U.S. Markets open in 4 hrs 26 mins

Edited Transcript of BOBNN.S earnings conference call or presentation 24-Jul-19 8:30am GMT

Half Year 2019 Bobst Group SA Earnings Call

Jul 31, 2019 (Thomson StreetEvents) -- Edited Transcript of Bobst Group SA earnings conference call or presentation Wednesday, July 24, 2019 at 8:30:00am GMT

TEXT version of Transcript

================================================================================

Corporate Participants

================================================================================

* Attilio Tissi

Bobst Group SA - CFO

* Jean-Pascal Bobst

Bobst Group SA - CEO

================================================================================

Conference Call Participants

================================================================================

* Armin Rechberger

Zürcher Kantonalbank, Research Division - Analyst

* Bernd Pomrehn

Bank Vontobel AG, Research Division - Analyst

* Christian Arnold

MainFirst Bank AG, Research Division - Analyst

* Daniel Koenig

Mirabaud Securities Limited, Research Division - Analyst

* Remo Rosenau

Helvetische Bank AG, Research Division - Head of Research

================================================================================

Presentation

--------------------------------------------------------------------------------

Operator [1]

--------------------------------------------------------------------------------

Good morning, and good afternoon, ladies and gentlemen. Welcome to the teleconference where Mr. Bobst, Chief Executive Officer of Bobst Group, will be discussing the group's 2019 half year financial results.

Sir, please go ahead.

--------------------------------------------------------------------------------

Jean-Pascal Bobst, Bobst Group SA - CEO [2]

--------------------------------------------------------------------------------

Good morning, ladies and gentlemen. Thank you for the interest you're showing our company by attending this telephone conference. Its purpose is to comment on Bobst Group first half year results 2019 as well as on the outlook for the full year.

With me today is Attilio Tissi, our Chief Financial Officer; and Stefano Bianchi, our Investor Relations Manager and Group Treasurer. The press release, which was issued this morning and the half year report can also be found on Bobst Internet website.

Bobst Group first half year financial statements show a decrease in sales and a decrease in EBIT versus previous year. Net result is down mainly due to lower operating results. Today, we expect 2019 full year sales on a similar level as in the previous year. The guidance for the 2019 full year operating result margin, which was in the range of 6% to 7%, is lowered to less than 5%. The reduction in operating results margin is mainly due to an increased price pressure in order to defend market share, a lower utilization of the industrial capacities due to a reduction of order intake and the planned reduction of inventories.

Our telephone conference is structured in 3 sections. First, I will talk about the group sales and operating results for the first half year 2019. Second, I will make a macro analysis by business unit and by region. And finally, I will give you the outlook for the full year 2019.

The group sales and operating results. The group turnover for the first 6 months of 2019 amounted to CHF 736.8 million, representing a decrease of CHF 25.7 million compared with the same period in 2018. This negative evolution was due to volume, price variances and exchange rates. The split is as follows: volume and price variances had a negative impact of CHF 13.5 million, negative impact of exchange rate due to conversion representing minus CHF 6.7 million, a negative transactional impact on sales volume from our Swiss operations of minus CHF 5.5 million (sic) [CHF 4 million].

By business unit, compared to the 2018 half year figures, sales reached 96.5% for Business Unit Sheet-fed, 86.2% for Business Unit Web-fed, 102.7% for Business Unit Service. A reduction of consolidated sales was mainly driven by lower order intake compared to the first 6 months of 2018. The group operating result shows a profit of CHF 14.8 million compared to a profit of CHF 35.2 million for the same period in 2018. This is due to lower sales volume, a quite unfavorable product mix in [key] technologies, the increased pressure on prices to defend our market shares and a planned increase in costs associated with the digital initiatives launched by the group. All of these aspects have led to the reduction of the operating results for H1.

The Business Unit Sheet-fed operating results decreased from a high CHF 29.7 million in the first half of 2018 to CHF 12.1 million in the first half of 2019 due to lower sales, product mix, pressure on prices and a lower utilization of the industrial capacities due to lower order intake and the planned reduction of inventories.

Business Unit Web-fed turnover was lower in H1 2019 than in H1 2018, and the high pressure on margin remains. The quality campaign launched in 2018 is progressing well and should bring the expected improvements. The operating result was minus CHF 21.4 million in the first half of 2019 compared to minus CHF 20.2 million in the first 6 months of 2018.

The Business Unit Service has to absorb the run rate effect of the planned increase in the number of field service technicians and the technical support people, which was accelerated in 2018 according to the group strategy with also some price pressure on spare parts. These factors have a negative impact on the business unit's operating results, which was CHF 25.3 million in H1 2019 compared with CHF 27.4 million in the same period in 2018.

All 3 business units have higher costs due to the ramp-up of the group's digital investment strategy, which has been launched in 2017 and continues until 2021. The net result amounted to CHF 7.4 million compared to CHF 24.9 million in 2018. The decrease in net result is mainly due to lower operating results but also to losses on which no deferred tax assets are recognized since year-end 2018. Higher financial expenses for the setup of a revolving credit facility and unfavorable foreign currency impact were compensated by an exceptionally high result from associates in the first 6 months of 2019.

Net debt increased to CHF 117.1 million from CHF 20.7 million at the end of 2018. This is mainly due to ongoing capital expenditure, dividends paid and the usual increase of work in progress for machines to be invoiced in the second half of the year. The consolidated shareholders' equity reached 36.5% of the total balance sheet compared to 33.4% at the end of 2018.

I will now continue with the second section, which will give you some details for each business unit regarding market situation, sales and operating results evolutions.

