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Edited Transcript of DUE.DE earnings conference call or presentation 12-May-16 12:30pm GMT

Thomson Reuters StreetEvents

Q1 2016 Duerr AG Earnings Call

Stuttgart - Zuffenhausen Mar 3, 2017 (Thomson StreetEvents) -- Edited Transcript of Duerr AG earnings conference call or presentation Thursday, May 12, 2016 at 12:30:00pm GMT

TEXT version of Transcript

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Corporate Participants

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* Ralf Dieter

Duerr AG - CEO

* Ralph Heuwing

Duerr AG - CFO

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Conference Call Participants

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* William Mackie

Kepler Cheuvreux - Analyst

* Ingo Martin Schachel

Commerzbank - Analyst

* Stefan Augustin

Oddo Seydler Bank - Analyst

* Harald Rehmet

Landesbank Baden-Wurttemberg - Analyst

* Peter Rothenaicher

Baader-Helvea Equity Research - Analyst

* Christian Cohrs

Warburg Research GMBh - Analyst

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Presentation

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Operator [1]

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Welcome to the Duerr conference call. Ralf Dieter, CEO, and Ralph Heuwing, CFO, of Duerr AG will present the Duerr Group figures for the first quarter 2016 followed by a Q&A session. I will now hand over to Mr. Dieter, CEO of Duerr AG.

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Ralf Dieter, Duerr AG - CEO [2]

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Thank you, Laura, and good afternoon, ladies and gentlemen, and to welcome everybody. It is our pleasure to present to you Duerr's figures of the first quarter 2016. As always I am joined by my colleague Ralph Heuwing. I will start with also always by summarizing the key highlights.

We had a very good start to 2016 with incoming orders improving by 17%. Adjusted from currency translation effects sales in the first quarter remained unchanged. EBIT and earnings after tax rose strongly after normalization in purchase price allocations and financial result and tax rate.

Let's turn to page number 4. Incoming orders increased substantially in all divisions to more than EUR1 billion, first time in Duerr's history. The residing order backlog ensures good capacity utilization in 2016. The book to bill ratio came to 1.3 in the first quarter. We saw a slight decline in sales as expected, but currency translation had a negative effect of minus 3 percentage points to order intake and sales.

On page 5 you see that incoming orders in America rose strongly due to several large orders in North America. In Brazil, India and Russia incoming orders remained at a lower level. But interestingly we will be able to book in the same quarter a small paint shop order in Brazil. And as anticipated, incoming orders in China were somewhat below the previous year's figures. And orders in Eastern Europe rose mainly due to a large greenfield order for the construction of a paint shop for a luxury car manufacturer. The proportion generated in the emerging markets again exceeded the 50% mark.

Let's turn to page number 6. In the first quarter we achieved an EBIT margin of 7.1% compared to 5.6% last year. So we started the year already within our full-year target range of 7% to 7.5%. As expected purchase price allocation expenses decreased to a normal level of EUR2.2 million. Our EBIT includes bookings from a real estate sale of EUR5.1 million in the US following the move to our new campus.

Like-for-like operating EBIT adjusted for PPA effects and income from the real estate sale came to EUR55.8 million compared to EUR58.9 million in the first quarter last year. This resulted in an operating EBIT margin of 6.8% versus 6.9% in the previous year. As anticipated, there was a strong improvement in financial result while tax expense returned to a normal level which meant that net profit more than doubled.

My colleague, Ralph Heuwing, will now take you through our financials.

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Ralph Heuwing, Duerr AG - CFO [3]

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Yes, thank you, Ralf. Ladies and gentlemen, let me continue on page 7. Operating cash flow came to minus EUR3 million in the first quarter, down by EUR42 million year over year. This reflected an expected EUR22 million increase in net working capital compared with the end of 2015. And a cash out of EUR50 million for a terminated employee participation program at HOMAG. Free cash flow stood at minus EUR22 million while net financial status declined from EUR129 million at the end of 2015 to a still comfortable level of EUR89 million.

The overview of our work in process and progress billings on page 8 shows that the payment balance with the customers has further normalized by EUR64 million compared to the end of 2015 and now stands at minus EUR148 million in our favor. We consider a figure of around minus EUR100 million to constitute a normal level, so expect some further cash outflow in the next quarters.

