Dear ladies and gentlemen, welcome to the Andritz AG Results H1 2017 telephone conference. At our customer's 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 Mr. Wolfgang Leitner, who will lead you through this conference. Please go ahead, sir.
Thank you very much. Good morning, everybody. Welcome to our half-year analyst call. If we start right away, on page two, sales development and basically that's typical also for most of the other numbers that I'm going to present. After a very good first quarter, second quarter was not quite as good compared to second quarter of 2016. But overall, for the first half year, we are reasonably satisfied with the results. Continuing with the sales on page two, for the half year, we are slightly ahead of last year with +1%. However, second quarter was -6% following a first quarter of +8% of sales. The decrease in Q2 is mainly attributable to Hydro deviation and Pulp & Paper. Hydro is our main concern. Whereas Pulp & Paper definitely is in good shape, and we see also looking forward for Pulp & Paper, no real issues.
Regional split of sales, emerging markets 41% and Europe, North America, 59%. If you look at the numbers, China slightly above average number and South America slightly below average numbers. On slide three, order intake, similar picture. After a strong first quarter also after low Q1 2016, a decline of 8% in the second quarter. For the first half year is still +8%. Again, the main deviation in Q2 is Hydro with only EUR 205 million order intake after EUR 339 million last year, and also Metals. Metals are both traditional Andritz activity, but also Schuler. Order intake by region, similar to sales. Emerging markets slightly lower, 35% only. Europe, North America, 65%, two-thirds. Again, South America, quite low at 6%. Reasons are obvious.
It's one country, Brazil, where we have not seen any large pulp mill projects going ahead and continue not to see any large hydropower projects going ahead. Therefore, order intake from South America definitely is at a very low level. Slide four, order backlog. Still good level. As always, hydropower accounting for nearly half of the order backlog due to the long execution time of larger hydropower orders. Pulp & Paper about 30%, and the rest split between Metals and Separation. Profitability and earnings. Good development. Also in Q2, +11%. Why are we not fully satisfied with it? There is one special effect which definitely is a one-off, but is non-recurring, but is to a large extent related to the actual business, and that is the sale of the Schuler Technical Center in Tianjin in China. What does it mean?
It sounds a little bit odd if we sell a technical center. Let me give you a quick history on that. Several years ago, Schuler had developed a new type of press, a forming press. The question was, where should we put up the first press to show it to our customers and convince them that this is a new and effective technology? Decision was let's do it in China, because we definitely want to anyway strengthen ourselves in China. We decided not only to put up another pilot plant, we decided to put up an actual production press and offer to produce certain parts, and the parts were parts for automatic gears for the automotive industry in China. That was the first press that was able to produce this, we call it the clutch, the part for automatic gear, to produce it in China.
This was a very good idea, and within a short period of time, we received several orders for this, to produce these parts. Number one, we were satisfied we had made the right decision, but we were getting concerned that we started to become a competitor of our customers, which is never a very good idea. We decided to sell this pilot plant, including the order backlog for the parts, to a customer for whom this parts production was a core business. Since the timing was very good, we got a very good price on that. That's about three-quarters of this EUR 25 million one-off effect. It's a consequence of a good business decision.
No reason to discount it saying, okay, this was an asset sale, but still it's non-recurring, and I think it's good to say this was a successful project, but it's not going to continue and therefore we need to concentrate on the underlying business, on the recurring business. There we clearly are not fully satisfied with Schuler, neither in the order intake nor with the profitability. We will have to review, to a limited extent, our strategy with Schuler and make certain minor adjustments in the near future on that. So much about this one-off effect. Overall, EBITA from EUR 183 million- EUR 207 million. EBITA margin in the first half, 7.5% without the non-recurring item, 6.6%, compared to 6.6% in the first half of last year. Q2 at 7.9% or 6.2% respectively. Overall, good order factory profitability. Slide six, the collection of all the numbers.
