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

Q3 2019 Andritz AG Earnings Call

Graz Nov 6, 2019 (Thomson StreetEvents) -- Edited Transcript of Andritz AG earnings conference call or presentation Wednesday, November 6, 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

* Aurelio Calderon Tejedor

Morgan Stanley, Research Division - Research Associate

* Daniel Lion

Erste Group Bank AG, Research Division - 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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Ladies and gentlemen, welcome to the conference call of ANDRITZ AG. At our customers' request, this conference will be recorded. (Operator Instructions) May I now hand you over to Dr. Leitner, 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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Good morning, everybody. Welcome to our third quarter conference call. Before going into the detail, as always, a general introduction. I think we agree that global economy could be stronger. And in light of this rather weak situation of the global economy, we are quite satisfied with the results we have achieved in the third quarter and also in the first 9 months of 2019.

Order intake in Q3 is up again and reached nearly EUR 2.1 billion, predominantly driven by Pulp & Paper. Order backlog has continued to rise and after 2 years, we have exceeded the first time EUR 8 billion as backlog. In regards to the earnings development, we booked in the third quarter, the restructuring charges, predominantly Schuler (inaudible) for us some smaller capacity adjustments in the other business areas, adjusting to the overall economy.

We have seen very positive development in net working capital and the operating cash flow. So overall, in our view, the third quarter developed solidly and in line with our expectation, and therefore, we are maintaining and continue to confirm our guidance for the full year 2019.

We're now going to the details, Slide 3. So group order intake, EUR 2.1 billion. In the quarter -- third quarter, with an increase -- Pulp & Paper, extremely active. Second highest quarterly figure in our history. Order backlog, already covered, exceeding EUR 8 billion first time. Sales increased to nearly EUR 1.7 billion, predominantly due to the growth in Pulp & Paper. EBITA, obviously impacted by the restructuring charges where we booked overall of EUR 95 million; thereof Metals of EUR 84 million. And profitability adjusted for these extraordinary items at 6.0%, so at the same level as in the third quarter of last year.

On Page 5, order intake. On the left side, third quarter; on the right side, first 9 months. So a substantial increase from not quite EUR 1.5 billion to nearly EUR 2.1 billion, plus 43%. Of that, 33 percentage points organic. Newly acquired companies contributed EUR 139 million, predominantly Xerium and some other smaller companies. Similar picture on the right side. First 9 months, order intake up 22% and of that 13 percentage points organic; newly acquired companies contributing EUR 460 million. And of that, EUR 347 million, Xerium.

If you look in the middle, the changes by business area for the first 9 months, Pulp & Paper up 79%, Metals down by 12%, Hydro down by 11% and Separation down by 5%. So we see quite this different development in our 4 business areas.

Slide 6, quarterly development, continuing increase. What was driving the order intake in Q3, a large order for Pulp project in South America. But also Hydro book pumped storage power order from Dubai, believe it or not, EUR 125 million. They are building, going to build a water pump storage for the power plant.

Slide 7, sales. Again, good growth, predominantly, in this case, driven by first time consolidation, obviously takes some time to convert order intake into sales.

Slide 8, service, continuing growth. Last 4 months, we saw a growth of plus 31%. Longer term, compounding annual growth rate of 7% last 4 quarters, amounting up to EUR 2.6 billion. And corresponding to 40% of our sales, which is a very positive development and should create substantial stability in the years to come.

Slide 9, share of service business in the respective business areas. Pulp & Paper leading -- more than half of sales in Pulp & Paper are repeat service sales, more or less repeat sales. In the aftermarket, Separation traditionally has had a higher share of service sales of 47%; Hydro, 30%; and Metals, 27%. Especially Metals, [some of the] Hydro, we see good potential to increase the share of service sales on Hydro side, so we're promoting these O&M contracts, operate and maintain. Where we are running, there is a growing number of hydropower plants. The [overly] and this -- the operations are managed centrally from our control center in Italy. On the metals side, (inaudible) Schuler has -- should have very good opportunities to expand the service sales there.

Slide 10 on the backlog. As we said, highest ever, EUR 8.1 billion, a good basis for the next 2 to 3 years of revenues to come. Hydro and Pulp & Paper traditionally account for the vast majority of this order backlog.

