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Edited Transcript of AALB.AS earnings conference call or presentation 25-Jul-19 12:00pm GMT

Half Year 2019 Aalberts NV Earnings Presentation

Langbroek Jul 31, 2019 (Thomson StreetEvents) -- Edited Transcript of Aalberts NV earnings conference call or presentation Thursday, July 25, 2019 at 12:00:00pm GMT

TEXT version of Transcript

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Corporate Participants

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* Arno R. Monincx

Aalberts NV - CFO & Member of Management Board

* Oliver N. Jäger

Aalberts NV - Executive Director & Member of Management Board

* Wim A. Pelsma

Aalberts NV - CEO & Member of the Management Board

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Conference Call Participants

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* Henk Veerman

Kempen & Co. N.V., Research Division - Research Analyst

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Presentation

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Wim A. Pelsma, Aalberts NV - CEO & Member of the Management Board [1]

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Welcome, people in the room. Welcome, people joining our webcast. The agenda for today is that we will talk about Aalberts and the highlights of the first half year. We will look to the operational review, financial review, but we also are looking forward, what we expect in the second half and further. And then, of course, we all -- we have a lot of questions and answers. Aalberts -- yes, Aalberts and this sheet, we have shown many times is that we have unique technologies -- mission-critical technologies, where we have a unique market position.

We are a company where mission-critical people can't resist going beyond the line of duty. What does that mean? It means that you really have the mentality to go the extra mile, and that good is never good enough. It's a culture where we are really proud of.

The third thing is, is that greatness is made of shared knowledge, hence, sharing ideas, creativity and fast learning brings you a lot of innovation. So this is the essence of our company.

To create shareholder value, it's a way of working. And when you look to the 3, let's say, a point we just mentioned, then actually, the way we create shareholder value is by achieving these leading niche technology positions. And you saw that also in our press release of today, that it's very important to have this unique positions to really have high entry barriers, pricing power, but also create a high-added-value margin to invest and keep investing in innovation.

Combined with our culture, operational excellence, relentlessly, continuously improving your margin and generating strong cash conversion. We also show that in the first half, and we will come back to that. And then the cash you generate, allocate that on a very disciplined way, there where you make the highest return. It's a continuous process where you have to be very alert and very disciplined, but also very thorough. We also aligned capital in the first half to other topics where we thought we could have a higher return.

Technology exchange, innovation speed, creativity, fast learning, adapting to the market, will be more and more important, in my view, in the coming years. So when you share knowledge and you learn from each other, that's a tremendous strength of ours. So we really practice that also in our networks. And it also gives us the amount of innovations, what we also see in the first half, but also the last years, which we started, but also the coming years.

Our track record. Over the last 40 years is shown in this sheet, sustainable profitable growth over 40 years. A focused technology leader strongly positioned for accelerated future growth. We did it already 40 years, and we will continue to do that on a very disciplined way.

The most important is, it's all about people, I always say. Without good people, without the strength of the culture of the people, but also the intensiveness they practice their job every day and being an entrepreneur, take ownership, go for excellence, share and learn knowledge, try to become better, and of course, act with integrity, is the basis of this success. And without that, you have no future.

But when these people also, let's say, exchange the knowledge, you get a lot of creativity in your company. Innovation is driving our growth. And I think you see more and more that we get traction in that. The innovation road maps, we started to build somewhere 2 to 3 years ago. In one business team, we started earlier than the other business team. We made also 5-year business plans, including innovation roadmaps.

We invested heavily in R&D. We still are doing that. We also will not stop because R&D, and also creativity in R&D, will bring the profit and the organic growth of the future. We leverage megatrends. And I can't say how important it is because we studied that the last years. But also in our Capital Markets Day of 2 years ago, we set climate change, urbanization, raw material scarcity, Internet of Things and globalization and co-development is really driving all kind of new initiatives in the world. And we are on top of that, and we are at the heart of it. And we have changed this thinking, and also we embrace the new technologies. Therefore, you need a very pragmatic culture with fast learning, close to the business, and that's why you keep yourselves ahead of the game.

Now when you look to the highlights, and what I did here in this sheet is to show you a little bit, what kind of activities where we are active in at the moment? There's a lot going on, and this started already 2 or 3 years ago. But when you look to all the -- and these are the real highlights. Innovations driving additional growth in installation technology. It exceeded our expectations, yes? So the -- our power press fitting and valves are really doing very well. We launched it in the beginning of '18, and we have a tremendous revenue already in '19.

And we must even be careful that we can all produce in the coming years. Successful innovation. A set of our digital engineering services worldwide. We extended -- we are busy with extending expense of the building in Belgium with our company, [Hancock]. And a new distribution assemble center in the Netherlands in Zeewolde, which we will make operators after summer. It's now built, so we have to utilize it. New generation of electronic regulators for cars. We launched the full flow valve for district energy and industrial and the residential and commercial buildings, very interesting. And my colleague, Mr. Jäger, will come back to that. We increased the investments on additive manufacturing. We put investments in related processes for additive manufacturing. We basically won some very nice contracts there for the future.

We started co-development projects for service technologies. What happens in electrical and hybrid cars is that you see more and more weight reduction because the cars are more heavy with the batteries. So they are looking for lighter materials, but you have to have the same strength. We bring the outcome with our service technologies. We opened a renewed extrusion hole in the Netherlands with upgraded equipment. And we scored the first long-term digital contracts in climate technology through our digital apps in France and the Netherlands.

Last but not least, advantage of investments and earlier gained projects in the semicon industry, we took really advantage in the first half. We still made organic growth even it was lower in the semicon in the first half, but we see a prosperous future. We are where technology matters, where we really can make the difference and where we also can make progress through innovation and through doing it on a very unique way. There's a lot to gain.

The highlights and numbers. Organic revenue growth, plus 3%, that's -- and EBIT growth, 5%; EBIT margin, we increased to 13.1%, despite more difficult market circumstances, but we kept investing in CapEx. It's even plus 26% to facilitate all the initiatives we have running at the moment.

And also to facilitate, but also to finance the innovations for the future. Innovation is normally done for 3 to 5 years. So at the moment, you start with an idea, and you have it operationally run, and you get sales out of it. It could take you 3 to 5 years. We did a large acquisition in Chicago and our cash flow from operation showed a very strong increase.

We think a very solid performance due to the unique market positions, innovation and organic growth initiatives which we took the last years. Our entrepreneurial strength because it's all about people and very strong focused business teams, which we created the last years. By creating focus in your business team, they are busy with long-term innovation roadmaps and long-term business plans.

So you get focus in your activities. And we will continue with that. My colleague, Mr. Jäger, will now talk about the operational review.

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Oliver N. Jäger, Aalberts NV - Executive Director & Member of Management Board [2]

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So Wim, thank you very much for the intro. Also, I would like to welcome the people here present in our nice boardroom, and the ladies and gentlemen joining us on the web. After having seen that the overall picture is pretty positive, I would like to give you some background of the business, and specifically, so intending to start with installation technology.

We made a turnover of EUR 574 million, which is more or less flat compared to the period in 2018. Whether that come from -- and besides the positive development we see in a couple of areas, in the U.S., we had a pretty slow start, though the top line was more or less like 2018.

In Europe, we achieved organic growth which was above average. And if you look at Asia Pacific, which is in that business, this low number, we achieved slight organic growth, but the lever is pretty small, so that is not so visible in the numbers.

Positive currency effects been somehow balanced out with divestment, representing some good USD 20 million. Arno may later out that in a bit more detail. If you look at the turnover, we achieved around an EBIT of EUR 70 million. That equals to 12.2%, which is a bit softer compared to the period in 2018. So the main deviations or impact on that,

we had a good stock production in the U.S. You may remember from last year's discussion that we had a strong increase in the U.S. stock for a couple of operational items, when we changed the way of how to distributing, that was one of the backgrounds. So we are currently in process to get that reduced. We had the U.K. topic where the business is a pretty uncertain. So we got stock increase, stock decrease. So that made the entire operation a bit less favorable.

And then we have no principal stock increase in the entire segment, if you look at that at the 2018 numbers. So Arno Monincx, our CFO, will give you some details of how that work and what are the EBIT impact is.

If you look at the CapEx, we are still continue to invest in our fast-growing product lines as well as in the overall operational excellence project. Wim laid that out at the beginning. There is a significant portion of our taken care of, having good operations, being world-class manufacturing, and that requires investment into our operations.

