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Edited Transcript of DUE.DE earnings conference call or presentation 23-Jul-19 12:30pm GMT

Half Year 2019 Duerr AG Earnings Call

Stuttgart - Zuffenhausen Aug 16, 2019 (Thomson StreetEvents) -- Edited Transcript of Duerr AG earnings conference call or presentation Tuesday, July 23, 2019 at 12:30:00pm GMT

TEXT version of Transcript

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Corporate Participants

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* Carlo Crosetto

Dürr Aktiengesellschaft - CFO & Member of Management Board

* Ralf W. Dieter

Dürr Aktiengesellschaft - Chairman of Management Board & CEO

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Conference Call Participants

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* Alexander Hauenstein

DZ Bank AG, Research Division - Analyst

* Christoph Laskawi

Deutsche Bank AG, Research Division - Research Analyst

* Daniel Gleim

MainFirst Bank AG, Research Division - Director

* Jasko Terzic

Metzler Equities, Research Division - Research Analyst

* Sebastian Growe

Commerzbank AG, Research Division - Team Head of Industrials

* William Turner

Goldman Sachs Group Inc., Research Division - Research Analyst

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Presentation

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Operator [1]

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Welcome to the Dürr conference call. Ralf Dieter, CEO; and Carlo Crosetto, CFO, of Dürr AG will give you a short introduction, followed by a Q&A session. I will now hand you over to Mr. Dieter, CEO of Dürr AG.

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Ralf W. Dieter, Dürr Aktiengesellschaft - Chairman of Management Board & CEO [2]

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Yes. Thank you, Mr. Perniga. Good afternoon, ladies and gentlemen. Good morning to those of you in the U.S. We are presenting to you today our preliminary first half figures and also the background of our revised outlook that we did last night.

To start with the summary, we have our sales picked up by 8% and the incoming orders nearly on the same level like last year, although we have challenging market conditions as you all know.

The book-to-bill ratio at 1 and the order backlog still at EUR 2.6 billion, which is slightly above the end of last year.

We're positive in our service business, which is -- was growing 15%, which is a strong growth.

The earnings were moderate in the first half where we show on the EBIT side a minus of 6%.

The increased competitive pressure in all divisions, we have also have implemented cost-cutting measures. We are working heavily on productivity improvements, and particular, our extraordinary costs we had last year, we have significantly reduced as well.

The cash flow was disappointing in the first half mainly due to some further delays in customer progress payments. But it was also the fact that we had no large-scale order in the second quarter, which you can see in the PFS group which normally gives us a decent amount of down payments, which we had not in the second quarter.

The Paint and Final Assembly Systems, Application Technology and Clean Technology Systems are well on track to reach their 2019 targets as published.

And the order intake in Measuring and Process Systems, after a slow start, the first quarter improved in the second quarter and should lead to higher sales in the second half of this year compared to the first half. But higher R&D costs mainly for digitization and increased competition. And particular weaker demand, actually very low demand in the powertrain business, I will comment on that later, weighing on the results.

On the HOMAG side, we have a strong decline in the high-margin business in China. We had the second year again 50% reduction, which we did not anticipate so far. And therefore, the HOMAG outlook is reduced to a lower business volume in the second half of 2019.

On the Page #4, we have an overview as usual for the key figures. On the EBIT side as already mentioned, operating EBIT is down minus 5% on a level of EUR 107 million. And the net profit is down round about EUR 4.5 million to -- so minus 6%.

On Page 5, we show the order intake in the regions. We have in China in a weak development, but this is mainly due to 2 facts. First of all, HOMAG, as I said again, 50% less than last year. And also we had no large-scale order in the paint and the APT side in China in the first -- in the second quarter, but this will change for the second half. We will comment on that later.

Americas up, mainly influenced by a large-scale order we had in Mexico. Germany, more or less, and development on project difference of slightly below last year. And Europe, quite stable. And Asia, this is nice growth, which is China excluded. And yes, in particular, we had a -- since many years again, an larger petrol order in India.

Now I would like to hand over to my colleague Carlo gives you more insights on our figures.

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Carlo Crosetto, Dürr Aktiengesellschaft - CFO & Member of Management Board [3]

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Yes. Thank you, Ralf. And good morning and good afternoon to everybody on the call also from my side. I will now walk you through the next few slides, and I will start by giving you a quick summary of our key P&L profit figures.

As you can see in Chart 6, our gross profit on sales was up compared to the previous year, to the first half of 2018, but less than it should have been mainly because our gross margin, that was only 22% instead of 23.1%. That's mainly driven by higher cost of goods sold. So as it's stated here, higher production cost wages, material costs, and as Ralf already mentioned at the beginning, due to increased competitive pressure on some of the divisions.

The EBITDA number looks pretty good with EUR 150 million. I have to highlight here that we have the so-called IFRS 16-related effect where obviously it's impacting depreciation. And this is why it's a little bit higher than it was in the previous year.

The extraordinary effects that we have in our P&L are similar to what we had for the first half of last year, about EUR 11.7 million. We have a bit more extraordinary effects related to PPA in the clean technology division, the acquisition of MEGTEC. And that is compensated by lower extraordinary effects in the corporate center due to costs that we had last year that we didn't have this year. But in total, extraordinary effects remain the same.

What is worth highlighting in our expenses, our selling expenses were up significantly compared to the first half of last year. And the main reasons for this is that we had significant and quite important exhibition like this planned open house in the first half of '19, which we didn't have last year. So we do expect that selling expenses should decline in the second half of 2019.

