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Edited Transcript of FI-N.S earnings conference call or presentation 18-Jul-19 8:00am GMT

Half Year 2019 Georg Fischer AG Earnings Call

Jul 23, 2019 (Thomson StreetEvents) -- Edited Transcript of Georg Fischer AG earnings conference call or presentation Thursday, July 18, 2019 at 8:00:00am GMT

TEXT version of Transcript

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Corporate Participants

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* Andreas Müller

Georg Fischer AG - CEO, President & Head of Corporate Development

* Mads Joergensen

Georg Fischer AG - CFO and Head of Corporate Finance & Controlling

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Conference Call Participants

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* Armin Rechberger

Zürcher Kantonalbank, Research Division - Analyst

* Charlie Fehrenbach

* Christian Obst

Baader-Helvea Equity Research - Analyst

* Jörn Iffert

UBS Investment Bank, Research Division - Director and Analyst

* Martin Flueckiger

Kepler Cheuvreux, Research Division - Equity Analyst

* Michal Lichvar

Bank Vontobel AG, Research Division - Analyst

* Patrick Laager

Crédit Suisse AG, Research Division - Research Analyst

* Tobias Fahrenholz

MainFirst Bank AG, Research Division - Director

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Presentation

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Operator [1]

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Ladies and gentlemen, welcome to the Georg Fischer Midyear Results 2019 conference call and live webcast. I'm Miruna, the Chorus Call operator. (Operator Instructions) And the conference is being recorded. The presentation will be followed by a Q&A session. (Operator Instructions). The conference must not be recorded for publication or broadcast.

At this time, it's my pleasure to hand over to Andreas Müller, CEO; and Mads Joergensen, CFO. Please go ahead, gentlemen.

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Andreas Müller, Georg Fischer AG - CEO, President & Head of Corporate Development [2]

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Welcome, and thank you for joining our half year conference. Present on our side are Mads Joergensen, CFO; Daniel Bösiger, Head of Investor Relations; Beat Römer, Head of Corporate Communication; and myself, Andreas Müller.

Let's turn to Slide 2. During the first half year of 2019, we competed with a very strong first half year of 2018. Geopolitical uncertainties, such as the trade dispute between the U.S. and China and the upcoming Brexit in Europe, worsened and negatively affected the economic environment. We experienced a 5.5% organic sales decline in the first half year of 2019. The decrease of 20% to CHF 1.915 billion was mainly due to the divestment of 2 German iron foundries at the end of last year, with sales of approximately CHF 352 million for first 6 months of 2018. Currencies turned into headwinds, whereas they were supportive this time last year. The operating result was affected by the reduction in sales and decline to CHF 153 million, corresponding to a return on sales before one-off items of 8%, whereas the same time last year, we achieved 8.7%. The swiftly taken measures at Casting Solutions caused one-off costs of approximately CHF 65 million, out of CHF 14 million are reflected in the midyear results. The EBIT margin of the one-off effects came in at 7.3%. I will go into more detail about this later. The strategy 2020 implementation is fully on track, but actual footprint adaptation of GF Casting Solutions will secure higher margins after implementation and increasing the competitiveness of the division.

Slide 3 shows an uneven sales development of our 3 divisions. The most resilient one, GF Piping Systems, organically confirmed a strong first half year 2018 with a reported growth of 11% back then. 3/4 of the decline of the GF Casting Solutions is on the account of the divestment of the 2 German iron casting companies end of 2018. GF Machining Solutions faced subdued customer demand in China and lackluster sales in Europe. As a result, the division organically came in 9% below previous year.

Let us turn to Slide 4. The EBIT margin was strongly supported by the largest division, GF cast -- GF Piping Systems, which increased its margin by 60 basis points to a strong return on sales of 12.7%.

The focus on higher-margin business and innovations is showing results. As the utilization of most GF Casting Solutions foundries decreased, EBIT margin dropped to 3.9% or 1.2% of the one-off items. The weaker first half of GF Machining Solutions resulted in an EBIT margin of 5.1%, below the extraordinary strong first half of 2018.

Slide 5 shows the return on invested capital. The reduced EBIT is considered the most important reason for a reduction of the overall return on invested capital. We have initiated measures at GF Casting Solutions and they will bring back the profitability of this division into the strategic corridor in the next 2 years.

Let's move to Slide 6. On Slide 6, you see the sales by region and by division. For the first time, more than 50% of sales were generated outside Europe. The strong development of the Americas, but also the strategic transformation of the division Casting Solutions are the main pillars of this shift, fully in line with our strategy 2020.

Let's continue with the 3 divisions on Slide 7. GF Piping Systems experienced a solid demand from markets addressing mega trends. The division confirmed its strong first half year 2018, before currency effects, with sales of CHF 921 million. Healthy order intakes in Americas and Europe compensated subdued demand of China. The focus on higher-margin business and solutions and the well order plans result in the strong profitability increase of 60 basis points to 12.7%.

On the right-hand side, you see a new application for our COOL-FIT and prefabricated service. The Pontoon-based data center increased energy efficiency by more than 80%, hence, reduced operating costs by 30% compared to conventional data centers. We were able to supply and design preassembled Piping Systems kits as outlined in the small picture.

On Slide 8, you see 2 typical water applications. On the left-hand side an ultra-filtration system to enhance the water quality before it is returned to the groundwater, a Californian initiative to replenish the groundwater basins in the Southern California region, mainly industry and prefabricated products are built in. On the right-hand side, you see a new water pipeline reducing water loss by 15% in the São Paulo metropolitan area in Brazil. GF is providing jointing technologies, fittings and services for this important project for our customer service.