Moving onto profitability on Slide 11. EBITA in Q3, EUR 85.9 million, 6.0% in 2018. From there, up to EUR 101.7 million before nonoperating items of also 6% and after charging of the charges down to EUR 6.4 million or 0.4%. What we charge on the right side in restructuring, EUR 84 million is Metals; Hydro, EUR 7 million; Pulp & Paper, EUR 3 million; Separation, EUR 1 million. So some minor capacity adjustments since we are rather cautious on our view on the economy for next year, you will see continuing minor adjustments in our capacity to make sure that we are fit and strong as we go into next quarters.

On Slide 12, the first 9 months, similar picture. Obviously, less impact from the restructuring charges, down from EUR 287 million EBITA to EUR 184 million.

Our business area on Slide 13, the red numbers always before -- the adjusted numbers are before restructuring charges. Pulp & Paper continuing good profitability, 9.1%. Metals slightly profitable at 0.3%. Profitability negatively impacted by under absorption, underutilization on the Schuler side. And hopefully, we'll come back to that in more detail. Hydro, 6.5%; pre-restructuring of 5.6%. And Separation quite positive, continuing good development of profitability compared to the first 9 months of last year, up from 4.6% to 5.8%.

On Slide 14, net working capital. We started the year or the end of last year, EUR 160 million. In the first quarter, it went up to EUR 183 million. Came down to EUR 84 million in Q2 and is now down to EUR 30 million in Q3. Pulp & Paper due to the booking of new orders and [down payments down.] Metals up somewhat. Hydro down. So overall cost development down to EUR 30 million.

Obviously, that contributes also to the operating cash flow on Slide 15. You see the bridge from EBT to the cash flow from operating activities. The numbers in parentheses showing you the comparable numbers from the first 3 quarters of 2018.

So depreciation, obviously up substantially, EUR 236 million. Of that is EUR 146 million depreciation. EUR 61 million is amortization, IFRS 3. Of that, EUR 39 million from new acquisitions, predominantly Xerium. And EUR 29 million, impairment of goodwill in Metals is predominantly -- it's actually -- all these [are Schuler,] that is Schuler. So that adds about nearly EUR 150 million on the way to the operating cash flow. Provisions also contributed positively. And net working capital improved by comparing it to last year to -- by EUR 400 million, from minus EUR 265 million to plus EUR 154 million. Then some minor adjustments. So overall, we saw a cash flow from operating activities of EUR 439 million, after minus EUR 85 million a year ago. Obviously, a lot of that is driven by projects, specific circumstances. But obviously, we are not unhappy about this development.

On Slide 16, we also provide you with the EBITDA to net income bridge, starting with EUR 329.9 million EBITDA, 6.9%. Depreciation of that, IFRS 16, EUR 34 million. And new first time consolidations, EUR 26 million. Down to an EBITA of EUR 184 million. And then we have IFRS 3 amortization, EUR 60 million (sic) [EUR 61 million] --- 2/3 of that for new acquisitions. Then impairment, EUR 29 million -- I mentioned that, Metals. EBIT, EUR 94 million. Then financial results with minus EUR 35 million, to a large extent, foreign exchange valuation of basically things like [securities], balance sheets, cash accounts, et cetera to an EBT of EUR 58 million, or net income of EUR 40.7 million.

To summarize on Slide 17, we have the full set of numbers. I think we have covered probably everything that is of interest to you. Maybe to summarize, IFRS 16. So total asset number went up by [EUR 218 million]. Property, plants and equipment, sales are the same, obviously, unaffected. EBITDA is up EUR 38 million. Depreciation is up EUR 34 million. EBITA up EUR 4 million and interest also up by EUR 4 million, interest expense. So [EBT, obviously] effect is 0.

Now moving on to the business areas, Pulp & Paper, a very good situation, very active market. In spite of -- as I said, a difficult overall economic environment and in spite of a lot of turmoil on pulp price -- on pulp prices, on the pulp market, but we see continuous good project activity. As always, we cannot speak for our potential customers when they will go ahead with the projects, but I think many of you are following the announcements or the silence that has followed some of the announcements with regard to projects. From our standpoint, all these projects are real. All these projects are tangible. Nearly all of these projects are in the hands of large companies committed to continuing to expand the pulp capacity. When -- so there's not a question whether they will go ahead with these projects. Question is always when do we go ahead and this may be impacted by permitting issuances, may be impacted by political issues in the countries where they continue to invest that may be short-term, impacted by inventory issues in the global pulp market, price issues. So long term, we are very confident of the future of this market. Short term, we need to continue with our wait and see activity or our customer position.