If I can move on now to Page 7. I would like to show you the so-called cash evolution or the development of the net financial status. What is known is the impact of IFRS 16. So we have adjusted that compared to the previously reported number and brought the adjusted NFS number down to minus EUR 66.5 million.

And then we have the usual walk that you see in every call. What is obviously disappointing and what is obviously not in line with our expectation is the development of the net working capital. As I will show you later in the next slide, that's mainly related to customer payments and less advanced payments received, but I'll get to that later.

So you see the rest of the position are in line with our expectations in terms of CapEx or depreciation and taxes and so on. The net financial status as of June is at the level of minus EUR 310 million. And as we have also highlighted in the top of the slide, we do expect the cash flows, operating cash flow, free cash flow, of course, net financial status to improve towards year-end in the second half of the year.

Page 8, you will see a breakdown of the key net working capital positions. And what is pretty obvious is that the big deterioration is coming from the reduction in total contract liabilities of a deviation of EUR 139 million reduction, which means in a bottom line, less advanced payments received. If you look at the total inventory and prepayments, which includes materials, work in progress, finished goods and, of course, prepayment to suppliers, the number is roughly at the same level as it was for the same period last year and slightly higher than it was at year-end. So it's clearly the problem that we have in net working capital is related to the position of total contract liabilities, which is getting smaller than it was a year ago.

Working -- and this obviously has an impact on the total net working capital number that you see on the slide.

If we move on now to Page 9, we can see that the total balance between total contract assets and total contract liabilities is become a positive number, which means that basically we are developing in a situation where we have less advanced payments in excess. And we still confirm, or we haven't changed the target that the balance should be between 0 and minus EUR 100 million. Although given today's numbers, I have to say that we probably need to guide you towards the lower end of this range based on today's numbers. But we are still assuming to remain within this range.

On Page 10, we have the key equity and balance sheet figures. What is certainly worth highlighting in positive terms is that the equity ratio is improving and is moving towards the 30% range that we still have as an objective. It's currently at 28.2%, but it's up 11% year-on-year basis.

The net financial status, I've already explained the walk with the minus EUR 310 million. And as you will see later, the expectation is that we will have at year-end, the net financial status between minus 180 million to minus EUR 130 million.

Cash in July is actually higher than it is shown here at the end of June. That's mainly driven by the fact that we have issued a schuldschein of about 200 million. So cash balance, let's say, a few days later is above 600 million.

Return on capital employed is clearly not at a satisfactory level with 14.5%. And we see the return on capital employed expectations for the full year '19 to be in the range between 15% to 20%, which is lower than the previous year's period, but it's still above our cost of capital.

And I would like to pass back to Ralf Dieter for the divisional presentations.

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Ralf W. Dieter, Dürr Aktiengesellschaft - Chairman of Management Board & CEO [4]

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Yes. Thank you, Carlo.

And I'll start with Page 11 on Paint and Final Assembly Systems. The order intake was in the first half on the same level than last year, although we had a weaker quarter, second quarter. But as I always mention, a quarterly view on order intake in Final Assembly and Paint Systems is not the right view.

The sales side, we had an increase. In the EBIT side, also more or less same level. But on the margin point, we are a little bit behind last year, 0.3 percentage points. But this is mainly due that we still have some orders in execution which were on a very low-margin level, which we acquired in the last year as we already mentioned in the last call. But this will change over the course of the year. We have -- we will see in the second half improvements out of also our FOCUS 2.0 program and where we will improve our cost position. And we have a healthy pipeline of petrol projects, in particular in China, particularly also this is new EV players where we see in the second half of the year, more orders and a nice order intake to come.

On the Application Technology side, we have a drop in order intake of 11%. But this is mainly due to some service business, which is slowing down because the service business, or the spare part business of APT is heavily linked to the planned utilization of our customers. And if they have not such a high utilization, [the wear] parts are not used so much, and we see that in that numbers.

On the sales side, we have further slight decrease. On the EBIT margin, we could keep the same level as last year first half, which is the effect of improved positions and profitability in our accruing and in our industrial product side. So here, we make progress. And the book-to-bill is still at 1.1.

On Page 13, we look at the Clean Technology Systems. The numbers are difficult to compare because as you know we have now the MEGTEC business fully in our numbers. And so therefore the sales is nearly 3x more than last year. We have a strong book-to-bill rate. In the second quarter also the earnings strongly improved. Therefore, we see the integration of MEGTEC/Universal in a successful path and it is progressing as we planned.

On Page 14, we have a look at Measuring and Process Systems. From the incoming orders side, we could pick up in the second quarter because the first quarter was quite weakened. At the end, we could slightly improve compared to the first half of last year.

On the sales side, we had a strong drop of 12%, which means in that case, more than EUR 20 million. EUR 26 million, which has a direct effect on our EBIT, which was adequately lower. Also the EBIT was influenced by higher than planned, the costs for digitization, but we basically didn't stop that costs because we think that this is very strategic and important to us and will pay back on a mid- and long term.

Yes, that's the main point here. I wanted to mention we have also -- we have a business area in the balancing side for turbocharger and crankshafts, which is totaling about 40 million per year. And that business has really dramatically decreased. And we have projects in the pipeline, but no decisions. And this mix is also a little bit hurting us because it's very profitable, but here at the powertrain side, we see the effects of the discussion we have about combustion engines and electro-mobility.

