Dear ladies and gentlemen, welcome to the half-year results 2018 of Andritz AG. At our customers' request, this conference will be recorded. As a reminder, all participants will be in a listen-only mode. After the presentation, there will be an opportunity to ask questions. If any participant has difficulty hearing the conference, please press star key followed by zero on your telephone for operator assistance. May I now hand you over to Wolfgang Leitner, CEO of Andritz AG, who will lead you through this conference. Go ahead, sir.
Thank you very much. Good morning, everybody. Welcome to our half-year conference call. Overall, I think we are satisfied with the results we're showing in Q2 and also with the first full first half year. Obviously, especially satisfactory has been the order intake in Q2 with over EUR 1.7 billion, a very high value. Now, we have seen an increase in four quarterly results in order intake and also looking backwards, on this level, last time we exceeded EUR 1.7 billion order intake in a quarter has been nearly three years ago. Sales have developed as expected into the right direction compared to Q1 2018, an increase. EBITA results and profitability overall are satisfactory. However, two big differences between the business areas, with especially the one business area, meaning metals, certainly substantially too low compared to what we expect.
During the quarter, obviously, as you certainly have followed, we also have made a few acquisitions. I will not comment on the biggest one on Xerium, which currently is under execution, and we expect that to close in the fourth quarter of this year. To the smaller ones, I'll come back in a few minutes. If we move on to the presentations on slide two, as said, group order intake by more than EUR 1.7 billion, is very favorable, particularly driven by pulp and paper. Within pulp and paper, the main driving force has been green energy production orders, both based on biomass and on sewage sludge, but also on the recovery boilers for the pulp industry. This increased to nearly EUR 1.5 billion, so making good the shortfall of the first quarter. EBITA in Q2 increased compared to Q2 2017.
If we adjust Q2 2017 for the one-off effect from the sale of the Schuler Technology Center in China, plus the sale of the real estate of Schuler in southern Germany, in the aggregate EUR 25 million. However, we have not been able to completely compensate the Q1 EBITA shortfall. If you look at the business areas, pulp and paper, excellent profitability. Hydro and separation, good and stable profitability, and as already mentioned, weak performance of metals. Obviously, with a big order intake, we also have been able to increase the order backlog. On slide three, other details. Order intake on the left side, Q2 year-over-year, plus 43%, First half year, plus 18%. If you look at the business areas on the upper right-hand side, you see that in Q2, but also for H1 across all four business areas, we have seen an increase of order intake.
Order intake by region, maybe worth to mention is that China, the share of China has gone up from 15% to 21%, and the share of North America, despite Mr. Trump's efforts to invigorate economic activity, went down from 23% to 15%. Overall, we certainly are satisfied with the split between the developed markets and emerging markets, which basically is half-half, which we think is a very healthy split, avoiding any substantial dependence on any one of the regions. On slide four, sales increase of 6% in Q2, practically compensating the -7% from Q1. Overall, we are -1%. We see quarter-over-quarter an increase in practically all of the business areas. For the first half year, a slight decline in Metals. A similar picture on the geographic split with North America still being higher in sales.
The share of sales is 20% and China is still at 14%, which obviously will change as the orders are going to be executed over the next one to two years. Slide five Development for the quarter year-on-year overall -14%. However, after adjusting for the EUR 25 million one-off in last year, we are at +9%. Profitability-wise, excluding the one-off event, from 6.2% last year to 6.4%, including it 7.9% down to 6.4%. Slide six. First half year. Also, after adjusting for the one-off event last year, we are still -9% compared to last year. Basically, caused by the low profitability of Metals in this year, from 6.6% to 6%, or 7.5% to 6%. On slide seven. Once again, the business areas. First half year for Hydro, stable development, practically unchanged. Pulp and Paper, excellent development from 8.5% to 9.2%.