Power generating boilers are continuing to serve project activities, especially in Japan. We continue to be very successful in Japan. So overall, it's a very good situation.

On Slide 20, we see the numbers. Order intake up, sales up, earnings at a very good level. Obviously, with this higher backlog, our employee numbers have started to go up, predominantly in Brazil, in Finland and some other countries. By region, you see the difference between order intake and sales. So sales, Europe and North America, still denominating. And order intake, the emerging markets are dominating.

Different picture on Metals, 21. Metals Forming obviously, heavily affected by the automotive industry, very weak activities. Some [board] executions are also delayed; uncertainty of the size of some large customers where they should build, if at all, should build a new plant. We have followed in the press the discussion in Volkswagen in Turkey and Bulgaria -- there are some other second thoughts in -- with some other car companies where to build new capacity. And, as always, when the market is low, then pricing becomes very aggressive. Everybody tries to fill up with backlog and therefore, the situation there is certainly not very good.

Similar situation in Metals Processing. Steel industry is in not a very good position, and the lower number of orders placed for new projects are heavily contested between main suppliers, with a negative effect on the prices.

I'm on Slide 22. The numbers, if you look at Q3, EBITA before extraordinary items, EUR 9.9 million. So a slight improvement compared to the first 2 quarters, the majority of the EUR 10 million is -- goes to Schuler (inaudible) Schuler. As I said, Schuler is still impacted by underabsorption, underutilization.

When we look on the next page, on Schuler, you see the development on sales. Organic sales development minus 14% between '13 and 2018. You see also that we, together with the actions that we have announced, and we have [not] provided for in the third quarter, we take down the employment of Schuler in Germany by 1/3 from 4,000 employees to 2,600, which we achieve -- fully achieved by 2022, but a large part will take place next year.

Where do we stand with regard to the social plan? We are aware that Germany is a very difficult area for that -- time consuming. But we are making, I would say, reasonable progress in the negotiations. We have passed some of the gates that have to be passed on the way to an agreement on the social plan and interest on, how should I say, (inaudible) finding an agreement on which criteria should be followed in the restructuring. And we hope to have results by year-end. But as always, we cannot agree to agree [about certain things.] So we need to see how things go. But it's -- currently, it's on a good way, taking into account the very complicated procedure that has to be followed in Germany. So much about Schuler. As we have said, we expect total savings of EUR 60 million and fully in place from 2022 onwards, but improvements already starting from the middle of next year.

Slide 24. Hydro, still quite low market activity. We booked this pump storage order, we see some interesting larger projects for next year where we think that we should be in a good position. So let's see. I think next year will still be a relatively subdued order intake, but with 1 or 2 of these larger projects would go ahead in the first half of next year. I think next year could see a certain pickup of order intake.

25 is the numbers. Maintaining in spite of gradually shrinking sales, maintaining profitability. And I think that's also what we would expect, so we will continue our gradual capacity adjustments following the sales. And with that, we should be able to maintain profitability also in the next few years.

Slide 26, smallest business area, Separation. Doing quite well. So we continue to improve profitability. I think we are making good progress in some of the segments that we tried -- where we try to expand. And if you look at Slide 27, order intake for the first 9 months is down by 4.6%. But we booked a large order -- a large order for Separation of nearly [15 million] last year for the large drying in -- for the waste water treatment plant of Shanghai, which obviously a similar-sized order has not been booked this year. So compared to that -- so taking that into account, we show quite good, continuous growth. And as I said, improving profitability. So there, we are increasingly optimistic that we are not (inaudible) to a good profitability and showing organic growth, which together would also enable us to look into some M&A activity in this field, where we have always said there are plenty of -- should be plenty of opportunities there due to the quite fragmented structure on the supplier side.

To conclude on Page 29. Obviously, we see a slowdown of global economy, and we expect a further moderate slowdown of the global economy with some country-specific issues. Turkey continues to have a negative impact on us. Brazil, uncertain. Chile we can add to the difficult countries, unfortunately. We are executing a large project for Arauco there. There hasn't been any impact on that. But clearly, the investment climate, I think, in Chile has deteriorated and may have an impact on activities on the Pulp & Paper industry there. Nevertheless, Pulp & Paper continues to show very good project activity, and we expect that also to continue into next year. Steel and automotive industry particularly are very much down, and we do not see any light at the end of the tunnel in these 2 industries.