On the Page 15, we have a look at HOMAG. Incoming orders, minus 16% roughly compared to last year. We already mentioned there is a significant drop again in China and the whole market. As we already have said, the whole market of the woodworking machinery business, it has a drop of more or less 20% compared to last year. So we see here a situation where this market is really calming down.

And the earnings decline is also therefore affected. We have stronger price competition. Because if there's less volume out there, therefore, the competitors becomes more aggressive.

And we have higher production costs and [interest] and material costs. That has an impact on the EBIT margin. We have a lot of cost reduction programs in place. Should improve therefore the situation in the second half on the costs side. And that's about HOMAG in short words.

The service business on Page 16 as I already mentioned has shown a nice growth of 15%. The margin is slightly below last year, but this is mainly due to the mix of the revamped shops, spare parts. Nothing significant, but in terms of development here, very positive. And we expect that this also continues, maybe not at that growth rate, but on a growth rate for the second half as well.

Finally on Page 17, I would like to comment on our changed outlook. We have yesterday published, as you know a new guidance for 2019, which is not changed in terms of order intake. Here, we are still convinced we can reach the target between EUR 3.8 billion and EUR 4.1 billion.

On the sales side, we also are still optimistic that EUR 3.9 million to EUR 4.1 million is a feasible number to get to. The EBIT margin, we had to lower through the effects we already mentioned, from 6.5% to 7%, now to 5.5% to 6%. And in consequence also the ROCE now 15% to 20% instead of 20% to 30%.

Although the earnings after tax are influenced by that, so it's not anymore EUR 175 million to EUR 190 million, it's now EUR 145 million to EUR 160 million. And the cash flows that Carlo already mentioned, therefore we are here on the guidance which is not up to previous year, but now more down than compared to previous year.

Yes. I think that's the main numbers here to mention. And we also provided to you on Page 18 the targets for the divisions, to be very transparent here on Page 18. Unchanged guidance and targets for paint and final assembly, application and clean technology as already mentioned. Measuring and Process Systems now are 10% to 11% because we are confident we can pick up in the second half and -- instead of 11.5% to 12.5%. And on the HOMAG, now 5.5% to 6.3%, and the original guidance was 6.7% to 7.5%.

And I think that's the main parameters of our outlook, and this was our introduction. And I would like to hand over to Mr. Perniga to receive your questions, and then you will get our answers. Mr. Perniga?

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Questions and Answers

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Operator [1]

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(Operator Instructions) First question we received is William Turner from Goldman Sachs.

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William Turner, Goldman Sachs Group Inc., Research Division - Research Analyst [2]

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I have a couple actually. The first one is on working capital. Here you state that you expect to see a clear improvement in customer payments. Can you give us some more details here? Why do you expect that? And what divisions and regions are these net working capital issues occurring in?

And then my second question is on the free cash flow guidance, we have a technical one. When you say you switch to (inaudible), do you mean lower than the 78 million in 2018? Or could it possibly be negative?

And then my final question that was on HOMAG. Can you just explain what you internally are thinking about the Chinese woodworking market and when you expect that to recover? Has the shortfall in orders been a kind of pause? Or is there anything a bit more longer term that we need to think about?

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Ralf W. Dieter, Dürr Aktiengesellschaft - Chairman of Management Board & CEO [3]

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Okay. Before we answer one, I would like to ask everybody who ask a question that we do one by one. Otherwise, it's getting difficult for us. Is that possible?

Carlo, first. Two questions.

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Carlo Crosetto, Dürr Aktiengesellschaft - CFO & Member of Management Board [4]

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Yes, I will take the first 2 question. I'll start with the first one on working capital and what makes us so confident. I mean first of all, it's obvious that if we execute a project based on project execution and delivery execution, we know what we expect to pay. The big difference really has been that if you look at the Q2 order intake, especially on the PFS, has been quite low. And within the second quarter, there has been hardly any real big project with big advanced payments. So this is to a certain extent a bit unexpected that the working capital, meaning the advanced payment side of the working capital, was so negative in Q2. But this project, if we do achieve those revenue numbers, will ultimately transform into cash. So we do see basically a delay in the pickup in the second quarter -- sorry, in the second half of the year. So it's just that the percentage of advanced payment is lower than what we had originally expected.

Your second question regarding free cash flow, yes, we do expect it to be lower to the 78 million that you were referring to. It's probably going to be close to 0, slightly positive, so lower than what we had originally assumed.

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Ralf W. Dieter, Dürr Aktiengesellschaft - Chairman of Management Board & CEO [5]

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Okay. So just speaking for your third question regarding the China market and HOMAG. HOMAG, when you look at the Chinese market for HOMAG, you have to look at 2 parameters. First of all, larger system projects for customer ordering broad lines or even to the factories, which was very, very strong business in '16, '17 and also past till the first half of '18, and the single machine business.

The single machine business has also topped, but not so significantly. This is slightly tough. But the system business is really topped, absolutely, I would say, through nearly nothing. And the reason is that the top 50 furniture manufacturers in China, they have bought lines in factories. They have still a gross in the market of 15% in China in the furniture market. But they all bought new lines and first ones to utilize those plants. And they are careful for further investments because of the trade tariff, all this in the U.S. So I think that is at the moment in a situation in China where they are watching what's going on and what's happening and not investing. And we expect that this will continue this year. And we see that maybe to recover second half of next year, not before.

