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Edited Transcript of ANDR.VA earnings conference call or presentation 2-Aug-19 6:30am GMT

Half Year 2019 Andritz AG Earnings Call

Graz Aug 10, 2019 (Thomson StreetEvents) -- Edited Transcript of Andritz AG earnings conference call or presentation Friday, August 2, 2019 at 6:30:00am GMT

TEXT version of Transcript

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Corporate Participants

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* Wolfgang Leitner

Andritz AG - President, CEO & Member of Executive Board

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Conference Call Participants

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* Andreas P. Willi

JP Morgan Chase & Co, Research Division - Head of the European Capital Goods

* Joerg-Andre Finke

HSBC, Research Division - Head of Equity Research Germany and Analyst

* Robert John Davies

Morgan Stanley, Research Division - Equity Analyst

* Sebastian Growe

Commerzbank AG, Research Division - Team Head of Industrials

* Sven Weier

UBS Investment Bank, Research Division - Executive Director and Analyst

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Presentation

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Operator [1]

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Dear ladies and gentlemen, welcome to the presentation of the H1 Results 2019 of ANDRITZ AG. (Operator Instructions).

May I now hand you over to Dr. Wolfgang Leitner, CEO, who will lead you through this conference. Please go ahead, sir.

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Wolfgang Leitner, Andritz AG - President, CEO & Member of Executive Board [2]

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Thank you very much. Good morning, everybody. Welcome to our half year results.

Yes, and overall, I think we are reasonably satisfied with the second quarter and the first half. I think we have performed quite well in many areas. Obviously, there are business -- there is one business area where we certainly cannot be satisfied, also this is not a specific language, but this is the automotive industry and its suppliers that clearly are in a more difficult situation.

To start on Page 3. Group order intake with above EUR 2 billion. It's the second highest quarterly order intake in our history. So clearly, we are very happy about it. We had an excellent order intake in Pulp & Paper, across all divisions, not only Pulp but also biomass, power, also paper are quite good.

And we have a reasonable order intake in Separation. And Hydro and Metals are on the lower side. Hydro, is stable at lower side, Metals are also.

Sales increased to about EUR 1.6 billion, strong increase in Pulp & Paper. Hydro and Metals are down on a year-on-year basis. In Hydro we see on the sales side, the shrinking order intake over the last several years, now being translated into sales.

EBITA at EUR 95 million, practically unchanged. So the EBITA margin, 6%. So a good margin development in Pulp & Paper, clearly unsatisfactory in both parts of the Metals. And Hydro and Separation on an okay level of intake.

On Slide 5, you see details for the order intake. On the left side, in the second quarter and on the right side, in the half year. The quarterly order intake is up 18%; Pulp & Paper, up 55%. The other areas down, Hydro 10% down; Metals 4% down; and Separation 17% down. For Separation, Q2 2018 has seen a large project being booked for EUR 45 million so the EUR 179 million that we see here for Q2 2019 are still a very good order intake.

On the right side, first half year, up 13%; on an organic level, up 4%. Similar picture, Pulp & Paper up substantially, 63%. The other business areas down.

If you look on Page 6, the quarterly development. You see the development since Q1 2015. And you see also that EUR 2,047 million order intake in Q2 is the second highest -- was only surpassed by Q4 2015, with EUR 2.25 billion.

Regional split on the right side, Europe and North America, slightly above 50% as is [typical.] But then you see that South America is up substantially from 5% to 20%, these are the Pulp contracts, basically; and correspondingly, in China, down from 21% to 11%; and Asia, went slightly down from 15% to 11%.

Yes, overall, also Xerium, with about EUR 111 million on very good [bank].

On the sales slide, Slide 7, basically the same picture. Pulp & Paper up substantially; the other business areas, slightly down. Separation is up 11% in sales for the half year, and 4% for the first quarter -- for the second quarter, sorry. On a half year basis, overall, 11% up, growth coming from acquisitions on an organic level, flat sales.

Slide 8 shows the development of the service business, sales in service. Good trends, last 2 years, basically. And see also that the [sales] picture has now grown to about 40%, 41% of total sales.

