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Edited Transcript of FI-N.S earnings conference call or presentation 26-Feb-20 12:00pm GMT

Full Year 2019 Georg Fischer AG Earnings Presentation

Zurich Mar 9, 2020 (Thomson StreetEvents) -- Edited Transcript of Georg Fischer AG earnings conference call or presentation Wednesday, February 26, 2020 at 12:00:00pm 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

* Daniel Bösiger

Georg Fischer AG - Head of IR & Head of Corporate Controlling

* Mads Joergensen

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

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Conference Call Participants

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* Christian Obst

Baader-Helvea Equity Research - Analyst

* Martin Flueckiger

Kepler Cheuvreux, Research Division - Equity Analyst

* Michal Lichvar

Bank Vontobel AG, Research Division - Analyst

* Remo Rosenau

Helvetische Bank AG, Research Division - Head of Research

* Tobias Fahrenholz

MainFirst Bank AG, Research Division - Director

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Presentation

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Daniel Bösiger, Georg Fischer AG - Head of IR & Head of Corporate Controlling [1]

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Ladies and gentlemen, welcome to the analyst conference 2020 of Georg Fischer. Today's presentation will be held by our CEO, Andreas Müller; and our CFO, Mads Joergensen. First, Andreas will comment on the course of the business 2019, and Mads will give you further details to the financial statements.

After the presentation, we are pleased to answer your questions. There will be microphone, please make use of them. This conference will be recorded, and you will find a recall as of tomorrow on our website. After the conference, you are invited to [another one] outside in the foyer.

Having said that, we will start the conference. Andreas, the floor is yours.

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

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Thank you, Daniel. Not really a lady, only our internal people, gentlemen. A welcome to our annual conference.

Strong performance at our division Piping Systems, characterized by the strategic transformation of GF Casting Solutions and by economic headwinds, Slide 2. Geopolitical tensions and the upheaval in the automotive industry affected the overall economy in 2019. Consequently, business sentiment in key industries and markets were subdued and created a more challenging environment for GF.

Our sales declined by 18% overall and by 4% organically to CHF 3.7 billion. The divestment of our iron companies in December 2018 and for 2019 cut sales by CHF 633 million.

In addition, currency effects amounted to minus CHF 88 million. The operating result before one-off items were supported by the strong performance of GF Piping Systems and came in at CHF 281 million, expected one-off items amounted to CHF 46 million for the relocation of the light metal foundry in Germany and the divestment of the iron casting company in Austria.

The Board of Directors will propose a dividend on prior year's level of CHF 25 a share at the upcoming shareholders' meeting on the 16th of April. GF is well positioned in its markets and its focus on less cyclical segments has increased its resilience to economic slowdowns and headwinds.

GF considers 2019 as a transitional year. One of our 3 main strategic thrusts on Slide 3 is to focus on customer-centric innovations. In 2019, GF redefined its innovation processes and fully incorporated the design-thinking methodology. Many products were successfully launched in 2019, such as COOL-FIT 4.0 for industrial cooling applications, laser milling machines for ceramic matrix composite materials and 3D printed aero engine parts made by GF Casting Solutions.

On the right, you can see 2 breakthrough developments. At the top, as already shown at the Capital Market Day, a 5G digital application to transmit real-time kinetic work piece data to optimize production processes and consequently reduce process times by up to 20%. And at the bottom, I have to say, this is actually a project which is -- accompanying me since I started at GF, so it has a legacy of 25 years. And last year, we did a breakthrough here, really, a fire retardant plastic pipe that fulfills the marine L3 fire standards for the first time. These are known as the harshest standards in the industry and are used to approve critical applications in ships and buildings of all kinds.

The test requires the plastic pipe to resist the temperature of approximately 1,000 degrees Celsius for 30 minutes. GF will launch this product within the next 3 years.

In 2019, Slide 4, we consistently drove forward the implementation of our strategy 2020. GF Casting solutions accomplished its withdrawal from the European iron casting market for passenger car components with the sale of its iron foundry in Austria. This is fully in line with our strategy to shift our portfolio to its higher-margin businesses.

In September, GF Machining Solutions inaugurated its new innovation and production center for milling machines in Biel, Switzerland. The various production sites have now been consolidated at one single location. This will lead to further synergies in the years to come, also fully in line with our strategy to optimize the European production footprint.

Also in line with our strategic thrust to widen our presence in growth markets, GF Piping Systems signed a joint venture contract to establish a pipe and fitting production company in Egypt. Via this new company, GF will support the Egyptian infrastructure project to connect more than 20 million households to the gas and water supplies. The division also acquired a marine supply expert in the United States to strengthen its shipbuilding market segment.

Let's move on to Slide 5. As you can see, GF Piping Systems grew organically by 1%, thanks to its broad global customer base. The division was able to grow organically 3% in a challenging market situation in the second half of 2019.

GF Casting Solutions and GF Machining Solutions shrank organically by 10% and 8%, respectively. The strong share of GF Piping Systems in our overall portfolio supported the sales development of the corporation.

Nonetheless, GF faced market headwinds in all regions and declined organically by 4%. As anticipated, the organic drop of 2.5% in the second half year was much less pronounced then the organic decline of 5.5% in the first 6 months of the year. On average, over the last 4 years, GF's annual sales have grown by 3.5% organically, in line with our strategic target range of 3% to 5%.

On Slide 6, you can see the development of the EBIT margin. GF overall achieved an EBIT margin of 7.6% before one-off items and 6.3% after one-off items.

Our largest division, GF Piping Systems maintained its high profitability of 11.9%. GF Casting Solutions was affected by the market turmoil and the ongoing strategic transformation of the division. EBIT before one-off items decreased to a low 2.3%.

Lower sales also clearly impacted the EBIT and the EBIT margin of GF Machining Solutions, which dropped by 2.4 percentage points to 5.9%.

The return on invested capital before one-off items, Slide 7, decreased to 15.3%, while GF Piping Systems' capital efficiency remained clearly above target at 26.1%. GF Casting Solutions' [accounts] subdued performance affected the overall result. The division delivered an ROIC of 3.2% before one-off items. Due to the market situation, the results of the German light metal foundry was partial closure we have already announced and the ramp-up costs for the U.S. light metal foundry in North Carolina.

GF Machining Solutions reached 18.4%. The gray column on the chart indicates the 4-year average return on invested capital. GF considers all 3 businesses to be strategically well positioned, but some work remains to be done.

Let's turn to GF Piping Systems, Slide 8. Sales of the largest division were organically up by 1.3% to CHF 1.802 billion. By the way, this is also the year of our foundation. The division has grown in all 3 business segments: Industry, Utility and Building Technologies. The European markets proved the strongest with growth of 5%. The U.S. market came in on the same level following strong growth in 2018. In Asia, the division experienced a slight reduction of 2%, predominantly as a result of the subdued Chinese market.

In the picture, you can see the division's recently inaugurated innovation and training center in Schaffhausen. We foster new developments and customer trainings with collaboration spaces and new training facilities. GF Piping Systems welcomes more than 10,000 customers and employees for training sessions every year.

On Slide 9, you can see 2 promising market sentiments for GF Piping Systems. The Cooling segment, the picture on the left, grew 12% last year, clearly supported by the new COOL-FIT 4.0 system, which enables our customers to save up to 30% of the energy they use for the cooling application.

For example, data centers account for up to 3% of global electricity consumption, 40% of that energy is used for cooling. With our new systems, a substantial amount of this energy can be saved. On the right, you can see skids for a water rehabilitation plant. GF is well positioned in this segment, and its sales grew last year by 4%. This is quite a large segment for GF Piping Systems with sales of more than 200 million. Water scarcity will remain one of the major challenges in the years to come. GF is working on even further solutions in this segment.

Customer-centric innovation, Slide 10, results in attractive solutions for our customers. GF has sold ball valves in the amount of CHF 50 million in 2019. It has set a new landmark with its new valve, which now also enables and includes digital features such as position sensors. On the right, you see a recently launched virtual training program. This program allow our customers to efficiently train their installers and workers wherever they are. With this kind of training methodologies, GF is at the forefront of the industries and addresses one of the major pains of unskilled labor.