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Operator [6]

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The next question received is from Alexander Hauenstein from DZ Bank.

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Alexander Hauenstein, DZ Bank AG, Research Division - Analyst [7]

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I have also a few questions. Let us begin with the first one. With regard to your guidance on Page 17, you're commenting that there's a new operating margin guidance on the sales side. What are the underlying assumptions here in terms of this -- on the sales side? And how conservative is this? Or to put it differently, how confident can you be that you do not need to cut back your PFS and APT outlook in a few months' time here? I understand that automotive is doing quite well comparatively, but maybe you can share some views here about potentially the risk of Chinese new e-car players scrapping orders or also some established OEMs on the Western Hemisphere.

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Ralf W. Dieter, Dürr Aktiengesellschaft - Chairman of Management Board & CEO [8]

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Okay. Thank you. But the answer is very short: we are very confident that we will get this guidance into the range of the guidance.

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Alexander Hauenstein, DZ Bank AG, Research Division - Analyst [9]

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Okay. So it seems to be a conservative one from your side, right?

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Ralf W. Dieter, Dürr Aktiengesellschaft - Chairman of Management Board & CEO [10]

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You can call it conservative. I would say it's reliable.

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Alexander Hauenstein, DZ Bank AG, Research Division - Analyst [11]

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Okay. And on HOMAG with regard to the wages and also material costs but also on the production cost side, how do you think about further potential structural measures to be taken in the near future? Are we talking here more on the European side or on China itself?

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Ralf W. Dieter, Dürr Aktiengesellschaft - Chairman of Management Board & CEO [12]

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Well, we are working on our manufacturing structure all the time. And we have moved already with some part of production to, for example Poland, which we increased very much. We are continuing that process because as we also said some years ago that we have a very large footprint in Germany with plants. And that will not be, let's say for the future, the right model to go. But this we'll be taking step by step.

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Alexander Hauenstein, DZ Bank AG, Research Division - Analyst [13]

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Okay. And a technical one, could you quantify the leaner and the open house effect here, please?

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Ralf W. Dieter, Dürr Aktiengesellschaft - Chairman of Management Board & CEO [14]

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I can quantify that roughly, that's I would say a minimum 5 million, 5 million to 6 million.

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Alexander Hauenstein, DZ Bank AG, Research Division - Analyst [15]

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In total?

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Ralf W. Dieter, Dürr Aktiengesellschaft - Chairman of Management Board & CEO [16]

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Yes. (inaudible) expenses, but we have to do this.

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Alexander Hauenstein, DZ Bank AG, Research Division - Analyst [17]

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Yes, sure, sure, understood. I just wanted to have a rough idea.

And last question on MPS with regard to these digitalization costs, and also on the F&E side, research and development side. How long do you think this investment needs to be done? How long will this be seen in the numbers? This is probably not something which will stop in 1 or 2 quarters, right?

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Ralf W. Dieter, Dürr Aktiengesellschaft - Chairman of Management Board & CEO [18]

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You're right. I mean we had a little bit of overrun. We have a plan. The main reason is that we are developing a whole new generation of measuring software, which is of course of those machines, yes? The machine itself is quite typical, but measuring software, that's the key and the differentiator. And this software development, we decided end of last year to undertake. And we have decided also to make it faster because it's really a big differentiator. Therefore, we had higher costs than in the first half than anticipated. But the overall cost is budgeted for the next 2.5, 3 years.

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Operator [19]

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The next question received is from Daniel Gleim from MainFirst.

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Daniel Gleim, MainFirst Bank AG, Research Division - Director [20]

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First, I would like to dive in a little bit on your reliable PFS and APT guidance for this year. Could you comment on the PFS sales first? We saw a little bit of a slowdown in the second quarter versus the first one in '18 overall. Have you seen any project slowdowns? I appreciate that you have contractual obligations with the OEM. But have you ever in the past perceived that these projects have been pushed out? So is there any risk that we could see some further slowdown in H2 following the trend we saw in the second quarter after Q1?

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Ralf W. Dieter, Dürr Aktiengesellschaft - Chairman of Management Board & CEO [21]

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Okay. Understood your question. We always have a situation -- not always. We have very often have a situation that projects have been delayed but because the customers are pushing them out. But just [barely] to the fact that, for example, buildings, which are the first step before we can install our equipments are delayed. And this we saw, like recently in some cases, but there is no effect where a customer asked us not to install or not to implement or not to execute as agreed.

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Daniel Gleim, MainFirst Bank AG, Research Division - Director [22]

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Okay. And if you think about quite bullish margin guidance for PFS compared to where we stand after the first half, can we pinpoint the year-over-year margin increase then for the third quarter? Is that something you firmly expect?

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Ralf W. Dieter, Dürr Aktiengesellschaft - Chairman of Management Board & CEO [23]

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Actually in the third quarter.

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Carlo Crosetto, Dürr Aktiengesellschaft - CFO & Member of Management Board [24]

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For the rest of the year.

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Ralf W. Dieter, Dürr Aktiengesellschaft - Chairman of Management Board & CEO [25]

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And for the rest of the year, because of course it's only a matter. But we will have an increase, mainly out of the fact that our cost measures or the FOCUS program are more and more showing effect. And second because we are, let's say, getting rid of finalizing orders which had a very low margin, which we still execute and taking orders last year and the year before, end of last -- end -- the year before.