On page 9 you see that at 25.4% our equity ratio increased by 4.5 percentage points compared to 31 March 2015. We expect a further improvement during the course of 2016. Our new bonded loan in German (inaudible) the volume -- in the volume of EUR300 million is not yet included as of March 31, 2016. Our total cash currently, so today, stands at around EUR750 million. ROCE again exceeded the 35% mark in the first quarter and should stay at or rather above this level for the whole of 2016.

I'll now and back to Ralf Dieter who will highlight the performance of our divisions and summarize our outlook.

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Ralf Dieter, Duerr AG - CEO [4]

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Yes, thank you, Ralph. Let's move on to page number 10. Order intake paint and final assembly systems was strong with a plus of 20%. Our project pipeline remains healthy also because a number of immobility projects are being planned both in China and in North America. Looking forward paint and final assembly systems expects generally stable demand. The decrease in earnings was due not only to lower sales but also to the margin returning to a normal level. At 6.7% the EBIT margin was on par with the fourth quarter last year.

Page 11 shows that application technologies order intake also increased considerably, mainly due to several large greenfield projects, while modernization business was steady. [Base] decline was a consequence of strong order execution in 2015 and moderate order intake in the first quarter. EBIT was up EUR4.3 million due to the EUR5.1 million income from the mentioned real estate sale in the US. The operating EBIT margin remained above 10% due to the strong service business.

On page 12 you can see that order intake of measuring and process systems rose substantially by 20%. Order intake was strong in all activities. With sales down 10% the book to bill ratio increased to 1.6. The EBIT margin was weaker due to the reduced sales and reached 7.8%. We anticipate a margin of 10% to 11% for the full year.

As announced on April 12, we are currently exploring different strategic options for the future direction of the cleaning and service processing segment. Cleaning and surface processing consists of the Duerr Ecoclean Group, the market (inaudible) leader for industrial cleaning machines. Our aim is to develop a strategic partnership, but we are also considering anything from a minority shareholding by Duerr [to] the sale of these activities.

In 2015 cleaning and service processing achieved sales around of EUR200 million and an EBIT margin of about 6%. We believe that the market offers further consolidation opportunities. However, it will be very difficult for Duerr, as Ecoclean's owner, to drive this consolidation process due to our already strong automotive market position. The process has already started and it is expected to be concluded by end of the year.

Page 13 shows the results for clean technology systems. Order intake and sales rose strongly in the first quarter driven by growth in our environmental business. Order intake exceeded sales by 29%. We received several orders from China and North America. The weak earnings are mainly due to the development in energy efficiency technology. In fuels and lower energy prices, this business has developed more slowly than initially planned. Measures to intensify sales activities and optimize costs have been initiated.

Ladies and gentlemen, let me continue on page 14 with an overview of the HOMAG

Group which is equivalent to the woodworking machinery and system division. HOMAG continued on its upward trend and order intake rose by 6% and sales by 2% in the first three months. EBIT increased by EUR13.4 million and considerably outpaced sales growth.

One reason for this was a EUR9.3 million decrease in PPA expenses and the other was operating improvements worth EUR4.1 million. Adjusted for PPA effects, the EBIT margin rose to 6.4% in the first quarter, up from 4.9% last year. The reported EBIT margin stood at 5.5% compared to 0.4% in the first quarter last year. In the coming quarters PPA expense will be around EUR2.2 million per quarter.

Let's move to page 15 and you can see that our service business is a key driver for both customer satisfaction and value creation. Services grew by a strong 8% in the first quarter coming to EUR231 million and accounting for 28% of consolidated sales getting closer to our midterm target of 30% of total sales. The service margin remained at a high level. We expect the positive trend in our service -- the business to continue based on further progress in our customer excellence initiative.

Let's move to page 16. PwC's market experts published their latest forecast for light vehicle production in April, shown on this page. PwC has scaled back its short-term market expectation somewhat and now project global production growth of 4% in 2016. In particular Brazil and Russia are continuing to underperform while India, Southeast Asia and Iran are on an upward trend. Europe and North America are performing well with growth rates slightly above expectations. And the 2016 growth forecast for China now stands at around 6%.