And we are expecting improvements to go: a, with the realization of further agreement with large key accounts; and further execution of the operational excellence project. If you look at that top of subdivision multilayer system, so they achieved a fantastic H1. They have opened a huge amount of larger key accounts, resulting out of the R&D activities and the efforts we have spent into that technology in the last years. So as a key takeaway, the strategy getting more and more traction. And we see a lot to gain in the upcoming months.

If we then move over to material technology, where we do have achieved EUR 392 million turnover, represent a good 4% growth compared to 2018, despite the fact that we have lower activities in Europe, mainly due to the automotive market. Everybody knows that there is a capacity constraint on the WLTP testing, which comes up with a new emission requirement. We have, therefore, lower car sales worldwide, which is also visible if you analyze a bit the automotive guys, especially on the OEM. And that caused that we have an inventory reduction in the entire supply chain. When you know that we are sitting more or less on a T3, T4 level, so is the whole supply chain start producing their inventory, yes, that is somehow an effect for us. That is somehow compensated with very good developments in Eastern Europe as well as in North America. And also for parts for electrical and hybrid vehicles, where we have a lot of projects which are currently in reservation and already running business.

If one would then look at the results with the EUR 54 million, that represents around a 13.8%, it's a slight growth compared to the last year. So where does that come from? Mainly is the U.S. market and all major markets we are in, whether that's automotive, general industry and aerospace. We achieved good performance. We did a very good cost base management in Europe. So we aligned that with the reduced business. We started that very early as we saw signs that automotive may become a bit weaker. And also the integrate -- the business we have acquired in 2018, they were very well integrated and showed a very good performance.

If you look at specialized manufacturing. They did very well in aerospace, in general industry and also in automotive. I mean one could say that we're harvesting there the fruits of the combined highly specialized technology offering we do there in [Finland].

CapEx was steered into growth areas such as North America, Eastern Europe and new technologies. So Wim mentioned in his intro that we start looking into the additive manufacturing environment, where you see in a couple of industry projects to be developed, and we come into that business with our wide range of post-treatment capabilities. So if you look at that division, it's not only about the print job, which is a quite crucial part of that, but there are around 10 process around the print shop, especially on the post-treatment side, where we have a highly expertise with our more than 100 different technologies would be useful for that. So when we started developing that business with our key competence.

But last thing to mention is the acquisition of Precision Plating. Wim led -- set that out at the beginning. That is Precision Plating. That is a consequent development into another region for the PEM business we did last year in France, and France is all about electrical and application, whether that is for aerospace, for automotive or for buildings. It's all about the electrical connectivity. And therefore, the related plating processes, where we do have a very strong position in Europe with the acquisition we did in France, and we gained a comparable position with the acquisition of PPC. So turnover is around EUR 36 million, EUR 38 million on an annual basis and that is consolidated starting from May onwards.

So the key takeaway for material technology in H1, that is a solid performance despite the lower order intake into some of the European markets. And we have a lot of opportunities while our portfolio is strengthening.

If we go over to climate technology, there, we're blending with in a EUR 278 million, a slight organic growth. But the organic growth was pretty strong with good 3%, so that we're in line with the entire Aalberts industries, but part of that organic growth is eaten up by currency effects. The EBITDA expectation were actually higher than the EUR 33 million, which we have expected. There was one -- another product line, which took a bit more time and more efforts in -- than we have anticipated in our planning. But right now, it's on a good track. So -- and we're expecting for the second half of the year better development. So there is a lot of ground for further developments.

It's a fast-growing digital hub which we have realized in France and the Netherlands. We mentioned that already on the full year numbers for 2018. We have a lot of operational excellence project which are increasing. One example is the automated expansion which we realized in Italy. And the new build production and distribution center in the Netherlands, which is -- the decision is taken, so that's going to be start and that will give us further good performance in the future.

Further, we do optimization of our existing product lines. So as a key takeaway, one could say we have new product lines. There's still a lot to improve as well as portfolio optimization.

Concerning industrial technology, it saw some very strong growth of 11%. So the fluid control activities show organic growth driven mainly by innovations. We said in the beginning that innovation is a key topic for us. To give you a few examples, we've realized wealth projects for CNG as well as air-conditioning. They were partly tailor-made for specific models. We get a good progress in the dispense technology via innovation as well as a strong alignment of the sales force that we could target more and more worldwide key accounts.

In advanced mechatronics, we are well positioned in the semicon market. We had a good growth of 3% to 4%. Clearly, it was less than what we had expected and also less than the 20% we did in the last -- in 2018 of that division. But one could say, despite the principal development of the market, we are still growing. And we see there a payoff of the investments and the stock buildup what we did in that segment. And we have a good horizon for the second half of this year.

I just mentioned the ASML outlook, so they are pretty positive. So if they would like realizing their profits, and, yes, then we would participate on that. The EBIT of EUR 34 million, that represents the 15.9%, demonstrates a strong performance of this technology and innovation-intensive business. Also, the acquisition of VAF was very well integrated and showed an increased performance, and what we have expected by doing that. A continuous portfolio analysis, which is quite key in that division, that results in a divestment of one company with a turnover of around EUR 12 million a year.

And we expect further strong performance for the months, especially in the semicon market and in the other markets we are working in. So where the key takeaway, one could say innovation is driving the growth, and we take advantage out of investments earlier done.

If you can summarize the entire operational review, innovations, operational excellence is also helping us in the first year of -- first half of 2019, managing to some challenges which you see worldwide. And we did our homework for creating a good future and also to managing quite properly the day-to-day activities.

If we go on further, then I would like to hand over the word to Arno Monincx, our CFO, and he will give you further guidance and further insight of the performance of the first half of 2019.

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Arno R. Monincx, Aalberts NV - CFO & Member of Management Board [3]

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Thanks. Yes. Welcome, everybody, also from my side. Welcome, people on the webcast. Welcome, people in the room. I would like to go now through the financials. And just for the record to be mentioned, of course, to start with IFRS 16. It is applicable from '19 onwards. So in the figures of '18, we did not restate them. They are as they were reported last year. And for '19, IFRS is taken into account.

I will give a full explanation of the differences per item in the last slide.

So I think a nice revenue growth, 4%, 3.6%, actually in the detail, of which 2.5% organic, not so much impact from acquisition divestments as also guided last year by John Eijgendaal. Good to mention also is that the added value, as already shown by Wim, has been increasing with 50 basis points again, which shows that the constant improvement of our portfolio is also, yes, bringing the results. Now, of course, EBIT -- sorry, depreciations and EBITDA are a little bit impacted by IFRS, a little bit, EUR 14.7 million, but the operating profit EBITA is impacted by EUR 0.4 million, so that is limited. As also indicated last year, 5% increase.

Another important change is net interest expense, where we have an increase of cost, but also partly clarified by IFRS for EUR 1.2 million. Other increase is the change of mix of the loans that is converted from euro loans, which we have paid off for new dollar loans for also recent acquisition made, of course, in the U.S., which are a little bit more expensive.

And in the other net finance cost, you see that there is -- yes, of course, foreign currency exchange results, which clarifies the biggest difference, plus some currency and material contracts. A little bit lower ETR, also because we divested in a company -- as also mentioned by Oliver, HFI, small company, which gave a little bit lower effect on the ATR -- ETR, and that ends up tending a net profit of plus 6%. EPS before amortization, EUR 1.25. And yes, again, the main takeaway -- the key takeaway here is that although market circumstances were difficult -- more difficult, we still created EBITA and net profit growth.

Balance sheet. Also here, of course, some impact -- important impact of IFRS, which is in the noncurrent assets by the right-of-use assets of EUR 126 million, which is also, of course, coming back in noncurrent and current liabilities. That brings me to the first point, in net debt, you see a big increase until EUR 905 million. But as said, EUR 126 million of that increase is referred to IFRS, which also means that the, let's say, normalized increase outside IFRS is EUR 34 million. And just to bring back into your mind also that we have done from the 1st of July last year until now, 4 acquisitions, which is also walking through this number.

The net working capital improved with 0.4%. I will come back to that later in my next slide because we believe it's mainly the balance of the net working capital has been increasing a lot. And I will also explain where we did that. But what has been negatively impacted substantially by the IFRS is ROCE. ROCE has been impacted by 0.7%, which means that outside IFRS, we would have been on 15.1% compared to 15.2% last year. Again, with 4 acquisitions done since then, but now we report in IFRS, 40.4%. So takeaway is that the ROCE has been impacted by that.

Cash flow. Of course, EBITDA increased. And we have made the correction for HFI for the nonoperating income in the result of sales of equipment and change in provisions. And then we have the change in net working capital, which is about the same as last year. But there's a big difference because last year, we built up inventory in the first 6 months, EUR 48 million, for the whole group. And as Oliver said, that it was even more in, let's say, installation technology.