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Daniel Gleim, MainFirst Bank AG, Research Division - Director [26]

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Yes. The drivers are up?

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Ralf W. Dieter, Dürr Aktiengesellschaft - Chairman of Management Board & CEO [27]

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Sorry?

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Daniel Gleim, MainFirst Bank AG, Research Division - Director [28]

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Yes, I mean the drivers are well understood. I'm just wondering because we're waiting for any quarter to finally see an increase over the margin. And now in the second quarter actually the underlying went down further over the first one. So I'm just wondering whether you firmly believe that in the third quarter of this year, we finally see a sequential increase of the PFS margin.

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Ralf W. Dieter, Dürr Aktiengesellschaft - Chairman of Management Board & CEO [29]

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I don't like to do quarterly outlooks, but I would say for the year-end, you will see that. Maybe you have to wait a quarter, but we will see that to the end. And here, we are quite confident. Quite very confident.

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Daniel Gleim, MainFirst Bank AG, Research Division - Director [30]

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Maybe on APT, your comment is that there is a slowing growth in services at the moment mainly because of the utilization rates in automotive plants. Yet for the full year, you're still quite upbeat on the total top line momentum. So what makes you think that the utilization rates will go up in the second half, and hence the growth in the revenues in APT will resume?

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Ralf W. Dieter, Dürr Aktiengesellschaft - Chairman of Management Board & CEO [31]

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Yes, because first of all, we see an improvement in the margin, which you don't see on the order intake side, which is also an effect of our activities here. Second that it's not only based on utilization, but we have every day more robots out there in store, which creates additional business. So we are confident on the store. I calculate in the 6 months' horizon, we can see that quite clear.

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Daniel Gleim, MainFirst Bank AG, Research Division - Director [32]

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Okay. Maybe one last question on woodworking. You have quite a downbeat lower end at your order intake guidance. And I understand that the lead periods are around 6 months for single machines. So if you see this EUR 250 million run rate in order intake in Q3 and Q4, which is in essence unchanged over the second quarter, we will see sales probably also go to the lower end of your guidance, which then means the sales decline year-over-year in the second half. Yet when I look at your margin guidance for the full year, it's rather at the level that we see in the second quarter. So I'm really wondering if the drop-through gets more negative of lower utilization rates in the second half, how you can sustain stable margins in the third and the fourth quarter? If you could help us what the offsetting factors could be here?

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Ralf W. Dieter, Dürr Aktiengesellschaft - Chairman of Management Board & CEO [33]

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There are 2. First of all, we have also single machine business, which is even below 6 months' lead time. And don't forget, we also have acquired a stock of build machines, which are ready to sell, which is also a significant number. I think it's close to 60, 80 million?

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Carlo Crosetto, Dürr Aktiengesellschaft - CFO & Member of Management Board [34]

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55.

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Ralf W. Dieter, Dürr Aktiengesellschaft - Chairman of Management Board & CEO [35]

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55, 60 million, which is basically our order intake and revenue 4 weeks later. And also we have taken a lot of cost measures, which will materialize in the second half. That's why we are confident that we can keep that guidance.

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Daniel Gleim, MainFirst Bank AG, Research Division - Director [36]

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Can you provide us a rough ballpark of these cost savings? That's how many million do we need to -- okay. That's from my end.

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Ralf W. Dieter, Dürr Aktiengesellschaft - Chairman of Management Board & CEO [37]

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Every number, every number I give you is not correct, but it's definitely enough that we can see that we get there.

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Operator [38]

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The next question received is from [Roberto] from Hauck & Aufhäuser.

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Ralf W. Dieter, Dürr Aktiengesellschaft - Chairman of Management Board & CEO [39]

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Hello?

(technical difficulty)

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Operator [40]

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So we go on with the next question from Sebastian Growe from Commerzbank AG.

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

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Sebastian over here. The first one is on the MPS business, the second one would be on working capital MPS and eventually. You could just refresh memory. I think you always guided for a better margin development over time at MPS, while increased competition and the rather high exposure to combustion engines might rather suggest that margins might come under further pressure. Maybe you could just give your thoughts on that very thesis?

And then the other question around MPS I would have is if you would rule out at this point to eventually also consider selling balancing or other parts of the MPS business after the overall successful development -- sorry, the successful divestment of Ecoclean.

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Ralf W. Dieter, Dürr Aktiengesellschaft - Chairman of Management Board & CEO [42]

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To answer the second -- the last question, we are not intending to sell balancing -- the balancing business. That's absolutely clear. On the margin side, yes, you know the markets of the balancing business are very -- have a big variety. And we have -- we see an improvement also in order intake in the airline business and the overhaul business, which has also a very good margin. And that's -- we see that during the quarter and the orders we have on hand. And we got in the end of the first -- end of the second quarter make us confident. And we can calculate that, that we will have improvement -- to the year-end in the guidance, in the revised guidance we gave today.

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Sebastian Growe, Commerzbank AG, Research Division - Team Head of Industrials [43]

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So there's no structural element at any point as at this moment, at least, that margins are coming under pressure because of the mix effect on noncombustion eventually taking and setting more pressure on the overall development here?

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Ralf W. Dieter, Dürr Aktiengesellschaft - Chairman of Management Board & CEO [44]

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No, because we always call this balancing business like it was a cylinder engine because one is down, and one is up. And we see now the down is the powertrain side. And we see an improvement in the second quarter on the aircraft and high-speed side, which makes us confident because that's also high margins.