The Business Unit Sheet-fed. Total bookings are satisfactory in the first half of the year, though 13% below the exceptionally strong first 6 months in 2018 particularly for corrugated equipment. This decrease is seen as well in corrugated board and in folding carton. The folding carton market started slowly in the first part of the year particularly in growing markets such as India, China, Middle East, where the bookings portfolio is below expected level. In mature markets, Americas are stable, but some countries in Europe are clearly below the first 6 months of 2018. The sales in first half 2019 remain satisfactory. Thanks to the strong backlog at the end of 2018, machines have been shipped early in the year along with sales to reach a similar level as in the first half of 2018. Americas are ahead of the previous year, but all the other regions are below the high level reached in the first 6 months of 2018.

The operating result of the Business Unit Sheet-fed decreased from the high CHF 29.7 million in the first half of '18 to CHF 12.1 million in the first half of 2019. Lower sales in the first half of the year, a quite unfavorable product mix, pressure on prices and a lower utilization of the industrial capacities due to lower order intake and the planned reduction of inventories led to this drop in operating results. The outlook for the full year is positive, but a slowdown is confirmed. We can expect up to 15% reduction in various regions of the world.

Business Unit Web-fed. Business activities in terms of bookings and turnover are lower than previous year due to a slow start in Europe but with a good level of order intake in growing markets. The brand owners' current sustainability road map generate uncertainties and some postponements of investments. At the open house in Firenze, Italy, had in April, together with REVO partners and Mouvent, the business unit launched revolutionary innovations such as Digiflexo closed loop and ink-on-demand. These new features, which bring improved time to market, color control and food safety, are raising strong interest from the market.

Sales for Business Unit Web-fed started slow in H1, but we expect the second half year to be better than the first one and to close the year at the similar turnover level as in 2018. In the second half of the year, the business unit will be present at LabelExpo Europe exhibition in Brussels with a world premier for hybrid printing solutions and a high-speed water-based label machine. At K show in Düsseldorf, the business unit will present solutions for sustainable and recyclable packaging. At the same period, the new coating Competence Center in San Giorgio will be officially inaugurated.

The operating result amounts minus CHF 21.4 million compared to minus CHF 20.2 million in the first 6 months of 2018. The slightly lower operating result is due to lower sales in H1. The quality campaign launched in 2018 is progressing well and should bring the expected improvements.

For the Business Unit Services. First half year sales for the Business Unit Services are slightly above the same period in 2018. Sales increased versus last year in all regions except Africa and Middle East. The growth has been done mainly with our contracts and associated parts revenue. Sales are growing by 2.7% or CHF 6.5 million compared to H1 2018. The operating result amounts to plus CHF 25.3 million.

The Business Unit Services expects to see normal business development for the second half of 2019. It will pursue its digital and business transformation while continuing to hire and train new service technicians to increase competencies on the needed market and technologies. The focus for the second half of 2019 will therefore be to further develop our distribution network worldwide, to support web-fed services while improving the overall spare parts availability and to continue to work on customer satisfaction.

Let's have a look at the group turnover by geography. Looking at the distribution of sales by geography zone, we see that Europe has decreased by 7.3% or minus CHF 26.8 million versus first half 2018, and the Americas posted an increase of plus 8.5% or CHF 18.9 million. Asia and Oceania decreased by 7.9% or minus [$11.9 million]. Africa decreased by CHF 5.9 million.

The decrease in Europe is due to a certain slowdown of the activity coming down from a very high level in 2018. This is not a real surprise as we told you during our last few analyst conference that the level is very high, and we were expecting a slowdown coming. Now is the time. Americas is growing due to the good performance of North America. Asia and Oceania are decreasing due to a slow start in some Asian countries and mainly in China. Africa is decreasing, and we don't see the growth expected a few years ago. Middle East is struggling to find a good business balance, and service activities are reduced in this region.

Now let's move to the last section, which is outlook for the second half of 2019. Uncertainty has increased in our relevant markets due to geopolitical instabilities, the trade war between U.S. and China and more political interventions in the economy. Sustainability discussions are creating, for sure, a big uncertainty in what to do, by when and with which technology. Finally, new technologies such as digital printing, not quite mature yet. It is likewise bringing some chaos in the "What is right for me" scenario. All these elements are creating a much more complex landscape for our group to manage and to anticipate future trends. For sure, this will bring new opportunities for Bobst Group in the mid- to long-term, but it slows down the current investment of our customers and increase price pressure on our current product portfolio. Accelerated consolidation in our industry and new entrants are leading to more severe competition and price pressure that affects all our industry's sectors.

The group continues to invest in quality improvement programs, to invest in digitalization initiatives such as the launch of a range of digital printing products for label and textile, in the Bobst Business System and in Internet of Things, developing new equipments for our large machine portfolio. All these initiatives, combined with an unfavorable product mix and the Business Unit Web-fed ongoing transformation and expansion, have a significant negative impact on the group's 2019 profitability.

The group is also evaluating the divestment of land and buildings in France and in North America. Bobst Lyon is investing in the expansion of and modernizing -- sorry, Bobst Lyon is investing in the expansion and modernization of its current site in Bron, and sequentially the Villeurbanne site will become available for sale. The aim is to conclude the transaction in the next 12 to 18 months, and an agreement to sell was signed on 22nd of July. For Bobst North America, it's evaluating the move of its operations and the sale of its excess land, which is not currently used. Discussions are taking place with interested parties and authorities with the aim to conclude the transaction in the next 12 months. If successful, combined proceeds from these 2 divestments will have an impact of around CHF 30 million to CHF 35 million on operating results and of around CHF 20 million to CHF 25 million on net results.