And on the next page, you see the split for the 4 business areas. So in Pulp & Paper, we have now already more than half of our sales come from service from the aftermarket. Separation traditionally has had a high share of aftermarket, close to 50%, and the Hydro and Metals being in the high 20%s share of service business. More or less stable. The investments we are increasing we have acquired a nice company for the steel industry that certainly has increased our service sales there.

On Slide 10. Order backlog has been growing continuously since middle of 2017, so in the last 2 years, we are now at EUR 7.7 billion, nearly a record high order backlog. Again, mainly driven by Pulp & Paper. Hydro traditionally has a high order backlog, so the 2 of them account for 3/4 of our total order backlog.

Moving on to earnings on Slide 11. And [the actual] number is flat, EUR 94.7 million in Q2. Slightly up for the first half from EUR 166 million to EUR 177 million; percentage-wise in Q2, down from 6.4% to 6%. And for the first half year, down from 6.0% to 5.8%.

Now we had in the first half -- we had about EUR 8 million nonrecurring costs, which we did not show separately. If we would separate that, the first half year would also be in the range of 6%. So a relatively stable profitability for the first half year.

If you look at Page 12, the profitability by business areas, you see 3 green arrows and one red one. So Hydro is up compared to the first half year 2018; and then Pulp & Paper, slightly up. So when I was -- when it [disturbed] to the market, when I said at quarter -- first quarter presentation that I cannot guarantee a continuation of the very higher margins, in Pulp & Paper, you'll see they're still very high. Separation is also continuing to improve, now it's 5.3% for the first half. Metals is clearly at a low point. Unfortunately, both parts of Metals are -- have problems with the profitability, but we'll get to that in more detail in a few minutes.

Slide 13, very positive good development of our net working capital in the second quarter mainly driven by Pulp & Paper. You see, Hydro is still slightly up, as I'd indicated also that we expect a slight increase for the next 2 to 3 quarters in Hydro. Pulp & Paper is substantially down EUR 79 million, Metals is down. Separation is down. So overall, we could reduce our net working capital compared to the end of last year from EUR 160 million to EUR 80 million, so nearly cut in half which obviously is a very good development.

Slide 14, cash flow development. Good cash flow. So you see the main contributors. Obviously, you see the details here. The -- increasing contract liabilities, it's EUR 98 million of cash flow, positive (inaudible) Cash flow comes from EUR 138 million increase in contract liabilities. EUR 75 million -- so the other thing -- the other direction, increase in inventories. Decrease in trade receivables. Increase in advanced payments made. Decrease in contract assets. Some other smaller changes. So overall, our cash flow from operating activities of EUR 272 million is really good. Free cash flow, we estimate at around [EUR 150 million, EUR 156 million.]

Slide 6 -- Slide 15 shows you the bridge -- gives you the bridge from EBITDA to net income. And from an EBITDA of EUR 263 million; depreciation EUR 85 million; IFRS 3, the amortization of intangibles, EUR 44 million; some small impairment of EUR 4 million. Gives an EBIT of EUR 129 million. Financial results around EUR 20 million, EUR 21 million, consequence of higher interest expense due to some additional bonds, basically Schuldscheindarlehen and a lower net cash position, lower interest rates also total a minus EUR 21 million. EBT of EUR 108 million and income tax, 29.9% at -- takes you down to EUR 76 million or 2.5%.

On the next slide, summary of the figures. And I think we have covered everything more or less, capital expenditure at EUR 62 million, of that about EUR 7 million coming from the -- from the newly acquired companies.

IFRS 16 leasing accounting, obviously has had quite a sizable impact. Our total asset number went up by EUR 221 million. [EBITDA] went up by EUR 26 million, depreciation went up by EUR 23 million. EBITA, therefore, plus EUR 3 million, interest up by EUR 2.6 million as effects of the IFRS 16 leasing accounting.

Moving on to the 4 business areas on Slide 18. Hydro, still weak markets. You see the order intake is still low. We see a few larger projects around. We do not expect any substantial increase or improvement. We continue with our adjustment of our capacities. And as I've said in the first quarter, we continue to consider -- or to see the Hydro business area and the hydro market as attractive but at a lower level than it used to be some 5 years ago.