Where do we stand? With a very good order backlog of EUR 8.1 billion. Good visibility of sales going into 2020. Progress of Schuler restructuring is, I think, reasonable and should see first visible effect on the numbers in Q3 2020.

We'll continue to do our homework in the other business areas, which will mean certain minor capacity adjustments also and expect continuing good profitability in Pulp & Paper, continuing step-by-step improvements in Separation, stable profitability in Hydro. And Metals, looking at next year, probably close to breakeven and showing some sizable positive results due to the fact we need to -- we have to observe a notice (inaudible) so that we will only start to see effect from the middle of next year onwards.

So that's my report, 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 is from Andreas Willi of JP Morgan.

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Andreas P. Willi, JP Morgan Chase & Co, Research Division - Head of the European Capital Goods [2]

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I have 2 questions, please. The first one on the end market commentary relative to what you said at the Capital Markets Day in mid-September. Is there a conscious change to the commentary? Or is it maybe just the language in the release that's a little bit different if we compare like Separation now described as solid versus good and maybe some of the comments in Hydro as well on aftermarket? Is there a change? Or is it just the words that were chosen? And the second one on the dividend proposal for the full year in terms of payout. How should we look like at the payout ratio, and how you think about it in terms of the charges and write-downs this year that affect net income?

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

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With regard to the first question, do you feel I'm more cautious than at the Capital Markets Day or more optimistic?

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Andreas P. Willi, JP Morgan Chase & Co, Research Division - Head of the European Capital Goods [4]

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Maybe slightly more cautious.

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

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No, I don't think so. It's certainly not intentional. And I don't see any dramatic change or any real change in the overall economy. I think I could personally, and really, this is now in a very slight difference in shadows of grayer. I think China may look a little bit more optimistic looking at the stock market. Apparently, people in China become a little bit more optimistic. Obviously, if there would be a trade agreement in place, that could come into place with the U.S., I think there is substantial upside on China. On the other side, Turkey, Brazil, Chile, obviously, rather slightly negative developments. So overall, I think the negative thing is that I don't see a real big change to the positive. But I don't see a deterioration -- I think it's unchanged. Does that answer your question?

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Andreas P. Willi, JP Morgan Chase & Co, Research Division - Head of the European Capital Goods [6]

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Yes, yes. And on the dividend?

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

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Yes. Dividend, I think, let's wait and see until the time comes to a formal opinion. I think it will depend on the -- our view on next year. And obviously, this restructuring charges have an effect on income. So we cannot neglect it completely. But as I said, I think we would prefer to wait and see how the general situation is and then decide what to propose.

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Operator [8]

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The next question is from Sven Weier of UBS.

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Sven Weier, UBS Investment Bank, Research Division - Executive Director and Analyst [9]

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The first one is on the project pipeline. Obviously, you already mentioned, still quite a busy pipeline on the greenfield and pulp. I was just wondering if you could share like a number with us for the next 12 months of projects that would be worth say, more than EUR 200 million, EUR 300 million for you, if there's a total number that you see.

And also, on Metals, I think your order intake in absolute terms was actually not so bad, I would say, in Q3 and Q2. But you mentioned, obviously, pricing is tough. So does that mean that these orders has to have a certain lower-margin tailwind? Or what should we keep in mind in terms of the margin quality of these orders?

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Wolfgang Leitner, Andritz AG - President, CEO & Member of Executive Board [10]

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Thank you for the questions. Starting on your second one. Clearly, as prices are, we have to offer aggressive prices for a chance to get the order because our competitors are doing the same. So clearly, the margin content of the backlog in Metals has declined. Obviously, we do our best to contain this reduction. We try to pass it onto our suppliers. And as I said, I think once we can adjust our capacity in Schuler, that certainly will make us more competitive and will help to improve also the quality of the backlog.

With regard to projects going into next year, it's -- I would hesitate to really mention a specific number. But I would say, there's certainly a handful of large projects for pulp that -- where I would not be surprised if they are realized next year.

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Sven Weier, UBS Investment Bank, Research Division - Executive Director and Analyst [11]

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Okay. Understood. The second question is a bit more personal question because I think your contract is running out in the next 2 years and I was just wondering how you plan on succession, what we should be expecting there in terms of maybe internal solutions, and what all of that means in terms of strategy. Obviously, you've been obviously very, very impactful on the company in the last 20 or so years. So I think I would be quite interested in your thoughts on that very issue.