Receivables, we increased EUR 8 million more than last year. But, let's say, we collected EUR 8 million more than last year. But in payables, as you all may remember, in the year-end results of '18, we have gone a little bit too far maybe by stretching our payables. So what we did in this period is that we stretched a lot less, and that means also a negative impact of EUR 54 million on this payable line. So in total, that brings the sum of EUR 2 million difference with last year, but because we built up much less stock in the begin -- in the first half year of this year and much more last year, we believe that the balance of net working capital is much more healthy. And it also says something about the quality of earnings because the margin that you normally also have gained with stock buildup is now not there.

A second important point is the line for acquisition, disposal of subsidiaries, where we, of course, made our acquisition of PPC per the 1st of May. And also, there, we have some deferred payments and earn-out of previous acquisitions. But of course, also on the disposal side, we have the collection of the sale of HFI.

In general, a net increase in cash, let's say, decrease in cash of EUR 202 million versus EUR 234 million negative last year, which is an increase of EUR 32 million.

Strong cash flow from operations. Net working capital more balanced after, yes, the big stretch we made last year. And again, we also realized ourselves that we had to bring back the inventories more in line and that's what we actually are doing.

Revenue and CapEx segment reporting. Now we have seen already the numbers, of course, in the previous slides and the increase of revenue of 4%. But also on a strong increase in CapEx, we continue to invest in many, yes, innovation and organic growth projects. But also, we continue to invest in efficient initiatives. And that's also, like Wim said, we have still a lot to gain there, and that's also exactly the reason that we continue to invest in that -- in these organic growth initiatives.

Operating profits, EBITDA increase of 5%. And you see the split here per segment, again, also compared to last year. What we see, of course, is that the installation technology is a little bit lower revenue-wise, but that has to do, like Oliver explained, with divestment, of course, mainly divestments of our -- some activities last year.

They made good organic growth in Europe, a little bit slower start in the U.S., but also there, we saw an increase of orders at the end of the second half year. But what is most important here, also when you look at the EBITA percentages, is that we built off these stocks of over EUR 50 million. And even in the U.S., we did not build up less stocks, but we decreased stocks. So we believe that the situation is much better because of that now, and we also are confident that with the plans that we have for more businesses because we do not only installation technology, for the next 3 years, we have good improvement plans running, which we follow up regularly, and we will continue to improve these inventories.

Material technology, good increase. Oliver already explained about that, also profitability increase. Actually, the rest is increasing. Climate technology, a little bit small increase, but there, it was already explained that although we also there, had an okay organic growth. We had some delay in the product introduction or new product introduction, where we put a lot of effort in. And that is still to expect in the second half of the year. But of course, the costs are also made in the first half year, without the revenues there. So there, we had a little bit smaller increase of profits. And additional technology, yes, performed well. And also there you see that the portfolio is really bringing the results.

That brings me to the last slide, with the impact of adaptation -- adoption of IFRS 16 in our numbers, where you can see that on EBITDA level, the adoption is EUR 40.7 million. On EBITA level, it's only EUR 0.4 million. This is the number that we are, at least, always focusing on, so that is not hardly changed.

Net interest because of the right-of-use assets, of course, and also the financing part of that increase of EUR 1.2 million. Income tax expenses, a correction of EUR 0.2 million, and that then brings to the net profits. That's a little bit lower, EUR 0.6 million, versus the number without these corrections. And net debt, an important number, where you see the EUR 126 million increase for only, yes, IFRS. The same -- almost the same number estimate as the total assets are increasing. And yes, that brings to the brings to the ROCE, which is lower, as I already explained, 0.7% that has impacts. And also on the equity percentage, you see a negative of 1.9%. Leverage ratio to finalize 0.2 difference, which means that we are now at 1.9 instead of 1.7. The 1.7 would have been exactly the same again as last year. So the adoption of IFRS, it has impact on return on capital employed. That is a -- that's the big takeaway, I would say, from this slide.

And then I can hand over again to Wim.

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Wim A. Pelsma, Aalberts NV - CEO & Member of the Management Board [4]

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Yes, Aalberts looking forward. This is Aalberts looking forward. A lot of self-help going forward to drive organic growth. Yes, I can say we are actually pretty positive about the second half because when you look to these examples, like innovations in -- for thermo management, for hybrid and electrical vehicles. We are busy with many co-development projects and service technologies for changes in voltage in cars. So I always said that we are living a material technology of new parts. So that means when the voltage which is now happening in cars are changing, then you get weight increase because you second material. That's not possible because then the car will be very heavy. So they use other materials, but they want to have the same strength. So we, at this moment, especially in Southern Germany, we have a very good order intake in this field because they're all busy with new parts that will accelerate. And we are one of the few companies in Germany, we are market leader in Germany in service technologies, who can help the customer to deserve this kind of coating.

One example I can give, there is a car, it's called the 7 Series, which has to be cooled because this is a hybrid car. Instead of having 2 cooling pumps, this car needs now 7 cooling pumps. All these cooling pumps have to be treated for service treatment. That's one example. Now -- so when cars are changing, parts are changing. When parts are changing, you have to innovate to develop them, and that is new business. So we are living from new parts. Besides that, we also come back to the existing automotive markets because we want to give you a little bit more our guidance, what we hear from our customers.

Coming back to Aalberts looking forward. Also in, let's say, climate technology, we have a fantastic amount of new product lines. We already mentioned in February that we have 50 new product lines on the table, which we showed in our -- in the biggest [exhibition] in a building in Frankfurt in the month of February, March. We are launching them step-by-step. This will take 18 months to 24 months. Innovation is not going like a rocket, it's going step-by-step, that we are not stopping. So that means that we will continue bringing these products to the market. As you maybe also remember last year, quarter 3 was not the best quarter for climate technology. But we expect now a much better quarter. So that's what's including also these innovations.

We will start the new build probably in quarter 4 when we have the approval to build, for climate technology to build a new factory. It will be in Almere. Probably, we will also send a small press release out because we're very proud on it. It will be probably September, October, where we built a complete new factory but also a new assemble center and also a distribution facility besides it. Because we have a very good growth in these product lines, we should produce now in (inaudible).

Our innovations on the area of marine are also making progress. We see more and more of that in marine. There come legislation for emission reductions. The 1st of January 2020, the bigger ships, like container ships, have to reduce their emission. We can help them because we can control the fuel systems in their engines. So we expect also from this kind of sustainable transportation trends, we expect a lot of innovations.

It's not for nothing that we set climate change or sustainable transportation as one of our topics to drive innovation. That will only increase, yes, but it's not something on the short term. We're building a company on the long-term, yes, or midterm. So that will keep on continuously progress.

The innovation road maps, again, started 2, 3 years ago. The most effect of the innovation you always get between 3 and 5 years, so that means for us, in 2020, 2021, we will see impact of that. And it's now coming more and more. That is called self-help. So we think that also in the second half, we will add a lot of self-help. Besides that, operational excellence will be continuously, relentlessly pushed. That means we have to become more efficient. We have to automate more on factories. We still have a few larger sites which we want to consolidate. We are not ready with that. Especially in installation technology, we have still a lot to do because we brought it together. And as last -- the last theme which was brought together was installation technology. So we still have a lot to gain.

So a lot of innovations are underway, expansions, automations of factories, but also, yes, new equipment. So that means that our CapEx will continuously going to rise. Also, that is what we explained in December 2017. It could hit somewhere between the EUR 150 million, EUR 170 million in the end. After sudden spike, in the coming years, we will go down again. So that's why you see we expand Belgium, we built in Almere, we finished (inaudible), and we keep on investing in innovations.

Also very nice to mention are the upgraded product lines in dispense. Dispense we brought together as we heard from my colleague, Mr. Jäger, that we have very nice products in dispense which we also launched in the second half. We expect a lot of it because one competitor of ours did not such a good job. So maybe we could take that position for a big part.

There's a lot to gain, and there's a lot coming. That is my message to you. When we look further forward, next slide, we give a little bit more guidance on 2 markets because it is difficult. And what you read in the papers and what you hear, there's a lot of uncertainty. What we did for ourselves, we did a very thorough investigation with our customers.

We call them intensively. Our management is on top of things. And this is what came out in automotive. That we think that the engine mix of vehicles, which is now really disturbing a little bit the supply chain, that means which engine has to go to which car because diesel is less, petrol is higher, gas is higher, electrical is coming. So you get the change of mix. This should be in the boundaries of the legislation, which is in 2021 effective. So you see the car manufacturers, especially, what is the right mix. This is coming more clear, we see that now. Maybe when you order your own car, you sometimes also see that because you see a delay when it's delivered. It doesn't say anything about the ordering, it says something about the delivery. That's a big, big, big change and a big difference. The second thing is the capacity of the WLTP testing, which Mr. Jäger mentioned is improving. We see that.