Slide 9. Turning now to GF Casting Solutions. The division was affected by a significant reduction in demand by Western Europe and Chinese currency. Shifts within the product ranges of important customers as a result of the new emission standards additionally amplified this effect. The German iron casting companies divested last year contributed to the reduction with CHF 350 million. Various currencies were highly supportive last year, they turned into headwinds this year.

Organically, the division sales fell by 11% to CHF 521 million. As a consequence of the reduced utilizations of the casting factors, the operating result before one-off items sank from CHF 60 million to CHF 20 million, which equals an EBIT margin before one-off items of 3.9%. The new light-metal plant Mills River, USA has started operation. However, ramp-up of new orders [still weigh] on the half year result in the amount of CHF 8 million.

We are quickly addressing the changed market environment by adapting our footprint in Europe. Over the coming month, approximately 300 shops will be shifted from the location in Werdohl, Germany, to Romania and Austria. By accelerating our strategic growth map implementation, we will expand the light-metal foundry ore casting in Romania, which we acquired in autumn 2017, to accommodate the transfer of customer programs. This measure will clearly increase our competitiveness in Europe. To complete the strategic withdrawal from iron casting in Europe in automotive industry, GF is also planning to divest the iron foundry in Herzogenburg, Austria, following the divestment of the plants in Singen and Mettmann, Germany. It is foreseen to close the transaction in the second half of 2019. One-time costs of approximately CHF 65 million in total have been assessed for these 2 measures.

Let's turn to Slide 10. GF Casting Solutions strongly invest in the future. On the left side, you see already an expansion of the light-metal foundry in Mills River U.S. The new production building will accommodate value-adding processes, such as machining and assembly for complex light metal components. On the right-hand side, you see a picture of the new additive technology production center, AMotion, in Stabio, Switzerland. This company focuses on parts for the aerospace industry made by additive manufacturing technology.

Slide 11. Let's turn to GF Machining Solutions. Sales in the first half organically fell by 9% to CHF 525 million. Markets, especially businesses in China, posted a strong decline due to the trade tensions with the U.S. In addition, we have not seen many customer innovations in the ICT, Information, Communication, Technology segment, which could have driven investment spending of this industry. Order intake for new technologies, such as laser milling, laser texturing and additive was up by more than 70%. Aerospace orders, especially in the U.S. remains on the strong level and mitigated the subdued demand in Asia. As a result, we could realize a good book-to-bill ratio of 1.1.

As you can see on the right-hand side, innovations remain key for the division. The picture illustrates a worldwide unique EDM, Spark Control technology to enhance quality and traceability by simultaneously reducing energy consumption. However, less sales led to a result below the very strong previous year. EBIT amounted to CHF 24 million with a return on sales of 5.1%.

Let's move to Slide 12. GF Machining Solutions recently launched its new generation laser texturing machine. This environment friendly technology replaced its acid-based methods. And on the right-hand side, you see a laser milling machine designed to process new high-tech materials, such as CMC, Ceramic Matrix Composites, predominantly used in the aerospace industry.

Let's move to slide -- next slide. With that, I will now turn the call over to our CFO, Mads Joergensen, for a detailed look at our first half financials.

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Mads Joergensen, Georg Fischer AG - CFO and Head of Corporate Finance & Controlling [3]

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Thank you, Andreas. Ladies and gentlemen, also from my side, good morning, and welcome to this call. I will now present the consolidated financial results for the first half of 2019. As you can see on Slide 14, in the last line of the table, the overall sales of GF declined by 20.1% to CHF 1.915 billion; this includes the disposal of the Singen and Mettmann operations. Organically, sales declined by minus 5.5%. At the divisional level, the first half of 2019 was characterized by quite diverse situations. Piping Systems again performed strongly and came in with CHF 921 million organically at previous year's level. The strong performing European markets and a solid situation in North America compensated for the decline that the division experienced in the Chinese market. Here, in particular, the utility pipe market was down due to the continued postponement of the coal-to-gas project.

For Casting Solutions, the first half turned out to be quite challenging. Sales declined by 43.6% to CHF 521 million, mainly due to the divestment of the Singen and Mettmann foundries. Adjusted for this project, sales declined organically by 11.1% driven by the substantial reduction in call-offs in Europe and in China.

Sales at GF Machining Solutions declined organically by 9% to CHF 474 million. This was primarily caused by the decline in the Chinese market, in particular, the ICT market was subdued. On the positive side, sales of new technologies such as laser, femtosecond laser and also additive manufacturing recorded sales growth of 31%. With the divestment of the iron casting companies in Germany, the corporate exposure to material cost fluctuations have been reduced significantly.

On Slide 15, we show the various effects in the sales development. Starting on the left-hand side, with the consolidated sales of the first half of 2018, which is adjusted by CHF 352 million for the divestment of the 2 iron casting foundries. This brings us to comparable sales of CHF 2.044 billion.

In April 2018, we acquired the Precicast Group, a leading investment casting company in Switzerland. And this year, we, therefore, had the consolidation effect in the first quarter of CHF 28 million. The currency effects were negative, mainly driven by the weakening of the euro, the Chinese yuan and a 25% devaluation of the Turkish lira. Overall, our organic sales declined by CHF 114 million and the lion's share of this decline related to the situation in China.

On the next Slide 16. This provides an overview of the regional sales development. All 3 divisions actually increased sales in North America. In Europe, the organic sales declined by 4.1%. This was mainly due to the severe drop of GF Casting Solutions markets. On the other hand, GF Piping Systems performed strongly with organic sales growth of more than 5% driven by all 3 business areas, industry, utility and the building technology area.