Let's now turn to our Casting Solutions division, Slide 11. The subdued Chinese and European automotive markets combined with the structural change in the industry left their mark on the sales of the division. GF Casting Solutions reported an organic drop of 9.7% to CHF 949 million. Most of this reduction was caused by the divestment of the European iron casting companies. The operating result before one-off items stood at CHF 22 million, down from CHF 86 million in 2018.

The reduction in volume plays an important role in the profitability development. However, we announced relocation of the German light metal foundry combined with the drop of call offs in this company resulted in higher operational losses. The ongoing ramp-up costs for the U.S. facility remained on previous year's level caused by the successful acquisition of customer programs that have to be prepared well ahead of their start of production and slightly delayed customer projects.

Our CFO, Mads, will come back to this topic. The focus on lightweight components made of aluminum and magnesium and parts for the aerospace and energy market is in full swing and is expected to deliver better returns in the years to come. The picture on the right shows our new mold development and production center for lightweight components in Suzhou, China. It is an important facility for shortening time to market and expanding the value chain in China, clearly underpinning our strategic focus on higher-value businesses.

The strategic transformation of the division will continue throughout 2020. Thanks to its Nadcap-certified investment casting and additive manufacturing center in Switzerland, Slide 12, the picture on the left. GF Casting Solutions perfectly addresses the needs of its aerospace customers, and the segment has grown by 24% in the year under review. On the right, you can see our new fully automated production of cross car beam members in Mills River in the United States. This is a typical body and structure component for the automotive industry. Despite the difficult market condition, the segment grew by 4% globally.

The repositioned GF Casting Solutions focuses on innovative solutions for its customers, Slide 13. The picture on the left shows the new e-car from Aiways, a Chinese start-up. The company appreciates GF's ability to design, develop and produce complex lightweight body and structure cars. In 2019, sales of products for e-cars increased by 50% to a total of CHF 70 million. The share of e-car lifetime orders increased to 30%, indicating the importance of these new powertrain technologies in the years to come.

GF was awarded for its expertise in casting innovative structural components, picture on the right, at the most important casting exhibition in Germany by Euroguss. This is a cross car beam member with a lot of surfaces which can be seen later on when the part is installed in the car. So it looks simple, but it is super complex. GF Casting Solutions is well positioned in its market segments.

Let's turn now to Machining Solutions, Slide 14. The division was impacted by the Sino-U. S. trade tensions during the entire year and the slowdown in German machine tool demand in the second half of 2019. Thanks to its strong presence in the U.S. aero engine market, GF Machining Solutions was able to offset part of the drop in the other regions. U.S. sales were up by 5%, while Europe was down by 4% and Asia down by 17%.

Ultimately, sales of the division fell organically by 7.5% to CHF 972 million. As a consequence, the operating result came in at CHF 57 million. New laser technology sales with ongoing high demand grew by 41%, once more reflecting the importance of innovative new products. The picture on the right shows the inauguration of the new facility in fall last year in Biel.

Growing market segments, Slide 15, such as aero engines and med tech with 17% and 9% more sales, respectively, than in 2018, clearly demonstrate the importance of focusing on less cyclical market segments. The Aerospace segment for the division accounts now for CHF 250 million. On the left, you can see a Microlution laser machine, which enables our customers to machine ceramic matrix composite materials to increase the fuel efficiency of jet engines by up to 20%. On the right, you can see a dental implant production supported by our latest cloud-based calibration systems.

Excellence in innovation, GF Machining Solutions focuses on excellence in innovations, Slide 16. At EMO, the world-leading machine tool exhibition, GF Machining Solutions launched various new digital products such as Spark Track, an application to precisely control each production step of safety parts. The picture shows a fir-tree of a jet engine made by EDM technology. And on the bottom right, the picture of our new factory dashboard to ensure high availability of the installed machine base. New laser technologies on the top left enable our customers to speed up their production processes up to 3x. The division is well positioned in its markets, thanks to its innovative machine tools and automation capabilities.

I will now hand over to our CFO, Mads Joergensen, who will give you details of our 2019 financials.

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

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Thank you very much, Andy. Gentlemen, also from my side, welcome to the conference. 2019 was a challenge, but it was also a year where Georg Fischer demonstrated its ability to weather stormy markets and still retain a very strong financial basis.

I'll now turn to present the 2019 financials. On Slide 18, we see in the upper part of the table, the sales by division. During the year in review, the 3 divisions underwent quite different developments. At group level, we had declining sales of minus 4.1% organically to CHF 3.72 billion. GF Piping Systems demonstrated resilience on the sales side but was adversely impacted by negative foreign currency effects, leading to total sales of CHF 1,802,000,000. The top-performing markets in Europe and North America compensated for the difficult situation in China, which was clearly impacted by the Sino-American trade dispute.

Sales at GF Casting Solutions dropped to CHF 949 million. Here, the divestment of the 3 European iron casting facilities impacted sales by CHF 633 million. The division was, in addition, heavily impacted by the crisis in the global automotive industry. These fundamental structural changes eventually led to the decision to partially close and relocate the Werdohl facility. Correcting for negative currency effects from the euro and the Chinese yuan, sales declined organically by 9.7%.

Sales at GF Machining Solutions came in at CHF 972 million, a decrease of CHF 94 million. The division was mainly adversely impacted by the drop in investments in the global ICT industry. The electrical discharge and milling machine business declined by 15% and 11%, respectively. However, this was compensated by an all-time high performance of the Aerospace segment and more than 40% sales growth in advanced technologies such as femtosecond laser machines, laser texturing machines and 3D printing machines. Eventually, the division ended up with a 7.5% organic sales decrease.

Moving now to the lower part of the table. In the first semester, sales declined organically by 5.5%. And in the second half, the sales situation improved somewhat to a decline of 2.5%.

GF Piping Systems grew 3% in the second half against a flat first 6 months. GF Casting Solutions decreased by 8% compared to 11.1% in the first semester. And Machining Solutions, the decrease was less pronounced in the second half by 6% and slightly better than the global industry compared to a 9.1% decline in the first half. It is worth mentioning that for the month of December, prior to the coronavirus pandemic, the sales in foreign currency for all 3 divisions in China were above previous year by more than 20%.

Slide 19 shows additional details of the sales development. The effect of the divestment of 3-year in iron casting facilities amounted to CHF 633 million. Next, the effect of the acquisitions was CHF 30 million, stemming from the full year effect of the acquisition of the investment casting business, Precicast, which was acquired at the start of April 2018. A second effect, but much smaller, is the acquisition of the marine piping business global supply. The currency effect amounted to CHF 88 million, leading to an organic decline of CHF 161 million.

Slide 20 shows the sales development from a regional standpoint. The Americas grew 3% organically with Georg Fischer Linamar growing more than CHF 26 million and GF Machining Solutions growing 6%, mainly driven by the strong Aerospace and Medical segments.

GF Piping Systems ended up slightly below previous year due to a later in the year subdued oil and gas markets and declining industrial sales. In Europe, the markets declined organically by almost 4%. Behind this was the challenging situation at GF Casting Solutions as well as subdued market for machine tools in general. This was compensated by the top performance of the European piping business. In 2018, we were still highly dependent on Europe with 55% of global sales. This has now decreased to 47%, however, mainly caused by the divestments.

Asia decreased organically by 7.4%, which was almost entirely attributable to the Chinese market. The sales in the rest of the world is mainly impacted by the Turkish lira and subdued emerging markets.

On Slide 21. This slide provides some details on the foreign currency effects. Overall currencies affected sales by CHF 88 million and the EBIT by CHF 21 million adversely. It's the first, further -- most severe effect in the past decade from currencies. As can be seen, Georg Fischer Piping Systems was the division predominantly impacted by the negative currency development followed by GF Casting Solutions. And from a currency perspective, on the right-hand side, most of the negative effects came from the euro, the Chinese yuan and the Turkish lira.

Slide 22 shows the EBIT and the margin development. Despite the negative foreign currency effects, GF Piping Systems was able to keep the profitability at an all-time high level of 2018. EBIT for Piping Systems was CHF 214 million, with the EBIT margin of 11.9%, equal to previous year.