Liquid funds went up substantially from EUR 1.4 billion to EUR 1.8 billion. We issued a short-term loan to the extent of EUR 400 million in June for partially seven years and partially 10 years. We could not let the very low interest rates for long-term fixed loans pass by without taking advantage of it. We are confident that if not this year, then next year, we should find reasons or good targets to spend on that. Therefore, we decided to add this to our balance sheet, obviously, which increases our total asset numbers to a certain extent. We succeeded in placing these funds without negative interest rates. At working capital, here we see clearly the consequence of the low order intake, especially in Hydro, went up from a -EUR 230 million to a -EUR 120 million.
In reality, it is Pulp & Paper that has continued to be substantially negative. The other business areas are either plus or minus zero in the case of Hydro, or positive in those areas where the customer activity is a substantial part of the overall business. We move on to the business areas. Slide seven, Hydropower, still a relatively weak market. You see here the installation of a large pumped storage power plant in Austria. Experience we gained in Austria, Switzerland, and also Southern Europe, for example, Portugal, led to, I think, a very good position that we have obtained in China. China has a substantial plan ongoing to add pumped storage capacity for hydropower in China, and we hope that we can book one or the other mid-size order in the mid-teens, with mid double digits, millions in China still this year. That is a bright spot.
Overall, low order intake, relatively low market activity, and obviously, we hope that that is going to change in the not-too-far future. Slide eight, numbers. First half, only EUR 514 million order intake. Second quarter, EUR 200 million only. Sales still holding up. And margins slightly lower, basically a consequence of lower sales. Slide nine, Pulp & Paper. Good activity in spite of the fact that no large pulp mill has been placed. For those of you who are following the pulp industry closely, it has been announced by the owner of one large multi-pulp mill in Brazil, who is related to JBS. It is a world-leading meat company, that he is considering to sell this pulp mill.
That means that the plans he has to add a second line definitely will not go ahead in the near future and will also result with one of the large pulp producers that for themselves had plans to build either a greenfield mill or add a second line to an existing mill may end up spending the money they have reserved for that on buying this pulp mill, which obviously would lead to a lower market for us. On the other hand, besides these greenfield pulp projects in South America, overall activity is very good, both in pulp and in paper and in power, biomass power. Therefore, we are reasonably, definitely happy with the business development.
If you look on page 10, also profitability, EBITA margin first half 2017, 8.5%-8%, is continuing on a very good level and we also are reasonably optimistic for the near future in this regard. Slide 11, Metals. As I said before, Schuler, if we set aside this one-off or gain from the sale of this technical center in China, we are concerned about low order intake, which is not visible at the top level because it is supported by first-time consolidation of extra acquisitions that Schuler has made last year, and which had not yet been consolidated first half of 2016. Net of these acquisitions, order intake is definitely on a very low level. But as low as we thought it would get when we acquired Schuler. Therefore, clearly we need to become more active on the segment outside the automotive industry.
We need to become more active in the domestic Chinese automotive industry, where Schuler is making some inroads, but definitely not enough. We will support and defend our leading position with the large European car manufacturers, both in Europe and in Asia or China. There, the market has been so far quite slow. There are some projects around, which could go ahead in this year. The result may also be that they are not going ahead this year. The restructuring we have made with Schuler, and which we are just concluding, was definitely very important to protect ourselves against underabsorption, underutilization. Again, the goal has been to put that on top of continuing growth, and that definitely has not happened.
As a consequence, also, profitability, except one-off items, is below what our goal for Schuler is, and as a consequence of the low sales in the core markets. Slide 12 shows the numbers. Order intake, EUR 800 million, slightly ahead of 2016. Again, for a first time, consolidation plays an important role in this development. Net of that, this is the substantial decline. EBITA margin supported by this one-off gain. Slide 13, Separation. Still stable, slightly improved profitability for the core Separation business. We are confident that the good order intake in first half 2017 will be translated in good sales in the second half.