Slide 19, is the results. Order intake, EUR 600 million in the first half year, and sales at EUR 675 million so we are approaching now -- sales are approaching order intake and EBITDA margin, 8.9%, and EBITA margin, 6.5%. Split more or less half-half developed markets and emerging markets.

Pulp & Paper, obviously the brightest spot in our universe, very good activity in Pulp. Reasonable activity in Paper. Very good activity in biomass boilers, especially Asia -- Asia and Japan. And well a stable competitive environment.

On Slide 21, we see some specific projects. So we received from Arauco where we build the better part of their pulp mill. Currently, we received maintenance contract for next -- for 9 years for the complete mill, including the equipment that is being supplied by our competitor.

We will, according to IFRS, we'll book this order intake in annual installments. And this has been the biggest and longest maintenance contract we have ever received. It's a -- sort of the landmark for [exhibitors] in this field. It strengthens our aftermarket activities, gives us a long-term presence in -- with one of our larger customers who until recently has been predominantly buying equipment from our contribution source, so that gives a very good achievement.

[To date we received] about half the mill for Klabin pulp mill, it has been booked in our second quarter. And we received a large additional pulp mill order that has been booked, partially in Q2, and a large part will also be booked in Q3. So that is not yet fully reflected in our half -- first half year order intake. Overall, very good development. And clearly, technologically, appreciated by our customers.

On Slide 22, you see the numbers, order intake up substantially, obviously. Sales are up, and the EBITDA margin, 12.4%, up 2 points; and EBITA margin slightly up from 9.2% to 9.4%. Yes, [makes sense.] Xerium obviously, has added to that also in sales, EUR 113 million. Xerium is on good track as we had hoped and we see a lot of mutual support between Xerium and our existing aftermarket activities. So we are -- also we have said we do not expect substantial growth from within the Xerium business because it's a mature business. And we still think that it's correct but still we are optimistic that one or the other change [we should have to] either gradually improve profitability further or create one or the other growth area.

So the low point is on the next Page 23, Metals. In forming, which is Schuler, and we have received a few large orders but overall, still a very moderate project activity, and a very low activity in Europe. Still a lot of uncertainty in China. And also in the traditional metals processing part, we still suffer from some individual order events, and we see a substantial slowdown in the project activity industry. So we're more cautious on this Metals Processing side as a consequence of this very tough price competition. We have stayed away from one or the other project because we were not willing to reduce our price as much as some of our competitors.

So Slide 24. And I'm sure you have read our ad hoc release in the beginning of this week, I think. And so we have -- and as we have announced in our first quarter communication, we have been analyzing the situation during the second quarter and have now come up with a plan. The plan is to reduce our workforce in Germany by approximately 500 employees, predominantly manufacturing, but to a certain extent, also in the other areas.

We will take in the third quarter, a one-off charge of EUR 85 million, plus we'll book an impairment of goodwill of approximately EUR 25 million, predominantly from Yadon Company in China that has been acquired by Schuler a few years ago, to a small extent to another acquisition in the tooling and parts area.

Obviously, in Germany, it takes some time until you can really go ahead with workforce reductions. We hope, given the situation that practically all participants in the automotive supplier industry has to adjust for the new situations and have to reduce their workforce -- we hope for a rather quick agreement with the workers' representatives with the unions because I think there's no question that the market has changed and will not change back quickly.

So -- but we do expect that we'll see the first positive effects in the second half of next year. And then a majority of effects until the end of 2021. We hope that -- we have already started last year a restructuring program, so the 2 combined, we expect savings of approximately EUR 60 million from 2022 onwards.

And Slide 25, a quick history of Schuler. When we acquired Schuler, we acquired it at approximately 4.1x or 4.2x EBITDA. That time, we already communicated, it has been a year with the highest sales and the highest profits, so we expected some reduction over the years.

If we look at the 6 years after the acquisition, we had an EBITDA, excluding extraordinary items of EUR 676 million, including the one-off charges, around EUR 610 million. So in hindsight, the price we paid was 5x EBITDA, still a very reasonable multiple for a global market leader.