A very important point, inventory reduction will stabilize. We get really the signs of that. It started already step-by-step from July last year. And we see now where we produce products in specialized manufacturing, we see a rise. That means for us, normally, the 3, 4 months later, you have also your heat treatment and service treatment business. And so we trust on that. And we talk to our customers. Developments of hybrid and electrical cars will continue. It will give new business, yes, so it will not stop. And it will give new business and replace also the business you lose, yes, because all this business in automotive, in material technology is mostly taking some years and then you get a new part.

When you look to semicon, we expect an increased activity level in the second half of '19. We talk to our customers. But also the front end of the semicon market, and that's very important to understand, you have a front end and the back end. The front end, you invest in the efficiency, how you produce a chip. That means that the customer who eventually uses the machinery in the front end has a competitive edge when he has more efficient in chip producing. That means he can fight in the market. The moment a customer doesn't do that, you lose also in the market. So the efficiency investments in semicon are continuing. And that is where we are. So we see an increased activity level in the second half, mainly quarter 4. I think you get also some guidance from others in the market, the last weeks, where that is confirmed.

Our inventory was kept on a high level. So the inventory reduction we gained in installation technology, we build up in industrial technology, advanced mechatronics. Why? Because we will see the pickup. And when we see the pickup, we can deliver immediately. So we build up there roughly, I think, 15 million to 20 million additionally inventory, which we will ship out the second half for a big part. So we are busy with the customer.

The development of projects in which Aalberts is participating is not stopping. It's ongoing. We scored 2 very big projects, as you can maybe remember 2 years ago. And we pre-invested in machinery, and we take really advantage of that. So in semicon, we grew the last year's 20% -- more than 20%. First half is maybe 4%, but we will ramp up again. And next year will be very nice, yes? So let's be a little bit longer-term thinkers. And we have a prosperous future in this end market, a very prosperous future. Why? Because 5G, autonomous driving, the mobile phones, everything will increase, data, memory, logic, everything will increase, so this is a fantastic market. And we are a top supplier in this. So let's not disturb us from a short-term, little bit lower growth. We have a prosperous future.

So coming to that. Self-help initiatives, acceleration of that even, organic growth potential. We have more CapEx. Do you really think that we would spend all this CapEx when we don't see the possibilities? When we say every time disciplined capital allocation. On organic growth, this company has fantastic possibilities, and we will pursue that. Besides that, we expect in the semicon and automotive a pickup, yes? In automotive, we expect a stabilization, as I explained, but also a small pickup because inventory reduction is over. And semicon, we have a very good signals that we will have a good second half, especially quarter 4.

So that brings us to the outlook, which is exactly the same, that we remain confident in the execution of the many growth and innovation initiatives, also efficiency initiatives and investment plans, we keep on pursuing them because we really believe in them even more than 6 months ago. We will pursue our strategy focused acceleration, which we set almost 2 years ago. And we will drive our profitability further and convert, especially this year, strong operational execution into free cash flow. We will make a nice cash flow this year.

To update you -- and that's my next slide. To update you on our strategy, which we launched, as you know, 2 years ago, we will update you about where we are; what are -- what did we find out in the 2 years more in depth; what will we accelerate; what will we change; and because we think we learned a lot in these 2 years. But one thing is for sure, the organic growth possibilities, what we have initiated also 2 years ago, even exceeding our expectations to coming years. So that's a little bit a tip of the [flyer], the tip of the whatever, and of what we want to say there. So we want to invite you and our shareholders but also potential shareholders, investors to come to our fantastic facility here in Utrecht, where we are here, in our experience centre. And we also will show you some very nice innovations which we have in the pipeline and also are already selling. So we will do that the 4th of December 2019. So hopefully, we get a lot of visitors in our nice new office in Utrecht, near the train station.

So I would like to thank you very much for our presentation, and we hope, of course, that we have a lot of questions and that we all can answer them. Thank you. So who's first?

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Questions and Answers

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Unidentified Analyst, [1]

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Is it me? Can I go first? Okay. [Frank Classen] of (inaudible). Question on M&A, how high is that on your agenda? And what are the main focus areas currently? And what do you see on pricing, for instance? Do you see multiples already coming down? And then secondly, working capital. How much room for improvement do you see still there? And what are the main areas? Is it indeed inventories? Or is there also room on the other fields?

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Wim A. Pelsma, Aalberts NV - CEO & Member of the Management Board [2]

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Yes. I may be coming to the -- to M&A. M&A, as we also guided at the beginning of the year that we expect 2 to 4 acquisitions, mainly bolt-on acquisitions to do in '19. That's still our goal. So we still -- we think we can achieve that between 2 and 4, as we a little bit did last year. Now bolt-on acquisitions are very interesting because, yes, you strengthen your market position, you create more uniqueness and they can be integrated pretty easily. You take lesser risk, and you have a quicker return on the business plan you made upfront. So we will continue that. M&A will always be an important fact of the growth. Our ideal situation is organic growth, of course. It's a nice growth. But combined with bolt-ons that you build your chosen market positions further.

Coming to pricing. We also talked and we looked at a lot of bigger acquisitions. But for me, the prices are too high. So -- and they are not coming down at the moment. So we will not spend money on 2 expensive acquisitions when we don't see the return. And our policy is, as always, that we have 3 golden rules. It's that it should be a perfect strategic fit. The second thing, it should be management of ourselves or the management of the other party that we really believe in your business integration plan, that we get a return out of it. And the third is, we never pay too much based on the free cash flow out of the business integration plan because we want to have our money back in maximum 7 to 8 years, yes? The bolt-on acquisitions are very nice because you build up a relationship. We know the market in depth, so we have lesser competition. We don't like auctions because with auctions, everything is driven up to the highest profitability and there are no CapEx investments. So when you take them over, you have to invest all the things. So we believe in bolt-ons, where you really build relationships. And then -- that there are more arguments to sell to us than only the money, and there we are pretty successful. And we will keep on successful. We have a very nice pipeline. But we are very critical. I can tell you, the last 2 months, we rejected probably 3, 4 projects that we were busy with, yes? So -- and even -- and we even sometimes signed already in LOI. And so we are very critical. We are working for our shareholders to have a disciplined capital allocation that we see enough room for additional acquisitions also this year and the coming years. But notables for bigger companies, in my opinion, yes, I think they are crazy, personally. So we'll not do that.

Working capital?

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Arno R. Monincx, Aalberts NV - CFO & Member of Management Board [3]

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Working capital. As I also explained, we have for a -- yes, our most important capital -- or let's say, working capital users businesses. We have made 3-year improvement plans, of course, mainly focused on stocks. But also on the -- to keep focus on the -- on receivables. Payables, I would say you see already now per half year one closing that we are trying to stress that a little bit less than we used to do in the past. That also means that the first gain we had now in the first half year did not really pay off in cash immediately because we had to compensate for the year-end position of last year of the payables. But we believe that with the stock improvement plans that we have at this moment in the next 3 years, we could make an improvement of about EUR 100 million. Calculate in days when you're calculating that because also, of course, when you grow organically in revenue, you also grow working capital normally that we can improve in days, calculate at about EUR 100 million.

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Wim A. Pelsma, Aalberts NV - CEO & Member of the Management Board [4]

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And what will happen is that we will keep on reducing inventory in installation technology that when we ship out advance mechatronics, that will also go down in the second half. So that's because we build up in advance in the first half.

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Unidentified Analyst, [5]

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[Martin Peg], (inaudible). Firstly, can you provide some kind of bridge in your EBITDA? Because we have seen highly profitable acquisitions. We have seen a divestment. And also, obviously, some organic performance?

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Arno R. Monincx, Aalberts NV - CFO & Member of Management Board [6]

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And let's say, as you saw in the revenue splits, the impacts of M&A in half year 1 was not so big. That's also what (inaudible) guided last year. When we look to the holding elimination line in the EBITA specification, you see that we had a normal situation here, first half year last year, about EUR 6 million of costs. This year, it was a little bit lower, EUR 3.9 million. So you see that there, we had a small advantage of a disposal that we did just before closing of half year 1 of HFI. In principle, the first half year of '18 showed a normal picture. And that's also what we still expect for the remainder of the year.