At current exchange rates, the group expect 2019 full year sales on a similar level as in the previous year 2018. The guidance for the 2019 full year operating result margin, which was in the range of 6% to 7%, is lowered to less than 5%. This is due to reasons explained before. The long-term financial target of at least 8% operating result and minimum 20% return on capital employed remains our long-term objectives.

To conclude, we would like to highlight the following. In 2019, Bobst is very confident with its mid- to long-term strategy, leading its digital transformation. This important investment will allow the group to consolidate its technical leadership midterm. This will be done through developments of more sustainable packaging solutions with connected machines and services; development of our global digital printing portfolio for the label, folding carton, corrugated and textile industries, including prepress software and chemistry; the development of internal and external IoT connectivity and data intelligence; the launch of technical novelties for machines and services; the increase of our presence in China and Southeast Asia. We do continue our transformation journey dedicated to success with the objective to create value for our shareholders.

Thank you very much for your attention. We are now ready to answer your questions.

================================================================================

Questions and Answers

--------------------------------------------------------------------------------

Operator [1]

--------------------------------------------------------------------------------

(Operator Instructions) The first question comes from Remo Rosenau.

--------------------------------------------------------------------------------

Remo Rosenau, Helvetische Bank AG, Research Division - Head of Research [2]

--------------------------------------------------------------------------------

If you could talk a bit about this price and margin pressure. I mean we heard about that already last year particularly in Web-fed at the time. We heard about these new competitors coming up, some of them former Bobst employees. Then I had the impression that this issue was not that grave anymore but, as it seems, it has aggravated again now. So the margin pressure has not decreased but increased, as it seems, in Web-fed. And simultaneously, we have now new margin pressure also increased margin pressure in the segment Sheet-fed. I mean could you just elaborate a bit on how the situation developed over the last 6 to 9 months and why it aggravated?

--------------------------------------------------------------------------------

Jean-Pascal Bobst, Bobst Group SA - CEO [3]

--------------------------------------------------------------------------------

Thank you, Remo, for your question. Overall, maybe as an introduction, as you have a slowdown and less order intake, of course, the cake in each technology is getting smaller. And therefore, as we want to get more market share, some efforts in price pressure are made, not so much on the Web-fed technologies. That -- this is stable. We are not getting worse than before, but it's much more on folding carton and corrugated area. You can see that as an example as well in China. China first semester overall is quite low. You can see as well on the market the results of some other colleagues, competitors, when they publish their numbers. And you can see that the drop of volume and drop of margin in China is very strong. So I will say this is more an overall climate and environment where, again, we came from a very high level, very blue sky for a number of years, and now we see more and more clouds, not -- far from not only Web-fed but folding carton and corrugated, and this is the main difference compared to last year.

Did I answer your question, Remo?

--------------------------------------------------------------------------------

Remo Rosenau, Helvetische Bank AG, Research Division - Head of Research [4]

--------------------------------------------------------------------------------

Yes, partially. So do I understand that correctly that the main pressure is in China so far, not that much in Europe and the U.S.? Or is there also pressure there?

--------------------------------------------------------------------------------

Jean-Pascal Bobst, Bobst Group SA - CEO [5]

--------------------------------------------------------------------------------

No, no. So I took China as an example, but the price pressure is clearly in all different areas, all different countries. As the order intake is going down, we said minus 15%, as we see markets shrinking, competition is getting more aggressive, and this is a bit everywhere. It's not only one industry or the others or one region or the other, it's a global climate we see overall.

--------------------------------------------------------------------------------

Remo Rosenau, Helvetische Bank AG, Research Division - Head of Research [6]

--------------------------------------------------------------------------------

Okay. Got it. And in Web-fed, you say that the situation has not aggravated, but it has also, of course, not improved.

--------------------------------------------------------------------------------

Jean-Pascal Bobst, Bobst Group SA - CEO [7]

--------------------------------------------------------------------------------

So I will say Web-fed did not aggravate, that's correct. On the other side, depending on product mix, it -- we hope and we do everything to improve. We could and should be able to see improvements in the near future despite the fact competition is very, very tough. Why? Because all actions we have made and will implement should bring the results expected.

--------------------------------------------------------------------------------

Attilio Tissi, Bobst Group SA - CFO [8]

--------------------------------------------------------------------------------

Okay. Remo, this is Attilio speaking. Just to add one element to that one. As we explained to you, not to you particularly but to the financial community and the media last year, we came to the conclusion that we have to redesign the full product portfolio for our flexo printing machines for flexible materials, meaning the product range of Bobst Bielefeld, and that this would take 18 to 24 months. So we are on the way to install by the end of the year the first 2 prototypes of better machines of the first newly designed machine, but we don't have yet the effects of the redesign to cost we are undergoing.

--------------------------------------------------------------------------------

Remo Rosenau, Helvetische Bank AG, Research Division - Head of Research [9]

--------------------------------------------------------------------------------

Okay. One smaller question. The net debt was again up around almost CHF 100 million versus the end of last year. I mean that is somewhat typical development in the first half. You have this seasonality. However, CHF 100 million, I mean last year, it was also CHF 100 million up in the first half. The years before, however, it was significantly less up in the first half. So what would the net debt level be -- what is your best guess for the end of the year?

--------------------------------------------------------------------------------

Attilio Tissi, Bobst Group SA - CFO [10]

--------------------------------------------------------------------------------

So assuming that we will manage to have the inventory reduction, which was already announced earlier this year, we expect to be in a similar level of net debt as we close the year 2018.