The Asian region declined the most by CHF 88 million or 13.6% organically. All 3 divisions were heavily impacted by the difficult situation in the Chinese market. GF Machining solutions the most, with sales in China declining by 31%. Sales in the rest of the world mostly impacted by the devaluation of the Turkish lira. Organically, however, sales decreased by 1.3% due to the strong performance of GF Hakan in Turkey.

Slide 17 shows the details on the currency impact. The currency impact amounted to minus CHF 43 million, whereas the effect in previous years was actually positive with CHF 97 million. As you can see, the biggest part of the currency effects was attributable to Piping Systems. One of the reason is the exposure of the division to the Turkish lira.

Casting Solutions was both impacted by the lower euro and the Chinese yuan exchange rates. Machining solutions profited from the appreciation of U.S. dollars and hence, was less impacted. Overall, the biggest effect was from euro with minus CHF 23 million.

Let us now move onto the next slide to profitability. Slide 18 shows on the left-hand side, the EBIT in million Swiss francs. And on the right-hand side, the EBIT margin in percent. Please note that there are 2 columns for the first half of 2019, showing the effects of the one-off from the Casting Solution relocation project.

Despite a flat situation in sales, Piping Systems was able to increase the profitability to CHF 117 million. The EBIT margin increased from 12.1% by 60 basis points to 12.7% driven by the strong load of the European and North American production plants. This compensated for the EBIT shortcoming in China. GF Casting Solutions saw a decrease in EBIT from CHF 60 million to CHF 6 million. This includes a value adjustment on fixed and current assets of, in total, CHF 14 million. Before these one-off effects, the EBIT decreased by CHF 40 million. This was primarily caused by the strong decline in sales, but also due to the continuing ramp-up costs in our Mills River facility in the U.S.

I will revert later to the effects of the Werdohl relocation project and the Herzogenburg potential divestment. The EBIT of GF Machining Solutions decreased from CHF 42 million to CHF 24 million, a drop of CHF 18 million, here of CHF 15 million, in general, relates to the lower sales volume and approximately CHF 3 million relate to the move of the new-build facility.

At corporate level, the EBIT declined from CHF 208 million in 2018 to CHF 139 million, included the mentioned one-offs of CHF 14 million. As a result, the EBIT margin declined from 8.7% in previous year to 7.3% for the first half of 2019 and before one-offs, the EBIT margin was 8%.

On Slide 19, you will find the details of the currency impact on profitability. Previous year, the currency effects were positive, actually, by CHF 6 million. In 2019, the effects were negative by minus CHF 11 million and thus, weighed down on the profitability.

On the left-hand side, we show the currency effects by division. GF Piping Systems was impacted negatively from the strengthening of the U.S. dollar, as a lot of the raw materials are procured in this currency. Also a drastic decline in the Turkish lira added to the negative impact.

GF Casting Solutions was due to its natural hedging euro and Chinese yuan, less impacted by the adverse development in these currencies.

Slide 20 brings us to the income statement of the corporation. Mentioned earlier, sales declined by 20% to CHF 1.915 billion. Gross value-addeds decreased by CHF 147 million compared to previous year, here of CHF 86 million was due to the changes in consolidation. The gross value-added as percentage of sales increased from 37% to 38%. The personnel costs decreased by CHF 81 million, most of which was due to the divestment of the 2 German plants. Organically cost increased by CHF 11 million driven by ordinary salary increases. The EBITDA decreased by CHF 66 million to CHF 216 million. Despite the decline in sales, the EBITDA margin stayed strong and only decreased by 50 basis points from 11.8% to 11.3%.

Depreciation and amortization increased by CHF 3 million to CHF 77 million; behind this development was a decrease in the depreciation of CHF 9 million from the divestment of the Singen and Mettmann plants. Now on the other hand, the relocation of the production from Werdohl cost an impairment of fixed assets and their working capital of CHF 14 million.

Moving on to the financial result, which decreased by CHF 4 million to CHF 12 million, the decrease was due to the cost of an additional corporate bond that we had last year and which was repaid in September 2018. And furthermore, the strong cash position in China lowered the need for local credit lines. Income taxes amounted to CHF 25 million and the tax rate remained stable at 19.7%. Net profit after minority interests decreased from CHF 150 million to CHF 101 million.

Slide 21 shows the development in the free cash flow. The lower EBITDA was partly compensated by a lower increase in net working capital. The first half 2018 was characterized by a very strong sales growth and hence, a stronger need for working capital. The operating cash flow decreased by CHF 36 million to CHF 10 million. Investments in property, plant and equipment amounted to CHF 80 million, CHF 14 million lower than previous year. The reduction related to the finalization of the new-build facility for GF Machining Solutions. The biggest investments in 2019 relates to the continued ramp-up of the GF Linamar joint venture in the U.S. This leads to a negative free cash flow before acquisitions of CHF 58 million, close to previous year's CHF 55 million.

For the full year, GF is targeting a free cash flow before acquisitions in the range of CHF 150 million to CHF 200 million.

On the next slide, 22, you will find some additional information on the relocation of the Werdohl plant and the potential sale of the Herzogenburg iron casting facility.

For the full year 2019, we expect a one-off EBIT impact of CHF 48 million, consisting of CHF 38 million for the relocation of the Werdohl plant and up to CHF 10 million for the divestment of the iron casting plant. The CHF 17 million expected one-off costs in 2020 relate mostly to the ramp-up of production in the new locations in Romania and Austria.

In the lower part of the table, we show the cash flow effects. Of the overall CHF 65 million EBIT effect, only CHF 35 million is cash effective, of which, most will take place in 2020. CHF 30 million of the cash effects are capital expenditures to be invested in the expansion of our Romanian facility and the 2 Austrian plants. These capital expenditures should, in general, not be considered on top of our ordinary capital expenditures. In the year 2021, we expect to sell the property in Werdohl. The payback of the relocation project is around 3 years.

