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Edited Transcript of G1A.DE earnings conference call or presentation 17-Mar-20 2:30pm GMT

Full Year 2019 GEA Group AG Earnings Call

Bochum Mar 25, 2020 (Thomson StreetEvents) -- Edited Transcript of GEA Group AG earnings conference call or presentation Tuesday, March 17, 2020 at 2:30:00pm GMT

TEXT version of Transcript

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Corporate Participants

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* Marcus A. Ketter

GEA Group Aktiengesellschaft - CFO & Member of Executive Board

* Oliver Luckenbach

GEA Group Aktiengesellschaft - Head of IR

* Stefan Klebert

GEA Group Aktiengesellschaft - Chairman of the Executive Board & CEO

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Conference Call Participants

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* Akash Gupta

JP Morgan Chase & Co, Research Division - Research Analyst

* Felicitas von-Bismarck

Deutsche Bank AG, Research Division - Research Analyst

* Klas Henrik Bergelind

Citigroup Inc, Research Division - Director

* Lars Wauvert Brorson

Barclays Bank PLC, Research Division - Director

* Lucie Anne Lise Carrier

Morgan Stanley, Research Division - Executive Director

* Sebastian Growe

Commerzbank AG, Research Division - Team Head of Industrials

* Sebastian Ubert

Societe Generale Cross Asset Research - Equity Analyst

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Presentation

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Operator [1]

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Ladies and gentlemen, thank you for standing by. And welcome to the GEA Group Full Year 2019 Conference Call. (Operator Instructions) Also, I must advise that the call is being recorded today, Tuesday, the 17th of March 2020. And without any further delay, I would now like to hand over the call to your first speaker today, Oliver Luckenbach. Thank you. Please go ahead.

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Oliver Luckenbach, GEA Group Aktiengesellschaft - Head of IR [2]

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Yes. Thank you very much, Ramon. Good afternoon, ladies and gentlemen, and thanks for joining us today for our full year and Q4 2019 conference call. My name is Oliver Luckenbach, and I'm the new Head of Investor Relations at GEA. I joined 2 weeks ago and I am, together with my team, very much looking forward to having a very successful relationship with you. With me on the call today are Stefan Klebert, our CEO; and Marcus Ketter, our CFO. Stefan will begin today's call with the highlights in 2019, and Marcus will then cover the financials before Stefan takes over again for the outlook 2020 and our key priorities. Afterwards, we open up the call for the Q&A session.

I would like to start the call today by drawing your attention to the cautionary language that is included in our safe harbor statement as in the material that we have distributed today.

And with that, I will hand it over to you, Stefan, the floor is yours.

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Stefan Klebert, GEA Group Aktiengesellschaft - Chairman of the Executive Board & CEO [3]

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Thank you very much, Oliver, and good afternoon to everybody on the call. It's my pleasure to welcome you to our conference call today. Before I share our view on COVID-19 with you, a topic that is, of course, top of mind of all of us and its impact on our business later in the outlook section, let me start with our performance in 2019.

I'm very pleased to say that 2019 was a year of strong progress for us, and we have delivered what we promised. First, we have implemented a new organization structure and set up a new management team. We have given the P&L responsibility to the divisions team, as we believe to take it away from them was the main reason for the margin decline in the past. Second, we have accelerated our restructuring process and reduced the number of FTEs by 400, half of the total number expected by the end of 2020. Third, we have achieved or even exceeded all financial targets. That makes us confident that we are on track to restore credibility in the capital markets. However, we know that there are many more steps to come. Fourth, we have set ourselves midterm targets for 2022. And we confirm them today despite the temporary challenges posed by the coronavirus outbreak because we remain fully confident about the future growth prospects of GEA, thanks to its healthy fundamentals and its strong positioning within an attractive and generally growing industry. And we will talk about this in more detail later to give you more -- even more confidence in our markets. Fifth, we are on track with our portfolio pruning. End of November, we sold the de Klokslag Engineering, and we are expecting more disposals to follow. All in all, I can say that we have set the grounds for long-term successful development of the GEA Group.