--------------------------------------------------------------------------------

Remo Rosenau, Helvetische Bank AG, Research Division - Head of Research [11]

--------------------------------------------------------------------------------

Okay. So around [EUR 20 million] something?

--------------------------------------------------------------------------------

Attilio Tissi, Bobst Group SA - CFO [12]

--------------------------------------------------------------------------------

In that area, yes.

--------------------------------------------------------------------------------

Operator [13]

--------------------------------------------------------------------------------

Our next question comes from Christian Arnold.

--------------------------------------------------------------------------------

Christian Arnold, MainFirst Bank AG, Research Division - Analyst [14]

--------------------------------------------------------------------------------

So 1 or 2 questions from my side. On your margin guidance, back in February, you gave a margin guidance not only for 2019 but also for 2020, also assuming that the margin will be in the range of 6% to 7% also for 2020. Now these days, you have not made any comment there. Maybe you can, yes, share your view on 2020 in terms of margins or why you don't give any margin guidance here for 2020 anymore.

Then on the sales guidance, you gave -- you made the comment that you expect sales to be at the similar level than last year. Now being at mid-year some 3% down and having order entries decreasing 15% and backlog 9%, that looks a little bit demanding to me. Maybe you can elaborate on that. And here maybe again, the question, this order entry decrease of 15% by mid-year, what does it mean for 2020? And my third question, you were talking about new competitor entries in your field. Could you give us here some names?

--------------------------------------------------------------------------------

Jean-Pascal Bobst, Bobst Group SA - CEO [15]

--------------------------------------------------------------------------------

Thank you very much, Christian. First of all, we cannot give today guidance for 2020, it's premature, as you can understand, and so we will not comment on that. And we had to change our guidance for 2019 due to the effects you understand. So that's the main reason. For the sales guidance, yes, booking is lower. But it's not abnormal when you look at the last years that we make only 42%, 43% turnover first semester and much more second semester. So '18 was very well balanced, and therefore we were able to linearize very well the production capacity and the workload in our production facilities, which improved the profitability. But this year is not abnormal, it's normal, and we are very confident to make the turnover rate around what we have made in 2018.

For the new competitors, it's more -- to understand, I would say, all the digitization in digital printing is not only 1 or 2, it's the overall environment, which, for example, we are selling a prepress -- preprint machine, sorry, preprint for the folding carton industry reel-to-reel technology, then you put that on the corrugator. Or of course, as we enter more and more label industry or as we see on the folding carton sheet-to-sheet equipments, more and more suppliers come in with digital printing solutions. None of these solutions are really industrialized yet. However, our customers are investing in these lines. And of course, when they invest in these lines, it's not on the Bobst product portfolio as of today as we just ramped up now, the last few months, [move in] technology. So those are all orders that we do not count on our accounts. And therefore, these newcomers are putting pressure as well on the choice of our customers to continue to invest. So this is what I mean with newcomers in these -- in the packaging field.

Did I answer your question properly?

--------------------------------------------------------------------------------

Christian Arnold, MainFirst Bank AG, Research Division - Analyst [16]

--------------------------------------------------------------------------------

Yes. Just a follow-up about -- to make it clear. So I mean you talk about newcomer, you talk about mainly digital printing but not your existing product portfolio.

--------------------------------------------------------------------------------

Jean-Pascal Bobst, Bobst Group SA - CEO [17]

--------------------------------------------------------------------------------

Absolutely. This is within digital printing. But again, if you look at the 90SIX preprint machine, which we are selling via Bobst Bielefeld, it's a CHF 12 million to CHF 14 million turnover machine. We have seen the last 18 months now digital printing machines taking some of those deals because customers want to test and try digital printing on these large-sized machines. And with or without success, so this is another question whether that puts pressure on prices for the current product portfolio and, of course, that avoid us to take more leads in this activity, in this section. And we are far from the #1 worldwide on these applications. So that has a big impact, you can understand, with this large-ticket amount.

--------------------------------------------------------------------------------

Christian Arnold, MainFirst Bank AG, Research Division - Analyst [18]

--------------------------------------------------------------------------------

Coming back to my first question, you were saying that last year, you also had the seasonality, 32% of sales were done in H1 and the rest in H2. However, 1 year ago, your order entries increased by 13% and your backlog by 14%, and now we do have quite a significant decline in order intake as well as in backlog. So I mean how much of your sales has been secured already for the second half at this point in time?

--------------------------------------------------------------------------------

Jean-Pascal Bobst, Bobst Group SA - CEO [19]

--------------------------------------------------------------------------------

Yes. I think, again, it depends. Unfortunately, I cannot give you one number, it depends a lot on the product portfolio. Some technologies, we have already booked because lead times are quite long. For the shorter ones, within 3 months' delay, we still have until October to book and ship. And we are very much aligned with a normal year. So again, from a top line perspective, we are quite confident to make the top line this year.

--------------------------------------------------------------------------------

Operator [20]

--------------------------------------------------------------------------------

The next question we have comes from Armin Rechberger.

--------------------------------------------------------------------------------

Armin Rechberger, Zürcher Kantonalbank, Research Division - Analyst [21]

--------------------------------------------------------------------------------

You mentioned some investments you want to do in quality improvements. So there are still some unsolved issues like the 26 machine? Or what is the background of this investment in quality improvement. Then service, the [marching] went down, even though the volume went up, what is the problem there? Can you elaborate a little bit more on this? And then you mentioned the inventories you want to bring down in some cases. Well, we are talking about big numbers. Can you elaborate on that?