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Wolfgang Leitner, Andritz AG - President, CEO & Member of Executive Board [12]

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Yes, I need to check my contract, I don't think -- I think it's in 3 years or probably 2 years. No, there will not be a new contract for sure after that. And I'm obviously aware of my age. I reserve the right to make any decisions, but currently, I would not expect to sell my shares. So there are some interest and we have a very good succession. Their interest is not for growth, but it has been difficult to replace me. And obviously, there's something that I have an eye on that, the [surprised] Board has an eye on. And we're -- we all think that we are in a good position with regard to succession.

So that's enough, yes?

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Sven Weier, UBS Investment Bank, Research Division - Executive Director and Analyst [13]

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Well, it was an appetizer, yes. So we'll have enough time to continue talking about that, I think.

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Wolfgang Leitner, Andritz AG - President, CEO & Member of Executive Board [14]

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I will prepare for the next conference call with maybe slightly more tangible answer, yes?

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Sven Weier, UBS Investment Bank, Research Division - Executive Director and Analyst [15]

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Yes, that's fine.

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Operator [16]

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And the next question is from Aurelio Calderon of Morgan Stanley.

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Aurelio Calderon Tejedor, Morgan Stanley, Research Division - Research Associate [17]

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So I would just like to ask on your employee footprint at Chile. So if you think in 3, 5 years' time, do you see that employee footprint moving more towards China, given that it's now around 35% of 4 years and only represent something like 20% of the employees? And how do you see that developing in Europe and especially in Germany after 2022 and with all these announced cuts?

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

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Obviously, it depends on the market. And if we would know now, or if we would think now that we have to go down further. Obviously, we would communicate now that long term, we will continue with these reductions. Currently, that's not the case. But currently, I cannot exclude that either because it's driven by the demand for the Schuler products. I think Schuler has seen 6 very successful years, which certainly resulted in -- busy enough not to think about long, midterm -- longer-term necessary adjustments of the footprint in the balance between high-cost country, low-cost country and where the markets are for the product.

But having said that, the Schuler products are very appreciated worldwide. And so if we succeed in bringing down the costs, maybe to a certain extent, also the products be more specific to the customer needs. I think Schuler has a very good chance. I'm quite convinced that now that the Center of Excellence will remain in Germany, and we have excellent people here, manufacturing, can easily be the case that we see a continuation of the trend to other countries, whether that's China or other European countries, I think, remains to be seen. I think we -- currently, the distribution between China and, for example, even probably Eastern Europe would be a close decision. So China is not the only low-cost location in the world.

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Operator [19]

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(Operator Instructions) The next question is from Daniel Lion of Erste Group.

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Daniel Lion, Erste Group Bank AG, Research Division - Analyst [20]

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I would like to get a little bit more flavor on how the order situation or the delays in the Pulp & Paper business could turn out. Would you see or do you received orders being delayed? Or would you have you just reflected on potential new orders that are being delayed now or the process has been delayed? Maybe a little bit more color on this one.

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

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Yes, I was referring to some press announcements that are estimated by companies that are a little bit overdue now in terms of following actions. But I do not see that there's any indication of general [quick mark] on this project as following the market situation for Pulp & Paper, there's been a big buildup of inventory in the beginning of this year, which is now softened again. So it's reduced. It's coming down, which certainly will help to -- but the market is not in sales, but it has been obviously a cloud over the market to have 2 million or 3 million tons of inventory in ports in China. So that is now being resolved, being absorbed. And that should -- that could have had an impact on some delays. I think it's -- I would rather think it's more specific -- more perhaps with specific reasons in political situation in 1 or 2 countries being -- permitting delays or overly optimistic schedules for permitting that have not been achieved. And therefore, it may take a month or 2 or 3 or even longer until 1 of the other projects goes ahead. But it's not -- it's clearly nothing too large, project-specific, maybe to a small extent, impacts the overall situation of the pulp market.

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Daniel Lion, Erste Group Bank AG, Research Division - Analyst [22]

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And maybe a follow-up on this one. When we look at the price developments, paper prices seem to be on the -- somehow bottoming out maybe even, maybe also indicating that we see some -- the breakeven points of the producers might have been reached when we look at the historical developed comparison of the current price levels. In Pulp & Paper, we are certainly not that far yet. Would you expect that just basically the inventory situation would help to stabilize prices going forward further maybe in the first half year of 2020? Or is there a risk that we see some longer-term impact on demand maybe from the price developments?