Clearly, we have been able to finish and finally turn over a few larger contracts and therefore profitability has been exceptionally high in the first half of this year, both in absolute terms but also in relative terms. Metals, as already explained, negative development, very low profitability, 2.4% after 5.3% first half last year, after already adjusting for the EUR 25 million. We will come back to that in somewhat more detail. In Separation, stable developments. Typically, the second half of the year is substantially higher in sales and therefore also we are still confident that we can slightly improve profitability of Separation until year-end. Slide eight. Group order backlog, as I said, increased based on book-to-bill ratio. Typical picture with Hydro accounting for about 40% of our backlog. Slide nine. Some more detailed numbers. If I comment briefly on the boxes that you find on the left side.
Financial results is down from +EUR 3.5 million last year to -EUR 10 million. Basically, the difference is evenly split between lower average net liquidity, as you see it further down, then substantially lower interest rate in Brazil, where we used a substantially high cash or liquidity drop has been in the range of 500 basis points. The third one is interest expense for the bond for the consequence of changing net working capital. If we go down to the bottom box, increase in net working capital from -EUR 120 million to +EUR 90 million, so a total of EUR 210 million. About EUR 100 million of that is due to an increase in inventory and especially work in progress in connection with contracts that are accounted for with a completed contract method and about EUR 100 million or slightly more are caused by an increase of POC receivables/a decline in POC payables.
All factors went into the wrong direction, which caused a substantial increase of net working capital, which, as we have discussed, I think last time already, has become a focus of our analysis of our activities. We have started several projects to manage net working capital in a better and more stringent way, and we hope that in the next two to three quarters, we can show some improvement there. Also, certain elements of that will take longer when payment terms are converting into sales. Net liquidity is down from EUR 817 million to EUR 569 million. Consequence of lower customer advance payment, as well as with some cost outflows, which have been reserved for already in the cost provisions. It's often the net liquidity. Much for page nine. Move on to the business areas, slide 10. Hydro still unchanged. They are projects, tough competition.
We see also larger projects under development. However, that will take several quarters, not to say years, until the majority of those projects will go forward and will result in actual bookings of electrical and mechanical equipment. Pumps continue to show good project activity. As we have seen also today, we have announced the order intake in the range of about EUR 120 million for a very large rebuild of a hydropower plant in Tajikistan. Going to be the biggest hydropower plant in Central Asia. This has not been booked in Q2, but will most likely be booked in Q3 of this year. On slide 11, you see the numbers for Hydro. The order intake with EUR 763 million for H1 of this year, substantially up. Also, as you remember, up from a very low level last year.
With the EUR 760 million, we are, I would say, at a reasonable level, but certainly could also still be higher. Sales are practically unchanged, and profitability is also practically unchanged. Slide 12, Pulp and Paper. Good project activity, as I said, especially in renewable energy, in biomass, in sewage sludge, and in recovery boilers for pulp mills. Paper markets, reasonable activity, also not really dramatically high. From a competitive standpoint, stable situation. Large projects are definitely very competitive and fought for. Overall, price level, I think, is reasonable. On slide 13, the numbers. Order intake, EUR 1.18 billion H1, up 5%. Sales, up by 2%, especially with sales from service. Profitability, as I said, due to certain release of cost provisions, excellent profitability with 9.2%. Slide 14, Metals. Metal forming, good project activity.
We are very happy that we've been able to book three Asian orders for forming lines or press lines for the automotive industry, for the new automotive industry. We continue to see a good development of Yadon in China. Metals processing, in principle, low project activity. However, there are certain projects, and due to this low project activity, obviously a very tough market with regard to pricing, where if we want to book an order, we definitely have to make compromises with regard to pricing and gross margins related to such projects. Slide 15, order intake up, substantially up in Q2. This comes predominantly from metal forming, but also metals processing was able to increase the order intake. Sales are down by 6%, especially in the metal forming sector with Schuler and EBITA substantially down.