Due to the operational challenges in the other 2 divisions, Piping Systems contributed more than 3/4 to the consolidated results before one-offs.

Let me spend a moment to elaborate on the profitability of GF Casting Solutions. It is obvious that the division was hit by the drop in the automotive production in Europe and Asia. However, the impact of GF Casting Solutions was more pronounced due to a number of factors, which eventually led to the decision to partially close the Werdohl facility. This decision triggered one-off costs of CHF 37 million in the financial year 2019.

Another one-off event was the consolidated book loss of CHF 9 million related to the divestment of the Herzogenburg iron casting facility, which brings the total one-off effects to CHF 46 million. But to better understand the decrease in EBIT before the expense of one-offs, it is important to note the following: the CHF 22 million EBIT actually reflects 2 main elements; first, a CHF 16 million ramp-up cost at GF Linamar Mills River facility; and secondly, a CHF 23 million operational loss relating to the substantial decrease in operational performance at the Werdohl facility after the announcement of the closing. In other words, the adjusted EBIT before one-offs still includes a total of almost CHF 40 million of costs, which can eventually be considered as nonrecurring in character.

Overall, for the Casting Solutions division, the EBIT margin before one-offs ended up at 2.3% compared to 5.1% in 2018. The EBIT of GF Machining Solutions dropped from CHF 88 million to CHF 57 million. This was mostly caused by the global drop in the machine tools business combined with a high operational leverage. The EBIT margin declined from 8.3% to 5.9%.

Before one-offs, the EBIT of the corporation came in at CHF 281 million and the EBIT margin before one-offs decreased from 8.4% to 7.6%. In the lower part of the table, you can see that in 2019, 54% of the EBIT was generated in the first semester and 46% in the second semester, which is similar to previous year.

Turning to Slide #23. We are here providing an update on the one-off effects as first forecasted by mid-year 2019 and now compared to the current situation. Starting in the first row, we have the guidance issued by mid-year 2019, showing one-off effects of CHF 48 million in 2019 followed by estimated one-off ramp-up costs of CHF 17 million in 2020. The second row shows that in 2019 we only incurred CHF 46 million in 2019, our estimate of the ramp-up costs for 2020 remains CHF 17 million.

From a cash flow perspective, shown in the lower part of the table, we only forecast slight changes compared to the original estimate. Overall, we expect the net effects to be minus CHF 31 million in cash out.

On Slide 24, you see a summary of the consolidated income statement. Gross value-added decreased by 17% to CHF 1,386,000,000, mainly due to the declining business and the divestment of the European iron casting facilities. The personnel cost expenses declined by CHF 127 million to CHF 1,012,000,000. However, this was impacted by changes to the scope of consolidation of CHF 160 million. And on the other hand, the personnel costs increased by CHF 21 million due to the one-off restructuring cost of the Werdohl closing and due to other general increases. It is worth noticing that most of the capacity adjustment in the workforce were done in the area of lease employees as well.

The EBITDA decreased from CHF 521 million to CHF 374 million. Adjusting for the one-off related effects of the CHF 24 million, the operational decrease was CHF 123 million. Depreciation came in at CHF 139 million, down from CHF 147 million in 2018. Changes to scope of consolidation lowered the depreciation by CHF 16 million and the partial closing of Werdohl led to impairments of fixed assets or an increase of CHF 12 million. On a like-for-like basis, depreciation was then more or less at the previous year's level.

EBIT before one-offs came in at CHF 281 million, a decrease of CHF 101 million. 64% of the decrease relates to GF Casting Solutions. The financial result was close to the level of 2018. Interest expense decreased by CHF 5 million due to a repayment of the corporate bond in 2018 and less bank loans.

On the other hand, cost increases by CHF 10 million due to a partial value adjustment of financial interest in associated parties relating to the 2 divested iron casting facilities. The effective income tax rate decreased from 20% to 15%. However, this reduction was mostly caused by the one-off effects relating to the implementation of the Swiss tax and social security reform. Net profit attributable to GF shareholders decreased from CHF 281 million to CHF 173 million, leading to a decrease in earnings per share of CHF 27 to CHF 42.

Slide 25 shows the assets of the consolidated balance sheet. Overall, we had CHF 3.3 billion of assets at the end of 2019, down from CHF 3.4 billion in 2018. Lower year-end currency spot rates reduced the assets of more than CHF 50 million. Acquisition and divestments led to a net reduction in total assets by approximately CHF 28 million, and the one-off impairment effects from the Werdohl project further reduced assets by CHF 16 million.

The reduction in accounts receivable of CHF 100 million was attributable to the lower business movement. The days sales outstanding remained with 65 days at the level of 2018.

Inventory decreased by CHF 28 million, but due to the sales decline of GF Casting and Machining Solutions, the days inventory outstanding increased from 106 days to 122 days. Noteworthy is the liquidity position of the company remained very strong with CHF 530 million available.

Slide 26 shows the liability and equity section of the balance sheet. As mentioned, half of the decrease in liabilities is caused by some of the lower currency spot rates. The current liabilities decreased by CHF 120 million, mainly due to the lower sales and investment level, capital expenditures. You will see here also that GF's equity ratio increased even further from a solid 41% to 43%.

Let us now move to the cash flow statement on Slide 27. The increase in the net working capital was only CHF 10 million, net of acquisitions, divestments and currencies. Most of the effect came from the lower accounts receivable, but also the accounts payable declined due to lower business activities and therefore lead to a cash out. Overall, the operational cash flow decreased by CHF 79 million, mostly caused by the lower EBITDA.

Cash outflows from capital expenditures decreased from a record CHF 234 million in 2018 to CHF 178 million. The ramp-up activities at GF Linamar in North Carolina led to CapEx of CHF 48 million, there are CHF 24 million paid for GF. Furthermore, the finalization of the GF Machining Solutions, Biel facility, the new plant in Suzhou in China as well as the new innovation center at GF Piping Systems in Schaffhausen accounted in total for CHF 31 million of the CapEx.

Acquisition outlays in 2019 were minor. The CHF 5 million shown here relates to the acquisition of the Piping Marine business as well as the payment of an earn-out to the former owners of the femtosecond laser business, Microlution.

Eventually, GF was in 2019 able to generate free cash flows before acquisitions of CHF 137 million, only slightly below the figure from previous year.

On the last slide, we summarize a few important figures here. Despite the challenging business environment, and our net debt continued to decrease to CHF 232 million. However, due to the lower level of profitability, the net debt-to-EBITDA multiple increased slightly to 0.6x and remains at a solid level. The return on invested capital before one-offs decreased to 15.3%, down from 22.4% in 2018. The decrease was almost entirely caused by the lower profitability. As a result of the solid balance sheet, the continued strong free cash flow and the intact fundamentals, the Board will propose a dividend at previous year's level of CHF 25 per share.

The headcount decreased by 249 people, the impact from the Herzogenburg divestment was CHF 248 million. As part of the ramp-up of the business, GF Linamar had to increase staff by 80. And operationally, GF reduced staff by 180 to adapt to the lower business level.

Let me now finally summarize the financial results. Despite the economic headwinds, the ongoing transformation of the Casting Solutions division as well as the lower profitability in Casting and Machining Solutions, Georg Fischer was in 2019 able to further strengthen its already very solid balance sheet. We increased our equity ratio from 41% to 43% and further boosted our cash and cash equivalents position to more than CHF 0.5 billion. This was facilitated on one hand side, by the solid Piping Systems business, but also by the good free cash flow of CHF 137 million, only slightly below previous year.

The free cash flow, the solid balance sheet and the favorable strategic position of the GF group were the main drivers for a decision to maintain the proposed dividend at the level of previous year, even despite being temporarily low our -- above our indicated bandwidth for the payout ratio.

Thank you very much for your attention. I'll now hand over the word 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 now turn to Slide 30. Current events makes the visibility of the month ahead very challenging. Rate tensions, political instabilities and the recent corona pandemic clearly influenced our Asian business in the first quarter, and most likely will have an impact on other regions in the upcoming months. However, we are confident that the current exceptional situation caused by the coronavirus will pass and that we will return to a more normalized business. Therefore, it is far too early to give a guidance on the full year. Also, we can't yet quantify the impact on quarter 1 and quarter 2.