We definitely see currently more upside than downside in Separation and hope that in the next two quarters by year-end, we can say that Separation clearly has increased the order intake double digits and also continues to increase or improve profitability step by step, which definitely would be a relief after several years of struggling. Looking at the numbers, order intake EUR 318 million, up from EUR 290 million. Sales nearly stable, so not yet high order intake, not yet translated into sales. As a consequence, EBITA margin up at 4.5%, but hopefully it should continue to go up in the next few quarters if and when sales pick up. So much for these areas, and slide 15. Conclusion. Hydro, we continue to be cautious. There are some large projects around.
There are also some large projects where we think we have good chances, but they have been around for some time and there is no compelling reason why we should expect that to happen in the next two or three or four months. Pumps activity is good. Paper, good development with this one concern, meaning with regards to large greenfield pulp projects in South America. They will go ahead, but they may incur or experience a delay of one, two years as a consequence of this upcoming transaction with regard to Eldorado as it has been published. Metals, I think I have covered Schuler sufficiently. The traditional Andritz part had some lower impact and lower profitability. This is in the first half year, but should be reasonably good shape by the end of the year. Integration for the outline set. This looks promising.
As a consequence, for the full year, we expect a slight decrease in sales and at least the same profitability, EBITA margin as in 2016. We will do our best to have this increase in profitability is not fully dependent on non-recurring items. So much for my presentation, and I look forward to your questions.
Thank you. Now we will begin our question and answer session. If you have a question for our speaker, please dial zero one on your telephone keypad now to enter the queue. Once your name has been announced, you can ask 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. The first question we have received comes from Sven Weier, UBS. Please go ahead. Your line is now open.
Yeah. Thank you. Good morning. Three questions please from my side. The first one is with regard to the slight change in your revenue guidance, and also the weak order intake in Q2. I was just wondering what has happened between now and Q1, because at stage of Q1, I think you sounded more constructive. Is it really that the Hydro market hasn't really improved even slightly as you would have expected? Or is it also that the Metals area is just simply weaker than you would have thought? That would be the first question.
Connection was very bad. I hope I understood everything. Yeah, as I said, I think there are some larger projects in Hydro around. To be honest, we had some hope at the end of last year and they ended to be delayed. Therefore, I said there is no compelling reason that this will happen in the third quarter. Also, there is still hope it will happen in the third quarter. But we are now already basically mid through this quarter, so I would not want to give too much of, let's say, show too much optimism that this will happen very short term. Yeah, I think based on what we have seen, we would expect either a continuation for the next two quarters of this level of order intake, maybe a slight increase.
Can we really or are we optimistic that we will get back to the old levels of 2015 and before? Currently, I would say no.
Mm-hmm. The other question just on what you said regarding Schuler. Obviously the old Schuler business being weaker than you would have thought, which is interesting because if you look at the order intake of other auto CapEx related companies being quite strong in the first half. Is it really that you see a weak investment environment for press shops, or do you see that Schuler has maybe lost some market share?
I don't think Schuler has lost market share. With our core customers, nothing has been lost. We have successfully started out the Tesla line now. So I don't think we have lost market share. What has not worked out as I would have hoped is developing markets outside the premium automotive segment. There is some progress, but not enough. Not enough progress in developing the purely domestic automotive market in China. There we need to, I would say, refine our strategy, nothing dramatic. As I said, we are now excluding these acquisitions, which by the way, the company in China we acquired, it's developing very well above expectation. So that is a very good acquisition. We should not blind ourselves by saying, okay, overall it looks good.
Yes, overall it looks reasonably good, but it's owed to two special reasons that are not related to the base business. We need to make the base business healthier.
Mm-hmm. My last question I have was regarding your margin guidance. If I just understood you correctly, are you confident to improve or keep the margin stable also when you exclude the EUR 25 million one-off of Q2?
I said we will do our best that any increase in profitability is exclusively caused by this one-off item. I think it's too early to say after which you've been. But currently, we would say excluding this, stable or slightly improved profitability is our goal, excluding this one-off.
Understood. Thank you very much.
Thank you. The next question we've received comes from Mr. Andreas Hirsch, JP Morgan. Your line is now open. Please go ahead.