Main reasons are cost overruns on some projects and also low gross margin already when we booked the orders, which are now being turned into sales. All that leads to a decline, which obviously is less than shown here if you deduct the EUR 25 million from the comparative figures from last year. Still, it is in the decline and definitely is something that we are concentrating on, and we were looking into the need to further increase our capacities in Asia to follow the project activity there, which means that we will continue to gradually reduce capacities in Europe, mainly Germany. We're in the process of analyzing that. Currently, we have no plan yet, but currently, we do not expect any dramatic restructuring costs. Current estimate, but that's definitely preliminary, I would say the cost of such a capacity adjustment could be in the tens.
We will most likely when we hear from each other for Q3, we definitely will have a better understanding of what our plans are and what the related costs are. Current estimate in the tens of millions of euros. slide 16, Separation. Continuing good project activity. Mining minerals. Lithium is active, where we are very active and have a good position in Chile. Chemicals have become more active. Foods, slightly better project activity. Municipal, as I said, sewage sludge is good, and competition is not our main problem. I would say the market is big enough.
On slide 17, order intake substantially up due to a large order for a sewage sludge drying, which is part of the separation and incineration, which is part of pulp and paper for Shanghai, which obviously is a very prestigious order, apart from the fact that it adds substantial value to the order intake line. Sales are slightly up 5.8%. EBITA and profitability more or less unchanged. As sales pick up further, that should also increase slightly over the second half of this year. To conclude, slide 18, the outlook. Hydro, as we said, unchanged. Now with the order intake of EUR 120 million to be most likely to be booked in Q3. Also for Q3, Hydro order intake looks reasonably okay. Clearly, we continue with our capacity adjustments and do not expect a substantial pickup of project activity short-term. Pulp and paper, good project activity.
On the greenfield side, we continue to believe that there will be most likely one project based on press releases and confirmations that have been published by our customers, which would be in South America. Other announced projects most likely will not see their final go-ahead with orders in this year, but obviously, there is a pipeline for next year. Metals. Project activity in metal forming continues to be okay, to be good. We hope to continue with a reasonably good order intake in metal forming. We will adjust capacities, as discussed just a minute ago. Metals processing, no real change. I mean, the margin for both parts of the metals business area will stay under pressure for the next several quarters. On the shorter side, because of these three orders for automotive press lines in Asia, where we are executing, we also are optimizing the cost base.
That will only be visible to the full extent once we get the next orders for that. In metals processing, due to the still low level of investment, pricing remains a big challenge, and therefore the margins there will continue to be under pressure. Separation, good market activity. We are confident we will have a last year both in order intake and sales and also in profitability. Much for my summary, and I look forward to your questions.
Ladies and gentlemen, we will now begin our question-and-answer session. If you have a question for a speaker, please dial 01 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 02 to cancel your question. If you are using speaker equipment today, please lift the handset before making your selection. One moment, please, for the first question. The first question is from Jack O'Brien, Goldman Sachs. Your line is now open.
Good morning, thanks for taking the question. First question is just on the outlook for 2018. You've mentioned you expect stable sales relative to 2017. Obviously, the first half is flat, but if we look at the order intake, it's up 18%. Do you think there's scope for actually revenues to increase in 2018? That's the first question.
I guess we prefer to stay with a stable sales outlook. Some of the orders or many of these orders that we have booked in the first half year are sizable, and that means that over the first two quarters, typically it's the three quarters, basically it's engineering, which obviously doesn't add a lot to the sales.
Mm-hmm. Just thinking about through the rest of the year, you mentioned Hydro order intake through the third quarter looks okay on a preliminary level. Any other comments you could make by division on how you're expecting order intake through the rest of the year and tendering activity and so on?
Yeah, as I said, I think project activity is good, continues to be good. It's always difficult to say what will be our share of projects that are actually placed, orders that are placed. Obviously, we had a very good Q2, which we certainly cannot multiply by 4. We also had a very good H1, which probably might be a challenge to multiply by 2. I think having said that, we continue to see a satisfactory order level, project level, and therefore we are expecting a reasonably good order intake for the second half.
Thank you. Just 1 follow-up, if I may, on the Metals Division. Obviously, slightly more challenging there. Can you just give us a bit more color on these cost overruns and how long we should expect these to persist? Obviously, you've mentioned slightly lower margins on some of the new order wins and so on. If we're thinking about some of the costs you're incurring, can you help us out there, please?