On Slide 23, we have summarized the key figures. Net debt decreased by CHF 76 million to CHF 404 million. This was mainly caused by the [nova lead] for interest-bearing debt. The net debt EBITDA multiple remains low at 0.1x. And in addition, it should be noted that in June, we have secured a new syndicated loan of CHF 400 million up from previously CHF 250 million. And the loan includes an extension for additional CHF 100 million to CHF 500 million. This facility is undrawn at the moment.

The equity ratio increases from 34.7% and remains healthy at 41%. This is also in line with the equity ratio at the end of 2018. The return on invested capital decreased by 7.4 percentage points to 13.8. The decrease was attributable to the decrease in net operating profit after taxes. Adjusted for the one-off effects of the Werdohl relocation, the return on invested capital was 15.5%. The number of employees decreased by 1,926. Most of this reduction relates to the divestment of the 2 iron casting foundries. Thank you very much for your attention, and I'll now pass on to Andreas for the outlook.

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Andreas Müller, Georg Fischer AG - CEO, President & Head of Corporate Development [4]

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Thank you, Mads. Let's turn to Slide 25. Our Strategy 2020 implementation remains the pillar of our Daily Group. We want to further expand in growth markets, which is our first strategic thrust. Our shift to higher-margin businesses, our second thrust, is developing satisfyingly and our third thrust, strong focus on customer-driven innovations, has been accelerated and accomplished by using digitalization technology.

Trade tensions and the clear slowdown in the automotive market are expected to continue to affect demand in various industries worldwide, especially in China. The portfolio shift to less cyclical businesses in all 3 divisions and to create a share of GF Piping Systems in the GF portfolio will continue to help minimize the impact of the economic downturn. The stronger focus of GF Casting Solutions on light-metal components and activities outside the automotive sector will continue. The measures that have been swiftly taken will lead to onetime cost in 2019 and '20. But after this, they will contribute to a significant improvement in operating performance.

GF Machining Solutions has a solid order book, which should lead to a stronger second half year than the first 6 months. Chances are, therefore, given for improved results for both sales and profitability in the second half of 2019 compared to the first 6 months. Without unforeseen circumstances, GF expects to achieve for 2019 an EBIT margin before one-off items of about 8% and then return on invested capital between 14% and 18%.

For 2020, GF continues to target the objectives that were revised upwards in 2018 of 9% to 10% return on sales and 20% to 24% return on invested capital. Thank you for your attention. We are now ready to take your questions.

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Questions and Answers

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Operator [1]

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We will now begin the question-and-answer session. (Operator Instructions) The first question comes from Jörn Iffert with UBS.

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Jörn Iffert, UBS Investment Bank, Research Division - Director and Analyst [2]

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The first one is on your outlook for the second half. You mentioned there's a chance second half could be better than the first half on sales and profitability. Do you already see something for Q3 here? Is it really -- your sales foresees that there's rising customer activity? Or is it more kind of your thinking base in Q4 is lower and there are some hopes for Q4. So some more clarity here would be appreciated.

Second question would be, please, on your SG&A cost savings. We see your revenue run rate falling in casting solution. I mean, as you mentioned, you're reallocating 300 people, savings are maybe CHF 3 million, CHF 4 million if I calculated correctly, but is there more to come in the other sides to adjust for new reality? And what could be roughly the cost saving number for 2020 benefiting your EBIT?

And last question on capital allocation. I mean, again, some more EBIT loss is anticipated potentially by the market in the U.S. for the joint venture with Linamar. I think you, in total, have maybe already cash burn CHF 60 million, CHF 70 million, CHF 80 million. When is the payback expected -- when do you expect this to be breakeven? And what could be the revenue run rate with new contract then in 2 to 3 years?

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Andreas Müller, Georg Fischer AG - CEO, President & Head of Corporate Development [3]

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Thank you very much for your questions, Iffert. I will answer the first one, and I will pass on the second one about the cost savings to our CFO. The outlook for the second half looks different in all of our 3 divisions, whereas Piping Systems have seen quite substantial new projects being announced in the semiconductor industries for mega fabs and also with a solid order book in Europe. We assume that this division will have chances to achieve an organic growth at the end of the year for the full year. We do not see any catalysts in the Casting Solutions businesses in the car industry. So we remain on the level of what we have seen in the first half.

In Machining Solutions, as we have mentioned in our presentation, we have a positive book-to-bill ratio of 1.1. We have acquired aerospace and medtech orders in the first half of this year, which are due to be expedited in the second half of this year. And following a natural trend, this division normally has a stronger second half year. So we, therefore, assume that we will make up part of the 9% in the second half. Obviously, we do not expect division on a full year scale to be inorganic positive figures, we still assume that there will be an organic decline, but not in the magnitude of the first half. So that's for our outlook, and I will now pass on to Mads Joergensen for the SG&A and cost savings and the capital allocation payback.

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Mads Joergensen, Georg Fischer AG - CFO and Head of Corporate Finance & Controlling [4]

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Thank you very much, Andreas. And Mr. Iffert, on the SG&A cost reductions, we have implemented measures in the 3 divisions, mainly in the area of temporary staff as well as leased staff and focus on external expenses. The effect of this, you can actually see that reflected in our year-end guidance and forecast for the profitability. Specifically to Casting Solutions, the relocation projects, we expect savings in the area of CHF 16 million to CHF 18 million on a full year basis.

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Andreas Müller, Georg Fischer AG - CEO, President & Head of Corporate Development [5]

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Last question was about the capital allocation and the payback expectations of our Mills River facility. As you may have seen in our presentation, we have been successfully acquiring further value-adding steps and processes for our products, which going to make our focus even more on this higher-value business. And that means, overall, we expect to have a breakeven in this company, at least in the year 2020 and payback should start in the year 2020 as well.