PwC and others remain upbeat about the longer-term potential in China. This sentiment is consistent with our impressions from conversations with our OEMs in China. They continue to see significant potential in the long-term and in addition we also see growth in the modernization business, reflecting the lower degree of automation and the lack of environmental protection in the older plants. An increasing number of paint shops in China is aging and in need for modernization.

Let's turn to page 17. Based on the good start in the year we are reconfirming our outlook. We are confident that we can achieve our earnings targets for 2016. We are aiming for an EBIT margin of 7% to 7.5% with absolute EBIT expected to be par on this 2015.

Ladies and gentlemen, before inviting you to ask questions I would like to draw a short conclusion. We started the year with a strong order intake while sales developed as expected. Net profit more than doubled. The operating margin was stable despite the sales decline. Our cash flow was temporarily weaker, but an improvement in the second half of 2016 is expected. HOMAG is now the second largest earnings contributor in the group with further potential. And we confirm the guidance for 2016 with these upper guidance ranges as more realistic.

Ladies and gentlemen, now thank you very much for your attention. We are now happy to answer any questions you wish to raise and I hand back to Laura.

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Questions and Answers

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Operator [1]

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(Operator Instructions). William Mackie, Kepler Cheuvreux.

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William Mackie, Kepler Cheuvreux - Analyst [2]

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I have three questions please. First of all, during your work in the first quarter it seems you have become more optimistic around opportunities of electric vehicles in China. Can you give us a sense of your impression of the urgency to start the investments in factory roll out and electric vehicle investments and when we might begin to see that in the order flows within your Chinese business?

Secondly, with regard to the guidance for the full year. When I look at the gains in application technology and then the way you have reported the margin in the first quarter including those gains, when we think of your guidance should we also consider that it includes the gain on the property divestment? And is it possible that you will book other gains or you have visibility on that?

And lastly, a technical question. Given the benefit of the tax rate in the first quarter, can you give us a sense of where you see the tax charge for the full year? Thank you.

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Ralf Dieter, Duerr AG - CEO [3]

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Okay, I start with the first question regarding the urgency of investments in new factories for [e-mobility] of our [e-cars]. There are a lot of players at the moment in that field mainly driven by Chinese investors and they always start in the US and California and then China is the second phase. So we are working on let's say a handful of those projects.

Up to today it is not totally clear how the investment will be funded. So we have -- I think we will see some of them have plans will not be executed, some will do. And so, I'd say for my guess it is maybe two or three opportunities which are quite solid now for the -- you know with Tesla that is public knowledge. But there are the other ones like Faraday Future and so on.

And they -- it is difficult for us today to project when those investments will be awarded still because a lot of discussion and financing stuff in the background. Not before the second half and maybe end of the year but maybe also early next year. So we have to be careful. I can maybe give you after the second quarter better feedback on that.

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Ralph Heuwing, Duerr AG - CFO [4]

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On your second question, I mean the EUR5.1 million, if you calculate it is something like 0.1 -- less than 0.15% of our guided revenue. So that doesn't really make a big difference. And we have chosen not to change our [guide]. On the tax charges, we are calculating with a tax rate of 30% for the full year. Maybe a little bit lower depending on where profits accrue over the course of the year.

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William Mackie, Kepler Cheuvreux - Analyst [5]

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Thank you.

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Operator [6]

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Ingo Martin Schachel, Commerzbank.

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Ingo Martin Schachel, Commerzbank - Analyst [7]

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I have two questions. The first one would be on the Ecoclean business. Could you give us a little bit more detail to what extent the Ecoclean performance contributed to the [MPS] margin decline in the first quarter? Or how much of a deterioration for margin performance you would see there for that business compared to the 6% that you mentioned in the press release as a 2015 margin level?

And on the divestment, if you could maybe elaborate a little bit on your preferences with regards to maintaining or not maintaining a minority stake in that business. I think if you de-consolidated it seems like a -- well, reasonably attractive business with a nice [consolidation] hub. So just curious to hear your thoughts on what extent you would, if possible, have a preference on maintaining a minority stake in that one.