The cost overruns have been a main factor for the part of Metals, excluding Schuler. There have been some cost overruns in Schuler also, mainly it was in the other parts. This project has started up. I mean, the plant has started up. Far it's running well. Hopefully we do not expect any more substantial surprises or any more substantial cost overruns on this 1 project. It's a combination of surprisingly low sales in certain areas on the Schuler side, which we are confident partially can be recovered in the second half. Clearly the orders for these new markets have low margins. We have a plan to increase and improve these margins as we execute them, but obviously we cannot yet account for that in the POC sales that are currently underway.
Most likely to the full extent will only be visible once we get the next orders in this regard. So I think there is some hope for the second half on the Schuler side. Metals processing, the other part, taking into account the highly competitive pricing environment, I would be cautious on expecting too much of an improvement there.
Thank you. Perhaps just one final question. On working capital, obviously quite a significant outflow given increase in inventories and service business, and you talked through one or two things there. But would you expect we could see some reversal in that by year-end?
We have become increasingly, let's say, paying increasing attention to that issue, which I think, to be honest, has been under-managed by ourselves. Certain parts of that, if they're managed more closely, could show results quite soon. Others will take one or two years until they're fully realized as these existing orders are being executed. It's not really a change in payment terms that much. Maybe there's one or the other order that has a somewhat delayed payment. But clearly we are not incurring any payment risk from our customers. Everything is fully supported by bank guarantees or similar things, or insurance. But it's also that combination of several developments. As I said, POC receivables have gone up, POC payables have gone down, and also the completed contract sizes have gone up.
I think we are in the final stages of defining a plan what we want to do in this regard. It definitely hope that this trend does not continue. It's too early to commit to any specific goals. It certainly has caught our attention, and we are working on that.
Great. Thank you very much.
Thank you.
The next question is from Frank Beyer, UBS. Your line is now open.
Yeah. Good morning, Dr. Leitner.
Good morning.
Good morning. Thanks for taking my questions. First one is just quickly following up on the metals comments you made because I think I remember last time on the call you said that in the medium term you would see a 100 basis point dilution from what you've just mentioned. Last year you had 6% margin. Does it mean that, let's say, in the medium term this business should go back to 5%? Or should we assume that with the restructuring that you're also now doing that this could also go beyond this kind of 5% level? That would be the first question. Thank you.
If you allow me to ask in a diplomatic way, it's probably most likely based on our current expectation between the two numbers that you have mentioned.
Okay. Good. Thanks for that. The other thing I was wondering, you also said probably a bit challenging to take first half times two, but given that I understand you that you think the Arauco project is going to be awarded still this year. Is that a common challenge that without winning that project, but with winning it would be easier, obviously?
As you know, we always need some larger orders to fulfill our basic order level. I would not want to exempt or exclude any specific project from a forecast. Obviously if we would end up getting 100% of the Arauco project, which so far nothing indicates that. We have no reason to see more than 50% probability. Or actually maybe less, because obviously, there's also probability it would be split. Taking your if you would get all of Arauco, then obviously I would be more optimistic on the H1 times two.
Okay. Without it, yeah, as you said, a bit more challenging. Okay. You also said there are a few projects obviously coming in the next couple of quarters. Would you say that's then more loaded to the first half of next year, those decision makings? How many projects do you think we talk in total on the greenfield side?
I don't want to communicate my personal subjective assessment of client announcements or customer announcements. That would be inappropriate. I would see them split over the full year, and I'm not saying that we are looking very close, that more projects would go ahead. If not this year, then in the first quarter of next year. That I would not say that. No. I think it's evenly split over next year.
Maybe as a follow-up, on the more base kind of business, refurbishment business on the pulp side, are you also seeing that maybe clients are delaying this at the moment because they are so busy and highly utilized that they just can't afford any downtime? Does that mean there is still a bit of a tailwind once the situation normalizes, or what's your perception?