Let me now come to Chart 5. I am pleased to say that we have slightly exceeded our sales and ROCE targets. Sales grew by 1.1% to EUR 4.9 billion versus the initial guidance of a moderate decline. And ROCE came in at 10.6%, slightly north of our forecasted range of 8.5% to 10.5%. Our operating result EBITDA, before restructuring measures, reached EUR 479 million and was at the upper end of the guided range of EUR 450 million to EUR 490 million. Please keep in mind that this number includes around EUR 40 million of negative nonrecurring special charges. This very good performance, in combination with our strong free cash flow generation, was the basis for our decision to propose an unchanged dividend of EUR 0.85 per share.

On Chart 6, I want to share some more information on full year 2019 with you. Let me focus on some key developments. Order intake increased by 0.3% to EUR 4.93 billion and reached a new record level. Book-to-bill ratio stood at 1.01. Sales growth of 1.1% was driven by a strong Services Business, while new machine sales had a compensating effect. EBITDA before restructuring measures, I just talked about on the former slide. So let me come to net income or net loss. Net loss amounted EUR 171 million, mainly as a result of higher restructuring charges and the goodwill impairment on our subsidiary, Pavan.

With that, I hand it over to Marcus to give you more details on the financial numbers.

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Marcus A. Ketter, GEA Group Aktiengesellschaft - CFO & Member of Executive Board [4]

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Thank you, Stefan. Also a warm welcome from my side. Let's continue on Page 8 with some more details on our intake, sales and book-to-bill ratio. Order intake in Q4 2019 increased by 9% to EUR 1.34 billion, which represents a new record volume in the fourth quarter. The growth came from Business Area Equipment, where base and medium-sized orders were higher than in Q4 2018. Also, order intake at Business Area Solutions developed nicely. Here, the driver were large orders. Sales declined by 2.4%, while Service sales continued to grow. New machine sales were down by 4.6% year-over-year. The weakness of new machine sales came from both business areas. At Business Area Equipment, mostly dairy farming with difficult market conditions in the U.S. were the reason. At Business Area Solutions, new machines were almost flat. Strong growth in Beverage and utilities was compensated by negative impact in Food, Chemical and Pharma. Service sales grew by 2.5%, with Business Area Solutions growing a bit stronger as price increases at Business Area Solutions were carried out a bit later during the year.

To sum it up, order intake was very solid in Q4 2019. Growth was driven by the Service Business, while new machine sales growth (inaudible). Now I'd like to draw your attention to Page 9, the development of our Service Business in Q4 2019. Service Business grew by 2.5% to a new record level. In the quarter, Service sales accounted for 32.7% of total sales, which compares to 31.1% in the last year's reported period. As in the prior quarters, pricing contributed to the sales growth. In Q4 2019, the effect from pricing was around 2.5%. To sum it up, our high margin Service Business continued to grow.

Let's go to Page 10, with EBITDA, EBIT and ROCE. As you are well aware of -- from 2019 onwards, IFRS 16 is in effect and impacting EBITDA and EBIT. In Q4, EBITDA came to EUR 150 million, down from EUR 157 million last year. As in the prior quarter, there were the following effects: first, in Q4 '19, we had a positive IFRS 16 effect of EUR 18 million, 1-8, which did not exist in Q4 2018; second, with a headwind of special effects of EUR 16 million net expenses. These 2 effects, in net, was only EUR 2 million. EBIT declined from EUR 97 million to EUR 93 million. The decline was not as pronounced as on EBITDA level. This is mainly due to expiring purchase price allocation expenses on a year-over-year basis. ROCE started to slightly improve quarter-over-quarter. The year-over-year development is still down due to a decrease in last 12-month EBIT, an increase in last 4 quarters capital employed figure and the phasing in of IFRS 16 rights of use assets. To sum it up, EBITDA and EBIT were year-over-year lower due to a very strong Q4 2018. ROCE was lower year-over-year, but slightly improved quarter-over-quarter.