Good morning, Dr. Leitner. My first question is on a follow-up on Schuler and its cyclicality, whether that is a sign of weaker automotive CapEx to come, or to what degree it is maybe a bit of a temporary blip, because auto CapEx has been strong. It is at a high level, but we have not heard weakness from other companies. Schuler tends to be a relatively early indicator, I think, in that business. Maybe you could talk a little bit more about discussions you are having with the customers about investments going forward and whether that is impacted one way or the other by the disruption in the auto industry with electrical cars and all the model changes and what that means for you.
The second question on Hydro is: Is there a common reason that maybe some of these projects get delayed, or is it just a number of specifics in terms of local politics, local permitting, and things like that?
With regard to the first question, automotive. It is difficult to say because, obviously our project people need to be optimistic, and they are working with the project people, with the CapEx people for our customers, and they also pay to be optimistic. Which is not necessarily the case that this reflects the opinion of the top management for our customers. I think we had already last year a situation where we booked large automotive orders in the last minute, so to say. It was December 2016. We may have the same situation this year. On the other hand, I am old enough to know that things not always work out as you hope they would work out. So I would not be surprised if automotive bookings this year will not increase to the level that they increased in the same period last year.
With our Schuler losing market share, there is no reason for. We do not see that the position of Schuler has been weakening with regards to the premium automotive manufacturers. To be honest, other than a certain level of skepticism, I do not have any real information other than whatever could be written in the newspapers. But whether that leads to some restraint in CapEx decisions remains to be seen. I think that is all I can say. In Hydro, it is specifics. Obviously, it is a continuing weakness in Brazil. China looks more active. As I said, I think we should. If that works out, we would make an important step in China on the high-tech level for pumped storage turbines. That would be really an important step for Andritz.
And other than that, there are delays because of some complaints and not tender processes, those things that have been going on for some time. And obviously, we have lost one or the other project also. So year to date, I would say our market share is somewhat lower, but not dramatically, and within the, let's say, customary range of fluctuation of market share. Again, I do not see so many short-term projects expected to go ahead that I would be confident that Hydro for the intake will pick up within a short period to a substantial degree.
Thank you very much.
The next question we have received comes from Mr. Jörg-André Finke, HSBC. Your line is now open.
Yes, good morning. Thanks for taking my questions as well. Three from my side. The first one is, again on the slight amendment on the full-year revenue guidance. Surprised because H1 orders are still up 8% and H1 sales are slightly as well. So does the lowered sales guidance then imply a weaker order expectation for Q3 and Q4 as well? You had mentioned Hydro already, but maybe you can elaborate on the other segments as well. And then on Metals, also a follow-up to your comments. You elaborated on the weaker order intake trends, but if we look at revenues in the second quarter, they were up 6.5%, and still the underlying margin with 4.8% was very weak. So maybe you could elaborate a bit, what is the reason for this weakness and maybe also whether the measures you announced might imply any meaningful costs.
And lastly, you mentioned the Eldorado topic. Generally, there is some increasing speculation. I think Suzano said itself the merger with Fibria is an option. How would you see general sector consolidation on a larger scale in Brazil for investment decisions, not only on Greenfield, but on general CapEx? Thank you.
If I start with the second question. Eldorado has always been a special case, being the first pulp mill of a large Brazilian conglomerate in relative neighborhood to an existing pulp mill, which is just being doubled now by us, Fibria. So from the beginning, there has been speculation that Fibria might pick up the project or might pick up once the construction is ongoing. They pick it up if it is completed. Neither one has happened. If you follow the press, it has been published now that a Chilean company has been looking at Eldorado. I do not know where that stands. So I think Eldorado for many years has been an object of speculation for consolidation.
Beyond that, I would not see any obvious, let us say, targets for consolidation other than that BNDES, the government-owned investment bank, is a substantial shareholder in several of these power companies and may have an interest, depending on politics, obviously also, to maybe consolidate one or the other of their holdings. But it is always minority holdings, so other than Eldorado, I would not expect any substantial consolidation activity in the foreseeable future.