It is clear that we have to improve our capability to respond to the fast changes of the world. Therefore, we have started an agility program, focusing on the core elements, operational excellence, lean processes in our production facilities, sales proficiency and on our cost structures.

These initiatives in 2020 will set a solid base for a new GF strategy cycle 2025. They will complement the already initiated structural measures at GF Casting Solutions, with the ambition to sustainably improve future results, and thereby bring our performance back to our strategic targets.

GF will continue with its implementation of strategy 2020, and thereby focuses on innovation and operational excellence. The fundamentals of our business remain intact. Our innovation focus on solutions for clean water or less CO2 emissions and lighter components and for more energy-efficient processes, these mega trends remain key pillars of our business. Sustainability is an integrated part of our daily activities.

Let me shortly summarize 2019: Resilient GF Piping Systems against market headwinds. Transformation of GF Casting Solutions, well on track. Strong focus on innovation and digitalization in all divisions headed by our Machining Solutions division.

GF is well positioned in its markets as a technology leader.

With that, I would like to conclude our presentation. We are now ready to take your questions. Thank you.

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Questions and Answers

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Martin Flueckiger, Kepler Cheuvreux, Research Division - Equity Analyst [1]

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Martin Flueckiger from Kepler Cheuvreux. I've got 3, and I'll take one at a time. Just going back to your comment, Mr. Müller, on the coronavirus and the situation in China, Asia overall and now increasingly also in Europe. I know we all don't have a crystal ball, but what do you see on the ground now, particularly in the second half of January, first half of February? What do you see? What kind of magnitude theoretically talking about, at least in terms of scenarios? And was there -- was it just Casting Solutions and Machining Solutions impacted, which I would have assumed to be affected the most or was it also Piping Systems? That would be my first question.

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

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Thank you, Mr. Flueckiger. The coronavirus, as said in our outlook, is obviously the topic at this point of time. Our facilities in China have been ramped up, beginning with the 10th of February with an extended holiday season requested by the government. It was obvious that we could not resume our production in the last weeks in fall. So on the 10th, we started out of our 30 companies or 28 companies, 20 production sites and 3,000 people in China, we started with the first ones in that week. And it took us 2.5 to 3 weeks before we had all our production facilities, at least back to operational.

That back to operation doesn't reflect the normal operational level. We still are missing people which are banned to travel, which are still in quarantine. And so therefore, we assume that we have approximately 80% of our people back in our facilities. That means that February was a very subdued month where we assume that business was on a level of 25% to 30% only.

We do not expect that March is fully recovering since we are also going to see a slowdown in the businesses. And since we don't know whether this impact of the coronavirus is ending at that point of time, we're also going to assume that Q2 will be required to fully recover and to get back to normal operations.

But also, as you correctly said, we do not have a crystal ball, and therefore we can only be pretty vague on whatever has to be expected. We trust know that in case that full demand comes back, our companies are now ready to deliver at the level as it was expected. First, it is important that our people have, especially in that regions where we have the high outbreaks of the coronavirus, that our people stay safe.

It is -- which kind of scenarios? It is a good question. Otherwise, if we would have the answer to that, we would have given an answer in our outlook.

Which of our divisions are impacted? For us, China is a very important market, approximately 1/5 of our business is being realized in China. And all 3 divisions are present there. And for all 3 divisions, it is one of the largest markets as a single country. So therefore, all 3 businesses have been affected in the month of February.

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Martin Flueckiger, Kepler Cheuvreux, Research Division - Equity Analyst [3]

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Okay. Coronavirus and car market is sort of interconnected these days with the China situation. But just leaving corona aside for a while, it's not just the China car market, which was in the doldrums, at least as far as I've been reading. But also the European market has been quite difficult. My understanding is German car production was also quite challenging to say the least.

What are you seeing there? What are your customers telling you also in terms of outlook for at least the first half, if not the entire 2020? That would be my second question.

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

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The German or the European car market most likely will remain in a subdued situation during the course of the first half of 2020. I don't think that it is time-wise correct now to guess on the second half of 2020. What we see is the strategic transformation going to -- brings a lot of, let me say, consumer hesitations with it. Now the transformation towards this new kind of technologies, each variant in cars, that has actually disrupted the market in the year 2019, and it seems so that it continues to disrupt the markets in the year 2020. We have seen a rather weak start into the year in January. The data have been already published and also we have been double-digit down in the European markets at the start of this year.

So yes, it is a challenging environment and this is also one of the reasons why we have decided last year to refrain from the German production site or to relocate our German production site for lightweight components from there over to our Austria and also to our Romanian sites. That was also to adhere to the reduction in demand. And as we have said also during half year conference that we have been down in that specific facilities up to 30% in sales, that is somehow reflecting exactly the situation what we have seen in Europe.

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Martin Flueckiger, Kepler Cheuvreux, Research Division - Equity Analyst [5]

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Okay. And then third question, just sticking with the Casting Solutions for a moment. If I understood you correctly, Mads, you were talking about ramp-up costs of CHF 16 million in North Carolina GF Linamar, is that correct?

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Mads Joergensen, Georg Fischer AG - CFO and Head of Corporate Finance & Controlling [6]

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Yes.

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Martin Flueckiger, Kepler Cheuvreux, Research Division - Equity Analyst [7]

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And what's the -- how much incrementally is that versus last year? Was that the same? Did I understand that correctly?

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Mads Joergensen, Georg Fischer AG - CFO and Head of Corporate Finance & Controlling [8]

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It was exactly the same.

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Martin Flueckiger, Kepler Cheuvreux, Research Division - Equity Analyst [9]

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And what is your expectation for 2020? Is it going to be stable or is it going to be down, these ramp-up costs?

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Mads Joergensen, Georg Fischer AG - CFO and Head of Corporate Finance & Controlling [10]

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We expect that the cost would go a single digit. We expect breakeven in the fourth quarter of 2020. It is ramping up the big series at the moment and Andy has presented the Ford F-150 Magnesium cross car beam is being ramped up at the moment and that would definitely have a positive contribution at the end of the 2020.

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Unidentified Analyst, [11]

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Also 2 to 3 questions from my side, please. The first one would be on the automotive business. I mean, you did the divestment of 2 production sites because you stated they are strong alone. Why is it not the case for the whole division?

Second question would be, please, on the cost side and your organic sales are down in Automotive, close to 10%, in Machining 7.5%. What is your strategy on the cost that -- are you waiting and if demand is not picking up, you will reconsider the cost base in summer? Do you have room to save costs, what could be the magnitude?

And third question, just housekeeping. You mentioned in the CHF 22 million Casting Solution EBIT, you had one-off costs in brackets of [CHF 16 million] and the other CHF 24 million, if you just can remind me what you mentioned here again?

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Andreas Müller, Georg Fischer AG - CEO, President & Head of Corporate Development [12]

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Thanks a lot. The Automotive business, if you conclude what we said last year that we're going to refrain from the iron casting component market for passenger cars in Europe, that was also mainly driven that competitive differentiation in that segment is rather complex at this point of time. And it has an over demand and flexibility of management, owners is higher in regards to negotiating -- restructuring concepts to negotiating flexibility in the workforce. And therefore, we assume that those ones have a better cost structure. You may remember, we also said that the corporate costs can't be hardly borne by these companies, at least in regards, if you would like to achieve profitability as we want to do with 9% to 10% of return on invested capital from 20% to 24%. That would have been the main reasons.

And these main reasons remain valid. And it was the absolute correct decision to refrain from this iron casting business in Europe and focusing on lightweight component business. The lightweight component business is a different kind of business. What we do is we have centralized development of body and structure components. We have a centralized mold technology center in Europe. We also have now a mold technology center in our Asian country, in Suzhou just opened as shown. So we have a strong focus on an expansion of the value chain.

The picture we have seen in the presentation was also the steps after the cars process where we have now a fully automated production and assembly process where we had more than 140 components, for example, to this cross car beam member. So we have, by far, extended the value chain and believe that this is the right strategic focus. The complexity of these cars -- lightweight car components in magnesium or aluminum are by far higher than the ones which you would have on iron casting. So we believe that we can make a difference and also leverage in economies of scale.