Please follow me now on Page 11 to the full year EBITDA bridge. Our starting point here is EUR 539 million and is calculated from the old definition as follows: starting at an operating EBITDA of EUR 580 million for 2018, one deduct EUR 42 million strategic project costs and adds back EUR 67 million IFRS 16 impact as well as EUR 5 million carry down on inventory. This brings us then to the number 47 -- EUR 472 million, EUR 67 million and in total, EUR 439 million (sic) [EUR 539 million]. Volume contributed positively in 2019 with EUR 27 million. While new machines contributed EUR 43 million negatively, our Service Business with EUR 53 million positive overcompensated that effect. Also margin-wise, the Service Business was the clear driver. The development in Business Area Solutions with new machines contributing negatively by EUR 17 million has been seen on the back of the cost of EUR 21 million associated with the backlog review we conducted in 2019. Without this effect, the margin development would have been positive. Regarding R&D expenses, the driver here were the increasing personnel expenses. Same also accounts for SG&A. Personnel expenses increased by EUR 44 million and were only partly compensated by cost reductions in other SG&A costs. This shows the necessity of our program to reduce the headcount by 800 FTE in total. FX was a tailwind the entire fiscal year, predominantly from movements of the U.S. dollar. This, in total, brings us to an EBITDA of EUR 479 million. To sum it up, in 2019, eliminating our special items of EUR 41 million expenses and EUR 20 million of FX gains, our pro forma EBITDA was EUR 501 million. Additionally, one needs to consider positive special effects of EUR 23 million in the year 2018. Thus, operationally, the gap was only EUR 15 million, 1-5, year-over-year.

Let's proceed on Page 12 to a net working capital development year-over-year. Net working capital improved by EUR 65 million year-over-year, and the ratio stands now at 14.0%, down 155 basis points. Net working capital at Business Area Equipment reached now EUR 621 million, while it was EUR 86 million at Business Area Solutions. The year-over-year improvement was mainly result of the following factors: net trade and POC receivables declined by EUR 19 million and EUR 27 million, respectively; trade payables increased by EUR 18 million; inventories remained flat year-over-year. We're now at -- we are now already at the upper end of the targeted range for our net working capital ratio. Does this mean that we are done with our aimed net working capital improvement? Certainly not. The reduction in net working capital is one of our top priorities, as we have outlined in the last conference call. You will see further improvements already this year. However, there will be seasonal fluctuations between the quarters. To sum it up, reaching 14% net working capital over sales already at the end of 2019 shows our capability to reduce net working capital.

Coming from net working capital to cash flow on the next slide. Starting from an EBITDA of EUR 150 million. The improvement of net working capital in Q4 2019 contributed EUR 250 million in cash. The improvement came from a reduction of inventories by EUR 168 million as well as an increase in payables by EUR 132 million. Receivables increased, however, by just EUR 51 million. Cash out for restructuring was EUR 30 million and resulted from the initiatives, which were announced and implemented earlier in 2019. The category, others, was positive by EUR 50 million and included pension-related cash outflows of EUR 9 million and add backs from the net effect of divestments of EUR 16 million. This gets us to an operating cash flow of EUR 372 million. CapEx of EUR 59 million is about the same level of last year. And with other cash, this led to a free cash flow in Q4 2019 of EUR 308 million.

Taking into account these payments according to IFRS 16 of EUR 16 million and interest payments of EUR 5 million, our self-defined net cash flow came to plus EUR 287 million. A result of the positive net cash flow development, net financial debt of EUR 263 million at the end of Q3, reversed to a net cash position of EUR 28 million at the end of Q4. To sum it up, free cash flow came in strong with EUR 308 million. We were able to close the year with a net cash position of EUR 28 million. Both results are driven by an improvement of our net working capital.

Coming now to financing liquidity on Page 14. As always, starting on the left side of the slide, GEA is solidly funded on a diversified financing structure. The numbers have slightly changed compared to Q3 2019. The solid cash generation in the fourth quarter has led to a lower utilization of the bilateral credit lines by EUR 167 million quarter-over-quarter. Please follow me now to the right side of the slide. The decline of the equity position is predominantly explained by a negative net income of EUR 171 million caused by higher restructuring costs and the goodwill impairment at Pavan of EUR 248 million. The rating leverage stands at 2.9x according to Moody's consideration at the end of September 2019 and is deteriorated compared to Q4 2018, but improved sequentially from 3.1x according to Moody's consideration as of June 2019. The financial headwind long-term financing instruments and the net cash position are providing sufficient comfort in terms of liquidity. We are committed to our investment-grade rating, and our clear target is to maintain this going forward. Thus, there is currently very limited headroom for further leverage. To sum it up, GEA remains in a solid financial situation regarding its financing structure and liquidity.