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Sebastian Growe, Commerzbank AG, Research Division - Team Head of Industrials [45]

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Okay. Understood. And the other question I would have is on the working capital. I heard your comment on the overall better contribution of the higher prepayment related activities for the more better positive outlook on working capital development into the second half of the year. But beyond that, can you just remind us also of what exact measures you're undertaking to improve cash conversion over time? So is there any change to systems, processes, contracting guidelines, or that would you also consider changing personnel because eventually something not delivering on what they expected to deliver?

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Carlo Crosetto, Dürr Aktiengesellschaft - CFO & Member of Management Board [46]

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I mean I just want to be clear that the measures to improve working capital and cash flow have already been implemented since quite some time. So it's not that this is something new in terms of urgency. I mean if you don't get orders in at the level before if you get orders without a certain amount of advanced payment, then it's obvious that you can have all the measures in place you want, but it's a fact that you also have a customer who has a different opinion. And that's currently the situation that we face.

As you know, one of the measures that we have implemented is that the management is also paid in terms of variable compensation on its ability to meet days working capital. So obviously the 56 days that we are today is not satisfactory. And we, of course, need to bring it down below 50 over time. So that is clearly something that is being addressed, and -- but we also have to realize that we are facing a bit of headwind, and we are struggling to meet those goals. But we are quite confident that ultimately the cash is coming in ultimately. We will be working on not just project with that advanced payment ratios, but also with projects which have a higher advance payment. And as we execute those projects, we will also have cash coming in and reduce work in progress. So we actually track this business on a project-by-project basis. And we have a pretty good understanding of which project should generate what cash once we have them and once they're agreed on certain conditions.

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Sebastian Growe, Commerzbank AG, Research Division - Team Head of Industrials [47]

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Okay. That's helpful.

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Operator [48]

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The next question received is from Christoph Laskawi from Deutsche Bank.

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Christoph Laskawi, Deutsche Bank AG, Research Division - Research Analyst [49]

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Sticking with free cash flow and working capital, we are hearing from other suppliers that OEMs currently are stretching payment terms quite a bit and essentially unwilling to move back to paying fairly frankly, obviously managing their cash in a downturn with a very focused approach. My question will be do you see the same in the sense that they're holding back payments to some degree, and are in general not willing to provide the same prepayments as they have been in the past? And resulting from that, are we going through a phase then of structurally impaired free cash generation for a couple of quarters before we see OEMs coming back with more confidence on the cash position?

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Ralf W. Dieter, Dürr Aktiengesellschaft - Chairman of Management Board & CEO [50]

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I think we can answer the question together. I answer on the customer side. It's definitely the case that our customers, other than the big [pension] projects, are less willing to give us the amount of down payments as we have seen, for example, 2 years ago. 2 years ago, or 3 years ago because sometimes in some cases, they gave us much more advanced payments than even normally -- as normally they used to because they had excess of cash. And now they are much more careful with that, absolutely, and that we are facing.

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Carlo Crosetto, Dürr Aktiengesellschaft - CFO & Member of Management Board [51]

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Yes. I think it's really related to advanced payments more than receivable. To be honest with you, once we agreed on the payment terms, they usually pay us. So we don't necessarily have a concern about not getting paid.

I have to admit it obviously as we do more business in China, we are much more careful in terms of which customer we accept payment terms and if we are willing to, for a short period of time, to have cash not in excess of work in progress. We only tend to do that with players which we know that they are quite solid or have been doing business with us for quite some time. So it's really all about advanced payment.

Of course, we have in China customers who pay us with bankers' checks and drafts as well. But that is, in my opinion, better than a simple receivable because I could discount that amount with the bank. So that's what we see there.

Obviously now the question, how long will it last, it's a bit of the million-dollar question. I mean I think it's fair to assume that it's not going to change overnight, and we're going to be facing this battle for a few quarters. Nevertheless, it is our objective to improve this and to sharpen those measures to make sure that we get into a negative territory, meaning that we have cash in excess of work in progress. Maybe not at minus 100, but hopefully on -- at least on the lower side of this range.

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Christoph Laskawi, Deutsche Bank AG, Research Division - Research Analyst [52]

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Second question will be on HOMAG. You commented that you see low utilization for some products resulting from customers basically having set up the capacity they need and now being a bit more cautious. Is that already having negative impact on pricing because the industry is underutilized, and essentially you see competitors pushing for projects through price? And do you expect that to be present for, say, 1 to 2 years? Or would you see a recovery rather quick because in the end it also weighs on the overall HOMAG business quite a bit, and the recovery might be taking a bit longer than initially thought?

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Ralf W. Dieter, Dürr Aktiengesellschaft - Chairman of Management Board & CEO [53]

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I mean first of all, pricing is always under pressure in times when the market volume is shrinking. And -- but as you know, we are working on those in tiers on improvements and cost reduction, new designs of machines to basically to face that. That I would call normal business. And in particular China on the large system business, we have a very strong competitive situation. We have a very high market share.

So when that business picks up again, I think we are -- as I said before, we don't expect that before -- second half of next year to pick up. But they will invest again.

And I think the same for automotive. Everybody, when we talk to our customers, expect for China and straight development for even next year and then maybe '21 again an increase. And I think that's the situation in China, which is influencing all of us.