So in the first half year, there's only a very small advantage of an disposal because, yes -- let's say, if I compare it to last year, we also had some small advance in the first half year. But -- so that is not a big difference. And then for the second half year, we still expect that the whole elimination line, which showed the same normal picture, again, around EUR 10 million, EUR 12 million. Unless we can still make a divestment before the year ends to compensate some of that. But that is how it looks like. So let's say the EBITA performance of 2019 is more or less organic despite the currency impact, of course, what we also have disclosed.

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Unidentified Analyst, [7]

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But if I'm right, last year, you made a very profitable acquisition. PPC is a very profitable acquisition. You have...

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Wim A. Pelsma, Aalberts NV - CEO & Member of the Management Board [8]

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I guess that was done in May, yes?

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Arno R. Monincx, Aalberts NV - CFO & Member of Management Board [9]

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1st of May, but that's not really visible. But if you didn't look at that -- you know what we've done last year and this year, the acquisition impact, it's not 0 but it's not really visible in the numbers.

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Wim A. Pelsma, Aalberts NV - CEO & Member of the Management Board [10]

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Now the difference is we did VAF the 1st of July, and we sold the retail business 1st of July. So VAF was indeed having a higher margin than retail. The revenue is out of it, yes? So yes, that's 1st of July last year. And we did an acquisition, Roy Metal Finish (sic) [Roy Metal Finishing] in October last year, so that's really counting. But PPC, yes, it's -- you can't even count it. This is 1 or 2 months. So -- and then we did a very small one in New Jersey, Co-Planar, which at I think $7 million revenue. So it's -- I think on 1.5 billion, it's almost nothing. So the difference is, of course, that we acquired a little bit higher margins. So that's correct. So there, we have a little bit advantage. But not so much because that's how -- the most is EBITDA growth organically. I think it's not completely 5, but let's say, it's maybe 4. I think 4, something like that.

I think what is maybe important to mention is also that -- and that is really affecting our profitability is don't underestimate when you reduce your stock in a highly vertical integrated company like APOLLO in America because we do the pouring, the foundry, then we have machining, then we do the assembly. So when we -- you reduced that $30 million of stock, you're lacking a lot of absorption, that's how they call it. And so, yes, that's probably also the reason why the EBITA organic growth is a little bit less. But that was covered. The inventory reduction, we will not continue, we will further optimize.

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Unidentified Analyst, [11]

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Previous sessions, you had said that you are looking to your portfolio and intended to divest some EUR 50 million of business. When I read through the press release, I got a feeling that you once again run through your portfolio. And yes, might do a little bit more than that?

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Wim A. Pelsma, Aalberts NV - CEO & Member of the Management Board [12]

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Yes, it's -- I think then we wrote a good press release because that's -- you have seen that well. Especially, I think, in climate technology. Also, that is not new. I always said I have to get rid of some more and that it could be part of our topic in December, yes, because what we see after 2 years, yes, we drove these 12 business teams. We drove the 5-year plans. And as always, you have some things which go much better than you originally thought. And have some things which are lagging behind, and you get nice stories and nice excuses, yes? So we are indeed thinking and especially also in that area that we should maybe do a little bit more. But I don't want to make this the Capital Markets Day. But that's correct. That's also why we put that sentence in. And that is actually holding us a little bit back to increase our margin quicker in climate because when you would ask me where are you a little bit, while that did you expect a little bit more is actually in that area because it's such a nice business. And one part of that business we do very well, higher margins, another part is lagging behind and we must get rid of certain things.

So it's very well studied. I'm happy because then we don't write the press release for nothing.

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Unidentified Analyst, [13]

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Also what we discussed at the CMD, but I still want to ask you, what you also mentioned is that the main impact of IFRS is your -- on your ROCE. Is it something which will change as well the outlook because of the IFRS 16 implementation? Or is that still what you're going to reiterate over?

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Wim A. Pelsma, Aalberts NV - CEO & Member of the Management Board [14]

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We'll come back to that in December. But of course, it's a setback. It is like it is. But you know us a little better. I hope that we will try to -- of course, to outperform.

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Unidentified Analyst, [15]

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I hope so. And also a bit -- it's changing wordings concerning your capital investments because I thought it was very, very clear that you put your money there, where there's growth and margins and whatever. But still I read some kind of fine-tuning again. Could you really specify what the difference is?

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Wim A. Pelsma, Aalberts NV - CEO & Member of the Management Board [16]

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A very nice example, I think, the [other].

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Arno R. Monincx, Aalberts NV - CFO & Member of Management Board [17]

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Yes. I mentioned that when I said where we [split] our CapEx into certain directions. So we made a quiet move in the course of this year that we focused on North America and new technologies. I mentioned that we look for additive manufacturing. That we in that environment put a few investments and a few machineries in. So consequently, we reduced a bit what we're doing in other markets. That also applies for Europe.

Because that was technical-wise. And if you look at regions, so we further focused our investment into Eastern Europe. We work on a couple of Polish facility, which we will increase, partly automotive, partly aerospace, partly industrial gas turbines, where we have a good deal on with the supply chain over there. And the same in North America, if you look at regions besides the technology I have mentioned.

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Unidentified Analyst, [18]

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There's also the implications for the amount of CapEx you will invest. Or does it more or less the same what you...

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Wim A. Pelsma, Aalberts NV - CEO & Member of the Management Board [19]

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Guide?

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Arno R. Monincx, Aalberts NV - CFO & Member of Management Board [20]

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Now I think we have given guidance on that. And yes, we stick in that number. Yes, yes. And we will remain on that topic.

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Wim A. Pelsma, Aalberts NV - CEO & Member of the Management Board [21]

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But it's a continuous processing. And I think what you see now, we have lower sales in Europe. Of course, you change your presence. And when you see -- certainly additive manufacturing, we see some very nice opportunities. You can say, "Oh, I spend more." You can also say, "I take a little bit back and I put it there." So it's continuous fine-tuning. I think we have to do very aggressively all the time when the situation are changing. That's, I think, one of our things which we have in our DNA, that you have to be very alert on that.

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Oliver N. Jäger, Aalberts NV - Executive Director & Member of Management Board [22]

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But you've underlined that a bit. And if automotive is a bit less in H1 when it's somehow logics that you are not starting investing in capacity in Europe for automotive. So you put a break on there. And if you see opportunities, another add by you.

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Wim A. Pelsma, Aalberts NV - CEO & Member of the Management Board [23]

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Another thing is, for example, that you see that thicker materials in cars due to changes of voltage, acquired always sell volts. Now when you bring it to 24 or maybe 48 volts, yes, you need -- otherwise, you'll burn the whole car. So you need thicker materials. That changes certain business profiles. When you are too late with that, certainly, you see profitability going down. So below all these markets, there is going on a lot. And I think that the quickness on how we see that and you adapt on that, greatness is made of shared knowledge, it's really true. You have to learn and be adept -- adapt very fast, but keep on investing in the right things.

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Arno R. Monincx, Aalberts NV - CFO & Member of Management Board [24]

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You could say that we did the investment in PPC, but one part of that, when you see the change of the electrical vehicles, the more usage of that type of coating and that type of technology supports that development.

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Wim A. Pelsma, Aalberts NV - CEO & Member of the Management Board [25]

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But it could be that when certain things have such a big potential, so you want to put more CapEx or capital there. There's other things you should give no money anymore. So that's coming back to your first question. But we will come to that in December.

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Henk Veerman, Kempen & Co. N.V., Research Division - Research Analyst [26]

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Henk Veerman, Kempen. My first question is on the organic sales growth, 2.5%. And I just -- from my understanding, that equals about EUR 35 million of organic sales. From my understanding, is it fair to assume that about half of that EUR 35 million is industrial technologies and the other one, installation technologies? If you have to summarize what was being discussed?

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Wim A. Pelsma, Aalberts NV - CEO & Member of the Management Board [27]

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I think when you -- what we earlier said in these meetings is when you look what is above average and what is below average, then industrial technology was above average, material technology was a little bit below average, climate technology was spot on, and the same was roughly in installation technology, maybe a little bit more. But Europe was very good. And America was roughly flat due to the slow start. But we will see very good second half in America. So that's roughly the -- then I think you know leverage is 3, and then you know roughly where it is.

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Henk Veerman, Kempen & Co. N.V., Research Division - Research Analyst [28]

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Second question.

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Wim A. Pelsma, Aalberts NV - CEO & Member of the Management Board [29]

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When you are a quick thinker, of course. [You're quite ignoring, so write it down].

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Henk Veerman, Kempen & Co. N.V., Research Division - Research Analyst [30]

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Second question on -- one remaining question on the working capital and more specifically the inventories. I think in the previous earnings call, we also discussed the inventory position in relation to the commodity prices. And if I summarize the inventory position now, it increases by 1% versus sales growth of about 4%. (inaudible)?