And then my last and most important question. I mean, we had, last year, this problem with the 26 machine. And you had to do some -- you had to conceal some costs there. And that was a onetime effect, roughly. But now it's much worse, I think, this time. I mean, these problems with lower margins, more pressure on the markets, declining margins -- markets -- declining markets. These problems, they will stay. I mean, we won't see them go away within a year. So it looks quite serious to me.

--------------------------------------------------------------------------------

Attilio Tissi, Bobst Group SA - CFO [22]

--------------------------------------------------------------------------------

Attilio speaking. I will take the point. And if Jean-Pascal -- or if something is missing, Jean-Pascal can then jump in and add. The quality measures we mentioned, there is nothing new compared to what we have already mentioned and announced last year. As you know, it's in particular to 26, but then digging deeper, we also identified 2 more Web-fed machines last year, where we said that we would have quality work that we want to do.

So from that point of view, nothing new. When you look at the Service margins, which decreased, that shouldn't actually surprise you because we announced that we are ramping up the workforce, field service technicians and technical support people very heavily, and that we have a ramp-up for these people. So they are relatively low-performing in the beginning, and it takes a couple of years to bring them up to speed, up to 2, 3, and even 4 years depending on the qualifications they have when we hire them.

As we had a very significant hiring during the first half of 2018, somehow less but still hiring in '19 -- the second half of '18, you have ramp-up of the cost. So -- and the increase in sales was not proportional. The increase you saw in the first half of 2019 compared to the additional people we have, when you calculate the average monthly full-time equivalents we have. So it's the run rate effect mainly of all these new people we hire. So from that point of view, that the margin on the sales goes down is absolutely expected. Nothing new on that part.

Then, for inventories. We gave, in February, when we met you, in order to discuss the 2018 full year numbers and to give the guidance for 2019, we told you that we finished higher than what we actually wanted at year-end for various reasons for the inventories, and that we have an internal target to bring net working capital to sales. Again, down in a range of 13% in 2019, comparing with 14.7% in 2018, and then exceptionally low, 10.1%, in 2017.

So this gives you an order of magnitude of the millions we want to reduce, comparing year-end, year-end. And when you look back, and Christian Arnold also, I think, asked in that direction. It's quite normal. It's the seasonality we have in our business that inventories peak somewhere in between July and September and then until the year-end goes down. This is mainly the work in progress we have and we build up.

And the last point you mentioned, Jean-Pascal already talked about it. So with bookings reducing, not only for us but for all our good competitors, compared to an extremely high last year. And you remember that we had quite some questions, mid of the year, why we guided a certain sales level at year-end, even though having more than 20% higher bookings and backlog. Mid of the year, we already told you that we expected to come back to something more normal in the second half of '18, which was the case, with the last quarter, which was relatively low compared to the first half of the year. And the beginning of the year was on a similar trend, and it didn't come back to the levels we saw beginning of last year.

So now and as long as we don't see, if it's really a complete inversion of the trend that we are embarking a longer-lasting slowdown, we decided to make compromises on uncertain deals on prices in order to protect the market share. And this is also one reason why we are confident to make a similar sales level as in previous year, even though we have 15% lower bookings in the first half. But we accepted to have lower prices and therefore lower margins.

We don't see the opportunity to recuperate what we have lost in the first half based on conscious decisions, but we don't see the same effect in the second half. And if we see that it's a longer-lasting reduction on top line, then, of course, we will adjust our structures. We have more than 600 temporary employees still at the moment, and this would be one of the first measures we would take to reduce in that area.

--------------------------------------------------------------------------------

Jean-Pascal Bobst, Bobst Group SA - CEO [23]

--------------------------------------------------------------------------------

So Armin, for me -- again, Jean-Pascal. You said it's more severe and longer. No, we removed -- those are cycles. We move from one cycle to another. In some region, you're right, it's very difficult. China is one example. And you can read on the market all these variations and challenges in China. And if you take, in China, particularly, our brand ETERNA is doing well. And, however, the brand [book] with our new strategy. We do have challenges to get the volume we wanted because we wanted to double the volume of both brands in China with okay profitability. And this part today is very challenging, and we have to review the strategy mid-term.

So you have scenario, and you have regions in the world where global economy is moving. We have to recognize the slowdown and take necessary actions to protect our profitability. Does it answer your concern and question? Or...

--------------------------------------------------------------------------------

Armin Rechberger, Zürcher Kantonalbank, Research Division - Analyst [24]

--------------------------------------------------------------------------------

Yes. Just one point, about the inventories. I mean, when I got it right, you said an underabsorption of your production capacity is because of inventories being too high and you were trying to sell first your inventories before you produce new machines, when I got that right. I wonder, in which areas your inventories of new machines were too high?

--------------------------------------------------------------------------------

Jean-Pascal Bobst, Bobst Group SA - CEO [25]

--------------------------------------------------------------------------------

So when we look -- it's mainly -- not so much the engineering to order type of machines, but much more when you look at China, India or Switzerland, where we have more merger concept machines, where we can produce quite fast, and we launched some modules to go faster on the market. And those are the 3 sites where we have these underabsorption effect.

--------------------------------------------------------------------------------

Operator [26]

--------------------------------------------------------------------------------

Our next question comes from [Alexandra Bossert].