With regard to the low profitability in Metals, we had some minor cost overruns in the old Andritz part. But that is not dramatic issues, and it is mostly driven by somewhat lower sales. And Schuler, as I said, traditionally has been rather 8% and + 8% EBITA margin. Underlying core business is now about 6%. So that is disappointing. It is not where it should be, it is not where it has been. But it is not a big concern. It is still a 6% business.
Thank you. On the full-year guidance, is this implying a weaker order outlook for Q3 and Q4?
Well, it is basically what we have forecasted. It takes into account what the intake of the first half year and our expectation for the second year. It is not based on a dramatic pick up of orders. We have to keep in mind that Pulp & Paper and Hydro have long execution times. So very little of 2017 sales is dependent on second half order intake in 2017.
Does that then mean that execution is slower than you initially anticipated on some of the projects you have in the order backlog already?
Is slower. No, execution is-
Okay. Thank you.
Thank you. The next question we have received comes from Mr. Graham Phillips, Jefferies. Your line is now open.
I guess good morning. A couple questions on my side. Perhaps if I could just go one at a time. Just firstly, on Hydro. Can you talk a little bit about the margin range guidance that you've had for that division? Obviously, we've been at or below the low end now for quite a while. What is the competitive situation like? We obviously know the outlook is pretty weak, but how has Alstom now with GE looking in terms of the competitive standpoint? Also, how do you philosophically think about the fact that solar and wind costs have fallen substantially over the last decade and expected to fall even further and become perhaps compatible with coal? That it puts Hydro further and further away from the competitiveness position against those competing technologies.
Well, with regard to competitiveness of hydropower, electricity, I have no concerns. I think what we see is different schemes of support from governments for solar and for wind. Also, wind. I think wind might end up being close to the manufacturing cost of Hydro. So Hydro has always been the lowest cost producer, and I think that will continue. But wind in good locations may end up being close to that. Obviously, Hydro has had good market activity for several years. It sparked us in the investment boom in wind, offshore and onshore, and in solar. Do I expect substantial increase of that activity? Basically not. So I have no concerns with regard to long-term viability of competitiveness of hydropower production cost of electricity. That was hydropower. I believe the first part of your question was-
The target, the market target range of Hydro.
Profitability is, I think it is partially caused by lower sales. Partially, we had some cost overruns in projects where erection was included in our scope of delivery. That, I think we have. It is passed us, and we should not see any continuation of that, and therefore, I think we should see some improvement on the profitability of Hydro also still this year.
Okay. But in terms of the guidance, I think how you have targeted 8.5%-9% margins there. Is that a long-term ambition, or do you think that we have to get back to that level of profitability within one or two years, therefore we need to take these sort of actions, et cetera? Yeah. That is what I was meaning, really.
It was a long-term perspective, but obviously we are looking at the order intake. Having been at a low level for some quarters now, obviously we are taking first steps on resizing some of our capacities. That is going on, will continue until year-end, and that should bring some relief. But obviously with these long execution times of larger hydropower projects, we cannot expect a very short-term increase of sales and profitability as a consequence of higher order intake. This increase to 8%+ will take certainly more than a year, yes.
Okay. My other question was really on Pulp & Paper. At the other end of the spectrum, margins are now pretty much at the top end of the target range. How do you feel about the business here? How important is tissue and packaging, which obviously is the better area? Do you think that there is scope to increase the long-term margin target for this business?
No, I think also if we look at our main competitor in this field, I think our profit margin is very attractive currently, very high. I think it would be unrealistic to expect a further increase. On the other hand, we are now running at about 40% service business of total sales. I think we are seeing good organic growth there. We have developed good products. So we are confident we can continue with this organic growth in the aftermarket, and that definitely should have a stabilizing effect on maintaining the current margins.
How big is tissue and packaging within this division?
Tissue and packaging is, I would say, in the range of 15%, maybe roughly. So it is not the main influence.
How does that compare to, say, one to two years ago? Presumably, that has been the better area.