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Christoph Laskawi, Deutsche Bank AG, Research Division - Research Analyst [54]

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And the last question actually on the 2020 targets, you put in the EBIT line that the targets are currently under revision. I was wondering, do you have a certain event in mind when you will update those? Will it be Q3? Or would you probably wait until Q4 communication where you would provide the new guidance for 2020 anyway?

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Ralf W. Dieter, Dürr Aktiengesellschaft - Chairman of Management Board & CEO [55]

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The new guidance for 2020, we will bring out when we have our preliminary numbers in, I think, February next year. And up to then, we have a much better look on what's going on. Also we will then publish our strategy 2025. Because at the moment, we have an official strategy which ends 2020, which is next year. And since the company will not stop, we will continue this next 5 years strategy.

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Operator [56]

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And we received a follow-up question from Daniel Gleim, MainFirst.

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Daniel Gleim, MainFirst Bank AG, Research Division - Director [57]

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Apologies for belaboring the point, but I wanted to follow up on woodworking again. If that reach the lower end of your order intake guidance, right, you assume in essence at least stable order intake after the EUR 200 million, round about EUR 250 million in the second quarter, also for the third and also for the fourth quarter. Now you thankfully mentioned that China is not expected to come to the rescue. So you would expect that from somewhere else outside China, you would see a resumption of demand. The first question is, is that observation correct? Secondly, where do you think this is coming from? And lastly, do you have any signs of evidence that this is already happening? We appreciate that June was not a very good quarter for HOMAG. But do you see July current trading already picking up sequentially?

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Ralf W. Dieter, Dürr Aktiengesellschaft - Chairman of Management Board & CEO [58]

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Okay. The China figures, I don't have it. But I -- the -- first of all, your assumption is right. Second, yes, in other regions and in particular U.S. is still strong. And in Europe, we have a mixed picture. Some countries are below last year, and some are stable, some others are slight above. So overall, that's why we are confident that we can get to this EUR 250 million.

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Daniel Gleim, MainFirst Bank AG, Research Division - Director [59]

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And how does July fare so far? I assume you have checked with your sales force before articulating the revised guidance?

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Ralf W. Dieter, Dürr Aktiengesellschaft - Chairman of Management Board & CEO [60]

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No, because it's not due with anything now. But it's in line, don't worry.

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Operator [61]

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The next question is from Jasko Terzic from Metzler.

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Jasko Terzic, Metzler Equities, Research Division - Research Analyst [62]

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My first question is also regarding HOMAG. Could you give us an indication what operating leverage we can assume for HOMAG currently?

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Ralf W. Dieter, Dürr Aktiengesellschaft - Chairman of Management Board & CEO [63]

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First of all, can you repeat your question? I didn't get it.

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Jasko Terzic, Metzler Equities, Research Division - Research Analyst [64]

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Yes, operating leverage. So the margin you earn on the change of your sales volume?

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Ralf W. Dieter, Dürr Aktiengesellschaft - Chairman of Management Board & CEO [65]

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Still we have difficulties to understand this question.

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Jasko Terzic, Metzler Equities, Research Division - Research Analyst [66]

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So if your sales drop and you are guiding potentially on the lower end, you're guiding a drop for the second half compared to the first half of, let's say, some 60 million to 70 million, then I'm interested in seeing what is the negative impact on your EBIT, and then to compare it to your low end of the forecast, which is assuming a pretty stable development of EBIT. So I'm wondering what is your....

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Carlo Crosetto, Dürr Aktiengesellschaft - CFO & Member of Management Board [67]

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Okay. So you are referring to the potential impact of under-absorption.

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Jasko Terzic, Metzler Equities, Research Division - Research Analyst [68]

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Exactly.

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Ralf W. Dieter, Dürr Aktiengesellschaft - Chairman of Management Board & CEO [69]

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This I understand.

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Carlo Crosetto, Dürr Aktiengesellschaft - CFO & Member of Management Board [70]

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So we just used different terminology. Honestly speaking, it's very difficult. I mean we, of course, calculate that by factory. But we as Ralf Dieter was mentioning, we have triggered already at the end of the second quarter some significant cost measures and reduction of temporary workforce and overtime and whatever. So it's not comparable to what was the under-absorption ratios that we were using in the first and the second quarter. That's why we are confident that even though some of the volume for some factories depending on the volume mix, of course, and utilization of different factories will come in, we can manage that in order to achieve those goals. And we don't disclose under-absorption numbers by plants.

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Jasko Terzic, Metzler Equities, Research Division - Research Analyst [71]

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Okay. Second one is that you -- when you're referring to the China might revise in the second half of next year, does that imply that we should more or less forecast negative growth for the next 4 quarters? Or is that too negative approach?

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Ralf W. Dieter, Dürr Aktiengesellschaft - Chairman of Management Board & CEO [72]

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That's too negative.

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Jasko Terzic, Metzler Equities, Research Division - Research Analyst [73]

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Okay. So we are more optimistic on all other regions, and it was only referring to China then?

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Ralf W. Dieter, Dürr Aktiengesellschaft - Chairman of Management Board & CEO [74]

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Yes, China is the main focus point on that decline, and a lot of regions like U.S. are growing.

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Jasko Terzic, Metzler Equities, Research Division - Research Analyst [75]

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Okay. Then in MPS, you're pretty bullish on your backlog and execution for the second half. I think you had a good visibility also for your backlog at the end of last year. And still you have now downgraded your margin guidance. So what makes you this time so sure that you can now reach those expected margin improvement? Because back then you also guided for a decline in the margin, it was even weaker than anticipated.