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Wolfgang Leitner, Andritz AG - President, CEO & Member of Executive Board [23]

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I mean, demand continues to grow. Paper consumption is growing 2%-plus per year. We still have some high-cost old capacities that ultimately will go out of the market. As I said, once the cash cost -- when the prices are meeting -- projecting the level of the cash cost. And we have very positive trends with regards to plastic bags, with regard to plastics in general. We have very interesting technology plans with regard to fully organic packaging -- liquid packaging. We have high-tech developments, nanocellulose going into full intake in pharmaceuticals, et cetera, microcrystalline cellulose. So I think there are plenty of activities.

Not to forget that a year ago, I think the majority has expected that one would see more stable pulp prices than Suzano acquired Fibria, creating -- clearly dominating market pulp producer with, if I remember correctly, 12 million tons capacity. That has turned out not to be true. I'm not going into speculation on what has happened there. But this quite high level of consolidation is still in place. And I think everybody has learned. And I would expect, let's say, stabilizing the prices on a reasonably high level, which for the low-cost producers in South America should provide EBITDA margins of 40-plus percent of sales.

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Daniel Lion, Erste Group Bank AG, Research Division - Analyst [24]

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Okay. And then 2 questions related to the Metals segments. One is the EV subsidy that has just been announced for Germany starting in 2020. Have you heard any positive comments related to maybe a demand pickup for your business into 2020? Or would you expect this to take longer to take into effect?

And the second would be related to the layoffs. Would you see any change in timing to the official expectation that we should see first impacts from the layoffs on your financials in the second half year?

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Wolfgang Leitner, Andritz AG - President, CEO & Member of Executive Board [25]

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The answer is 2x no. So we have not seen any impact on the CBEs. I think the long slant in demand for new cars, we've last seen, the higher the probability becomes that we suddenly find recovery. So because people are postponing the purchase of a new car for half a year, by a year, by 2 years maybe, but at some point, they go ahead. I think what drives now the reluctance of buying cars is the uncertainty whether it's going to see gas or diesel or electric, as we see the price. We would have to if we would sell it after a last few years. But again, I don't think this will last 5 years. So the longer it lasts, the higher the probability that we will see a pickup, same for China. And with regard to the restructuring, there's no change in the schedule.

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Operator [26]

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The next question is from Sebastian Growe, Commerzbank.

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

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(technical difficulty) Pulp & Paper part, a bit of a nitty gritty question, to be honest, but the margin in the quarter was comparatively low at around 8%. And I was just interested in hearing your thoughts around the drivers for that. I'm assuming it's more a function of a greater paper content. Maybe you can just confirm that.

And also then give us a sense of what we should expect for the fourth quarter and also generally speak about what is in the books that's Pulp & Paper and how that's split simply between the 2, pulp versus paper. And that's the first one. Maybe take them one by one.

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

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Yes, I mean, the third quarter was slightly lower. It was on the capital side. The service side was -- continues to be very good. Some lower-margin orders, maybe some cost -- maybe that doesn't need (inaudible) cost overrun, but nothing, let's say, dramatic or about regular fluctuations. What was the second question?

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Sebastian Growe, Commerzbank AG, Research Division - Team Head of Industrials [29]

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The order split and the book between pulp and paper? Because I would assume that you would have a better margin at pulp.

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Wolfgang Leitner, Andritz AG - President, CEO & Member of Executive Board [30]

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Yes. It dominated the pulp then by Power, and the lowest one, smallest one is paper.

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Sebastian Growe, Commerzbank AG, Research Division - Team Head of Industrials [31]

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And no real change compared to what it was in the prior years also, yes?

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Wolfgang Leitner, Andritz AG - President, CEO & Member of Executive Board [32]

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Well, it's because of its high order intake, obviously, pulp -- this year, pulp has gone up. But other than that, no permanent change. Everything is project-specific, order-specific.

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Sebastian Growe, Commerzbank AG, Research Division - Team Head of Industrials [33]

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Yes. And with regard to the large orders, there's also nothing which is striking in terms of the price quality of the [very] orders secured or anything that would be worth mentioning in terms of working capital trends related to these very large projects?

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Wolfgang Leitner, Andritz AG - President, CEO & Member of Executive Board [34]

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No, no. I mean, obviously, the development of the net working capital is impacted by the down payments of the large order. So there's a positive effect, obviously, yes.