We -- as we have said, I think we've -- this acquisition of Yadon has been very important, although we have now a certain impairment over the short-term outlook of the Chinese market. But it has helped Schuler a lot to increase its competitiveness. We are optimistic that [until its] adjusted structure, Schuler to the market and to where the markets are, meaning Asia predominantly, but also South and North America, it should be back to good profitability. And be an important part of our overall business.

And on the next page. You see the numbers. So in EBITA, we had in the first half year, a loss of EUR 6.9 million, which was basically evenly split between Metals Processing and Metals Forming, so on a percentage basis, Metals Processing has performed worse than Schuler. So we need to have a close eye on Metals Processing, not so much in terms of restructuring but in terms of order execution, in terms of finishing this low margin or negative margin orders.

You remember this strange case of customs protect -- order protection in the U.S. with a wasp nest in one of the boxes that we had supplied. This is still ongoing, so we have increased the provision for that. Hopefully, we can resolve it [until] the end of this year. Schuler, obviously in fighting with under-absorption, under-utilization, but that should be taken care of once we can proceed with the restructuring program.

Slide 28, Separation. Overall good development, good activity, improving profitability. Overall, good development in spite of the fact that order intake is down 5%, but remember, that EUR 389 million in the first half of last year in order intake, included the EUR 45 million or EUR 47 million order intake of the large project. So net of that, so the order intake would have increased. And we continue to be optimistic for the full year. EBITA margin, up from 4.3% to 5.3%.

So that shows the 4 business areas. And on the last Page 31, guidance is unchanged. We continue to expect a good increase in sales compared to 2018, based on the order backlog. Also the large orders we booked in the first half of this year will contribute only very little to this year's sales.

And profitability, EBITA margin, we expect to reach the level of 2018, obviously excluding extraordinary effects from the restructuring, predominantly Schuler.

So that's my presentation. And I look forward to your questions.

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Questions and Answers

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Operator [1]

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(Operator Instructions). The first question received is from Sven Weier from UBS.

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Sven Weier, UBS Investment Bank, Research Division - Executive Director and Analyst [2]

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I ask them one by one. The first question is regarding M&A pipeline. Obviously, we've all seen the bankruptcy of Eisenmann, and I guess, in the old days, that would have been probably an interesting target for you. And I was just wondering, given the situation at Schuler and the difficult situation in the auto industry, if you have absolutely 0 appetite for something like that or whether you could give us any color? That's the first one.

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Wolfgang Leitner, Andritz AG - President, CEO & Member of Executive Board [3]

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First of all, we do not comment individual M&A projects. Having said that, I would say, a very limited appetite. And we always look at opportunities. But our main goal is to further -- first of all, we have made large acquisitions last year, so we had said we will be rather -- we're definitely cautious on acquisitions this year concentrating on integrating especially Xerium, making sure it develops favorably. And overall, we see our -- the more attractive areas in the aftermarket with a continuing business, which comes in small pieces and not the very big ones. It doesn't mean that we are saying nothing is of interest, but do not expect any great things this year from us.

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Sven Weier, UBS Investment Bank, Research Division - Executive Director and Analyst [4]

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Okay. The second question would be just on Metals. I was just curious, the order intake volume you had in the first half on the one hand, and if you look at your pipeline, on the other hand, is that something that the pipeline would also support for the second half?

And also wondering, you obviously talked about the restructuring at Schuler. If you could give us some trajectory on the EBIT margin development for Metals until 2022, when the cost savings should be up to speed.

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Wolfgang Leitner, Andritz AG - President, CEO & Member of Executive Board [5]

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In order intake, we have -- basically, we don't see any -- if the question was whether it would down or whether it would go up, I think best guess is it's a similar level as we are seeing in the first half. If I understood the question, correctly.

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Sven Weier, UBS Investment Bank, Research Division - Executive Director and Analyst [6]

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Yes, indeed.

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Wolfgang Leitner, Andritz AG - President, CEO & Member of Executive Board [7]

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And the second question was margin development in Metals overall. Yes. I mean it will be -- still it will stay low on an operating level this year. But -- and then for Schuler, I think we've said, we hope to see some beginning improvements second half of next year. Metals Processing, we hope to see an early improvement, but we are cautious and would like to see a confirmation of that rather than being too confident on a short-term improvement of margins from Metals Processing.

