Dear ladies and gentlemen, welcome to the presentation of the Q1 results 2018 of Andritz Group. 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 difficulties 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, who will lead you through this conference. Please go ahead, sir.
Thank you very much. Good morning, everybody. Welcome to the first quarter results of Andritz. If I may summarize the first quarter in a nutshell, obviously, as you have seen, sales and profitability are rather weak. However, we are very confident that this is a temporary effect, and we are very optimistic that we can make good over the course of this year what we have missed in the first quarter. Positive is definitely order intake. We have now the fourth quarter in a row with the increase in order intake. The level itself is very good. We see also for the coming future, for the coming quarters and coming months, quite good project activities so that we are cautiously optimistic on the development of the order intake in the next several months.
Last but not least, which is reflected in the order intake, Schuler has had some important successes in entering the Asian market for press lines for the automotive industry, a goal that we have pursued for actually several years, and that is now realized. Obviously, as we have always said, profitability of these orders is not dramatically good. We have to buy our way into this market, but it's a very important step and critical for the future of Schuler. Much for summary. If we now move on to the details on slide two. Sales down 7% compared to first quarter 2017. We see with the exception of Separation, for all other business areas, sales are down. Partially influenced by relatively high sales in Pulp & Paper, overall, 7% down. Geographic split. As always, very stable, no dramatic changes compared to last year.
Slide three, order intake. We have overall minus 2% to the first quarter of 2017. However, this has been a very high order intake. With EUR 1.53 billion, we are very happy and see that as a very good level of order intake. Hydro has caught up and has a good order intake at EUR 435 million, up 40%. Pulp & Paper had a relatively weak quarter in 2018. However, the comparative quarter in 2017 with EUR 650 million was extraordinarily high. If you would multiply that by four, you come to EUR 2.6 billion, which is 30% above what we usually have in this Pulp & Paper business area. On an average level, our order intake in Pulp & Paper has been quite reasonably good. Metals up somewhat, 6%. Separation also up 12%.
By region, very good order intake in Asia, excluding China, other than that, I think no dramatic development. Highlight certainly in this order intake for this quarter. As a consequence, backlog is slightly down to 6%. No dramatic changes, no risk of underutilization in any of the business areas. As we have said, we continue with a gradual downsizing of Hydro. This will continue this year. With that being in place, we have basically good order intake for all our capacities with regard to manufacturing as well as engineering. On slide five, EBITDA from EUR 97 million down to EUR 72 million, minus 26%. Approximately two-thirds of the difference come from lower sales. As I said, we are confident we can make good for part or all of that over the course of this year.
One-third of this decline, this reduction is caused by some moderate limited cost increases in some of the orders, predominantly in Metals. Profitability in Hydro and Separation is unchanged. Pulp & Paper is lower than last year. However, still at a good level. Overall, profitability is down from 7% to 5.6%. Again, two-thirds of the decline in profitability, volume-related, one-third gross margin related/some cost overruns. Slide six. Figures again, a few comments. On the left side, financial result slightly negative with EUR 1.4 million, lower average net cash. Low interest rates in Brazil and also the cost of the bond or short-term loan that we issued in the middle of last year. Cash flow negative mostly or mainly caused by a substantial increase in net working capital, increase in DOC receivables. Net liquidity down compared to first quarter of 2017, substantially EUR 300 million.
About half of that is a timing issue because this year we have paid the dividend already in March. Whereas last year, the dividend has been paid in April. That explains about half of the shortfall, and the other half is caused by working capital increase et cetera. I think that's it for slide six. On the next slide, moving on to the individual business areas. Hydro power, no change in the market. I think all the elements that make life a little bit more difficult than it used to be, like investments in solar and wind are still in place. We are doing our best. We see some larger projects in the market. We have booked one in the first quarter. We see a few other larger projects also for in the coming quarters.