And now back to Stefan.

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Stefan Klebert, GEA Group Aktiengesellschaft - Chairman of the Executive Board & CEO [5]

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Thank you very much, Marcus. Now we continue on Page 16. And to set the frame, I want to share our current view on COVID-19 situation with you. While the situation in China apparently eased, we anticipate further impacts in other regions, especially in Europe and also in the U.S. It is hard to reasonably forecast how the direct and indirect economic impact is going to be. However, we anticipate certain effects on global supply chains and workforces.

Coming to the current situation at GEA, after we have been affected by the official shutdown of entire regions in China, all sites resumed to work as per government permissions. Since then, all our sites are running. So far, we have not yet experienced any significant impact on our supply chain, but we already put mitigation efforts in place. However, it is clearly getting more difficult for our service staff to visit customers due to certain travel restrictions. The guidance, I will talk about in a minute, reflects our best guess as of last Thursday. I want to finish this chart by saying that we have put in place a global task force to react adequately. The team assesses a situation on a daily basis even at weekends, develops mitigation actions and ensures the health and safety of our employees, which remains the company's #1 priority. In addition, we implemented a number of measures, including travel restrictions. We will continue to provide close guidance to employees and take all appropriate steps to protect them as the situation develops.

While I'm not in a position to tell you when we will be back to normal, I am pretty sure that this situation will be temporary.

Now I would like to turn to our outlook, which reflects the current situation I have just talked about. In a normal environment, of course, we would have expected sales to be slightly above the EUR 4.9 billion we have achieved in 2019. However, assuming a certain impact of COVID-19, we guide for a slight decline in sales for 2020. Despite this expected lower sales number, we are confident to be able to achieve an EBITDA, before restructuring measures, in the range of EUR 430 million to EUR 480 million for the following reasons: first, last year, we had nonrecurring special effects of around EUR 40 million, which we do not expect to repeat to the same extent this year; second, we expect to benefit from an increase in operational efficiency, driven by the release of further FTEs; and third, we assume a positive contribution from our new global procurement and supply chain organization. It replaces the 3 formerly independent purchasing organizations we had so far. Lastly, ROCE is expected to be in a range between 9% and 11%.

Before I close with our road map for this year, let me focus on our key priorities for 2020. First and foremost, we will and we have to manage the impact of COVID-19 internally and on our operations; second, we will push to realize the savings from the new global procurement and supply chain organization; third, we will reduce our workforce by another 400 FTEs, like announced, in total, 800 employees by the end of 2020. On a full year basis, that will be around 600 FTEs. And fourth, we will continue to increase our operational efficiency; fifth, we will divest earmarked low-margin businesses to focus our efforts on the remaining operations. So we are very confident that we are achieving this -- that achieving these key priorities will be another step to further restore credibility of capital markets into the GEA Group.

Let me finish with our road map for 2020. I want to highlight our Divisional Strategy Day end of June in London. You can expect a deep dive into our 5 new divisions, giving you the opportunity to learn more about our business and to get more detailed information about our actions and targets for this division.

With that, I hand it back to Oliver for the Q&A session. Thank you.

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Oliver Luckenbach, GEA Group Aktiengesellschaft - Head of IR [6]

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Yes, thank you very much, Stefan and Marcus for the prepared remarks. We will now start the Q&A. And operator, please open the line.

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Questions and Answers

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Operator [1]

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(Operator Instructions) So our first question is from the line of Klas Bergelind.

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Klas Henrik Bergelind, Citigroup Inc, Research Division - Director [2]

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Yes, Stefan and Marcus, it's Klas from Citi. So a couple from me, please. First of all, in your guidance there was slight revenue decline this year, how much of this is protected by the backlog in Solutions versus in-for-out in Equipment? Equipment is obviously much shorter lead times. I'm interested in your lower end scenario, EUR 430 million sales and if orders is -- now no style from March onwards. To me, it feels difficult to achieve your lower end. So I will start there.