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Wim A. Pelsma, Aalberts NV - CEO & Member of the Management Board [31]

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No, because -- actually, the material prices between Q4 '18, Q1 '19 and Q2 '19 are more or less the same. There's the efforts. And, of course, it's also the way how you try to cover your materials, of course. So the impact of raw materials is not.

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Henk Veerman, Kempen & Co. N.V., Research Division - Research Analyst [32]

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Okay. Then I have some questions on material technology. And I hope that you appreciate them. If I...

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Wim A. Pelsma, Aalberts NV - CEO & Member of the Management Board [33]

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We appreciate every question.

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Henk Veerman, Kempen & Co. N.V., Research Division - Research Analyst [34]

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If I take a step back and look at the first 4 years, right, in material technology, you've had an economic tailwind. And you've invested about EUR 0.5 billion via CapEx and via M&A, which equals about [50]

(technical difficulty)

But if I look at (inaudible) growth and also, first -- and I look at turns being made of (inaudible) just like [ones -- exactly on the setose report]. Is it fair to say the best is still [off-line in speed and headlight]?

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Arno R. Monincx, Aalberts NV - CFO & Member of Management Board [35]

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Yes. I'm pretty (inaudible) if we made what sells [in '14]. When you look at the format of Impreglon when we acquired the company, that was around 6.9% EBIT margin. So this is more or less doubled within the years. We are running that business. So principally spoken, we are happy with the development of the success. Also we increase in the heat treatment division quite strongly, the EBITDA margin, if you look at 4 years ago and what has been achieved in the entire year 2018. But there are -- I couldn't say there is nothing to do. There are still room to improve. But the impact on acquisition, when you see

(technical difficulty)

ups and downs of certain sites. But at an average, one could say we are -- we have achieved what we have expected. But we have to think better.

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Oliver N. Jäger, Aalberts NV - Executive Director & Member of Management Board [36]

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That would be future.

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Wim A. Pelsma, Aalberts NV - CEO & Member of the Management Board [37]

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I think we agree that we could do better. But because we -- as you know, probably, before we did the acquisition of Impreglon, we made already -- in our service treatment and heat treatment, we made already 14.5% EBIT.

And I think it has also to do with the integration of the acquisitions, which I think some are going well. Obviously, it take more time. So it's always taking more time. But in general, I think it's a very good question because I think we still can gain a lot there. But also here, you see that certain businesses also now, due to the market changes, are disrupting a little bit. So you have still some things which are actually by far not optimal. So maybe you should split them from the very nice business. Very good question. So my opinion is, we still have a lot to do. So maybe we don't agree here. But I think we still have a lot to gain there. But don't forget now for the first half that we had a minus 3%, minus 4% in Europe, which is highly profitable. So that doesn't help for the first half year results. Well, we compensated with other things. But we -- yes, we had lesser EBITDA.

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Henk Veerman, Kempen & Co. N.V., Research Division - Research Analyst [38]

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Yes. Last question. On the -- it was like EUR 60 million cash outflow in the first half on the acquisitions, especially divestments side. You only did one small acquisition. Is it fair to assume that was a sizable earnouts also in that figure? Or...

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Oliver N. Jäger, Aalberts NV - Executive Director & Member of Management Board [39]

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There was also in earnouts of -- and some diluted payments that we agreed when we bought the other companies several years ago. So...

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Wim A. Pelsma, Aalberts NV - CEO & Member of the Management Board [40]

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So a combination. And it was a nice company we bought, yes, that's correct. But only for a few months.

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Unidentified Analyst, [41]

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First, I had a question about -- you made an example -- I mean I can imagine how innovation would work in challenging end markets. I can see why that would work in terms of your organic growth. But you also made an example -- I was actually looking for an example of how operational excellence works in challenging end markets. How that actually helps you, whether you have a real-life example to make it a little bit more simple for me.

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Wim A. Pelsma, Aalberts NV - CEO & Member of the Management Board [42]

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Our operational excellence is something we drive already all these years. And actually, I started to -- a lot with that when we transformed the company to clusters. What you see in the last years, we drive it much more innovation, organic growth for it's superior. It's a phase that operational action, you should always do.

What is operational excellence? And we have another list of projects in each business team. And I demand at least 20 or even more value, optimize your operations in every sense. So that means in your factory, in your supply chain. Now what does it mean? You have assembly work, which is where you have maybe amount of people assembly by hand and you automate it with the machine. And that's a project.

Another thing is that you consolidate the warehouses in Zeewolde, and what we're now doing. So the building is there. So we have 7, 8 warehouses all over Europe in installation technology. And we clustered them to one warehouse, then you streamline the packaging, you streamline the branding, you stream all this. That is what we're going to do in the coming 12 months in Zeewolde. We have still some larger sites which we want to consolidate with other sites. And for example, in the U.N.

(technical difficulty)

(inaudible) reacting. I think in the U.K., we are similar producer, so even more than we are, we must take the market. So we will bring additional [revenue to U.K.]. That's - [to tack] vision there it is the factory at [Gioman]. But that are the big things. The smaller things are, it was the 10,000 a year, and you gain 50

(technical difficulty)

thousand there because, yes, you continuously think of cost reduction, automation, supply chain improvements, and that's an ongoing thing. But of course, what -- the question which was here before. We are in material technology, when you have 3%, 4% lesser volume in instrument service treatment in Germany, which we have. Yes, we have a furnace. So when you have a furnace and your furnace is filled 4%, 5% -- 4% less, you have the same cost. So you have a pretty high breakeven point. That's the business. So that is, of course, not helping the total EBIT picture. But we compensated it, but we had this 4% less. But operational excellence is helping all these -- these are examples. So not only larger things which we still have in the pipeline we still have to reduce in my opinion, 2 or 3 bigger locations into other locations in America and Europe, but that's mainly in installation technology.

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Unidentified Analyst, [43]

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And then is it also fair to assume that while you consolidate the warehouse in Europe, I think -- which we always see in North America, there might be double running costs, there might be double inventories sometimes?

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Wim A. Pelsma, Aalberts NV - CEO & Member of the Management Board [44]

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I've explained that many times. There's a big difference between America. America was a very difficult situation in the last 4, 5 years because we had 3 companies, which had all reps and agents which were stockholding. So we had a situation of roughly 75 reps and agents, which also had our inventory in the context to their customer. We had only maybe 10 to 15 own salespeople.

Now the decision we made 4, 5 years ago, and it's -- I think it's really in that period, is that we said we want to have our own salespeople, our own sales force. Why? Because when you have innovations, you can push them really to the spec. You need to have a specification sales force to come in the specification of the building projects. When you don't have that, you have no power. An agent is short-term oriented. And he can sell tomorrow this, and then after tomorrow he sells that. So you have no power.

So we made a real strategic, difficult decision to do that. That means we have to build up the sales force of 85 people, from 12 to 85, and we have to reduce the agents from 75 to -- now we have maybe 8 or 10, and pay them off. In the meantime, when the reps are stockholding that you have to build up a separate distribution network, otherwise, you can't service your customers. That's why we had that period, double costs in America.

So we did that all. In the meantime, we acquired Shurjoint, which had also 2 warehouses, and what, by the way, more than $20 million of stock. We bought that company. So we also are busy to integrate that and bring it down. And we get also ready ahead of the 2 warehouses. We did at all, this was 2016. But it was so nice acquisition and we did it. So we have it all done last year. We also changed the management because we thought we should have much more professionalized, also the cash and everything. So -- and now we make it efficient. So what see you now, this year, 30 million reduction. We start a lot of operational integration. But still, IT is not on one platform. We still have to do. So that is America.

Europe is more simple. Because you have one warehouse, and we have already all the salespeople. So -- but we just do we said, at the warehouse in Germany or France, we integrate, and then we do the warehouse in places. So we integrate step-by-step the 6, 7 warehouses in Zeewolde with a very new IT system. And so you -- it's much easier.

So I don't expect a lot of disruption, it could be a little bit. But America was -- America, we have created a great position. And maybe when you noticed in the press release, we also said we expanded business with key accounts. We scored a few key accounts in the first half, where we have next year tremendous sales. So we have to invest heavily in our production lines in Fayetteville and in Arkansas. Otherwise, we can't even handle it. So the strategy is getting traction, what we said. But still a lot to gain. It takes time. But we are coming there now. We'll be getting in the right direction. So that's also why I still feel very confident to hit the 14% EBIT in installation technology.