--------------------------------------------------------------------------------

Unidentified Analyst, [27]

--------------------------------------------------------------------------------

I have a couple of follow-up questions for Mr. Tissi, if I may. One is, on the cash flow, which was very disappointing, and you have already elaborated that you expect net working capital to improve in the second half. But will it be sufficient to offset the negative net working capital in the first half? Also FFO, funds from operations, was very, very low. So do you expect this to improve in the second half?

Second question I have is on CapEx. Could you give us some indication where you see CapEx for the full year? And the third question I have is on this planned land disposals in France and in the U.S. You gave us some indication about the book gain, CHF 30 million to CHF 35 million, what will be the related cash flow impact of that transaction?

--------------------------------------------------------------------------------

Attilio Tissi, Bobst Group SA - CFO [28]

--------------------------------------------------------------------------------

Yes. So thank you for the questions, [Alexandra]. So the -- to answer the first point, cash evolution and net working capital. Yes, clearly, the ambition is to generate cash from operating activities. There are 2 main effects in -- which have the difference between H1 and H2, in a normal year for us, the one is that we generate relatively low net result in H1. So up to 80%, 85% of net result is generated in H2. This is one. And the second one is, that we, as usual, have a negative effect on net working capital comparing year-end to mid of the year due to the increase in work in progress. And this should -- assuming that we manage to come back in the area of 13% net working capital to sales, which remains for us, internally, the target, then it's neutralized year-on-year. So the CHF 60 million to CHF 70 million negative impact on net working capital, of which net working capital has on cash flow from operations, should get close to 0, and you have the positive effect of the increasing net result.

So from that point of view, we'll not get to the levels you saw in 2017, where we were more in the CHF 150 million range, which was absolutely exceptional. But overall, yes, we still are very confident to generate cash from operations.

From the CapEx point of view, we announced that we should be higher than last year. So we expect to be higher than last year. We still expect to be in a range of CHF 60 million to CHF 70 million. 2 very large line items or topics. One, is that we are underway to complete our modernization and expansion of the site in Bron, in France, which in a consequence, leased and free development [side] to be sold, and this should be finished by H1 2020, latest beginning of H2 2020. And we are also completing the most complete modernization and expansion with the competent center for coating, which was also mentioned in the press release in San Giorgio, Italy, and this should also be finished latest by Q2 2020.

This is also, by the way, one of the reasons why then CapEx for the coming years will be quite significantly lower than what we will see this year and what we had last year. The second big part, which will last at least until end of 2021, as mentioned already before by Jean-Pascal Bobst, is the Bobst Business System. So it's the complete rollout of one common template of -- on ones at SAP but also of our CAD systems. So to support our strategy and give us the opportunity to design, produce and service products wherever we want throughout the group.

So CapEx for this year, CHF 60 million to CHF 70 million. And...

--------------------------------------------------------------------------------

Jean-Pascal Bobst, Bobst Group SA - CEO [29]

--------------------------------------------------------------------------------

The land.

--------------------------------------------------------------------------------

Attilio Tissi, Bobst Group SA - CFO [30]

--------------------------------------------------------------------------------

Your last question -- yes, the land. So the cash impact is even slightly better than what you have as a net result impact because we have still a remaining book value of the land, and we have some costs, which might incur later on, so we tried with the CHF 20 million to CHF 25 million net result impact. We have already reflected some cost associated and the remaining book value, which is not huge. But still, for the cash, the cash impact could be CHF 3 million to CHF 5 million higher, even, than the net result impact.

--------------------------------------------------------------------------------

Operator [31]

--------------------------------------------------------------------------------

The next question comes from [Petitjean Olivier].

--------------------------------------------------------------------------------

Unidentified Analyst, [32]

--------------------------------------------------------------------------------

You said last year, you intended to hire more employees worldwide. Could you realize this plan? First question. And you seem to be very disappointed in the development of your business in South Africa is some divestment plan in that region? Or do you -- maybe you want to leave this area and this region, I don't know? And third question, when do you expect the order intake to increase again?

--------------------------------------------------------------------------------

Jean-Pascal Bobst, Bobst Group SA - CEO [33]

--------------------------------------------------------------------------------

Thank you very much for your question. First of all, the hire plan was well underway. And when we saw that, basically, the bookings level were going down end of last year, we reduced slightly the process. So we put on hold. We finalized until OTC said that all the hiring made in 2018, in fact, and indeed, in service, we see the full impact -- cost impact, on this year.

So from that perspective, we managed carefully, and we will continue to invest where needed to support rightly our technology launch. Because, as you know, we have a very large product portfolio, and we need to increase and develop the right skills in the right region, and this is what we will continue to do, but we stopped the increase of hiring as of already early this year.

Africa. Africa, we stay. We will not leave. Africa is a complex agglomeration, I would say, a melting pot of countries. And we understand very well the cycles. We are in Africa now for more than 30 years, and we will continue to do okay-to-good business according to the local situation. We are disappointed because we believe Africa can be much stronger. But it's not a Bobst issue, it's a global, local economy and rules and regulations, and we will cope with that and continue to satisfy and support our customers in these countries.

Order intake, no clue. If you can tell me what will be the trend in 2020, maybe I can. Today, I'm just -- we are just looking at the trends, and we see more clouds than blue sky on the horizon. So we are more prudent, and we don't see a change of trend for the next 3 months to come.

Did I answer your question? Or -- yes?

--------------------------------------------------------------------------------

Unidentified Analyst, [34]

--------------------------------------------------------------------------------

Just because -- when you said you stopped the increase of the hiring, that means you stopped to hire. You haven't hired the 400 people you said still now?