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Marcus A. Ketter, GEA Group Aktiengesellschaft - CFO & Member of Executive Board [3]

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Klas. At BA equipment, we are looking at end of December at an order backlog here of EUR 770 million. And we're looking at Solutions, we're looking at a backlog of EUR 1.7 billion.

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Klas Henrik Bergelind, Citigroup Inc, Research Division - Director [4]

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Okay. The EUR 770 million is for invoicing and Equipment. And is that roughly -- should we expect like a 6-month lead time of that backlog to be -- just to understand, Marcus, the duration of the shorter backlog, if you like.

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Marcus A. Ketter, GEA Group Aktiengesellschaft - CFO & Member of Executive Board [5]

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Yes, yes. Up to 6 months.

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Klas Henrik Bergelind, Citigroup Inc, Research Division - Director [6]

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All right. Good. Then my second one is on your savings of EUR 25 million for 2020. I get this if I back out the EUR 25 million and if I assume that revenues will fall slightly, which I think in GEA's language is 3%, then we get the operational gearing underlying to be around 34%. But I know that there are many moving parts. There are one-offs that are reversing and so on. But the 34% is not that different versus your gross margin. So shall we assume that you haven't taken any price pressure in your guidance at this stage, thinking more now about the second half rather than the first half?

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Marcus A. Ketter, GEA Group Aktiengesellschaft - CFO & Member of Executive Board [7]

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Klas, we -- no, we have not baked in any price pressure here on the -- on our sales figures yet. Will there be any price pressure? Well, we see actually the biggest challenge, perhaps more on the Service side than on the Equipment side than price pressure. Because it's always a question if we can get to side of our customers. And there actually you would -- be probably more potential challenge here with the coronavirus than currently what we see from our order intake, the negotiations, which are taking place.

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Klas Henrik Bergelind, Citigroup Inc, Research Division - Director [8]

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And how many -- so typically, I think when we met back in November, you and I, we were talking about that. Obviously, the majority of the Service Business today is still spare parts. So could you help us, Marcus is in terms of how much is Service contracts? So we could obviously basically model that it could be delays, both on volume and price, on people not being able to travel, et cetera?

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Marcus A. Ketter, GEA Group Aktiengesellschaft - CFO & Member of Executive Board [9]

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So when looking here at our Service figures, it's about 50% is spare parts. But of course, they need to be built in. So it's not just selling them over-the-counter usually, actually, we have to implement them in the machinery and equipment there. And then Service contracts is around 20% below.

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Klas Henrik Bergelind, Citigroup Inc, Research Division - Director [10]

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Okay, okay, good. And then I just had one quick one. Could you talk about the EUR 25 million here? This is from previous announcement. How much is procurement and supply chain versus the tail end of the 800 FTEs coming through? We know that 400 people have left. Just trying to understand the EUR 25 million better and whether there is any upside to this?

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Marcus A. Ketter, GEA Group Aktiengesellschaft - CFO & Member of Executive Board [11]

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We -- our assumption for this year is that we're going to have a full year effect of 600 FTEs in 2020. And there -- of course, there's some upside we are able to relieve more in the first half of the year. But I think that's a pretty fair assumption. When we say it's a 400 by the end of last year and another 400 this year to say there's a 200 FTE full year effect.

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Klas Henrik Bergelind, Citigroup Inc, Research Division - Director [12]

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Okay, cool. Very quick one, probably it's the last one. The footprint in Europe, could you help us with where you are more exposed other than Germany and Italy? So where exactly is your footprint? We're getting a lot of questions, if we see -- where we're seeing France closing, Italy has obviously closed down. The manufacturing, the blue-collar exposure, I don't know if you could rank them by country, talk a little bit more about your exposure in Europe.

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Stefan Klebert, GEA Group Aktiengesellschaft - Chairman of the Executive Board & CEO [13]

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Stefan is speaking here. So the -- our biggest number of blue-collar workers is, of course, in Germany. By far, we have placements in -- our operations in Denmark, in Netherlands, in France and also in Italy. But I can tell you that the situation in Italy is very, very dramatic in terms of COVID-19. All our factories are still working fully operational.