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Sven Weier, UBS Investment Bank, Research Division - Executive Director and Analyst [8]

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But do you see more of a steady improvement or really very back-end loaded in those years?

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Wolfgang Leitner, Andritz AG - President, CEO & Member of Executive Board [9]

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For Schuler or for...

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Sven Weier, UBS Investment Bank, Research Division - Executive Director and Analyst [10]

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For Metals as a whole, for Metals as a whole.

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Wolfgang Leitner, Andritz AG - President, CEO & Member of Executive Board [11]

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Well, I mean Schuler, is about 2/3 and Metals Processing is about 1/3 of total metals, roughly speaking. Metals Processing should be improving, as I said, earlier during the second half. This year, clearly, Schuler will stay difficult second half of this year because we cannot really [rule out] before we have found agreement with the unions. So Schuler will start to see some improvement gradually from probably second quarter of next year. Starting from second, next year, not back-end loaded but I wouldn't say then -- from then on in a -- more or less same inclination.

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Sven Weier, UBS Investment Bank, Research Division - Executive Director and Analyst [12]

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Okay. And the third question, last question is on Pulp. First of all, I was wondering (inaudible) was mentioning that June was showing some weakness. And we obviously heard that comment from other industries and wonder if you had any comment on June, particularly in your business, and especially in Pulp? And then also in terms of greenfield awards, I mean how many do you still see pending decision-makings in the near term?

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Wolfgang Leitner, Andritz AG - President, CEO & Member of Executive Board [13]

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Well, I cannot comment to [June,] that's -- I mean clearly the Pulp market has broken down, basically, since the -- since, February I would say, or somewhere like that, where the prices have really seen falling -- been in free fall. Probably by [payroll] impact, substantial price increase to an unsustainable level end of last year. And high production, buildup of a huge inventory and shipping to China and storing in warehouses in the ports in China, which obviously was noticed by the Chinese consumers. And that -- with that, clearly, the prices have turned around and went down to basically, as low as it has ever been in the range of $500. That -- so the market for Pulp, clearly is in big difficulties.

And on the project side, we still see very good project activity. Now we have to separate -- there are 2 -- actually there are 3 Pulp markets. The one is for long fiber which is in the Northern Hemisphere. The second one is for short fiber, which is in South America, predominantly, where we have [just talked on the] price. And the third market is for dissolving pulp, which goes into viscose fiber, which then goes into textiles. And this viscose fiber, there is some sizable investment activity. Lenzing has announced, they want to build something on the short fiber market. There is also some sizable activity. Now we have -- even a lot of the technology, where it can produce all types of pulp with the same equipment. And that has been attractive for our customer -- for customers. And -- but also on the pure short fiber pulp. I mean UPM has announced they want to go ahead with their second pulp mill in Uruguay. So on the project side, we still are optimistic. Will these projects be really realized? It's always a question. UPM has confirmed it in the end of July that they want to go ahead. Lenzing, in principle, have confirmed they want to go ahead but have not made, let's say, as strong a decision as UPM.

So from my standpoint, [we are] cautioned, but I think -- I don't think the orders we have seen being placed -- has been placed in the first half of this year have been the last for this year, inclusive one or the other additional order in the second half of this year.

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Sven Weier, UBS Investment Bank, Research Division - Executive Director and Analyst [14]

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And these weak price fundamentals you mentioned has also not impacted your more short-cycle business in pulp or service or brownfield or whatever? So it's basically the whole pulp equipment business that is doing strongly or any differences?

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Wolfgang Leitner, Andritz AG - President, CEO & Member of Executive Board [15]

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I think companies certainly are getting more cautious. I don't want to say that regardless where the pulp price is and where it stays, it doesn't have an effect. Yes, it will have an effect. I think currently, the participants have a certain confidence that -- or expectation that it will recover, not immediately, but in -- within a reasonable period once they -- the additional, or let's say, the surplus in inventory has been consumed. Suzano is a leading producer, has announced they will cut back production from a potential 11 million-plus tons to 9 million tons to 9.5 million tons. So that should help, I would say.

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Operator [16]

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The next questioner is Andreas Willi of JPMorgan.