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Unidentified Analyst, [45]

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All right. And if I -- if I'm not mistaken, within climate technology, there is one kind of area where you guys always have a white spot, so to speak, it was air. Is that still the case? Are you looking at that still? And is this something that has to be done...

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Wim A. Pelsma, Aalberts NV - CEO & Member of the Management Board [46]

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Remind myself on that. But on the previous question, [add in].

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Unidentified Analyst, [47]

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So is it something that needs to be inorganic? Or actually, could you try to build it up organically?

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Wim A. Pelsma, Aalberts NV - CEO & Member of the Management Board [48]

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So I think you're fully right. We mentioned also air and it is still in our definition. Air, we cannot do organically. I think it's too long. So when we will do air then you have to do an acquisition. I must say, at the moment, and we also face that, that we see so many opportunities in hydronic flow control, that air is actually became a little bit on the back side. But it's still an interesting market. So I don't want to say we'll never do it. But at the moment, you can drive organically your -- what you have is much more interesting than doing, again, a broader activity. So probably for the coming years, we will not pursue air. But exploit everything we have in hydronic and get rid of some old portfolio and maybe integrate even a little bit more than we did till now. But we'll come back to that in December.

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Unidentified Analyst, [49]

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And then my last question was more kind of a management message for myself, is how -- I mean on one hand you say innovation, you need to look 3 to 5 years out and it will help your business overall. But currently the challenging end markets also dictate, and I think Mr. Jäger just mentioned it, okay, we see a little bit weakness in automotive end markets. So we shift a little bit of the CapEx that we spent there, maybe down to 0, to other areas. How does that challenge the short stream of that and the long-term is of -- I mean it seems like a contradiction in terms. But so how should I -- how do you balanced basically the CapEx allocation in terms of short-term and long-term?

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Arno R. Monincx, Aalberts NV - CFO & Member of Management Board [50]

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What it has to do with, we also there, we guided, we said when we have the CapEx, we have 40% we spend on innovation, 30% we spend on efficiency and 30% we spend on capacity expansion. And where my colleague was referring to is the capacity expansion. So that's the first thing you cut because when you see volume going down you're cutting capacity expansions immediately. Yes? But the innovations, you protect. Growth areas, you also protect. You even give more money. So what we did -- actually he did, is that he cut capacity here and there and that we spend actually in innovation more, especially in additive manufacturing-related processes in North America.

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Unidentified Analyst, [51]

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All right. It's [Zack Povich, Lucerne]. A few questions on the margins. So the added value margin went up by 50 bps, which I think is quite impressive. Can you talk a little bit sort of what has been driving that? Was that product mix, pricing, anything else you would highlight?

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Arno R. Monincx, Aalberts NV - CFO & Member of Management Board [52]

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I think pricing was limited to between 0.5% and 1%, I would say, also because material prices were quite stable, of course. And yes, let's say, we made, of course, again, an improvement of our portfolio. And so that is supporting this improvement. And what we already said earlier is, let's say the margin in installation technology also a little bit lower. But take into account the less stock build that we made there. So still there is also upside, we believe, like, we've already explained also in earlier with the potential for the future.

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Unidentified Analyst, [53]

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And would you be willing just to share sort of how much that impacted the stock reduction on margins? Was it like significant?

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Wim A. Pelsma, Aalberts NV - CEO & Member of the Management Board [54]

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I would say that has cost us a few million. Yes. Maybe because of that (inaudible)

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Arno R. Monincx, Aalberts NV - CFO & Member of Management Board [55]

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I think it's more than a few million. But it's, let's say, few million.

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Unidentified Analyst, [56]

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Okay. And then sort of we actually see a lot of companies struggling with the cost inflation, labor cost inflation in Germany and in the U.S., et cetera. You actually seem to manage that really well given the EBITA margin development. Okay.

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Wim A. Pelsma, Aalberts NV - CEO & Member of the Management Board [57]

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There's a tricky thing there. The tricky thing is that wages always take longer. So we expect the second half and next year that there will be a big impact. So we already discussed a lot in the management team to increase prices based on that's -- it's going very slowly. Because things are -- you get a wage increase and then they say often, it will go on, on the 1st of July or 1st of Jan. So the wage increasing. That's also a discussion you have now in several countries. Why don't people have more salaries? I think it will come. Because we -- it's already agreed. And so we have to adapt on that. It's -- that's what...

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Unidentified Analyst, [58]

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So from that perspective, it's reasonable to assume that the pricing components on the top line also goes up a bit? That you actually have to cover up for wages.

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Wim A. Pelsma, Aalberts NV - CEO & Member of the Management Board [59]

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I think we have to -- we really have to compensate for that in the second half, but mainly next year. And when you don't do that it's a big risk because it sort of -- it kills you because it comes in very slowly; it's like raw materials.

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Unidentified Analyst, [60]

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All right. And then I would also just on materials technology, right? Because you indeed mentioned actually quite a significant headwind from the lower production in Europe, but the margin still went up, which I think is quite impressive. But what was actually helping that so much?

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Oliver N. Jäger, Aalberts NV - Executive Director & Member of Management Board [61]

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What I tried to explain that we made good cost management in Europe to stream margins and then we had a better business in Eastern Europe and as well in North America.

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Unidentified Analyst, [62]

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And what does it tell us about the second half of the year, if those volumes would indeed be more favorable, given the phasing of the auto unwinds?

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Oliver N. Jäger, Aalberts NV - Executive Director & Member of Management Board [63]

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We don't give margin guidance in detail. But if the automotive guys make what they're saying, I think then we are very positive.

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Unidentified Analyst, [64]

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Okay. Very clear. And then maybe also front loading the CMD. But I know you get to sort of the 3% organic sales growth targets 2 years ago.

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Wim A. Pelsma, Aalberts NV - CEO & Member of the Management Board [65]

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No, we gave at least -- average organic. But I think this is so difficult to explain every time. There's even (inaudible)

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Unidentified Analyst, [66]

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But it's at least 3%, which I think that's a fine -- the end marks were a bit more favorable [that I guess we do]. How do you see that sort of going forward, because it seems that the innovations are still accelerating? Do you also think that at least it could be more than 3? And we now have data (inaudible)

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Wim A. Pelsma, Aalberts NV - CEO & Member of the Management Board [67]

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We always said more than 3 because you said at least 3. No, but I think the message I also gave is that we see a lot of opportunities in our existing business. And some plans are working out well, some are exceeding our expectations and some plans are a little bit behind. So then it's wise to sometimes go through that whole sales cycle again and maybe say hey, I can maybe focus more on the things which are growing faster and I look at my capital there. Which you do every quarter. But from a business point of view, you have to review it and that's also what we are doing until December. And then it could be that you have a higher growth phase, yes. Because organic growth is by far the nicest growth. When you realize your operational leverage in your drop-through and that is also very important that you stick to your operational excellence, that you create also the leverage.

So yes, let's see.

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Oliver N. Jäger, Aalberts NV - Executive Director & Member of Management Board [68]

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It's not about the growth, it's about profitable growth. And that direction.

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Unidentified Analyst, [69]

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But we do certainly agree. I've got one question left that on advanced mechatronics. Like in the past, you've been a bit more elaborate on the fact that you might want to go greenfield into Asia to follow your clients in that respect. And I just wonder whether you could take me through what kind of metrics would be needed to actually follow up on that decision given that it seems unlikely that you're going to be doing large M&A in that area, given your comments on multiples. I was just wondering whether you could expand there a little bit.

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Wim A. Pelsma, Aalberts NV - CEO & Member of the Management Board [70]

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Yes, 2 comments on that. You're right, with the large multiples for buying a platform. The other disadvantage of buying a platform -- we investigated, by the way. We even talked to possibilities. The other disadvantage that you buy something where we are not so focused as we are today. I think the strength we have in advanced mechatronics is that we do the motion control systems, including the frames and the high-purity gas systems. And there, we are real specialists with our own IP. So we develop ourselves. And we have our own project management that also protects your margin. The moment you become a contract manufacturer, we don't want that. So when you buy a larger platform, which we investigated, you get a lot of things with it, and you pay a high multiple, which you don't like. And then you have to clean it up again in the coming 4 years. So when we could do a small acquisition, which would help us to start up quicker, that is the preference. And you are fully right, that is a real hot topic for myself. Because we need to be there. We get -- our customers ask us that. So we are working on that intensively. So hopefully, we will succeed. But it will probably be more a bolt-on or small or a greenfield or a combination.

And then it opens a lot of possibilities. And we have their footprint. As also you are aware, we're also investigating what is the best place.

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Unidentified Analyst, [71]

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Maybe one follow-up, actually, because you sound very excited about the semi, specifically. Is there anything that you could do to sort of boost that, expose to the group significantly by an acquisition or...?