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Operator [14]

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Next question is from the line of Lucie Carrier.

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Lucie Anne Lise Carrier, Morgan Stanley, Research Division - Executive Director [15]

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I have a couple of questions. I will go one at a time. The first one actually was around the dividend, and maybe if you could give us some indication in terms of your statuses regarding AGM and if we are potentially facing a risk of any delay, considering what we see on COVID-19? The reason why I'm asking is because we are seeing several announcements at this time on that front, and it would be great for us to understand what you have in mind, or what is possible within your article of association?

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Marcus A. Ketter, GEA Group Aktiengesellschaft - CFO & Member of Executive Board [16]

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So we have not made a final decision yet upon it, so it's still on for April 30, our AGM. We are monitoring closely actually the situation here in Germany. But it's advisable for our shareholders and for our employees to leave it on -- okay -- there. So -- and then further, actually, no, we have not contemplated internally any dividend cut.

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Lucie Anne Lise Carrier, Morgan Stanley, Research Division - Executive Director [17]

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Okay. And then do you have -- sorry, can you hear me? Hello?

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Marcus A. Ketter, GEA Group Aktiengesellschaft - CFO & Member of Executive Board [18]

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So did I answer your -- I thought your question was if we postpone the AGM. We have no plans postponing the AGM. However, that is, of course, a possibility if the situation in Germany deteriorates, and it's not possible to do an AGM due to new regulations. Then, of course -- and of course, we are more -- as I said, we are monitoring that closely.

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Lucie Anne Lise Carrier, Morgan Stanley, Research Division - Executive Director [19]

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Okay. Just to confirm also what you were telling earlier to Klas. You're saying all of your factories in Italy are currently running. Is it the case also across Europe despite what are -- hearing in terms of confinement measure and so on? So...

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Stefan Klebert, GEA Group Aktiengesellschaft - Chairman of the Executive Board & CEO [20]

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Yes, I can confirm, Lucie, that all our factories are working. Our people are working. We have many people in the white-color area in their home office is working. But blue-color workshops are all running. And we hope that this can remain like that. The only restriction we see, as Marcus already said, is that we are facing more and more challenges in getting our service technicians on-site of customers because a lot of customers are not allowing any more external visitors to their sites. We are also thinking of creative solutions, sending our technicians by night when nobody is there and so on. So there is a lot of activity going on and situation changes daily.

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Lucie Anne Lise Carrier, Morgan Stanley, Research Division - Executive Director [21]

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And just the last question, maybe moving away a little bit from the coronavirus situation. Can you comment maybe on the latest trends you've seen in your key end markets before that actually started? And what you are seeing now in terms of level of demand from your customer? Is it -- do you see a lot of delays in terms of their decision or maybe not so much? Just what you're seeing in current trading.

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Stefan Klebert, GEA Group Aktiengesellschaft - Chairman of the Executive Board & CEO [22]

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Yes. I can tell you that we had quite a good start in the year 2020. So we are very optimistic that also Q1 at least is -- will be quite a good one. But of course, as I said, the situation is very dynamic. But I have to remind you maybe what our key business at the end is. We are delivering machines where our customers are producing food and beverages. And I mean, if there is corona or no -- not, people need to eat and drink. And as more people are staying at home, as more -- it might increase the demand for processed food. So if people are not going to a restaurant where you can eat fresh fish, fresh vegetables and so on and people staying at home and eating more processed food. That might also be a positive impact on our customers. And at the end in medium and long term, they also need to invest, therefore, in new equipment, and they need to service their machineries. They need spare parts. So I would say there is no doubt at all that our long-term trend and our market demands are intact.

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Operator [23]

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The next question is from the line of Felicitas Bismarck.

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Felicitas von-Bismarck, Deutsche Bank AG, Research Division - Research Analyst [24]

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Hello, can you hear me? Sorry. I'm not sure if you can hear me.

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Marcus A. Ketter, GEA Group Aktiengesellschaft - CFO & Member of Executive Board [25]

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Yes, we can hear you.