You're going to ask about the cost base. With the closure of our Werdohl facility, we're going to relocate approximately 300 people from Werdohl to our sites in Austria, but also to our sites in Romania. And due to the current situation, we're most likely going to do this job without -- or this relocation without any increase at the receipting companies in headcount. So that can be digested by operational excellence, by lean processes, by optimized production, and therefore we can lower cost base.

We still have in all our companies a certain portion of flexibility via leased employees, but also we can make use of the instrument, short-time work. If you're going to ask us how much more flexibility is given to adhere to the new set of or to the new level of utilization, we still have flexibility in that one.

The CHF 22 million operational result in Casting Solutions, yes, you're absolutely correct, is including nonrecurring or partially nonrecurring items, not in the year 2020. We have to be very clear on that one, give approximately CHF 23 million of our Werdohl site, operational loss caused by the less efficient processes, but also by the very subdued orders we had in the first half and then in the second half and also by the ramp-up costs of our Mills River facility.

So overall, there is an impact of CHF 40 million, you can say, in the mid-term, nonrecurring costs. 2020, you still see this kind of cost in our Werdohl site, but we also may not at this magnitude. It depends a little bit on the progress of the closure, but also you're going to see some cost of them recurring in the first half in our Mills River facility.

Even so that this Mills River facility is -- as you may already know once again in a new situation where we could not improve, but we have stated in the half year conference that we have extended the Mills River facility. Since we have been successfully acquiring new orders and we have invested this year approximately CHF 50 million in this site, and we have already inaugurated the second phase or the Phase 1b as we call it internally in our site there, and that drove additional costs. For example, such a cross car beam member has to be start before start of production being first time produced 12 months ahead of time.

So we have already produced now these components. They are going now for sampling. They are now in a prototype version, and you have to have your people, you're going to have to have your production equipment and you've got to make a full run on these products before you can deliver these products in final to your customers. You do know about it. And we have spoken many times about that is ramping up the facility. It's a cumbersome process when it comes to profitability.

On the other hand, the other alternative is to buy a running company, which we couldn't expect at this time. And that's the reason why we're going to have to accept this cost. But we believe now it's a strong footprint, what we have set in Americas, in the U.S. with products somehow pioneering the large structural components made out of aluminium and magnesium.

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Unidentified Analyst, [13]

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It's not the first time this question has been asked, but it doesn't matter. The ROIC target is 20% to 24%. Of course, this is nicely calculated without any goodwill because this has been wiped away with Swiss GAAP FER. Do you have an internal shadow accounting, at least where you calculate the real number, including the goodwill you had accumulated in the past? Because, of course, you have put this money on the table, you spent it and you need to generate a return on it. And in order to be honest with yourself, you should calculate it including those goodwill. So do you have a translation of this 20% to 24%, including those goodwill numbers? What would they look like?

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Andreas Müller, Georg Fischer AG - CEO, President & Head of Corporate Development [14]

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First of all, what has to be marked or which has to be underpinned is when we have changed from IFRS to our Swiss GAAP FER accounting, we have increased the targets of our capital ability of our return on invested capital.

For the second question, I will hand over to Mads so that he can give you some ideas about the goodwills, which have been accumulated over the last years.

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Mads Joergensen, Georg Fischer AG - CFO and Head of Corporate Finance & Controlling [15]

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We were constantly looking at this number, of course. And if you look at it from an IFRS perspective, we're probably looking at a 3 to 4 percentage point lower figure. And as I said, what we're comparing here, the corridor that we're comparing to the actual numbers is an apple-to-apple with the Swiss GAAP FER.

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Unidentified Analyst, [16]

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Okay, 3% to 4% lower. And what number do you take to calculate? Is that the EBIT or is that the NOPAT?

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Mads Joergensen, Georg Fischer AG - CFO and Head of Corporate Finance & Controlling [17]

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It's the net operating profit after taxes.

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Christian Obst, Baader-Helvea Equity Research - Analyst [18]

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Christian Obst from Baader-Helvea. I have a question concerning cash flow. It's a little bit -- can you give us an idea what kind of CapEx do you spend or intend to spend for your Strategy 2025? And can you give us also now some kind of an idea of what you'd like to achieve in the next 5 years? So having a longer-term outlook and not looking at short-term corona impact. Or will you give us some kind of an update on your new strategy during the year?

Do you see some ongoing reduction of working capital is more possible in the balance sheet in the years to come? Can you deliver more cash flow? And what kind of free cash flow target do you have when you are fully have ramped up your facilities in the U.S. and back on some kind of normal operations?

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Andreas Müller, Georg Fischer AG - CEO, President & Head of Corporate Development [19]

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That's quite a few questions and a few of those questions obviously tied down to the situation what we're going to forecast for the current year, which we said already is quite complex at this point of time. So therefore, it would be just not fair to give an unsolid estimate on what's going on this year.

The situation when it comes to optimizing our balance sheet items, yes, that's an ongoing project. That goes also underneath this agility program, so we have addressed a couple of these net working capital initiatives, which is a constant endeavor in a corporation such as GF.

The Strategy 2025 as set will be elaborated in the year 2020. So therefore, it would be by far and by all means too early to give a statement about what would be the capital expenditure requirements over a period of 5 years. On average, what we, as GF, have invested is in the range of CHF 160 million to CHF 200 million.

Yes, we had some elevated levels due to the fact that we had built a building in Biel, where we have decided to do it on our own. The same is valid that we have set up a new light metal casting facility in North Carolina, which was also quite a severe or quite a substantial amount, which we have invested there. So therefore, it's you have to be very fast. So we will actually disclose that kind of figure with the Strategy 2025, which most likely will happen in the early stage of 2021.

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Tobias Fahrenholz, MainFirst Bank AG, Research Division - Director [20]

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Tobias Fahrenholz from MainFirst. I would have 3 questions blocks, starting with the first. Looking at structural growth opportunities in the automotive business, could you first clarify, please, if you're more or less completely out of the volatile trucks business? And if you also expect further business in-sourcing of some of your clients during 2020? And what kind of additional revenues you're seeing in Linamar this -- next year?

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Andreas Müller, Georg Fischer AG - CEO, President & Head of Corporate Development [21]

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You're completely right. We are nearly out of the rather cyclical truck business. With the divestment of the last iron casting facility in Herzogenburg, we have now withdrawn from the truck market nearly complete. We still have a minor part of lightweight components, which go into the truck industry, but -- and a little bit in China, but it is really rather minor. So we can say, yes, we are now to a level which is insignificant to the overall business of casting solutions.

Further in-sourcing of customers, I think we have been marked in the year 2019 by in-sourcing of customers. That's also one of the reasons why we have been underperforming, let's call it that way, the market last year, as you have seen with the growth development since we had also some growth in the U.S. We have had, obviously, an accelerated decline in Europe, which is perfectly in line with our strategy.

We once in a while said a couple of years ago, we want to focus on promising future technologies, and we consider the body and structure components being the next or the future business markets. Seeing this market segment for GF has globally grown by 4%, this is reflecting exactly the need for more lightweight, complex components in the car industry. And I think there's a lot more to be replaced.

This part of the car industry is growing 8% above the fundamental growth of this industry. At least for the last 2 to 3 years, we have seen that, and we also assume that it will continue in the years to come. So we believe that this are also components which are not, let me say, exposed to potential in-sourcing of customers.

We also address this body in structure components to a much larger customer base than we did that in the past with our, for example, iron casting business, which was much more focused on the German OEMs only.

Additional revenues, yes, they will come. But as said, we also are not eager to replace products where we believe now the future is not right. So our focus is on these body and structure components. So we will not desperately go for and after such products, and that's the reason when we closed the door or relocated the door foundry to Romania and to Austria, only a part of the sales will be relocated. As we have seen the drop last year of approximately 30% in this entity, which was an in-sourcing topic, that will not come back. And we are not after these quantities because we don't want to have this product in our product ranges for the future.

So additional revenues, yes, that may come to the U.S. facility. The U.S. facility intends to increase the sales next year in the range of approximately CHF 40 million -- CHF 40 million to CHF 45 million. And that's the additional sales what we're going to expect in this midserver facility.