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Sebastian Growe, Commerzbank AG, Research Division - Team Head of Industrials [35]

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No, no. Okay, okay, fine. Then working on and -- working on your operating cash flow on working capital to take that a bit further. We see now the second consecutive improvement in working capital, and you have been highlighting, I think, contract liabilities, which goes without saying would be a much increased load, but you also point to lower receivables as a key driver. So can you just comment around what is still sort of the headroom that you see in the receivables part? And if you could also comment on what is explaining the weak working capital development at Metals, in particular, which you're referring to on Slide 14?

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Wolfgang Leitner, Andritz AG - President, CEO & Member of Executive Board [36]

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Nothing -- no longer-term specific trends. It will return by individual quarters. So obviously, yes, there has been -- topically, the increase in working capital for Metals is driven by a lower intake sizable extent. Maybe some delayed payments, but no one project where we have a problem where we are not able to collect the money, whatever. That's not the case.

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Sebastian Growe, Commerzbank AG, Research Division - Team Head of Industrials [37]

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Yes. Okay. And then on M&A because I think you have been commenting on that -- on your introductory statements. If you could elaborate a bit more on what you -- in the general boundaries of what you can say at this point? But it seems really that you are more prepared eventually to become more aggressive on M&A.

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Wolfgang Leitner, Andritz AG - President, CEO & Member of Executive Board [38]

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So remember correctly, I was -- this was with regards to Separation where we see continuing improvements. And as we have said in previous calls, once we feel confident that this positive development is sustainable and solid. And yes, then we would also look into some -- have more focus on M&A in connection with Separation. And yes, that's the case. So we will start cautiously. It's nothing imminent. I cannot guarantee that we will make an acquisition in Separation next year. But clearly, this is -- and yes, a very strong position in Pulp & Paper.

So we're certainly more dependent on the market rather than on our sales. The same is in Hydro. Metals has its own issues. So the one where we see potential for M&A-related activities in Separation, and not only because the others are, let's say, in different situations, the other business areas, but also because the market is fragmented. There are many customer segments. We have products that can be applied in many more applications. For example, we are in test with one of the companies to produce, which, as I say, plant-based meat from protein -- from protein -- from plant-based protein. We have several machines that can be used in these processes. So there, I see -- our market share is definitely not dominating. So therefore, it's natural that we will increasingly looking for growth opportunities in the Separation side, while we were hesitant to do that in the last 2, 3 years because of the weak performance of the existing activities.

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Sebastian Growe, Commerzbank AG, Research Division - Team Head of Industrials [39]

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Yes. Okay, that's helpful. And then very last one is on the extraordinary items, which have been breaking out the segments, which is much appreciated. I was wondering simply to see you booking sort of smaller restructuring measures beyond Metals, which I've decided to not really have on mind. Maybe can you just talk around what is behind that. And then if you would rather see that as really 2019-specific item? Or is there anything else we should have in mind when it comes to other years?

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Wolfgang Leitner, Andritz AG - President, CEO & Member of Executive Board [40]

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I think it depends on the development of the overall economy. I mean, in our budgeting process, we are rather cautious. I think it's a good time to look into our internal structures to see where we have added some fabs, where we can increase, improve our competitiveness. So I would rather -- I would not say that this is a one-time thing. I think, depending -- I mean if the economy turns around and becomes very strong again, obviously, we would have other focus areas. But if it continues as it is now, we would continue to look into opportunities to improve our competitiveness, meaning that there may be continuing smaller and extraordinary charges. That's nothing, as to see from today, nothing dramatic.

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Sebastian Growe, Commerzbank AG, Research Division - Team Head of Industrials [41]

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Okay. And just to get that right, that all personnel-related, what you're doing there? And it's not really a complete closing down of the certain plant, et cetera, but rather just trimming it a bit to be less fat, as you raised it?

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Wolfgang Leitner, Andritz AG - President, CEO & Member of Executive Board [42]

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I think we are openly looking at everything. If we would come to the conclusion there, but there's not a plan to do that now. But if we would find out that these would be advantageous for the future, we would also go ahead with that. But as I said, as we see today, it will -- it might be continuing smaller charges, but nothing dramatic.

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Operator [43]

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As there are no further questions, I hand back to the speaker.

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Wolfgang Leitner, Andritz AG - President, CEO & Member of Executive Board [44]

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Thanks very much, and we look forward to discussing our full year results, I think in about 4 months, I think, probably in March. Thank you, everybody. Thank you. Bye-bye.

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Operator [45]

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