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Felicitas von-Bismarck, Deutsche Bank AG, Research Division - Research Analyst [26]

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Very good. I have a couple of questions. The first one, could you give us any indication of what your underlying assumption is on like just European growth or global growth under your guidance? Or is that really just the impact of people being disturbed by the other supply chain, so to say?

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Marcus A. Ketter, GEA Group Aktiengesellschaft - CFO & Member of Executive Board [27]

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So we said that this year, it's going to be slightly lower, our revenue compared to last year. How is it [going]globally, we can't tell you, actually. But what we expect with the coronavirus that there will be a certain slowdown. As Stefan said, our end markets are in general intact. Nevertheless, I mean, there will be some impact this year, that's why we said slightly lower. We still think that going forward in the next years, that assuming then when the coronavirus actually has come down and settled, that we will see at least a growth versus 3%, as we said on our capital markets.

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Felicitas von-Bismarck, Deutsche Bank AG, Research Division - Research Analyst [28]

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So is it reasonable to assume you made like a 500 bps cut to your growth assumptions? So 2%, 3% normally and now 2%, 3% negative? Something like that?

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Marcus A. Ketter, GEA Group Aktiengesellschaft - CFO & Member of Executive Board [29]

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No, we have not specified this. And as I said, slightly lower and we are (inaudible), we are slightly -- we are monitoring this right now. We don't...

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Felicitas von-Bismarck, Deutsche Bank AG, Research Division - Research Analyst [30]

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Okay. And on your -- yes, sorry.

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Marcus A. Ketter, GEA Group Aktiengesellschaft - CFO & Member of Executive Board [31]

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Go ahead.

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Felicitas von-Bismarck, Deutsche Bank AG, Research Division - Research Analyst [32]

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On your current trading, did I understand correctly that you haven't seen any impact in February order intake numbers from this?

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Marcus A. Ketter, GEA Group Aktiengesellschaft - CFO & Member of Executive Board [33]

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No, not yet.

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Felicitas von-Bismarck, Deutsche Bank AG, Research Division - Research Analyst [34]

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Okay. And then can you confirm that your debt on covenants that are extensions and on the adjusted EBITDA after IFRS assumptions?

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Marcus A. Ketter, GEA Group Aktiengesellschaft - CFO & Member of Executive Board [35]

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Say it again, what's with our covenants?

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Felicitas von-Bismarck, Deutsche Bank AG, Research Division - Research Analyst [36]

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Do your covenants, they run expansion debt, right? They are only based on your financial debt, not on the pension.

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Marcus A. Ketter, GEA Group Aktiengesellschaft - CFO & Member of Executive Board [37]

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They are only based on our financial debt, yes, not on our pension.

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Felicitas von-Bismarck, Deutsche Bank AG, Research Division - Research Analyst [38]

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Okay. And then the last question I have. Can you maybe remind us on your approved capital measures that you have from the IGM last year? And if you -- do you think it's a good idea to maybe increase those?

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Marcus A. Ketter, GEA Group Aktiengesellschaft - CFO & Member of Executive Board [39]

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Actually, yes, we will do this. We're going to come actually with the proposal with the AGM invitation out. And so you will see that everything which expires will be renewed. This will be our proposal for the AGM.

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Operator [40]

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Thank next question is from the line of Sebastian Growe.

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

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The first one is around the EBITDA guidance, and particularly around the bridge. You indicated in your prepared remarks that obviously you had the EUR 40 million, give or take, which is nonrecurring. So the starting point is rather EUR 520 million for the EBITDA. So my interest is focusing on what you have been assuming so far in the potential decline in service reps to just get a better sense of the overall sensitivity to those very, very high margin business contributions? And then also, what have you baked in, in terms of the headwind from wage inflation for 2020, if I may? Then moving on to portfolio, you had the impairment charge for Pavan and following the impairment and your comments indicating that the top line development has been quite satisfactory. My question is, what are you doing to tackle the margin line? Which has been obviously in freefall since the acquisition and that would normally suggest to me at least that we should be prepared for potentially further layoffs to come, in particular, in that asset. And then final one on Services. You, I think, indicated in the prepared remarks that you came in rather late in the quarter with price hikes, if I understood that correctly for the resolutions. Can you just give us a sense of the general price escalation? Is that you had planned for 2020? And how this is going with customers as we speak?

