistic that Q4 is higher than Q3. As I also said before, we'll not be on such a high level like Q4 last year, which was extremely strong quarter. For next year, it's difficult to predict, I would say. Everybody is hoping to see a vaccine, and it's very difficult to predict how the COVID situation will develop. We are very optimistic that once it disappears or the vaccine comes up, that we will also see a rebound effect.
Thank you very much.
Thank you very much. The next question comes from the line of Daniel Gleim from MainFirst. Please go ahead.
G ood afternoon. Thank you very much, gentlemen, for taking my questions. The first one is for Stefan. You just mentioned there could be a pickup effect once a vaccine is found. Could you provide a little bit more color how big that uptick could be? Do you expect, in such a scenario, a normalization, let's say 2021 similar to 2019? Could there be even be a temporary overshooting in terms of orders and execution once the vaccine is found? That is the first question. The second one for Marcus. We discussed a lot about the impact from pricing.
You haven't seen any yet on the gross margin and the order intake. Stefan commented that the backlog suggests no meaningful impact for the revenues in 2021 over 2020. Could you provide a little bit of color, if you only focus on external factors in the current order intake, whether there's any meaningful change from an internal perspective, change the profitability of these projects? If you isolate your view only to the external factors, including pricing and so forth, is there any meaningful change at this moment that we should consider incrementally to your internal measures? That is the second question. Thank you very much.
Let's first talk about the pipeline and the potential pickup or rebound or however we would like to name it. The order pipeline we see is quite promising. What we see is good, is okay. What we see and what we very much notice is that customers need more time to make the decision and that many, especially larger projects, tend to be postponed until the customers have more clarity about the economic situation. Of course, this might end up, once the situation is clear and the fear of COVID is gone, that we might see a kind of rebound, but it's extremely difficult to predict. I just can say that we have enough projects, that it's not that we are missing projects. The pipeline is full. The pipeline is on a very interesting level. The question is, when does a customer make the decision and decides to order?
Coming to your second question. By far the biggest part of our profitability is coming from service, and service is a very stable business. If we said FX neutralized, we actually had an increase in service. We don't see that much of a price pressure, actually, in our service business. Where we have some more price pressure, as Stefan said, is in bigger projects there. All in all, it's in a way that we can cope with this. It is probably more a question if we get enough order intake, not of the pricing situation.
If we see some underutilization in production, that probably would hurt us more than any price negotiations right now, with our customers. If you take a look at our order backlog, even though order intake in Q3 was EUR 200 million below, we were very strong in Q1 and also in Q2. Our backlog is actually just EUR 150 million below on a year-over-year comparison, which is less than 5% there when you look at the order backlog. That's your situation. We need to monitor how the order intake is coming, how the COVID-19 situation is doing. Service is really stabilizing our profitability and our gross margin.
Very clear. Thank you very much.
Thank you very much. The last question we have today comes from the line of Lars Brorson from Barclays. Please go ahead.
Thank you very much. Hello, Stefan, Marcus, Oliver. A couple of quick ones for me if I can. Just coming back, and sorry to belabor the point, Stefan, around the commentary on fourth quarter. It sounds like it's very predicated on landing some larger orders. I wonder whether you can help us understand a little bit better what you see in your base business and what you see in your service business sequentially. There hasn't been much of an uptick sequentially into the third quarter.
Can you help us a little bit with how you see that tracking into the fourth? On the large orders, is there anything you can say around end market? I appreciate that there's customer uncertainty and that's quite broad based. I would have thought end markets like brewery and food service probably under greater pressure. I'd love to hear what you're seeing on the dairy processing side.
The remarks I made for Q4 are not really depending on a very few big orders. There is also a normal underlying business, which we saw also in all the quarters. It's not that we are, let's say, depending on one or two or three orders to come or not to come. To give you a bit more color about the individual markets, so dairy is doing quite okay, especially also in SFT. We also see projects for butter, for instance, coming up. Oil and gas is no real change. It's also on a very low level. Marine business is also on a low level. We see some projects in the U.S. about hard seltzers, for instance, with a good market dynamic. When we look to FHT, it depends on customers more or less. Retail is weaker than customers serving supermarkets.
Poultry is stronger than beef. This is, let's say, what I can tell you to give you a bit more color. Of course, if you look to the regions, I would say front runner is really China. China has picked up. China has a good and stable development. There are no travel restrictions for people who are living in China or are in the country. On the other end of the scale, there is Latin America, where we see a very strong impact on orders placed.
Thank you. Secondly, if I can, to Marcus perhaps more. I just wanted to clarify what you said, Marcus, around ERP spending. I seem to recall at the Capital Markets Day last year, we talked about a sort of EUR 55 million-EUR 60 million spend over five years. I was thinking that was sort of a low to mid single-digit euro million impact next year. Is that the right sort of number? Are you seeing a more sort of significant short-term ramp around ERP spending?
I was referring to this year actually with the low to mid, with mid to a digit, a one-digit number. That I was referring to this year. Next year it's going to be higher there. It's up to the beginning of the 10th could be the case.
If I can, finally, I see there's no strategy updates, Stefan, in your roadmap, as it were, for 2021. No CMD. I wonder whether you can help us whether you feel when you feel it's time to come back and update the market on your progress.
You know that this is very difficult to predict now during this very volatile COVID time. Of course it's our wish to meet you as soon as possible or maybe also we'll think about any other format how we can do that. It's of course our intention to come out like promised and like discussed with the Capital Markets Day. Let's now, let's say, wait and see how the year end up in terms of the COVID situation, how the so-called second wave will develop. Once we have more clarity, we will come back to that question.
Thank you.
Thank you very much. There are no further questions. I will hand back the call to Stefan for closing remarks.
Thank you, operator. Thank you all for your questions. Let me try to make some closing remarks and to point out what are the key takeaways. Firstly, order intake in Q3 was below last year, but slightly above Q2 this year. We expect this trend to continue in Q4, or in other words, order intake in Q4 should be clearly above Q3, but below Q4 last year. Significant improvement and therefore going in the right direction.
Secondly, in the first nine months, we have seen a very solid operating development with strong increases in EBITDA, ROCE, and free cash flow. Thirdly, we are confident to achieve our specified guidance for 2020 and are on track to achieve our targets for 2022, despite the COVID-19 situation. We think that this is or should be a good message for you and the right message to close the call. T hank you very much for participating. Stay all healthy, all the best, and talk to you soon. Bye-bye.
Bye-bye.
Thank you very much. That does conclude the conference for today. Thank you for participating. You may all disconnect.