No, I don't think that's the case. I think the other way around. Obviously, we have an excellent situation on the pulp side with for the next two years, no new capacity coming on stream on short fiber. With Suzano Fibria merger or takeover, we have now with 11 to 12 million tons, by far a leading market leader, and together with the APP group with 7 million tons. These two are really having a very strong position. I would say the expectation that the pulp price stays at reasonable level, not as high as today, but attractive levels is very high. It's driven to a large extent also by the limitations of waste paper imports into China, so that Chinese paper producers are very anxious about securing their raw material base. We see a booming market in dissolving pulp replacing cotton.
All that clearly, I think, is a very good background for projects for the pulp industry.
Maybe I should put my question slightly differently, because what I really meant is that couldn't be your order intake even higher? Some clients are so highly utilized at the moment that they couldn't do any brownfields, let's say.
Even also large brownfield takes one to two years. Obviously, they currently are producing as much as they can. Could that have an impact, a negative impact for us? Yes. We rather see it may in the end then delay the finalization. Currently, we see many projects that are under development, under analysis, what could be done in expanding, adding a second line or similar things. The current project activity certainly is not limited by lack of attention or lack of time to develop these projects. In the end, it may be, on the other hand, if the prices continue to be high, the earlier you have the capacity running, usually the related shutdowns, if it's a second line, the shutdown of the first line, if at all, is very short.
Also, we have been doing very large refurbishments in Northern Europe, and the shutdowns have been very short because everything is being done to keep them as short as possible.
Are you seeing yourself gaining a lot of market share? If I compare your results to Valmet, they have been quite weak in pulp for some time, you've been doing quite a bit better than them for a couple of quarters now. Is that also your observation, that you get a higher share of wallet?
No, I don't think so.
Okay. The last question from my side, if I may, was just more of a housekeeping, you mentioned some provision releases in power. On the other hand, we had some cost overruns in metals. Is it fair to assume that both is kind of a wash and doesn't really have an impact net?
Yes.
Okay. Thank you, Dr. Leitner.
Thank you.
The next question is from Jörg-André Finke, HSBC. Your line is now open.
Yes, thanks for taking my questions. A few of them have been answered already. Maybe two follow-ups on pulp. You mentioned the waste paper ban in China as being supportive for pulp prices, but did you also see domestic pulp production in China becoming more of a topic on the back of that paper ban? And maybe likewise for Russia, I think you indicated there is more political support for pulp production in Russia again.
Russia has always been politically supportive to create more value added in Russia and not export. Rather than exporting wood, export pulp or export paper. That has always been the case. Whether one or the other project goes ahead remains to be seen. In China, I don't think there will be more pulp projects. I think there will be maybe more investment on reton processing waste paper outside China, in the adjacent countries, and import it then as pulp, as market recycling pulp into China. There may be, as you've seen from the acquisition of Arauco by Paper Excellence. Is this Performance Pulp or the Asia Pulp & Paper group? Or Paper Excellence.
Paper Excellence.
Paper Excellence, which is part of the Asia Pulp & Paper group in Brazil. I think these types of investments we'll see. There has also been an announcement that the APRIL Group has acquired a pulp company in Brazil with a goal to build a second line or a new line there. Lenzing has announced plans to do something there. I think we will rather see a continuation of new pulp capacities, conventional pulp, but also dissolving pulp in Brazil, where there is still plenty of land available and also there has been under development plantations. I think that supports the trend that we'll continue to see these projects in Brazil. Gradually, maybe in other countries in South America, but it's complicated to expect developments in China.
It's better to produce pulp where the wood is growing rather than shipping wood chips, which would be the reasonable requirement if you would want to produce pulp in China.
Okay. Thank you. The second question also relates to China. You mentioned last time that, or you received the order in Q3, I think, on a pump storage power plant, the re-entry into the Chinese market. You sounded quite confident to see more orders in 2018-2019 than at the Q1 call. Is that still the case? Do you expect more activity in China, Wolfgang Leitner?