Size-wise, no big difference. It has not gone up dramatically. If your question is, has it grown substantially? I would say beyond regular, the typical fluctuations from year to year, no, we have not seen any dramatic growth.
Okay. And just finally then on Separation, is there any update with regards to the possible divestment of this division?
No, the update is that we are more confident than we used to be that we can turn it around. And if we have turned it around successfully, then we will evaluate the future with a preference for developing it both organically and by some acquisitions, as part of Andritz. Over.
Thank you.
Thank you. The next question we have received comes from Mr. Eresh Rasendran, Warburg Research. Your line is now open.
Yes, good morning. Two questions from my side, if I may. The first one on Schuler. I understand that in general, the profitability of the Metals segment has been rather disappointing. However, I remember back in 2015, you announced a restructuring program in order to improve profitability, and also you closed down Schuler sites in Germany, and I was actually expecting the benefits of that program to come through in 2017. So maybe you could provide us with an update if the expected cost savings of that restructuring program actually have materialized by now. That would be the first one.
Yes. We have executed it successfully. We have reduced the workforce by more than 500 employees in Germany. If we would not have done that, today we would see substantial underutilization, under absorption. Now, obviously, that's only the second-best results you can have as a consequence of restructuring. But at least we continue to be reasonably profitable. Also, the core business is, with regard to order intake in the first half of this year, at a very low level, close to lowest ever. Not really lowest ever, but close to lowest ever.
Okay. The promised cost savings to the tune of EUR 30 million came through. You can confirm that?
Yes. For 2017, they still are not fully enforced, but for 2018, they will be fully enforced, yes.
Okay. The second one, please, is on your operating cash flow. Your operating cash flow has been rather weak in Q2 due to the higher working capital. However, I was wondering if you now assume a slighter, more muted top-line growth in H2, what shall we expect with respect to operating cash flow in H2? Are you going to expect a rebound, or are you actually expecting a further sluggish cash generation in H2? Thank you.
It depends to a large extent on the development of order intake in Hydro. If we book one or the other triple-digit order, then obviously with the related payment that should go up over the next two quarters, probably. If not, it would probably stay at this level here.
Okay. Understood. Thank you very much.
The last question we have received comes from Mr. Jack O'Brien, Goldman Sachs. The line is open.
Hi, good morning. Most of my questions have been asked already, but just a couple. Firstly, on your latest estimates for restructuring costs and benefits that we should expect in 2017 and 2018. Secondly, on the deal environment, obviously this is pretty challenging, particularly from a valuation perspective. Would you consider, in the absence of large deals, returning cash via a special dividend at year-end?
Yeah. With regard to deal flow, you are right. The valuations are challenging. If you look at the private equity companies as a seller, also the balance sheet is challenging, meaning that there is no tangible equity, so the better part of the price would be goodwill or intangibles. We continue to look at certain acquisition projects or opportunities. Depending on the strategic fit, we will not be unreasonable, meaning that we don't expect that we get a dramatically good deal in the current environment. If it would be a good strategic fit, we probably would pay somewhat more than we have paid in the past, but we are definitely not going to be unreasonable and are paying completely exaggerated prices. If that means that we are not making any large acquisitions for an extended period of time, obviously we would look at buybacks.
We have an approved share buyback program which is ongoing to increase that or maybe a higher dividend, which we will decide at the beginning of next year, depending on full-year results and outlook for 2018. The first question was- Cost savings on Schuler. Cost savings on Schuler. I think we have really entered that. We have fixed their own plans, and we have achieved them. Overall, for further restructurings, as I said, in Hydro, we have some limited projects ongoing, typically in countries where the cost of restructuring is not particularly high. So clearly, as we see it today, there will not be any sizable one-off charge in connection with adjusting to somewhat lower capacities.
Okay, thank you.
Okay, I think there are no other questions. Yes. So thank you very much for participating. If you have any further questions, don't hesitate to call Michael Buchbauer or myself. And look forward to talking to you in about three months. Thank you.
Ladies and gentlemen, thank you for your attendance. This call has been concluded. You may now disconnect.