I would say, last year definitely should be the low point of the order intake level for Hydro. Hopefully we can move up somewhat from that already this year. On slide eight, the numbers, as we've said already, order intake up substantially from EUR 309 million to EUR 435 million. Sales are slightly down, more or less the same. EBITDA slightly down, and EBITDA margin 6.1% after 6.2% in last year. Moving on to Pulp & Paper, slide nine. Good market environment both for very high pulp prices and also for brown paper and also for biomass power boilers. Overall, good market environment. If we look on slide 10, then you may say that this is not really reflected in the order intake. Again, Q1 2017 with EUR 650 million has been exceptionally high. The EUR 457 million this year are a reasonably good order intake.
I would say we are confident that this year, at least the next one to two quarters should be good quarters in order intake for pulp and paper. Just, I think yesterday or day before yesterday, it has been released that Mr. Putin insists on getting some pulp mills in Russia to avoid having to export the wood and missing the value added that could be created by converting it into pulp. That could be support to one or the other pulp mill projects that are active in Russia and where we are also involved. Also in South America, there should be, what has been published, at least one pulp project go ahead this year in Chile. I think also for next year, in spite of the consequences of the merger between Fibria and Suzano.
Also for next year, I would be confident that there is at least one pulp mill project going ahead in South America. Biomass is quite active, especially in Asia also, where we have a very good position. Overall, as I said, we are reasonably optimistic on order intake. Slide 11. Metals. Metals Forming, I have already said, important successes in selling press lines for the new automotive markets in Asia outside China and in China. Metals Processing, unchanged. You all know how the steel industry looks like, so that certainly has limited upside potential. Slide 12. Order intake up 6%, sales down as a consequence of lower order intake during the last few quarters. EBITDA margins are substantially down, both caused by low sales, but also by some cost overruns, as I have said before. Slide 13, Separation.
Continuing good development in the liquid solid separation part of this business area. We have a good order intake and see good project activity. We are optimistic that Separation continues on its way up from both with regard to order intake, but also with regard to profitability. Sales profitability typically have a peak in the fourth quarter, so that will take another two quarters until that will be visible. Order intake should continue on a very good level. On slide 14, you see the numbers, order intake up 12%, sales up 8.6%, and profitability basically unchanged at 4.6% versus 4.7%. To conclude on slide 15, the outlook. We see good project activity, and see Hydro on a better level, higher level compared to last year. Pulp & Paper, we see good project activity.
Metals, at least the Schuler part, we see continuing good project activity as well as Separation. That our guidance stays unchanged. That we expect sales comparable to 2017 and solid profitability. Much for my summary, and I look forward to your questions.
Thank you. We will now begin our question and answer session. If you have a question for a speaker, 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 are using speaker equipment today, please lift the handset before making your selection. One moment please for the first question. We've received the first question. It comes from Jacob Bern of Goldman Sachs. Please go ahead. Your line is now open.
Hi, good morning. A couple of questions. Firstly, just on the Metals. Could you just go into a bit more detail about the cost overruns, which obviously had quite a big impact on profitability, and how we should be thinking about those cost overruns in the context of the year? Would we expect those to continue into the coming quarters? That's the first question.
Yeah. If I may answer directly. I would say the projects where we had these cost overruns are very advanced, so they should be basically finished, I would say, in this quarter, second quarter. Then we know whether there's anything else coming up or not. We are found currently in the final stages of completing erection and starting up. On the overall profitability, keep in mind, as I said, with a substantial part of the order intake increase of Schuler comes from this new market. There the margin definitely is lower. So there may be some continuing pressure on the Metals margins in the next, I would say, four to six quarters, probably. Not on this level as we see in this quarter, but we'll have some, let's say, diluting effect on the coming quarters, which hopefully should be within the one percentage point range on profitability.
Okay, thank you. Just on hydropower, it's a market you've been, I guess, somewhat cautious on for the last couple years.
On the hydropower?
On the hydropower.
Okay.