And lastly on the APT order intake, if you could give us a very brief comment on -- I mean, it is one of the strongest order intakes that you had -- or the strongest in the last three years. If you could tell us a bit about business mix, whether that was more driven by big tickets and one-off lumpiness, order intake, or whether there was already some great element included from non-automotive applications or any specific growth drivers in there.

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Ralf Dieter, Duerr AG - CEO [8]

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Okay, Mr. Schachel, regarding [equity], please I ask for your understanding that we are in the beginning of a process here and also very early in that process. And due to fact we would not like to disclose more details on that, I think we can be clearer later in the year.

The APT order intake, as we said, there were some larger greenfields, but we see also a very healthy pipeline for we call it brownfield where we have either replacement of old robots or competitor robots or process changes further out in the [station] for interior painting. So there is a very, very healthy pipeline on that side as well which we will see in the next quarters to materialize.

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Ingo Martin Schachel, Commerzbank - Analyst [9]

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Okay, thank you.

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Operator [10]

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Stefan Augustin, Oddo Seydler Bank.

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Stefan Augustin, Oddo Seydler Bank - Analyst [11]

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I have actually two questions here. The first one is can you give us an idea a little bit if -- your very strong Q1 order intake goes a little bit at the expense of Q2, so have there been simply be a shift in timing of projects being signed?

And the second one is going to HOMAG. We see a EUR4 million improvement in EBIT and, if I am not mistaken, then anything that has been -- that they a little bit connected to the integration and has something like one-off elements has been rather in the quarters later on. So this should be an operational improvement. And is this a EUR4 million something like a sustainable level that we could roll out over the following quarters as well for this year?

And maybe as a last one, MPS is also really strong. Is this -- can you give us a little bit an idea if this is for all business units underlying in MPS and is it also not only from the automotive side? Is it also coming from other industries?

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Ralf Dieter, Duerr AG - CEO [12]

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Okay, first of all your first question is basically asking how the second quarter will be. To be honest with you, from today's perspective it will be not a -- I think last time we talked when we had some preliminary [sides] that was most [captive] but it looks quite okay. So we anticipate maybe a level around last year's second quarter. That would be a good achievement.

But as you know, we can't force customers to sign in time on the quarter end or before. We'll see, but we are optimistic. The MPS strength is based on all business units, for sure it is also the supplier side, but this is also -- majority is automotive. And it is healthy in all segments. So there's also a very positive surprise to us and it continues also to be for the year.

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Ralph Heuwing, Duerr AG - CFO [13]

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And your question on HOMAG, our message has been that we plan to improve the EBIT margin by roughly 100 basis points on an operational level year-by-year. And of course the first quarter has been good in that sense. And it is also correct that there were no -- other than PPA, no other distortions in terms of 2015 or 2016.

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Stefan Augustin, Oddo Seydler Bank - Analyst [14]

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Okay, would you -- as a follow-up, would you continue then in the light of the current project pipeline still to say that H2 should be above H1 from the pipeline's perspective order intake?

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Ralph Heuwing, Duerr AG - CFO [15]

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You mean globally or HOMAG?

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Stefan Augustin, Oddo Seydler Bank - Analyst [16]

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Globally, for the group.

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Ralf Dieter, Duerr AG - CEO [17]

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I will not comment today. Give me the chance, as always, that I have the second quarter behind and have a better view on that. But (multiple speakers) pipeline looks good. I can only say, but I can't say this on quarter because, as we always say, quarters are difficult to look at and we will know more later the year. But the guidance in order intake we confirmed, I even said that we could be also at the upper end of the guidance so I think that is maybe also a partially answer to your question.

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Stefan Augustin, Oddo Seydler Bank - Analyst [18]

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Okay, thank you very much.

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Operator [19]

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(Operator Instructions). Harald Rehmet, BBW.

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Harald Rehmet, Landesbank Baden-Wurttemberg - Analyst [20]

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Some minor questions from my side. First of all, industrial application technology, could you give us an idea what was the contribution to EBIT in Q1 and the relation to the previous year?

Second, your acquisition of iTAC, do you see already on the incoming orders or in the development of your project pipeline that the backing by Duerr as a powerful shareholder would have any effect or results for projects coming on stream by iTAC?