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Tobias Fahrenholz, MainFirst Bank AG, Research Division - Director [22]

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Okay. And then maybe coming to piping. You once highlighted the cruise ships business as a quite interesting niche business, I think, around 10% of revenues. Could you give us a figure here what it was in 2019? And do you see any structural weakening after all these corona pictures or whatever? So what's your view on this?

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Andreas Müller, Georg Fischer AG - CEO, President & Head of Corporate Development [23]

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I think that would be a little bit quick. If you would already have now an impact on the ships to be built in a couple of months from the coronavirus, will it have an impact? I don't know. I can't tell you. At least at the moment, no one may -- would join the Diamond Princess.

But the 2019 ship marine market was more or less flat in the Piping Systems division. We have last year developed and in the late of 2019 launched a few innovations, which are going to address the weight on these ships. And what you have seen, this breakthrough fire -- or flame retardant piping systems is mainly a piping systems, which you're going to find in the future then on ships. So this is a very interesting application, not only on ships, but also on ships. It may go also into critical buildings, large office buildings, but also data centers. That's the request, for example, this flame retardant businesses.

It is a business which is driven by innovations. And it is also driven by the sustainability aspects. You may -- it may sound a little bit odd, but the ship need to become lighter in the years to come. Therefore, the shipyard is going to search for alternative materials. And obviously, the plastic piping systems are a very good element to substitute iron pipes to many reasons. One is the lightweight. Secondly, it is not corrosive. And therefore, it has a much longer lifetime on a ship, which is constantly exposed to salty air.

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Tobias Fahrenholz, MainFirst Bank AG, Research Division - Director [24]

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Then the last one, if I may, on -- for Mads. Could you give us a sales and cost split for your major currencies? So I guess, you still have some more cost in Swiss franc?

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

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Could you repeat the question, sorry?

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Tobias Fahrenholz, MainFirst Bank AG, Research Division - Director [26]

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Could you give us a split how much sales and costs you have in each of your major currencies?

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Mads Joergensen, Georg Fischer AG - CFO and Head of Corporate Finance & Controlling [27]

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We have, on the top line, 30% of our sales is euro. We have about 17% U.S. dollars. Sales, 5% Swiss francs as the structure. If we look at it from an exposure point of view, which is probably is in your interest. If we take the cash flow exposure, we are 77 million euros/dollar -- sorry, euro/Swiss franc long. The biggest position we have is 228 U.S. dollar/Swiss franc by long position as well. That's mainly because of the machine tool business. And we have an about USD 89 million short position. That is the top.

And we run a very efficient hedging program. We use the normal forwards. And of course, that is only a short-term resume. But we, of course, always trying to do is to get a better operational hedge, which we have done, especially in the area of euro. If you go back to the big crisis in 2015, the currency crisis in January there, the exposure was substantially higher than it is today.

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Michal Lichvar, Bank Vontobel AG, Research Division - Analyst [28]

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Michal Lichvar from Bank Vontobel. I would have several questions. First one regarding your outlook. Can you just clarify what do you mean by bringing Georg Fischer's performance towards strategic targets? So towards this 9% to 10% margins, EBIT margins. Is this for 2021? Do you expect to be in this range in the year 2021?

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Andreas Müller, Georg Fischer AG - CEO, President & Head of Corporate Development [29]

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Let me start to say barring unforeseen circumstances, yes, we assume that 2021, GF will resume back to its strategic corridor.

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Michal Lichvar, Bank Vontobel AG, Research Division - Analyst [30]

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And afterwards, you will come up with the 2025 targets for growth rates and margins?

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Andreas Müller, Georg Fischer AG - CEO, President & Head of Corporate Development [31]

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Exactly.

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Michal Lichvar, Bank Vontobel AG, Research Division - Analyst [32]

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That's clear. Then a question regarding the coronavirus, I also have to ask one question regarding this. In terms of the Precicast business that's located in Ticino area, if I'm not mistaken. Are you taking maybe some contingency measures if the situation accelerates there in terms of new cases in Italy and Ticino?

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Andreas Müller, Georg Fischer AG - CEO, President & Head of Corporate Development [33]

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First of all, we're going to adhere, obviously, to rules and guidelines being published by the state of Switzerland. We have, of course, a crisis team in our organization established, which kind of focuses on measures and means in all our companies. So all our companies have a set of guidelines, which they have to abide at this point of time. So yes, it is -- it goes along with these increased hygienic approaches all over. And obviously, also there's some restrictions in traveling. Yes, we monitor the situation, but we stay somehow calm on this topic. We do the utmost to safeguard our people.

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Michal Lichvar, Bank Vontobel AG, Research Division - Analyst [34]

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So you don't see it as a risk for your business that you cannot supply your customers?

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

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It depends which scenario you're going to think about. At this point of time, we are confident that the situation remains controlled. And therefore, we do not see a risk. If the situation gets out of control, we're going to have to rediscuss this topic.

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Michal Lichvar, Bank Vontobel AG, Research Division - Analyst [36]

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And then last question regarding Machining Solutions. In 2019, your customer services business was substantially down. Is there any kind of -- is this a leading indicator or indicator for capacity utilization of your machines that customers use? And does this mean that customers used less of your machines in 2019, and therefore, they will probably buy less in 2020?

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

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The machining customer service business was down by approximately 4% last year. So that was below the decrease or the decline of the overall division. A part of this decline is also on the account of the reduction of raw material prices, for example, there's also a part of it is consumables. So which is, for example, a couple wires that had also a minor impact. So maybe 1 percentage point is to be allocated to the reduction of the consumable prices.

So overall, the customer service business was okay. It was obviously also affected, but it was not that much affected as this machine sales have been affected. So therefore, we are confident that the installed machine base was utilized.

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Unidentified Analyst, [38]

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I have one question concerning the liabilities related to the divestment of the iron foundries. Can you remind us about the liabilities you have in your balance sheet so far? Was that divestments and the payback terms?

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Andreas Müller, Georg Fischer AG - CEO, President & Head of Corporate Development [39]

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Thank you. I will hand over this question to our CFO.

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Mads Joergensen, Georg Fischer AG - CFO and Head of Corporate Finance & Controlling [40]

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In connection with the transaction we did in December 2018 and also disclosed at the end of the year, the liability we had was around CHF 61 million. At the time of the transaction, we also granted the company an operational credit line of additional CHF 20 million, which was drawn during the course of the year. At the end of the year, you can find it in the notes, we have an exposure of CHF 75 million financial liabilities in the balance sheet. That contains the before mentioned the vendor loans, the operational credit. We also issued a credit in the area of -- it was a bridging loan for which another CHF 3 million was drawn.

Due to the impact from the German automotive industry, the iron foundries, of course, impacted as well. And the payment terms have been extended, which led to a lower net present value, and therefore, we did a partial value adjustment on these loans. That's the reason, because of the extended payments.

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Unidentified Analyst, [41]

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Did I get that right that in China, you assume that now about 20% of your capacity -- production capacity is on stream or was that my imagination? I mean this market is very important for you, so maybe can you tell us a bit, again, how you see the situation there right now?

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

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Right now, the situation, what I described was the overall assessment of the month of February. So we assumed 25% to 30% of our production has been utilized in the month of February. That is caused by, first of all, a delayed start after the Chinese New Year. On the 10th, the first facilities of GF resumed business, resumed business on a very moderate level on an average of 40% to 50% in the first week when this started. A few of our companies are back now to 70% to 80%. A few of our companies still are in the lower digit numbers in the range to 40% to 60%. So overall, we assume that the month of February was down by approximately 70%.

The outlook, as I said, is that we expect some recovery in March. That this will get back to normal business, we do not believe, to be honest. At this point of time, we have call offs, and which can give us a little bit of idea where we're going to travel. So we see a stronger March but we don't see a full recovery, for sure not. And we believe that we need at least Q2, and we need a recovery or we need at least a reversing situation in the coronavirus.