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Andreas P. Willi, JP Morgan Chase & Co, Research Division - Head of the European Capital Goods [17]

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Dr. Leitner, I have two questions, please. The first one on Hydro where the first half order intake is probably a bit lower compared to the EUR 1.4 billion, EUR 1.5 billion level needed for this to be a stable business. Are you still confident that we can kind of get to stability on order intake at that EUR 1.4 billion, EUR 1.5 billion despite the weak first half?

And maybe on the Metals Processing and the issues on the orders in the backlog -- or the orders in execution now, you said that may start to improve in the next few quarters. Could you just elaborate a bit more in terms of the number of projects and the specific issues. And you mentioned earlier, the U.S. project that's causing the problems here.

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Wolfgang Leitner, Andritz AG - President, CEO & Member of Executive Board [18]

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Yes, with regard to Hydro. It's obviously very difficult to be confident on order intake because it's something, if you don't have it yet, so you cannot be overly confident. But I think though it's a good chance that second half should be better than first half. Will it be -- will it reach this EUR 1.4 billion to EUR 1.5 billion level you're mentioning, I would not be too confident. It's going to be a stretch, but it's not impossible. But I think I'm [definitely] confident that second half should be better than the first half.

On Metals Processing, yes it is -- it was impacted -- first half year it was impacted by an increase of the provisions for this U.S. contract. We had a few other continuing smaller cost overruns, which were unfortunate, which were not particularly reassuring or for looking forward. Clearly, the commitment of the division is that it should improve. There is -- it's -- overall, it's a handful -- or not quite a handful of orders. Let's see how it develops. Our expectation is it should improve but I would like to see the real numbers before being too confident about that.

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Operator [19]

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The next question received is from Robert Davies from Morgan Stanley.

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Robert John Davies, Morgan Stanley, Research Division - Equity Analyst [20]

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Actually, a couple of them have been covered. But perhaps, just on Hydro, if you could give us some more color on the growth dynamics between pump storage and large hydro. And through this -- particularly, I guess, through the sort of second half of the year, just be interested to see how those different bits of the business are moving.

And the other one was just on the large pulp mill order that was booked in 2Q. I guess, I thought that was coming in 3Q? I just kind of wanted to double-check, how much of the large Pulp & Paper order came in the second quarter?

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Wolfgang Leitner, Andritz AG - President, CEO & Member of Executive Board [21]

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All right. Thank you. To start with the second question, you're right. The bigger part will be in Q3. The smaller part has been booked in Q2 because they were staggered and a bigger part came into force only in July.

And on the Hydro side, yes, pump storage is important. I mean it's our main business in China, but also outside China, it's important. We hope to book another order in pump storage in Q3 or Q4 of this year. So it's -- it plays an important role on securing a reasonable order intake level in Hydro.

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Operator [22]

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The next question received is from Sebastian Growe of Commerzbank AG.

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Sebastian Growe, Commerzbank AG, Research Division - Team Head of Industrials [23]

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First question from Pulp & Paper and on Xerium on the integration progress. Can you just update us a bit on what has happened so far in terms of how things are going on the cost side of things, and eventually also comment on potential sales synergies, have realized that, obviously, the quarter-on-quarter sales was slightly up?

And can you also just break out what the contribution of Xerium was to EBITA in the second quarter?

And the other question I have is on working capital, and obviously there has been reassuring trend in the second quarter. Can you also here give us some comments on what you believe is the further trajectory from, I think, on the quarter 1 call, you indicated that you might see an improvement by about up to -- you said, I think, a higher double-digit number. So it's still a firm and valid assessment? And can you just really elaborate on the key drivers, especially on the inventory side of things? And then receivable side of things, how you make progress here?

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Wolfgang Leitner, Andritz AG - President, CEO & Member of Executive Board [24]

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Could you repeat the second question since I did not get, this was for Pulp & Paper and increasing double-digit number or...

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Sebastian Growe, Commerzbank AG, Research Division - Team Head of Industrials [25]

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The second question was related to working capital for the group as a whole. So irrespective really of Pulp & Paper, or any specific segment. It was more really the question where you think you can land on the working capital improvement side in 2019, because you said on the last conference call high double digits, I think, was your aspiration level for the full year. And particularly, I'm interested on the specific measures undertaken for, particularly, I think, the trade receivables, collection and, yes, any update there would be appreciated.