It's been a market which has been somewhat challenging and obviously you've pointed to 2017 potentially being the trough. Can you just give a bit more detail? What you're seeing in terms of perhaps tendering activity, greenfield opportunities versus brownfield opportunities? How we can think about that order intake developing from here on, let's say, a one to three year view.
Yeah. The main factor that is influencing the hydropower market is a boom in solar and wind. Either one of these two electricity sources is adding in the range of 60 gigawatts per year now. That's combined about three times what hydropower used to add per year. That's obviously massive an impact because the growth of electricity consumption is not as big. The costs have come down both for solar and wind, so they are competitive. We see auctions taking place in South America where investors are willing to sell long-term solar electricity for slightly above EUR 30 per megawatt hour, which is extremely low and makes actually hydropower new investments not profitable. We have also to keep in mind that in Europe and to a certain extent also in the State in North America the low-cost opportunities for hydropower have been invested already.
What is now open for investment is slightly more remote. Either has slightly higher cost or requiring a slightly higher distance to connect to the regions where the electricity is consumed. That has an impact. On the other hand, China has a big project on the way to connect the remote areas with solar, but also with hydropower, electricity production to the coastal areas where electricity is definitely needed, continues to be needed, which is the same for hydropower. We see, as always, it's gray.
As we have said, already last year or before, in our midterm plan, we assume a somewhat lower level for hydropower, not dramatically, but we don't think we can get up to the old levels. We have started to adjust to that some two years ago already, and we will continue to do that, also this year, so that we have no concern about profitability, but may not see the peak or the impacts that we have seen some three, four, five years ago.
Again, perhaps just one to finish on the guidance. Obviously, operating profit during the first quarter was a bit down for the reasons you've given. Just checking, I understand correctly that you still feel you can sort of make that up in the coming quarters to meet your stable profitability year-over-year. Is that fair?
Yeah. Keep in mind that last year we had some special effects in profitability in the range of about EUR 30 million roughly. Whether we can, we'll have similar effects this year, I think that's based on that. Other than that, I think we should be in the range. Not saying we will be exactly there, but in the range of last year.
Okay. Thank you very much.
Thank you. The next question is from Sven Weier. Please go ahead. Your line is now open.
Yeah. Good morning. It's Sven Weier from UBS. Just on the EBIT bridge for the first quarter, you mentioned those one-off costs and lower sales, but is it also fair to assume that last year in Q1 you had a mid-single-digit one-off in there, so we should keep that in mind as well? You also mentioned digitization expenses, which I would be also curious about. If you can maybe give us some more color to the effect for Q1 and how you see that developing for the full year. That would be the first question. Thank you.
Sorry. For the first half of the question, yes, there was a smaller one-time effect in the first quarter that in last year. That also explains a smaller part of the difference. The second part I did not understand.
I think you mentioned in your presentation also digitization expenses.
Yeah.
Which probably is also a bit of an influence on the year-on-year EBIT, I guess.
Yes. If I could pass on to Michael, from whom this comment is. Yes, we are spending on that, but I would say that it's moderate. We do. I think what is definitely true, I think we are quite advanced in this IIoT, not only efforts, but also products that we have on the market. We are hiring more than 50 engineers in the U.S. to staff the orders we have received for our optimization software. Obviously they have to be trained for nine months, that obviously costs us in the range of EUR 2 million up to EUR 3 million. That definitely is an effect from that. I think it's one of the many small effects that have had a limited negative impact on Q1 margins. Yes.
Mm-hmm. Then to the nature of the cost overruns again, because it's quite an interesting coincidence because Valmet also had a cost overrun in Q1 for the first time in a while. Can you describe more the nature of the cost overrun again? Is it a sub-supplier that was causing the issues, or is it more your fault? Maybe some more color on that.
Yeah. Number 1 is the fact that both of us are showing some cost overruns this quarter is not the effect of a phone call between Andy and me. Definitely not. In our case, it's not in Pulp & Paper. I don't know where it is in Valmet. Most likely must be Pulp & Paper.