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Wim A. Pelsma, Aalberts NV - CEO & Member of the Management Board [72]

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And I just explained the situation in -- what it might be in advanced mechatronics is it's a very young business, young as in age. And the supply chain is really -- in my opinion, the supply chain is one of the biggest issues of the bigger Tier 1s. So we have decided 3, 4 years ago to completely focus on that. So that's also the reason why we sold off a lot of other companies. And so when you look to the original activities we have, we have actually left advanced mechatronics. And there we acquired these and that's [mech tech]. In the meantime, we grow rapidly organically with our facility, also in our office in [Ranshofen] in the high-tech campus, and that will continue.

But I want to stick to the strategy. That means the technology I have, I want to expand worldwide. So -- and then doing a bigger acquisition, it disturbs actually your strategy. So I think we have a much higher profitability and sustainable profitable growth when we would do a smaller bolt on, and get a footprint in the market. And then accelerate, I believe, with organic growth. So I think organically, we will -- we have big plans there. So I think even without an acquisition, it's -- the coming 4, 5 years, also from 2020 onwards, it's a very prosperous future.

It's -- but you have to look a little bit further than only 3 months. That is the only request to you. Because it is so simple, yes? You have 5G, which will come. You have autonomous driving, which will come. You have more mobiles. Your children need more memory to memorize all the videos they make from their friends. There is building data centers everywhere. So that -- it's all based on more calculation power and more memory. And therefore, you need to bring it in smaller surfaces. And that is, for example, what also a company like ASML is doing. We are one of the top suppliers in that world. We are in EUV. So when EUV goes to 40 we also go to 40. Yes, it's so simple. But yes, then you have a small dip here. Yes. And then we are very well positioned. We invested a lot and preinvested, and that's also why we still make growth this first 6 months. And I will do the same in Asia. I will do exactly the same. But maybe I should get rid of other business to support that business more.

That's correct. So it's -- but it's not -- I'm not only positive about the semicon, I think climate also has -- but also integrated banking systems, there's a fantastic future. But advanced mechatronics, we started to bring together already 3, 4 years ago to cluster it. Integrated piping system, we closed the last one 1.5 year. And so there, you still go through certain turmoil what I explained. Yes. More questions.

Okay. No more questions. Then we have some questions left through the webcast.

Question one. Martin [Dendriver, Abient].

Why declined EBITDA margin installation technology, despite organic growth and the positive effect from divestments?

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Arno R. Monincx, Aalberts NV - CFO & Member of Management Board [73]

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I think we already touched this topic. And the main explanation is that we build off stocks or, let's say, that we did not build up stocks for EUR 55 million versus last year. So that's a big difference. And this is actually the reason that the EBITDA margin declined slightly despite completion of new distribution center structure in the U.S. and the sales catch-up delayed orders in Q4, coming in H1 '19. And [fen 3] continue to creep up certainly.

What is the cause of the increase other than organic growth?

Now this is -- this has to do -- what he means is the IPS, this in the U.S. where we -- as we explained already in the -- during the meeting, where we decreased the stock, really from the end of '18 until now, we decreased the stock so that is something that is not -- that it is creeping up. The total inventory creeped up a little bit because we also built up some stocks, and we did some acquisitions, of course. And so also there we have some adding of inventory. But the increase of stock, that was mainly in advanced mechatronics where we are preparing for, hopefully, higher demand in H2. And the rest is the foreign exchange differences and the acquisitions and divestments.

What is the reason behind the swing in payables between H1 '18 and H1 '19? Now the reason is that in H1 '19, we pressed -- or let's say, in end of '18, we pressed our payables a lot. Because we pushed also, we try to compensate actually the stock buildup that we have done in -- during -- during 2018, but also in H2. So therefore, we had to stretch payables a lot at the end of '18. And as John Eijgendaal already explained in his meeting in February, we had to take into account that it would be a pushback when you're going to open the balance in '19 because then, of course, you get the kickback of all these delayed payments, which is a negative. That is what we now have swallowed, I would say. And we compensated that by bringing the stocks down or at least less up. So that is the whole balance that we brought in, working capital much more healthy than at the end of last year.

A lot of questions. Aalberts was once indicated as a share with Brexit implications by ING. What are the implications of the Brexit for H2 in 2019? How does this influence the outlook?

Yes, I would say that, of course, we have some business in the U.K. in pounds. So when the pound is really devaluated, of course, that will hurt us for the foreign exchange differences. But we still have a local production with a local cost base and local business. And we are not exporting a lot to the U.K. We are more importing and exporting from the U.K. to the U.S. So we believe that with the strategy of, like Wim explained in the meeting, to really invest also in the local image of local production in the U.K. I think that is the best way to attack this risk.

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Wim A. Pelsma, Aalberts NV - CEO & Member of the Management Board [74]

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One thing maybe to add is that what -- as we always said, it will not be a very big impact. But what is not helping that's also what we wrote in our press release that is challenging because what happened, the 31st of March, it was announced that there was Brexit. So what did everyone in the U.K., they built up stock. So we had some nice orders. Yes.

So then after the end of March, suddenly there's no Brexit. It's now the 31st of October. So what did everyone -- who [sold down]. So what will happen probably now after summer, stock up. Now I can tell you one thing and that's the same is where you have a production where you have to work like that, it's not very efficient. So that doesn't help. And that's also why we wrote it that it is a challenging situation because -- so you have to build up stock. Otherwise, yes, maybe you can't sustain your deliveries. But then you get not a very stabilized production. And that is actually the main effect. On the other hand, we also do a lot in the Middle East, so the cash price is only reducing. So it can also take advantage. But our answer will be that we will utilize more our footprint, and utilize more our very strong market position to create more added value because we have a very integrated, a very long vertical integration also in the U.K. because we make our own bars of brands, we machine, we assemble. So we can utilize that more and then maybe decrease somewhere else and consolidate the factories, then we can take big advantage. And innovations. So we're launching in the second half a lot of new valve innovations to get market share where we are pretty successful actually also in the first half. But these disruptions doesn't help. And we know now who has been chosen to the new Prime Minister, so let's see what happens. But it's not a big implication by [ENG]. By the way, there is somebody of ING here, so.

Can you expand on your view and your most important asset, your employees? Salaries are going up, shortage of [pros at] personnel. What is your plan?

That is a very good question. Yes, what we see is that we have to do a lot of initiatives to get the right qualified people everywhere. So we initiated with our human resource development network, a lot of initiatives to -- also with external parties to reschool people from outside, to bring people to other jobs, but also automating equipment. So by automating equipment, you need less of people for assembly, for example, where you can utilize the people in other areas of your company. I'm not sure, until now, it's -- we still can find when we want good qualified people, but we have to really bring it to a higher level. So you find good people, but they don't have the right skills. So you have to train them. We put a lot of effort in with -- and yes, it's a challenge, but we still manage, especially in advanced mechatronics, we showed a huge increase in the last 2 years. In 2018, we took in 180 people, only there. But we still managed to find them. But the most point is that they did not always have the right skills. So we have programs in place now to really bring them to a higher level.

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Oliver N. Jäger, Aalberts NV - Executive Director & Member of Management Board [75]

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Now it is in Germany and in other countries. And the employee topic is more a strategic thing. When you look at the last years, what we all did with the acquisition and the development and bringing business together, who is doing that, but it's not the ones sitting here on the table, that our management team is doing that, that we have developed them. And it was always strategic to develop the people in the direction we need to develop them. And where we can't do that, where we have sources opening, yes, we looked at the outside and try to add qualifications to the management team which we are needing to be successful in the future. And if somebody asked was your plan? And if you start working on that today. I personally thought that might be a bit late. With the strategy we have in mind that one big part of the strategy besides putting machines and entering markets, making greenfields, making acquisitions, human resource development is an integral part of that strategy.

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Wim A. Pelsma, Aalberts NV - CEO & Member of the Management Board [76]

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And we have now an Aalberts network run by my colleague, which is [HRD], where we really have now a very nice group of persons which are really coming together and making these plans also and exchanging the plans jointly. So it's also talent development is shifting with certain people to other positions. So we put a lot of attention on that. Very good question because it's -- in the end, all about people on the right place.

Okay. Then I would like to thank -- we have no questions anymore. And I would like to thank everyone in this room, but also in -- at the joining the webcast. So thank you very much and for your presence. Thank you.

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Arno R. Monincx, Aalberts NV - CFO & Member of Management Board [77]

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Thank you.

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Oliver N. Jäger, Aalberts NV - Executive Director & Member of Management Board [78]

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Thank you.