--------------------------------------------------------------------------------

Jean-Pascal Bobst, Bobst Group SA - CEO [35]

--------------------------------------------------------------------------------

We stopped. We made the majority up to end of last year, and we stopped hiring beginning of this year. Correct.

--------------------------------------------------------------------------------

Operator [36]

--------------------------------------------------------------------------------

Our next question comes from Daniel Koenig.

--------------------------------------------------------------------------------

Daniel Koenig, Mirabaud Securities Limited, Research Division - Analyst [37]

--------------------------------------------------------------------------------

The question on the cost development personnel, that was already answered. I just had one little remaining question. Can you comment on the development of the income tax and the tax rate in first half? And what should we expect for the full year?

--------------------------------------------------------------------------------

Attilio Tissi, Bobst Group SA - CFO [38]

--------------------------------------------------------------------------------

Sure. So on the tax rate, I think it's important -- it's important to understand the development also since last year. So mid of the year 2018 is still recognized losses generated in our German entity, Bobst Bielefeld, which then became even much more important in the second half because we booked a provision for the quality campaign only in the second half. And then also, we decided not to recognize deferred tax assets on losses for our 2 Chinese entities, the Bobst branded Chinese entities. I don't speak about Gordon. There we have the new plant, which was inaugurated in May, which is still in the ramp-up phase, not having the right load and therefore, generating a loss. And then we have our traditional site in Shanghai, where we produce some entry-level Bobst equipment, where we decided, as mentioned before by Mr. Bobst, to go for a volume strategy lowering, in a quite aggressive way, prices, to test the elasticity of the prices in China.

And it was clear that we would incur a loss. And as we don't see -- we couldn't yet decide by when we can turn that, we decided not to recognize deferred tax asset. And on top of that, since we created Mouvent back in June 2017, as it is a start-up, we never recognized deferred tax assets on losses.

Now if you look at the situation in the first half of 2019, we have entities generating profit. And on those, we have an effective tax rate of around 21%. This is, in particular, including our operations in Switzerland but also in France and in the U.S. And then we have, in Germany, one site, 2 in China, and Mouvent out of Switzerland, which generates very significant losses. And on those ones, we don't recognize deferred tax assets.

Therefore, you get to these bizarre effective tax rate for the first half of the year. And this should somehow normalize, but not[fee]. And when you look in our annual report for 2018, you will see that because we disclosed that in a note, that the impact on taxes was CHF 20 million. The CHF 20 million is the tax effect of CHF 70 million, CHF 7-0 million, losses, which were generated in these 4 entities. So for that you see the details.

The accumulated loss will be lower. (inaudible) there's less loss in Bielefeld, but as already told you, movement will be on a similar level as in 2018, and the 2 combined Chinese entities also because we only started in April, the strategy in China, so the impact in China for this year is even higher than last year. So Bielefeld had less loss. In China, somehow, more, movement the same.

--------------------------------------------------------------------------------

Operator [39]

--------------------------------------------------------------------------------

Our next question comes from Bernd Pomrehn.

--------------------------------------------------------------------------------

Bernd Pomrehn, Bank Vontobel AG, Research Division - Analyst [40]

--------------------------------------------------------------------------------

You mentioned that the public discussion about the sustainability of packagings resulted in investments among your customers to be postponed. Why is this actually the case? Is it because the use of packagings will decline? Or because we will see more sustainable packagings, which will require different machines. And if this is the case, do we have the right solutions for more sustainable packagings?

--------------------------------------------------------------------------------

Jean-Pascal Bobst, Bobst Group SA - CEO [41]

--------------------------------------------------------------------------------

Thank you very much for your question. Sustainability is more a very long-term journey. And when we say that there's an impact now, yes, because we have seen in the last 12 to 18 months, very large brand owners, giving to the market, very, very strong statements, such as no plastic anymore up to 2025. And we know this is not feasible. We know it will not be the reality, but we have to counter these big waves of, I will say, communications on the market and then stabilize again and look for the best solutions, which means our customers, they hesitate to invest in technology, A, B, C, D or E, depending, of course, all these type of statements and change on the way they will have to produce packaging. So in a nutshell, the quantity of packaging will not reduce, contrary, we see packaging increasing, despite the fact everybody says less packaging, but we see a growth in packaging demand being folding carton, corrugated, film, plastic labels growing. That's a fact.

Now we should, as a worldwide consumer, we all as a consumer, should think about what and how to buy. We can make a difference. But from a Bobst Group perspective, the impact is threefold. First, yes, we have to work closer with brand owners on new chemistry, on new biodegradable substrates. It's not Bobst who will develop that, but we will be part of these joint developments so we can develop the right machines, chemistry to fulfill their needs.

Second impact is, yes, some customer, they say, should I buy Gravure technology, Flexo technology, the digital printing? Is it UV ink? Is it water-based ink? Is it low-migration inks? All these questions are more and more on the table and very relevant for brand owners.

And third, basically, we see good opportunities for Bobst as we're entering with our digital printing technology water-based, which we will show end of September in Labelexpo. It will be one of the first fastest machine water-based on almost all substrates, we can demonstrate to the market. It will take some years to bring volume, but that shows the major evolution and breakthroughs in technology, which will come in the future.

So all that said, yes, sustainability topic do put pressure and postpone acquisitions of new equipment because customers and us, we have to work together and develop the right solutions for their mid- to long-term investments.

--------------------------------------------------------------------------------

Operator [42]

--------------------------------------------------------------------------------

And finally, we have another question from Armin Rechberger.