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Operator [6]

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The next question from the phone comes from Patrick Laager with Crédit Suisse.

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Patrick Laager, Crédit Suisse AG, Research Division - Research Analyst [7]

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Quick question regarding Austria. How much sales, EBIT assets and liabilities are actually attached to this plant in Herzogenburg. I mean, this, of course, is very key to understand what could be the improvement in terms of return on invested capital. So that's point number one.

Point number two, or question number 2 would be around GF Machining Solutions. I'm quite surprised to see the negative leverage here, operating leverage. I mean sales were down 9%, EBIT was down 43%. You said that CHF 15 million was due to lower sales. It looks like basically that the cost absorption has been very, very weak here. Any reasons for that? So this would be question number 2.

And question 3 is, coming back to the point made or to the answer you gave regarding your sales outlook in H2. Basically, here, I'm just wondering why you're not committing to a sales guidance for 2019. I mean, you gave some color for each division, but you have not given any sales guidance.

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Andreas Müller, Georg Fischer AG - CEO, President & Head of Corporate Development [8]

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Thank you very much. Very good questions Mr. Laager. I will answer first one, the Herzogenburg side is in the range of CHF 80 million sales. The capital employed most likely is in the range of CHF 20 million to CHF 25 million. And the planned divestment should happen in the second half of 2019.

What is the negative operating leverage, you have mentioned for Machining Solutions. It is a high-margin business. And the focus here is on the machines. And the sales drop materialize substantially than in a missed or less contribution margin.

In terms of sales outlook, you are right. We have given somehow a detailed outlook for all 3 divisions and we would come up with, if we're going to guide that as a consolidated figure, in the range of minus 3% to minus 4%.

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Operator [9]

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The next question from the phone comes from Charlie Fehrenbach with AWP.

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Charlie Fehrenbach, [10]

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I'd like to come back to Casting Solutions. We had organically a sales drop of 11% in the first half. I'd like to know if this -- do you think this is the peak of the weakness? Or what do we have to expect for the second semester? Is there -- should we expect a further deterioration of the car market? Question one. And the second is, you mentioned a shift in products with important customers. Could you give us a bit more light there? What does this mean for Georg Fischer?

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Andreas Müller, Georg Fischer AG - CEO, President & Head of Corporate Development [11]

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Thank you very much. Very good questions. I will try to answer the first one. The second half year, the car markets, we do not expect any major catalysts, or we do not see any major catalyst that's the reason why we remain on the same level as the first half of the year. But we do not see any further negative catalysts at this point of time, but who are we to judge now what will happen in the second half in the car market, but that is our assumption.

Coming to your question number 2. The shift of our product -- of the customer products portfolio is mainly driven by the WLTP, which is these emission standards, which have terminated certain product lines earlier than anticipated. If you talk about certain engine blocks, they may have discontinued abruptly or suddenly, which hasn't been expected before, that has accelerated the effect on our Casting Solutions facilities in Germany. I hope I answered your question.

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Charlie Fehrenbach, [12]

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May I add, just an understanding question. Did you answer before for a sales guidance of minus 3% to minus 5% for the full year organically, did I understand this correct?

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Andreas Müller, Georg Fischer AG - CEO, President & Head of Corporate Development [13]

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Absolutely, it's organically, and it was 3% to 4%.

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Charlie Fehrenbach, [14]

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3% to 4%.

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Andreas Müller, Georg Fischer AG - CEO, President & Head of Corporate Development [15]

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Yes.

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Operator [16]

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The next question comes from Tobias Fahrenholz with MainFirst.

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Tobias Fahrenholz, MainFirst Bank AG, Research Division - Director [17]

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Just a follow-up on the auto business, which you mentioned. I was wondering -- I mean, your 11% drop was a bit stronger than I expected. The market might have been around, let's say, 7%, 8%, then you mentioned the run out of order blocks. Do you see comparable run out of special models and projects also in the second half?

And could you comment here as well on your long-term order books, especially in the e-mobility segment. So did I get it right that you still see minus 11% organically then also for the second half? Or do you see then the absolute sales level in H2 versus H1. That would be the first one. And then maybe you could guide us through your CapEx assumptions for '19, '20, '21, including all these additional investments.

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Andreas Müller, Georg Fischer AG - CEO, President & Head of Corporate Development [18]

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Thank you, Mr. Fahrenholz, very good questions. I will answer the first one and the last one will be answered by our CFO. We do not see any additional disruptions by the product portfolios of our customers since they have happened in the first half of 2019. We see the markets, we are in predominantly, Germany or Europe and China being both down in the first half year, about 10%. I think China was down by 14%, whereas Germany has been down by 10%. So that is the market where our Casting Facilities currently are supplying their product.

The ramp-up of the American facilities was positive, since we had a positive base effect there, but it's still minor sales in the range of CHF 20 million plus. So we have an order book secured as last year stated, it's more than 30% for electronic or electric vehicles and we are facing the ramp-ups of this project currently. So we're going to see these projects coming onstream end of this year, but also in the years to follow. So we're going to see us busy by phasing in this opportunities into the future in the next years. Yes, in regards to capital expenditure, I will hand over to Mads.

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Mads Joergensen, Georg Fischer AG - CFO and Head of Corporate Finance & Controlling [19]

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Regards to capital expenditures for the year 2019, we expect to be in the area of CHF 200 million to CHF 210 million, as previously mentioned. And for 2020, we will also see that level of investment. 2021 is, of course, far out in the future, but we would expect long-term to go to a [lower level].