Otherwise, we do believe that the business will not resume fully back because we have seen consumer spending was quite subdued. I think the first statistics have been published just days. We all have watched them. We all have been astonished. I have to say that certain consumer products have been dropped that substantially. I have seen a statistics this morning that car sales may -- is coming in, in February only on the level of 10%, 12% of a normal month, still very little figures. The first 6 -- the first half of the month of February, I think it was down by 92%, 93%. So this is quite substantial.

But yes, we believe and we are confident that there is also some rebounding effects coming along with it and all of that can obviously be compensated at the time has gone and also the labor is gone. You cannot just endless postpone and then recover all of that.

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Unidentified Analyst, [43]

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Then let me summarize maybe the markets about piping. I believe quite a stable market still. On maybe in China, for sure, subdued level for sure but America doing well. Europe may be a little bit lower. Then Casting Solutions, I don't see a recovery all over globally. I mean China, very difficult, as explained.

We were talking about these 2 segments, but about Machining Solutions, what do you see there? I mean except China there, it might be -- for sure, it's very difficult right now. But I mean you had a very good year, strong year in the Americas, especially with aero things. And -- but I mean, that's tough pretty sure. What do you see there?

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Andreas Müller, Georg Fischer AG - CEO, President & Head of Corporate Development [44]

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Also here, visibility is -- we have seen a recovery in the last month of 2019 in the machine tool business in China compared to a quite subdued level of the year 2018. As Mads mentioned, we have recorded in December a 20% growth in China. And that may well have continued if we would have (sic) [haven't] seen the situation with the coronavirus. So we believe now there is a market and it is and it will remain one of the largest markets for machine tools. So we're going to believe that China will recover.

China is also moving towards higher quality products, higher precision requirements. We have seen that many times last year when we were traveling around China that customers of ours have changed from rather low precision to high precision. A typical example is a gear for a window elevation that was -- it's a major customer of us in the Shanghai area. This customer has given up on producing these gears for windows of cars because he said this is too less of a precision product, this is too less of a quality demand. It's not so much a higher-value business. That kind of business is going to move away from China.

They go to Vietnam, they go to Cambodia. And this company is now focusing on high-precision microgears, microgears for all sorts of applications. One of the application, it was quite an amazing one, simple one. One of this robot vacuumizer, which you may have at home. Those ones they have. If they want to have a high durability, they're going to have to have a very high-precision made gear, which is by all means much more precise than a gear which you would have for window elevation in your car.

And so we're going to start to focus more on that. And that can actually calls then for a kind of machine tools GF can supply.

The same is valid for the whole optical electronic industry. If you think about cars, autonomous-driven cars, then you're going to have up to 8 already today installed cameras in a car. If you have a parking assistant, if you're going to have a lane control, that will actually even continue. So you're going to have more precision parts required for opto electronic detection in all areas, not only in a car, but also in other application devices. And this is exactly the sweet spot where GF machine tools can make the difference.

This is also a part of our laser texturing. Laser texturing is being used to make a super accurate finishing or special texturing to, for example, camera lenses. So this gives opportunities.

It is complex to guess on the American market at this point of time. You may have seen that also the American market has been subdued, particularly in the second half of the year 2019. Whereas this market remained quite stable and strong in the first half, it was rapidly actually decreasing its order intakes in the second half of the year.

Not only GF, I'm talking now the overall industry, not that we're going to mix the figures. GF actually had quite a strong second half with their deliveries and also their order intake on the aero engine components. But the overall market is -- was rather subdued in the second half and so the year-end of even in the Americas with its reduction in order intake of 19% in the industry.

But here, we have also to have a look back to the year 2018. 2018 was rather an elevated year. So 2018 was above average in Americas when it comes to machine tool spending. So is now 2019 more the normal year? To be questioned, but we have seen, of course, that the order intake also have gone down. So the confidence in the capital goods spending has been slightly reduced.

Europe, yes, you're right, Europe was affected and we have seen that effect already in the second half of 2019. We have seen Germany spearheading this development. In the last 3 months of the year, we have seen double-digit decreases of order intakes in the German machine tool industry, and this is actually also indicating now that GF was affected by the German market.

On the other hand, I just read yesterday, there were some in a positive and optimistic mode. The German capital goods producer actually assumed a slight positive development now for the first 6 months, which is indicating a good sign. And I think we're going to have to give that also, let me say, a certain credibility that businesses can come back on a higher level.

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Unidentified Analyst, [45]

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If I may, one last question regarding onetime effects, restructuring costs. You mentioned some costs at Werdohl and the agility program might cause also some costs. What do you expect there for this year?

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Andreas Müller, Georg Fischer AG - CEO, President & Head of Corporate Development [46]

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The agility program comprises also the structural change of our Casting Solutions division. So this relocation and transformation and the adaptation to the new setup of the Casting Solutions division is included. And we have said that it will be approximately CHF 17 million additional one-off costs, 2020.

Obviously, it comes along with the operational losses of this entity, which we are considering somehow nonrecurring, particularly when we have closed down the facility. But until we have closed this facility, as to the casting part of it, the foundry part of it, it's a partial closure only, not a comprehensive one, then we're going to see a reduction of these costs. But it will affect and impact also 2020.

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Unidentified Analyst, [47]

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You mentioned that within Machining Solution, the ICT-related business, I think, was down around 15% last year. Is that correct? And could you tell us how much sales do you actually do within the ICT business? And is it -- its profitability, is it above average within Machining Solutions?

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Andreas Müller, Georg Fischer AG - CEO, President & Head of Corporate Development [48]

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I think profitability is, across the various market segments, pretty much in a similar range. So the most profitable may -- is the aero engine parts segment, which is approximately CHF 250 million of the Machining Solutions division. The ICT segment was the largest segment in the past, it has dropped over the last 2 years. And therefore, it is now slightly below the -- on average, on the same level as the aeroengine business.

The ICT, yes, you're right, has been down, and it has been down also mainly due to the trade tensions between the U.S. and China because that has taken away confidence of the suppliers. If you are a supplier to one of the Apple products, you have been maybe reluctant to invest in the last year until you definitely know whether this production of these mobile devices will still be in China or whether it's maybe being relocated to another countries, such as Samsung has announced. Samsung is actually withdrawing their production from China and allocates their production or relocates their production to Cambodia, but also part of it to India. I think in the news, it was mentioned, that is now one of the biggest facility in India to produce smartphones.

It is changing the overall industry. On the other hand, I have to say, I have seen that many good customers of us there, and they are very confident. Of course, there have been somehow bounce back on this reduction of volumes, but they are still very profitable. They're cash rich. They're going to go for new ideas. They're going to embark to the next level of quality. It was impressive.

We have seen many customers last year, which are now automizing fully robotic process. Their facilities, it is actually without any people any longer in their facilities. I think there is a solid, strong base, which will provide further ICT components. And obviously, we also supply to other companies, which are going to produce for all kinds. We're delivering to the Chinese, we're delivering to the Japanese, but we're also delivering to the Korean ones.

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Unidentified Analyst, [49]

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I mean anecdotal evidence suggests that there is a pickup at least at the semiconductor. Do you see that as well in your business now?

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Andreas Müller, Georg Fischer AG - CEO, President & Head of Corporate Development [50]

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The semiconductor business is quite an interesting business. What we observed is that there is a certain repatriation, and this repatriation also drives an additional increase of [effect] for semiconductor products. So what we have seen now is the American-based companies is going to set up new facilities across the world, but not in China. And so we do see the Chinese also government-driven, have large investments in semiconductor factories. And this is mainly a business where we observe in our Piping Systems division that we see that this is actually currently boosting the business in a situation where demand remains pretty much on the same level, but you're going to see new facilities in China. And you'll see new facilities from Ireland to Israel to Americas to the U.S., all over. And this is -- it's quite contra-intuitive situation what we're going to see.

Yes, we also believe that in the ICT business, it is all about innovation. We said it many times, innovation is the key, whether this business is going to inspires us to buy these devices. And I think we're going to have to see more to come. You have seen the cameras was a major driver for new devices, which all made us to buy new device because we suddenly enjoyed the better quality of the pictures. And such things is going to drive such innovation, drive the demand and also drive later on the demand for machine tools.

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Unidentified Analyst, [51]

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So if there is a recovery in semiconductors, you will mostly profit in piping?