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Wolfgang Leitner, Andritz AG - President, CEO & Member of Executive Board [26]

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Yes. Okay. Sorry, it's clear. On Xerium, we see development as planned. So we are taking out costs, EUR 10 million to EUR 15 million range. This is being achieved.

On the sales side, obviously we had not only the hope that we can grow somewhat, also very limited, as we said, but we had also the challenge of some overlap -- overlapping customers where we and Xerium were the main suppliers and the reason that they wanted to have a real second supplier, which would have meant that 1 of the 2 [outlook] would have declined. We saw some of that, not as much as we had expected. So there's also -- on the positive side.

And going forward, the integration, the atmosphere is very good. I think we see many soft synergies in terms of cooperation, in terms of being able to -- to combine certain things. This is nothing that we will push now from month-to-month, but we will let it grow. So overall, we see continuing business slightly growing.

On the Xerium side, margins are the same as in the past. Obviously, we are amortizing the intangibles that we have included here. Also some of the inventory we've taken over. So that will have a -- let's say, a limiting effect on the EBITDA. But so far, everything is going on plan.

And on the working capital side, I think with the good order intake we are obviously making good progress. So the high double digits, we have already achieved. We have -- obviously, we hope to achieve more. This program that we have on the payable side is getting started, it takes time until it really is running, and we see the first effect. So I think that should be something we should see some effect at the end of this year. And then next year with a good order intake, I think we have no reason to believe that it would swing back.

The net working capital, maybe we can continue to increase somewhat. So we are quite happy with the development and are reasonably optimistic that it's not -- this should not be a onetime event.

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Sebastian Growe, Commerzbank AG, Research Division - Team Head of Industrials [27]

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Okay, that's helpful. And if I may just ask one quick follow-up on the Metals side. Especially on the commentary around Processing, you said that sometimes that price competition -- that you walked away from some projects. Can you just give us a sense of what the magnitude behind those potential lost volume is?

And separate to that one, if I take your words that you made before on the split between Forming versus Processing, then obviously, the Processing part is around EUR 500 million, EUR 600 million, on an annualized basis. So should we expect simply that the business is coming down structurally, so to speak, because you are deliberately walking away from those very contracts?

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Wolfgang Leitner, Andritz AG - President, CEO & Member of Executive Board [28]

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No. I think we are -- our capacities have been adjusted to this level. We don't see a substantial further decline. You never know, I mean if everything stops, then obviously, that would also go down. But currently, we would not expect that.

And it's -- Metals Processing is really driven by this handful of projects which are the result of a very tough price competition, plus some new technologies, first-time orders for us, which we have booked some 2 years ago, which now are in the final stages. Typically, if you book an order at a low price, low margin, it's the chances that it will further deteriorate are much higher and if you book an order at a good margin, the chances it will further improve is also very high. So that's -- unfortunately, the rule in the project business.

And -- but again, it's not only this [tight] cost calculation, but as we have explained in the previous communications, it's first-time reference for the project in the aluminum side in the highest quality, high strength steel galvanizing side. So we hope to benefit from that in the future. But currently, project activity is very small. And as I said, from -- especially one of the projects we have walked away because it was just -- the price was not worth for us to [do it.]

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Operator [29]

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The next question received is from Joerg-Andre Finke of HSBC.

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Joerg-Andre Finke, HSBC, Research Division - Head of Equity Research Germany and Analyst [30]

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And the first one, I'll take them one by one, as well. Related to Pulp again. You mentioned UPM project, and also the Lenzing and Duratex JV in your comments. Are you in a position to confirm the client of that order that you announced?

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Wolfgang Leitner, Andritz AG - President, CEO & Member of Executive Board [31]

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I am in which position to...

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Joerg-Andre Finke, HSBC, Research Division - Head of Equity Research Germany and Analyst [32]

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I mean you haven't disclosed the details on the customer from your latest big order on (inaudible) level and is that -- has that changed? Can you disclose the...