Yeah.
It's completely unrelated. I think since we started 0 in the first quarter, any movement, any cost overruns in the first quarter are obviously more visible than if they would happen in the third or fourth quarter. That's one of the effects. It's just two or three orders that were late in engineering, cost overruns in erection, and some outstanding issues with regards to performance, that we still need to resolve and clarify and bring to an end. It's a bit of a mixture if certain things cost more or if a project is more difficult than anticipated.
Mm-hmm. I was just curious because for Valmet it also sounded a bit like a stretched supply chain right now that everybody has a boom and maybe some of the stuff.
No. In our case, no. It's not supply chain. It's, I would say, 100% homemade.
Okay.
Thanks for saying that.
Is it also fair to say that in terms of the earnings, I didn't see it yet, but was there also maybe an impact from the accounting change that this year simply is more back-end loaded in terms of how you recognize the profit?
No. Vastly, accounting changes had not and will not have any substantial impact.
Okay. Then on the free cash flow effect that you talked about, obviously understood on the dividend, on the working capital, are you there also confident to reverse that by the end of the year similar to the revenues?
Yeah. Step by step, yes.
Lastly, just on Hydro. Sorry, I was briefly disconnected during the previous question, but did I understand you correctly that regarding the Hydro recovery, we should see that at the moment more as a kind of a lumpiness of orders? Last year it was a bit weak. This year, the timing of the orders is a bit different, but structurally, we're not looking at a new major upcycle here in your view, given what you've just said on the renewables. Is that a fair conclusion?
Yeah, I would not see an upcycle. I certainly would hope, and that's also our best guess, that the lower order intake last year was very low and was a trial of, let's say, our order intake development. Our basic or average level should be definitely higher than last year. Unfortunately, I'm rather confident we will not get the back up to the 2 billion EUR that we had in the P1 peak year.
Okay. That's it from my side. Thank you, Wolfgang Leitner.
Thank you. The next question is from Andre Finke of HSBC. Please go ahead, your line is now open.
Good morning. Thanks for taking my questions. Some that have been asked. A follow-up on Hydro and your progress in China after you received that pumped storage order in Q3 2017, which I understood was some sort of a successful re-entry into the market. Can you maybe elaborate a little bit on how project activity in China is progressing and what kind of inroads you have made? Secondly, maybe you could comment again on M&A pipeline, whether anything has changed from the last call. Thank you.
A new order for pumped storage from last year. Definitely it's the most sophisticated, most advanced technology for pumped storage you can have. Variable speed. It's the first of this type being built in China, and Andritz is building it, so that definitely is a stamp of approval for our technology. It's very good for our reputation in China. In the course of the recent visit of the Austrian government and the president in China, we signed cooperation agreements both with the State Grid and with China Three Gorges for China and for projects outside China. We think we definitely have gained a lot of ground over the last two years in China. Let's see when and to which extent this materializes in more orders. Obviously, we hope that we can get another pumped storage order maybe this year, maybe next year.
Certainly hope also that the cooperation with this state-owned hydropower companies outside China on the back of Chinese development financing or development support should help us in some of the larger projects in South America or in Africa. The second question was M&A. We are looking in some projects, medium-sized, maybe one somewhat bigger. All are definitely not mature and nothing where we would say we see a very high probability that we can go something. Situation's unchanged. It's high multiples. As we have said before, we have moved up our multiple logic somewhat to be able to participate at all. We have our limits, and depending on how these auctions go, we will decide whether we continue or not. There are some targets around, yes.
That's it from me. Thanks.
Thank you. As there are no further questions, I would hand back to you, Wolfgang Leitner.
Thank you very much. See you or hear you in three months in August. Thank you very much.
Thank you. Bye-bye.
Ladies and gentlemen, thank you for your attendance. This call has been concluded. You may disconnect.