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Andreas Müller, Georg Fischer AG - CEO, President & Head of Corporate Development [52]

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That's it.

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Martin Flueckiger, Kepler Cheuvreux, Research Division - Equity Analyst [53]

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Yes, Martin Flueckiger. Just a couple of follow-ups. Sticking with pipings, please. So you've just confirmed that semis is an important driver for top line this year, and I guess data centers as well is going to be a growth driver. Although both businesses might, I think, are pretty small for you. But how about the rig count in the U.S.?

If I remember correctly, the U.S. shale gas business used to be an important driver, at least, F 2017, '18. I was just wondering what's happening there for you?

And across the Pacific, also the Greater Beijing area, you had this major project that you were participating in switching from coal to gas heating. What have you been seeing there? That would be my first question.

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Andreas Müller, Georg Fischer AG - CEO, President & Head of Corporate Development [54]

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The microelectronics segment in the Piping Systems division is not that small. It is above CHF 100 million. Its data center is still at its early stage. So it has its birth a couple of years ago. So we're going to see whether substantial growth rates in this segment, but we have enlarged their segment focus, and we're going to provide our solutions. And also this COOL-FIT 4.0, what you have seen is a typical product, which kind of goes exactly into this data center.

The fire retardant piping systems is also a second very important product, which we'll boost in 1.5 to 2 years. This market segment in addition because it is a very important component to be allowed actually to install also in critical safety areas, this kind of piping systems.

So it is, yes, small, but the segment is normally going to start small, and then we're going to intend to make them bigger. And this is for Piping Systems.

The [share gas] business in Americas was not the predominant gas or the predominant end market for our businesses. In Americas, we are very strong in the utility distribution of gas. So we are a market leader, actually, in Americas, with gas and meter systems and house collections for households when they're going to get plugged to the gas supplies. And that's actually quite a stable and quite a solid business, which we have seen also growth rates last year.

The situation about the industrial end markets, yes, you're absolutely right, they have been affected, but it's not only the oil and gas. That's also a few other adjacent business fields, which have been affected last year in the U.S. So we have seen quite a mixed picture.

So we have seen strong -- on the one hand side, strong industrial businesses on the high-end product ranges for semiconductor, for example. We have seen water treatment facilities, water rehabilitation facilities, which was quite strong last year. We have seen a subdued development in the oil and gas supply industry, which might include then also that shale gases, but predominantly, we have a strong business foothold when it comes to the connections of houses in the U.S.

Then coal to gas, yes, you're right, I mentioned that the coal-to-gas business is still on hold. We haven't seen any recovery of this business in the year 2019. So overall, the utility business in China was also the main reason why the Chinese Piping Systems has been down last year.

In controversy, the industrial business of Piping Systems in China has been up, and that is mainly due to the fact that also sustainability drives major trends. So water treatment is a very important element, also when it comes to landfill, for example, groundwater recovery systems, that's all application fields. But also process technologies, industrial process applications or process liquids, which had to be flushed or cleaned. So this is a -- was a major driver. So that business was actually the industrial business of Piping Systems for us developing quite good in the year 2019.

So it was, as you correctly stated, the coal to gas, which has left a subdued utility business in China.

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Martin Flueckiger, Kepler Cheuvreux, Research Division - Equity Analyst [55]

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Okay. And then my final one, I guess, is one for Mads. Following the Swiss tax reform, I think that was one of the reasons why the tax rate went down that you mentioned. What is your best guess? I realize there's various components driving it, but just going forward for the next 2 to 3 years, what's your best guess for sustainable tax rate?

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Mads Joergensen, Georg Fischer AG - CFO and Head of Corporate Finance & Controlling [56]

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Thank you for the question, Martin. You're right, this year was positively impacted by about 5 percentage points down to 15%. And we actually expect that it will, in the next 3 to 4 years, come back to the level around 20% again and stay there.

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Unidentified Analyst, [57]

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(inaudible)

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Mads Joergensen, Georg Fischer AG - CFO and Head of Corporate Finance & Controlling [58]

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No, probably steep up. And then as the assets will be amortized, we will probably pendle around 20% mark, but it will not go gradually. It will go already this year, will start going back again.

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Unidentified Analyst, [59]

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(inaudible)

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Mads Joergensen, Georg Fischer AG - CFO and Head of Corporate Finance & Controlling [60]

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I would say about the 20%, 21%.

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Remo Rosenau, Helvetische Bank AG, Research Division - Head of Research [61]

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You mentioned also that you are looking at the aircraft industry. Perhaps one, the Boeing difficulties, have they affected your sales, your situation? To which extent?

Two, in general, the increase in sales, would you account that at the expense of other competitors? Or is it actually a growing market in this particular segment? And I assume you are driving your sales by technology advantages. How difficult would it be for competitors to copy these features?

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

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Thanks a lot, Remo, for your question. Boeing 737 Max is the LEAP engine. The LEAP engine program consists of 3 jet engines, which is 3 turbines, A, B, C. The A, obviously goes into the Airbus, Boeing and then there's a third one. The effect at this point of time in our machine tool sales is not seen. It is obviously affecting at this point of time suppliers in Americas, want to supply into this jet engine business because, obviously, the Boeing, the [LEAP] was the larger pool -- the largest portion of that one. So that may going to affect them. But at this point of time, it doesn't affect our business. And so our business is rather long term and installed base for these jet engines is already existing.

It is a growing market, yes, you're absolutely right. We see on average a growth of the years to come of 3%, some years a little bit more, some years a little bit less. But it is a constant growing market, and it needs a constant replacement here. So you have also after a certain amount of hours, the jet engines have to be totally refurbished. When you have a total refurbishment, you're also going to have to supply new plates, new plits (sic) [splitter] and this is exactly the business where GF machine tool is going in.

GF delivers with its technology a unique advantage to our customers. It is the focus that we combine the machine tool capabilities with special software, and that actually delivers a higher value to our customers. So it is a strong focus on our customers' advantage that makes it rather hard for competition to enter, and it's not the market where you're going to find tons of competitors. So you're going to find a couple of competitors, 2 to 3, which are in that business, machining, [plits] plates for jet engine components.

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Remo Rosenau, Helvetische Bank AG, Research Division - Head of Research [63]

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Are you earning money with this through 3D print you showed here last year as well? Or is it just a labeling something in the lab, and will come to the market later?

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

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If I'm not mistaken, Mads you correct me, we have approximately sales achieved of just a tad below CHF 30 million last year with 3D printing technologies, and we're going to have a partnership with a company called 3D Systems, where we have jointly developed now new machines. The DMP 350 and the DMP 500, which are fully integrated printing technologies.

Adjacent technologies have been developed, for example, a [CUT 400. A CUT 400] is a wire EDM machine, which is capable to horizontally cut the 3D printed components from a pallet. So I think we're going to offer here integrated solution to our customers. Yes, and it is a business which has to be further developed. So we have the [Amotion] Center, which is the additive production center for Casting Solutions. That's also a company which is located in the Ticino. They focus on printing components for aero engines, but also for energy turbines. And this is a business where we actually offer our customer solutions to this business.

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Remo Rosenau, Helvetische Bank AG, Research Division - Head of Research [65]

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And then the question in the U.S. for this Ford F-150 or whatever. So you have another additional cost this year, but when will you have a nice money earned? Is it the next year? Because you said Q4 breakeven. But is it then ramping up or slowly coming up?

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Andreas Müller, Georg Fischer AG - CEO, President & Head of Corporate Development [66]

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Yes, it is also here, not to be expected that it is done overnight, that full profitability. It is a process where you're normally going to have every eighth year, you're going to exchange a product. In the car industry, that's the normal life span, 7 to 8 years. It depends if you have components, which can't be seen, then it is a bit longer. Sometimes engine components, battery houses, they may going to last shorter or they may going to last longer. So you're going to have to have, let me say, a couple of years before you have a product range running, constantly running before you come to ordinary results. So it will not be like achieving breakeven and from the next day onwards you are at full profitability levels, which we're going to expect to come with this foundry.

So if there's no more questions, we would like to thank for your participation, for your interest in our companies and hope to see you soon. Thank you.