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Andreas Müller, Georg Fischer AG - CEO, President & Head of Corporate Development [20]

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May I also to add on the e-mobility business, we at GF see broader opportunities, good opportunities for us, since e-mobility drives for lightweight design components and this is exactly where we're focusing our businesses. We call this higher-value businesses where we can add value to our customers. Did we answer your questions, Mr. Fahrenholz?

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Tobias Fahrenholz, MainFirst Bank AG, Research Division - Director [21]

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Yes.

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Operator [22]

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The next question from the phone comes from the line of Michal Lichvar with Bank Vontobel.

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Michal Lichvar, Bank Vontobel AG, Research Division - Analyst [23]

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I would have one question regarding just raw material prices, mainly for Casting Solutions. Do you see any headwinds that impacted your results in first half? And how do you see this developing in the second half?

Then maybe a second question for Piping Systems. Do you see any recovery coming from this coal-to-gas heating transformation in China coming? Or is this going to be also subdued for the next 6 months or longer?

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Andreas Müller, Georg Fischer AG - CEO, President & Head of Corporate Development [24]

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Thank you, Mr. Lichvar, very good questions. I will answer the second one and Mr. Joergensen, the first one. I will start with Piping Systems, our coal-to-gas project. Yes, you are right. It will be still subdued for the second half of 2019. We are not seeing any catalyst at this point of time that this project is being reassumed. It's mainly due to the gas supply out of fresh air, which has to be finalized before this projects going to restart and we're going to see this project restart in the course of 2020. Mads, if you...

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Mads Joergensen, Georg Fischer AG - CFO and Head of Corporate Finance & Controlling [25]

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On the raw material side, the raw material development was not significant to the EBIT level. We saw a slight decrease in the aluminum prices. But on the EBIT level, again, the effect was neglectable in the first half. In the Piping Systems area that buys polyethylene, we also saw some price decreases. But in that industry, the price increases or decreases are passed on immediately to the customer. So also they are in the first half, neglectable effect.

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Andreas Müller, Georg Fischer AG - CEO, President & Head of Corporate Development [26]

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Did we answer your question, Mr. Lichvar?

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Michal Lichvar, Bank Vontobel AG, Research Division - Analyst [27]

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Yes, perfectly.

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Operator [28]

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The next question from the phone comes from Martin Flueckiger with Kepler Cheuvreux.

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Martin Flueckiger, Kepler Cheuvreux, Research Division - Equity Analyst [29]

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Actually, I've got 3. First one is on Piping Systems. I've read through your half year report, but could you provide a little bit of more granularity on the demand dynamics that you've seen in your 3 customer segments, utilities, industry, building technology, by geography and also not only [expose] talk about H1, but also about your outlook for these customer industries in the second half, that would be very helpful.

And my second question is on Casting Solutions. I understand that your capacity utilization rates were down in some plants. Could you give us some averages across the Casting Solutions network for H1 and what you believe the utilization rates will be in H2?

And then, sorry, just to come back to the Mills River plant in the U.S., for GF Linamar, these ramp-up costs, am I right that these were higher than expected? And if you could provide some guidance on that, that would be very helpful.

And my third question is on the outlook for 2020. With regards to the margin drives, you've talked a little bit about the sales drivers for the -- sorry, for H2 '19, not 2020. You've talked about the sales assumptions going forward. But could you also talk about the margin drivers that you see? And also what you expect in terms of net working capital developments.

Yes, that would be my first 3 questions and I'll go back in line for the next 2.

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Andreas Müller, Georg Fischer AG - CEO, President & Head of Corporate Development [30]

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All right. Thank you very much, Mr. Flueckiger, very good questions. First one, Piping Systems. A little more granularity on their markets and business segments, I will start with Americas. All 3 business segments, industry or actually all 2, because we are not there in the building technologies. Our industry in utilities have been up in Americas and we're going to achieve for second half even more projects in the Industrial field coming up in America. So that's Piping Systems in Americas.

Piping Systems in Europe experienced a very strong first half. I think we had, in all 3 business segments, growth and we have achieved all over Europe a growth of approximately 5% plus in the first half and we see the momentum to be continued in the second half of 2019. Whereas in China, we have seen in the business segments, building technology and utilities drop, whereas the severe drop was in the Utility segment, which is coming along with this coal-to-gas projects as well in the Beijing metropolitan area, we have seen building technology was slightly subdued, but a flattish industrial. And we assume that we will see somehow slight recovery, at least in the utility business, due to the recently announced projects by the government.

So that's Piping Systems in the second half of the year in Asia. And since we had a rather modest or moderate second half 2018, we assume that we can make up this organic growth, as we have said earlier during this call.

Coming to Casting Solutions, as said, base effects will amplify the growth in Americas, since we haven't been there in the last year. We're going to face in these projects, as said, that we do not expect any disruption in the second half of the year. In Europe, we are still missing catalysts why the market should recover, so we guide also on the second half year in the Casting Solutions markets on the same low level as in the first half of the year.

And in Asia, we assume that, at least the figures we have seen currently, will not worsen further. We have seen, in our opinion, the peak there, with the EVs coming on stream, we also may going to see a very slight recovery in Asia on this market.

Coming to our machine tools, Machining Solutions. They had a very strong Americas, whereas in the first half, we have seen growth and it's predominantly in the fields of medtech products and aerospace products, whereas Europe has been rather flattish. And in Asia, we have, as said by Mads Joergensen, a drop of 31%, which was mainly due to the lack -- lackluster demand of ICT components and therefore, no catalyst being given in that market that investments could have driven machine tool sales.

We see the second half of the year may still be subdued, but we have seen in our -- in all figures, at least the bottom and we assume there could be some catalysts such as 5G coming alive, which could give some positive momentum in this market, whether that will happen in the second half or in the year 2020, that's something which we can't comment on right now. But we believe that there is some good opportunities.