I would like to rephrase it. We hope to book something in China in the rest of the year, we would be too positive to say we expect it.
Last question from us at M&A, you said, I think in the call that you would like to comment on a few-
Sorry.
Maybe on the pipeline as well.
Xerium, I think we have covered. It's a very good fit into our Pulp and Paper Aftermarket business. It's a high-tech product. It's a consumable. I think it has all the ingredients of fitting strategically into us. Obviously, the price, I would say, has been a full price. The other acquisition we have announced is Diatec. That maybe sounds a little bit surprising to you. They're manufacturing machines, equipment to produce diapers, both baby diapers, but also adult hygiene products. It's a natural extension of what we are doing within Pulp and Paper already. Approximately EUR 200 million of our sales in Pulp and Paper go into machines to produce nonwoven fabrics, and a substantial part of these nonwoven fabrics goes into the diaper production.
To be able to control or to benefit from now understanding the technology, not only of nonwoven production, but also the following diaper production, we hope that we can provide additional value to this industry. We have acquired a small manufacturer in this industry with about EUR 40 million-EUR 50 million sales. We think it has a good potential, and we hope to be able to develop it from there over the next several years. We acquired 70%. The management will stay on, and they share the other with the 30%. Obviously, we put some calls in place. We think that is a very good addition to our Pulp and Paper business. The third one is a very small one. Novimpianti is a drying technology for tissue. I think that's not worthwhile to discuss in detail.
On the pipeline, obviously, with the Xerium acquisition, we are not particularly eager from a balance sheet standpoint to make another big acquisition very short term. We concentrate definitely next several quarters on continuing to support Xerium, to integrate them cautiously. There is very little overlap, but clearly it needs to be integrated into our Pulp and Paper organization. It adds many locations. We have 28 manufacturing locations which produce equipment, but also serve as service locations, which hopefully create some leverage with our existing paper business. Should you expect another acquisition? The chances are very low.
Very clear. Thank you.
The next question is from Graham Phillips, Jefferies. Your line is now open.
Yes, good morning. A couple of questions, please. First of all, just on paper and pulp. Can you talk a little bit about how much of the business you are focusing more around biomass and energy and sewage sludge collection and so on? Clearly that part of the market has got some very interesting dynamics around flue gas, desulfurization, and so forth. Can you give us a flavor of how much the sales split or the order split between those two areas as opposed to paper and pulp is and what the growth rates look like between the two?
Yeah. The energy side, which also includes the recovery boilers for the pulp mills, so that's a core of the pulp mills. The complete energy side is probably about one-third of our ordering intake in the first half of this year would fall into this energy category.
Mm-hmm. Have you specifically made a target to move more into energy as a complement to this business? Clearly I can see the synergies there. It's under paper and pulp, but clearly it's moving into a totally different market.
No, technically it's very similar. I think it's more driven by a very active market. For example, in the biomass side, we've been very successful in Japan after having booked the first order probably one or two years ago. Now we've booked one of the other consecutive orders. I think it's more driven by being successful and being able to increase our market share on this biomass side. This sewage sludge Shanghai project is, I wouldn't say a one-off, but obviously we are happy to have received this again, this large sewage sludge plant. Definitely neither are we moving away from core pulp and paper into energy, nor do we specifically focus more attention or whatever on these energy projects and get the pulp project.
I think we go after each and any of the projects that are accessible to us from a technical standpoint, from a reference standpoint. I would also not expect this year to continue on this level. I think it may be probably somewhat currently, although the project activity in biomass is continuously good, so I would not want to be negative on energy, but I think clearly this first half of this year has been very active on the energy side.
Are the margins in this area any different to the remaining two-thirds of the business in paper and pulp?
No. These are capital orders, so obviously the service part is substantially higher margin. Comparing to the other capital divisions, it's the same.
Okay, thank you. My second question was around Xerium. I know you said you didn't want to comment much more about it, can you talk about how the business will be financed, how you're going to pay for it? When we look at your net cash position, clearly some of this position relates to customer prepayments. What is your debt borrowing capacity? What would the expectation for interest rates be once we assume the full cost of this goes into your balance sheet?