--------------------------------------------------------------------------------

Armin Rechberger, Zürcher Kantonalbank, Research Division - Analyst [43]

--------------------------------------------------------------------------------

Well, tax rate, it was almost answered but still to get more security on this topic. Second half year, what can we expect on the tax rate, around 30%, I suppose? What was your answer exactly there? And bookings of land sale, you mentioned CHF 30 million to CHF 35 million on EBIT, CHF 20 million to CHF 25 million on net result. When will these be booked? I assume, starting in a year to 1.5 year.

--------------------------------------------------------------------------------

Attilio Tissi, Bobst Group SA - CFO [44]

--------------------------------------------------------------------------------

So first, for the timing. As we stated in the press release, we see it in the next 12 to 18 months. There is -- there are procedures, which have to -- where we have to go through with political instances, who have to move. So difficult to be more precise as of today. For the tax rate, instead of giving you a percentage because as of today, for me, it's hard to say which will be the breakdown of the profit by countries and different with the different tax rates. But what our basic assumption is, as I said before, is that the losses we incur will be lower in the 4 jurisdiction or in the 3 jurisdictions where we do not recognize deferred tax assets, being in Germany, Switzerland, and China, compared to the CHF 70 million we had last year. And the tax rate we have in the first half of the year, the recurrent effective tax rate, I told you, will not be much higher than what we had in the first half. So I told you, in the countries that we already generated benefits in the first half, this should be -- remain quite similar. But we remain with medium-high, double-digit million amount of losses we will not recognize.

--------------------------------------------------------------------------------

Operator [45]

--------------------------------------------------------------------------------

The next question -- we have another question from Remo.

--------------------------------------------------------------------------------

Remo Rosenau, Helvetische Bank AG, Research Division - Head of Research [46]

--------------------------------------------------------------------------------

I would like to come back to Mouvent, shortly. You said you expect more or less stable results compared to last year. However, in the first half, the loss has actually increased. It was the charge to noncontrolling interest of CHF 7 million in the last. First half, it was CHF 6.2 million. Then on the annual conference of the full year, you said that you couldn't realize around CHF 20 million sales will move in the old year because of delays, which cost you an additional CHF 5 million of EBIT, and this would now be realized in the first half '19. So these 2 elements would imply that your costs otherwise have still increased because [century] power booster the result should have been improved.

--------------------------------------------------------------------------------

Jean-Pascal Bobst, Bobst Group SA - CEO [47]

--------------------------------------------------------------------------------

Thank you, Remo, for the question. What we are currently doing is, yes, increasing our presence and competencies on the field to support the launch of these products. So we do have a slight increase there. And we have some, how we say, postponement on delivery of machines, H1 this year, but we started to ramp up now for the H2, what we should have made the last 3 months. So slight gap and postponement on the full year. And the ramp-up of the production and the competencies where we are seeing those machines.

--------------------------------------------------------------------------------

Remo Rosenau, Helvetische Bank AG, Research Division - Head of Research [48]

--------------------------------------------------------------------------------

Okay. So if I recall correctly, the target was to sell 3 to 4 machines a month at some stage. So you're not yet there?

--------------------------------------------------------------------------------

Jean-Pascal Bobst, Bobst Group SA - CEO [49]

--------------------------------------------------------------------------------

That was exactly the target since April, and we started to do that starting June.

--------------------------------------------------------------------------------

Remo Rosenau, Helvetische Bank AG, Research Division - Head of Research [50]

--------------------------------------------------------------------------------

Okay. Good. So kind of 3 to 4 months' delay in the plan?

--------------------------------------------------------------------------------

Jean-Pascal Bobst, Bobst Group SA - CEO [51]

--------------------------------------------------------------------------------

Three months' delay, exactly. And then you have also, like always, a [read] of that, I would say, product mix. And sometimes you have different price delta. But first, for movement, what we need is our clear customer and references on the market. This is what we built. And we are positive on that now. It takes time when you saw the first machine, you need not 2 weeks, but more 4, 5, 6 months' experience until the customer says, "I am ' happy. I can be a reference customer. Let's bring others come in and discover my production."

And this is where the stage we are in for textile and label. And now we start to have repeat customers. They order a second or third machine. So it's a ramp-up. And yes, I'm an optimistic guy. So I want to push fast, but to create a new brand with a new technology in a new field, it takes time. And we are happy, June was very good bookings. July, August should be okay. And the funnel, sales funnel is growing, and technology has started to make its -- prove on the market, and we need to make positive noise and run.

So end of September, if you can join us in Labelexpo, please come because that will be a very, very strong message to the market, and we should see the full effect after that. But the ramp-up, as always, a cost, and we will continue to invest step-by-step, not too much, but step-by-step to have the right technical support locally.

--------------------------------------------------------------------------------

Operator [52]

--------------------------------------------------------------------------------

There appear to be no further questions, I'd like to hand the meeting back to Mr. Bobst for his closing remarks.

--------------------------------------------------------------------------------

Jean-Pascal Bobst, Bobst Group SA - CEO [53]

--------------------------------------------------------------------------------

Thank you very much, ladies and gentlemen. We would like to thank you for your questions and interests for our group.

Within a changing business environment, Bobst Group is pursuing its strategy to deliver the expected sustainable profitability. More information will be given to you during our next meeting for traditional update on the full year activity, which will take place on November 8 in Zurich.

Thank you very much, and have a great vacation period from Lake of Geneva.

--------------------------------------------------------------------------------

Operator [54]

--------------------------------------------------------------------------------

Thank you, Mr. Bobst. Ladies and gentlemen, that concludes today's conference. On behalf of the Bobst Group, thank you for your participation. You may now disconnect.