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Ralf W. Dieter, Dürr Aktiengesellschaft - Chairman of Management Board & CEO [76]

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That the fact of the end of last year, the order intake, which was very weak in the second half '18 for -- and the effect of it, and the December very strong shipment ratio there. We were in the first quarter, let's say, still stable. But in the second quarter, we were running out, let's say, of machines to deliver. And therefore, we had this drop.

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Jasko Terzic, Metzler Equities, Research Division - Research Analyst [77]

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Okay. But I think the backlog was known, right? So you had already a view into the margin quality of the orders back then. And still you have adjusted your guidance downwards. So why are you so confident that this time, you will reach the significant improvement in the second half?

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Ralf W. Dieter, Dürr Aktiengesellschaft - Chairman of Management Board & CEO [78]

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Because of the numbers I have and I look at, I am confident. And also that we have in the order intake is nicely picking up. And I said also in some areas where we have higher margins like in high-speed business. And therefore, we are more confident.

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Jasko Terzic, Metzler Equities, Research Division - Research Analyst [79]

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And then also on PSF, you said that there is a good pipeline in the market. And do you think that it should revise the order development. Could you be more precise in what regions are those markets that are currently very strong? If I...

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Ralf W. Dieter, Dürr Aktiengesellschaft - Chairman of Management Board & CEO [80]

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China.

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Jasko Terzic, Metzler Equities, Research Division - Research Analyst [81]

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And is it only China or are more regions positive?

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Ralf W. Dieter, Dürr Aktiengesellschaft - Chairman of Management Board & CEO [82]

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We have opportunities, for sure, in U.S. Europe was quite slow, but China is a very strong pipeline.

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Jasko Terzic, Metzler Equities, Research Division - Research Analyst [83]

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Okay. And China is ...

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Ralf W. Dieter, Dürr Aktiengesellschaft - Chairman of Management Board & CEO [84]

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Including also the South Asia, but China is a focus point.

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Jasko Terzic, Metzler Equities, Research Division - Research Analyst [85]

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Okay. And I suppose that is also mixed with combustion and electromobility project? Is that also...

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Ralf W. Dieter, Dürr Aktiengesellschaft - Chairman of Management Board & CEO [86]

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But it's let's say, it's new EV players, but it's also known EV players who are expanding further, and also traditional joint venture OEMs.

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Jasko Terzic, Metzler Equities, Research Division - Research Analyst [87]

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Okay. But there is no risk that those in weaker prepayment terms are those new players, or have difficulties in getting financing for them that those project pipeline -- could be pushed further into the future?

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Ralf W. Dieter, Dürr Aktiengesellschaft - Chairman of Management Board & CEO [88]

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All the ones here are I think before we start with spending a lot of money for proposals of these guys, we have a very clear track on their capability to pay for those factories. And for example, we are talking to one of them about not 1 or 2 factory talks, but about 3 or 4 factories. And he's one of the richest guys in China, so that we check that out.

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Jasko Terzic, Metzler Equities, Research Division - Research Analyst [89]

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Okay. And then the final one is on your work in progress or the current situation that the OEMs owe you money. Can you remind us when was the last time that it was the case that the OEMs owed you money?

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Ralf W. Dieter, Dürr Aktiengesellschaft - Chairman of Management Board & CEO [90]

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That's a very good question. Since I'm for many years here now, but I would say difficult to -- was it 2009, '08, '07? I don't remember that. Maybe another year, yes?

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Jasko Terzic, Metzler Equities, Research Division - Research Analyst [91]

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Okay. So it might -- it could be your situation currently?

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Ralf W. Dieter, Dürr Aktiengesellschaft - Chairman of Management Board & CEO [92]

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Yes, exactly, yes. So as I said the last years, I have not seen that.

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Jasko Terzic, Metzler Equities, Research Division - Research Analyst [93]

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Okay. That's all my question.

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Ralf W. Dieter, Dürr Aktiengesellschaft - Chairman of Management Board & CEO [94]

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But don't adjust because we are all keeping on this point. But don't forget, we had times 3 years ago where we had got orders for EUR 250 million with a down payment of EUR 160 million. And those times are over now definitely.

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Jasko Terzic, Metzler Equities, Research Division - Research Analyst [95]

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Okay.

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Ralf W. Dieter, Dürr Aktiengesellschaft - Chairman of Management Board & CEO [96]

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Yes.

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Operator [97]

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(Operator Instructions) As there are no further questions, I hand back to the speakers.

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Ralf W. Dieter, Dürr Aktiengesellschaft - Chairman of Management Board & CEO [98]

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Thank you very much. And ladies and gentlemen, thank you very much for your questions and your interest in our results.

Just to remind you when we publish the final first half figures, I think that's on the 7th of August. Then we will not have a conference call because we touched everything, in our opinion, today. If you have any questions, please feel free to call our IR department if you have further questions. But the numbers are very stable, so I don't expect that you have to study numbers again, which you don't have already.

Good. Thank you very much for joining us. And then talk to you -- when is next time? December? 7th of November. Good. Speak then again, good. Thank you much.

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Carlo Crosetto, Dürr Aktiengesellschaft - CFO & Member of Management Board [99]

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Thank you very much.

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Operator [100]

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