And finally, some months ago you told us something about margin erosion in final and assembly and I think you are a bit more optimistic for the pipeline currently. So this has also a positive effect on the margin trend in this business. Could you give us there a sense of what is going on?

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Ralf Dieter, Duerr AG - CEO [21]

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Yes, Mr. Rehmet, thank you. First of all, industrial application is still a very small activity. At the moment it does not contribute to the EBIT. But this will be -- because we are still investing here, but it also doesn't hurt it. So it is quite neutral in the meantime.

iTAC, (inaudible) we have positive effects, even they are small numbers, but we have now order intake increase of 40%, I think maybe speaks for your question. We see that the customers have very, very positively confirmed the Duerr shareholder [shape] and they have got orders faster or easier by us being the owner definitely. So this effect we anticipated is happening, also for our larger projects.

And we didn't talk about [a month ago] margin erosion, we talked about margin pressure. For sure, it is higher than in 2012 and customers are talking about capacity reservation. But I would say it is a normal business, nothing special to mention. But normal [costs] in their times.

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Harald Rehmet, Landesbank Baden-Wurttemberg - Analyst [22]

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Okay, thank you.

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Operator [23]

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Peter Rothenaicher, Baader Bank.

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Peter Rothenaicher, Baader-Helvea Equity Research - Analyst [24]

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Regarding your pipeline in the paycheck business, you mentioned it is very healthy. Can you perhaps specify is China here a big topic because Q1 was relatively weak in terms of order intake from China? And is here, as you recently mentioned now, a bigger demand from some local players an issue?

And regarding the prospect -- application technologies order intake in the first quarter in this area was very strong. So with a good capacity utilization can we expect here perhaps some positive impact on the margin for the rest of the year?

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Ralf Dieter, Duerr AG - CEO [25]

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To your second question, as we already said, we will get to the level we used to have which is 10% round about. And so, we will have an increase over the year. And the first question is the pipeline of paint shops; it is healthy basically in North America, in Europe and in China. In China it was a little bit weaker the first quarter but, again, quarters doesn't count.

And, yes, we are in close -- or let's say in quite advanced negotiations with some local players as well. But although with the year (inaudible) just because over there sales has picked up in some areas quite nicely. So we see for China more activity in the second half.

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Peter Rothenaicher, Baader-Helvea Equity Research - Analyst [26]

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Okay, thank you.

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Ralf Dieter, Duerr AG - CEO [27]

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But it is not only driven by China, it is everywhere fortunately.

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Peter Rothenaicher, Baader-Helvea Equity Research - Analyst [28]

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Good.

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Operator [29]

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Christian Cohrs, Warburg Research.

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Christian Cohrs, Warburg Research GMBh - Analyst [30]

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Good afternoon. Thanks for taking my question. I actually entered the call late, so you may have addressed this issue already in your presentation. But I was wondering about most recent issue of your promissory note I think in the value of EUR300 million. You have a very comfortable net financial status, also good cash flow projects. Are you, yes, filling actually your war chest just for M&A or what is the key purpose for the most recent bond issue?

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Ralph Heuwing, Duerr AG - CFO [31]

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Mr. Cohrs, thank you for your question. The stated reason was of course both a general corporate purposes, i.e. working capital; finance, etc., but also to make us ready to act when we need to in terms of M&A. We are, as always, in the process of reviewing opportunities and we have already stated the criteria that we apply. But there is nothing specific to be reported on right now.

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Christian Cohrs, Warburg Research GMBh - Analyst [32]

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Okay, thank you.

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Operator [33]

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Thank you. We currently have no further questions.

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Ralf Dieter, Duerr AG - CEO [34]

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Okay, then, thank you very much for your questions, ladies and gentlemen. We enjoyed the discussion, as always, very much. And we would like to invite you to our Investors Day on June 24 in (inaudible) starting at 2 PM. We will present there our strategy Duerr 2020 and Digital@Duerr and some other highlights and we hope that many of you will join for that event. You will receive the invitation and the final schedule in the next days. I think for now we would like to say goodbye to you and wish you a pleasant afternoon or good morning wherever you are.

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Operator [35]

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