Yeah, we're going to pay cash. The cash purchase size is about EUR 200 million, $240 million I guess. We're also going to look at the balance sheet there and optimize that. Clearly our net cash position will go down. We have no substantial restrictions with regard to customer down payments because, obviously on the asset side, we have POC receivables and wait also to certain extent. There is no concern. I understand your concern or your question. Last year we have issued the bond or the Schuldenanleihen, which you are probably familiar with, at 1.55%, 1.6%. Currently we continue to see good interest rates being available. We would certainly plan to, if we would raise additional money, go onto the fixed interest side. I think we would still be in this range.
If more liquidity would be needed, we are confident we could obtain a very competitive speed, very competitive interest rates.
Right. Okay. You're paying EUR 200 million. You're absorbing a lot of their debt to make up that EV figure that we were given. They've obviously already got borrowings out there. I guess my question really is, how does those interest rates as well compare to what you may be paying? Is there some scope for refinancing?
Yes, definitely yes. Yeah.
Okay. Another question was around the hydro business. When we think about the 8.5%-9% margin corridor, can we get to there with the current size of the business? Clearly, it's been shrinking over a number of years. Do we have to think that is very much a long-term number, and we're not going to get there for a long time without another major round of restructuring? The employee-level numbers I see are basically flat in this business.
Yeah. They are almost influenced a lot by first of people hired for a specific construction site. That is not an indication that we are not reducing our, let's say, engineering or execution people. We definitely have reduced that and are continuing to reduce that. I would not discount yet the Bionics target because what we see is that we definitely need, besides having to a large extent adjusted, and I think we're in the final stages of these adjustments will be done next year, the capacity to that. We also see substantial potential to improve our order execution. We still have too many deviations. We have deviations both in the negative and in the positive side, which on a net effect is okay.
If you look at it from the level of how accurate are our cost estimations, how accurate is our order execution, that's clearly not sufficient, and we have started substantial reorganizations. We also have made one or the other management change there, and we'll continue to do that. If we succeed in not only maintaining our positive deviations but reducing our negative deviations, without being unrealistic, we will always see these deviations in large projects. If we can reduce it to what I would call an acceptable level, then these margins that we have published as our goals still would be feasible.
Okay. Thank you.
Obviously, this is a challenge. Would I bet that this will be achieved by the end of this year? No. I think if all the measures are in place, hopefully we can see an improvement of the current margin level.
Okay, thank you. Just finally, you were very helpful in talking about why working capital and net cash was lower than expected. There was two other items really from the first and the second quarter. I can see the provision reversal on the cash flow statement, minus EUR 33 million in the first quarter, minus EUR 25 million in the second quarter. Almost another EUR 60 million there. What is that exactly, and which divisions is this coming through on? Is this where you're actually physically paying cash for restructuring, removing people? Because obviously it's a reduction in the profit.
No. Basically, it's project order related.
It's projects where you've had to pay something out in the final completion of some projects or you've underestimated the cost?
That was where we are something that has been provided for in earlier quarters or where we have released provisions we have made in earlier quarters, which would have been booked as on the liability side, so that reduced net working capital. As that is being reversed and goes into profit, obviously the net working capital would increase because the liability side would decline.
Yeah. No, I'm not talking about the numbers coming through the working capital line I can see. These are new numbers in the top bit of the cash flow statement. What's the guidance for the remainder of the year in that number? Because that still has been quite sizable in the first and second quarter.
I don't think it will disappear. I think Mari Vuolteenaho will get back to you on that, on the guidance. I will get back to you soon.
Okay. Thanks, Leitner.
If there are no further questions, I would like to hand back to you, Mr. Leitner.
Thank you very much. We look forward to our next appointment in three months approximately.
Thank you.
Thank you.
Ladies and gentlemen, thank you for your attendance. This conference has been concluded. You may disconnect.