Coming to the utilization of our facilities. Utilization of our facilities as said early, have been heavily affected by this sudden market drop and we do not expect that the utilization should come up in the second half of the year since we believe, let's say, is remaining on the same level as in the first half year and that means that we are in the range of 65% to 75% utilization in those facilities at this point of time.

The Mills River plant, the ramp-up costs, as I said, we have been luckily acquiring good orders and also expansions for our orders, so we are currently facing in more products than initially anticipated. That comes along with some more ramp-up costs that may have been foreseen at the very late of 2018, but however it's all within our planning.

I will hand over now to this capital development -- net working capital development to Mads Joergensen.

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Mads Joergensen, Georg Fischer AG - CFO and Head of Corporate Finance & Controlling [31]

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Our net working capital, we have a situation where the accounts receivable are developing very positively. Where all 3 divisions have the possibility for improvement is in the area of inventory and we expect towards the end of the year what we call a normal seasonal improvement in these levels, so that we should have a positive development towards the close of 2019.

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Andreas Müller, Georg Fischer AG - CEO, President & Head of Corporate Development [32]

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Mr. Flueckiger, did we answer your questions?

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Operator [33]

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Your next question from the phone comes from Armin Rechberger with ZKB.

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Armin Rechberger, Zürcher Kantonalbank, Research Division - Analyst [34]

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Almost all my questions were answered. Just one remaining regarding this Herzogenburg plant. Did I understand correctly that you will have, say -- you will lose sales of only CHF 8 million by closing this plant? And -- or, I mean, selling this plant. And you must be very sure that you will sell it, so you have a partner there already and everything is almost fixed already, all the contracts, I mean.

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Andreas Müller, Georg Fischer AG - CEO, President & Head of Corporate Development [35]

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Thank you, Mr. Rechberger. I will give you the answers. Sale of this facility amount to CHF 80 million, not CHF 8 million, CHF 80 million. And we are currently investigating in different scenarios, and we are -- we'll come up with the information as soon as the deal will be signed. Currently, we are evaluating various alternatives.

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Armin Rechberger, Zürcher Kantonalbank, Research Division - Analyst [36]

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But you strongly assume the sales in second half year 2019.

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Andreas Müller, Georg Fischer AG - CEO, President & Head of Corporate Development [37]

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At this point of time, we plan to sell this site in 2019.

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Operator [38]

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The next question comes from Christian Obst with Baader-Helvea.

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Christian Obst, Baader-Helvea Equity Research - Analyst [39]

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I have 2 additional questions. One is on Piping Systems. So you reported a very strong EBIT margin, I would say, in the first half of 2019, maybe you can talk a little bit about main drivers here and what you expect going forward? And what kind of margin level can you constantly achieve in that Piping Systems area? I know you have some kind of guidance there also.

And the last one is on the ramp-up cost of the CHF 8 million in the first half. You stated that you have more orders and therefore, higher ramp-up costs. What can we expect for the ramp-up cost going forward? And when will they go down to 0? Will that be in the second half of this year, or will this last into 2020? Thank you.

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Andreas Müller, Georg Fischer AG - CEO, President & Head of Corporate Development [40]

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Thank you very much. Very good questions. The strong EBIT margin of our Piping Systems business is mainly driven by higher value businesses, so we are focusing on solutions. We are constantly enhancing our products. You may have seen innovations we have recently launched, such as our COOL-FIT Piping Systems, which is a pre-insulated Piping Systems, optimizing installation times and providing our customers higher values in terms of energy consumption. That's particularly one of the products which is going to drive the higher margin and that's one of the key reasons, but in addition, obviously with the good load of all of our facilities in Europe and Americas.

The second question is about the ramp-up costs in Mills River, where we foresee less ramp-up costs in the second half of this year, so we assume that overall costs will be below previous year, so we assume that we will see another CHF 3 million to CHF 5 million ramp-up cost in the second half of 2019.

It may has to be mentioned that we will phase in new products until the year 2021 or actually even beyond that date and whenever you phase in that products that comes along with ramp-up costs, but we believe that the business volume we're going to achieve in next year will be accommodate and compensate this ramp-up cost and so we can deliver profitable results in the years after. I hope we answered this question.

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Christian Obst, Baader-Helvea Equity Research - Analyst [41]

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I have an additional one on the margin in Piping Systems. So having in mind that you have strong order book also in Piping Systems and you are changing the mix going forward. This means you have a high utilization rate and you are changing the mix to water systems. Can we expect that we will see an ongoing margin level well above 12% going forward?

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Andreas Müller, Georg Fischer AG - CEO, President & Head of Corporate Development [42]

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Our initial guidance was 10% to 12%, and we are seeing currently very prospering situations, and we're going to rework our strategy 2020 in the upcoming year and then we will see what we will come up in the strategy 2025.

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Operator [43]

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We have a follow-up question from Mr. Flueckiger from Kepler Cheuvreux.

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Martin Flueckiger, Kepler Cheuvreux, Research Division - Equity Analyst [44]

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Just firstly, sorry to come back to the River Mills question asked just a few minutes or a minute ago. Incrementally, '19 versus '18, what is going to be the incremental cost burden and what is going to be the incremental cost relief for 2020? That would be my first question.

Second question is on your restructuring costs. I think, Slide 22 provides an outlook here and I realize the CHF 14 million incurred in H1 2019 is an impairment, i.e., noncash. But for the guidance in H2 in 2020 for that CHF 34 million and CHF 17 million, I realize you've given the cash flow impacts, but I'm wondering how much of that CHF 34 million and that CHF 17 million is cash and how much is noncash, i.e., are we going to see further impairments there.