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Wolfgang Leitner, Andritz AG - President, CEO & Member of Executive Board [33]

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No, no, no. If you make a few phone calls in Brazil. I'm sure you will hear it, but we have committed not to disclose it.

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Joerg-Andre Finke, HSBC, Research Division - Head of Equity Research Germany and Analyst [34]

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Then maybe a more general question, what is the reason that -- it seems that more EPC orders are taken again in Pulp, is there any change to the [tenant] processes in recent quarters that you experienced?

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Wolfgang Leitner, Andritz AG - President, CEO & Member of Executive Board [35]

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No. I mean we have been doing, what we call [island] EPC projects in Brazil since 2000, basically, last 18, 19 years. We have also had 2 projects in Uruguay, but that was with, maybe 1 project in Chile, but -- and we try to stay away. It is basically an established business model for Brazil. We have a lot of experience. We have been doing these type of projects in Brazil continuously for the last nearly 20 years. But in other countries, we are -- either don't do it or are very hesitant to do it or only do it in a very limited way. So it is -- we do not have a strategy to expand EPC.

We have a strategy to make sure that we leverage our technology position in the Pulp production field. And if that includes EPC projects in Brazil, that's fine; if that would include outside -- EPC outside Brazil, for example in Asia, we would not do it.

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Joerg-Andre Finke, HSBC, Research Division - Head of Equity Research Germany and Analyst [36]

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Okay. Very clear. And then coming back on Schuler, and you talked about the restructuring plans and the reduction of FTEs in Germany. To what extent will there be an offsetting effect by [building up] capacity and potentially FTEs, in say, China or other low-cost countries. Are there any plans for that?

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Wolfgang Leitner, Andritz AG - President, CEO & Member of Executive Board [37]

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To which extent, would it be offsetting what?

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Joerg-Andre Finke, HSBC, Research Division - Head of Equity Research Germany and Analyst [38]

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By building up capacity in other countries like China or...

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Wolfgang Leitner, Andritz AG - President, CEO & Member of Executive Board [39]

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Yes. Currently, we are not building up anything anywhere. But ultimately, it could lead to some build up, but we have enough capacities. Also we are currently tight in China, but we think we are -- have enough capacity on the (inaudible) scale also. So we will shift products, but we also need to shift from insourcing to outsourcing. And we have some -- in our opinion, we have enough capacity.

So we would not expect a substantial increase in workforce or manufacturing capacity now there is -- maybe a limited one yes, but not very much.

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Joerg-Andre Finke, HSBC, Research Division - Head of Equity Research Germany and Analyst [40]

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Okay. Thank you. And the last question is really on your comments that you repeated in your initial elaborations, margins of 10% in Pulp, which you indicated were not sustainable in the first quarter call. Is there any, let's say, structural change to that assessment? Or would you still see that as the Pulp -- as a peak margin, and we expect some gradual decline in the next quarters?

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Wolfgang Leitner, Andritz AG - President, CEO & Member of Executive Board [41]

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I mean it's -- there are 2 things. There are several (inaudible) it's always the same effects. We have now have very good order intake on the capital side, large projects. Obviously, large [productions] (inaudible) our capital with a lower margin. So if the share of capital goes up and share of service goes down that would have a downward pressure on the overall margin. On the other hand, if a capital project, even at a lower margin come on top of a regular level, they would go one-on-one to -- from the top line to the bottom line. So I think, as I said, we have seen some extraordinary effects in 2018, (inaudible) ones that you cannot always add up only the bulk of these (inaudible). On the other hand, this one-off effect will not be repeated this year -- until next year, most likely, we never know. So I think we are not expecting a substantial downward pressure. But to [amount] to promise that we will reach or exceed the 10% -- no, I would not want to do that now.

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Operator [42]

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As there are no further questions, I hand back to Dr. Leitner.

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Wolfgang Leitner, Andritz AG - President, CEO & Member of Executive Board [43]

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Thank you very much for participating. Thank you very much for the questions, and look forward to our next meeting in Q3 -- for Q3. Thank you very much.

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Operator [44]

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Ladies and gentlemen, thank you for your attendance. This call has been concluded. You may disconnect.