And then the third question would be, if you could provide a split for your organic growth or organic decline in H1 with regards to pricing and volume? And also, in that respect, if you could provide a number for the net divestment impact. I believe there were some smaller acquisitions, if you could comment on that as well, please.

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Andreas Müller, Georg Fischer AG - CEO, President & Head of Corporate Development [45]

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All right. Thank you, Mr. Flueckiger. Mills River will face this year as ramp-up cost in the range of CHF 12 million and we stated that we currently forecast a breakeven situation in the year 2020. So therefore, the incremental change will be CHF 12 million, assuming that we have the CHF 12 million this year. The question number 3 will be answered by our CFO.

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Mads Joergensen, Georg Fischer AG - CFO and Head of Corporate Finance & Controlling [46]

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All right. Thank you, Mr. Flueckiger. As you've correctly stated, in the first half, the CHF 14 million are noncash effective value adjustments. In the second half, the CHF 34 million that is shown on Slide 22 includes the potential up to CHF 10 million book loss that we could have on a disposal of a Herzogenburg plant.

In the second half, we expect that there should be only CHF 6 million cash effective out of the CHF 24 million relating to Werdohl. And then in the following years, we will see the cash effects coming in, meaning that in 2020, the majority of this will be cash effective as well.

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Andreas Müller, Georg Fischer AG - CEO, President & Head of Corporate Development [47]

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Coming to your last question number 3, the volume and pricing effect. Pricing effects can be neglective in the first half year 2019 as also mentioned by Mads Joergensen, since we had a couple of raw material prices going down and it has been passed onto customers. So overall, pricing effects can be neglective, so what you see as an organic development is mostly the volume organic changes. Did we answer your question?

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Martin Flueckiger, Kepler Cheuvreux, Research Division - Equity Analyst [48]

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Let me just double check, sorry. Yes, the net divestment impact and whether there were any smaller acquisitions, I think I've seen some CHF 3 million, if you could just -- one sentence explain what that was?

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Mads Joergensen, Georg Fischer AG - CFO and Head of Corporate Finance & Controlling [49]

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I think -- I think you're referring to the cash flow statement. Is that correct?

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Martin Flueckiger, Kepler Cheuvreux, Research Division - Equity Analyst [50]

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Correct.

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Mads Joergensen, Georg Fischer AG - CFO and Head of Corporate Finance & Controlling [51]

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Yes, that is actually a payment of an earn-out to a previous acquisition we did for the company Microlution, as well as a minority, a very small stake in the company, our last remaining shares of a company, Step-Tec, those are very small deferred payments that we have in our deals.

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Martin Flueckiger, Kepler Cheuvreux, Research Division - Equity Analyst [52]

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So the net divestment impact plus Precicast a little bit, I think, in Q1 and then minus the 2 iron foundries sold in Europe, how much was that exactly in millions or in percentage terms?

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Andreas Müller, Georg Fischer AG - CEO, President & Head of Corporate Development [53]

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The divestment of the Iron casting facilities in Germany amounted to CHF 352 million as illustrated on our chart.

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Martin Flueckiger, Kepler Cheuvreux, Research Division - Equity Analyst [54]

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That's for the full year, yes?

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Andreas Müller, Georg Fischer AG - CEO, President & Head of Corporate Development [55]

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But now that's the half year, that's the first 6 months.

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Martin Flueckiger, Kepler Cheuvreux, Research Division - Equity Analyst [56]

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Sorry.

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Andreas Müller, Georg Fischer AG - CEO, President & Head of Corporate Development [57]

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It's a half year comparison, it's not the full year versus the half year comparison. So we have the CHF 352 million, which is divestment for 6 months of the year 2018 of the 2 casting facilities and we had a positive impact of the first 3 months of our Precicast companies of CHF 28 million, which has been the first quarter since we have consolidated the Precicast for the first time the 1st of April 2018.

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Operator [58]

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We have another follow-up question from Mr. Iffert with UBS.

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Jörn Iffert, UBS Investment Bank, Research Division - Director and Analyst [59]

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It's just a question on the 2 production sites you divested in December. Is there a risk for Georg Fischer shareholders that there must be a cash and sanctions in terms of structuring you see there? What is your view here?

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Andreas Müller, Georg Fischer AG - CEO, President & Head of Corporate Development [60]

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Thank you very much, Mr. Iffert, very good questions and we can confirm that the companies are doing within their plans. So they have a very solid cash generation in the first 6 months of 2019, according to our plans, which we have done last year. So we are confident that there are no risks at this point of time for our shareholders.

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Jörn Iffert, UBS Investment Bank, Research Division - Director and Analyst [61]

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And may I ask, in case there would be a more tougher market environment in 2020-'21. Would you then support the 2 plans with cash and sanctions? Or do you say, no, that's really -- it's divested, that's done, just that we have a feeling of cash allocation.

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Andreas Müller, Georg Fischer AG - CEO, President & Head of Corporate Development [62]

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We will not speculate about the business development of these companies. At this point of time, the Fondium companies are good on the way, they have also acquired new orders in various fields and have increased prices. So they have exactly demonstrated the flexibility as we have anticipated, when we have divested this company. And you may going to have to turn this question to Fondium from this point of time. At this time, we see a very robust development of their cash flow and we are not concerned.

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Operator [63]

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There are no more questions at this time.

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Andreas Müller, Georg Fischer AG - CEO, President & Head of Corporate Development [64]

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Thank you very much, and we're going to close the call and see you at the Capital Market day in September.

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Operator [65]

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Ladies and gentlemen, the conference is now over. Thank you for choosing Chorus Call and thank you for participating in the conference. You may now disconnect your lines.