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Marcus A. Ketter, GEA Group Aktiengesellschaft - CFO & Member of Executive Board [42]

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Okay. Now first one, you talk about the EBITDA (inaudible), that was your first question. You're talking about the bridge actually from '19 to '20? Or was this just in '19?

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

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No. For the year '20, from '19 to '20 that is, yes.

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Marcus A. Ketter, GEA Group Aktiengesellschaft - CFO & Member of Executive Board [44]

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'19 to '20. Okay. Got you. Okay. So well, we thought EUR 479 million is the EBITDA before restructuring. And as I said in my prepared remarks, that we had special items of EUR 41 million. We don't assume we get in '20 another EUR 41 million onetime effects. Of course, every year, there are onetime effects, but by far, we do not expect that to see that amount. Then we said EUR 26 million in procurement savings also in our Capital Markets Day there, that's also our expectation. And we -- with the 600 FTEs, we also think that there should be a cost savings of around EUR 25 million from that. However, I mean, on the other side, we had last year, positive FX effects of EUR 20 million, so you need to deduct these. We expect to see a salary increase in total of around EUR 26 million. And then, of course, we have a corona effect, which we estimated in different scenarios. And also some additional risk buffer. And so when I take both into account, we end up here with our guidance with a midpoint of EUR 455 million. If we can have all the price increases, which we usually see end up at the higher end. And if corona's getting really worse and negotiations are getting tougher and our Service Business is affected, from today's point of view, this might bring us down to the lower end. It's pretty much in flux, as you can imagine, what's going to be the effect of the coronavirus.

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

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Yes, that makes sense. And specifically on the service element because I think you stressed it a couple of times and in your earlier answers that you provided. Can you give us a sense to what you're planning? Is this looking -- so are we looking Service revenues down this year? Would you conservatively say it's eventually only about flat? Or what is your working assumption there in particular?

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Marcus A. Ketter, GEA Group Aktiengesellschaft - CFO & Member of Executive Board [46]

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Well, we don't have any working assumptions here right now for the Service Business. We expected actually to have steady prices in our planning, plus some inflation adjustments. If we can have more -- we're going to try this, of course, to increase our Service price. As I said, the corona issue might hold us a little bit back to be able to do price increases in Service this year. I think I answered your (inaudible) to wage inflation, I said that was around EUR 26 million in total. Then you said here, Pavan, that the margin needs to be improved. We fully agree to that state. We are working on this. There have been some layoffs also part here (inaudible) headcount 800 program, which we announced, so we'll bring some efficiency to Pavan as part of this program here.

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

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Okay. But this is it for the time being? Or can you just remind us of what is coming up then for potential further provisions that you might take for the year 2020?

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Marcus A. Ketter, GEA Group Aktiengesellschaft - CFO & Member of Executive Board [48]

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Well, we're going to have some -- of course, we're going to have -- as announced, we're going to have some restructuring charges of around EUR 50 million to EUR 60 million, around that number. There's no such thing as something really big at Pavan, as I said. I mean, we're bringing down the number of employees there, bring more efficiency. And it's still a workable company. It's -- we just really need to focus now on the margin. And that's what we are doing right now.

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Operator [49]

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It's from the line of Sebastian Ubert.

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Sebastian Ubert, Societe Generale Cross Asset Research - Equity Analyst [50]

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Many questions have been answered. But one is still left over also maybe an update on the current situation in Germany now that schools have been closed. How really does your blue-collared work force come to work as they need to care about kids? And how do you see this going forward? How do you manage this process? And what could we potentially see as an impact to your productivity or to your top line?

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Stefan Klebert, GEA Group Aktiengesellschaft - Chairman of the Executive Board & CEO [51]

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As I already said, all our factories are running right now worldwide. So we do not expect a significant impact in the blue-collar world. In the white-collar world, we have a lot of people, meanwhile, in home office, wherever it is possible. But we have good IT infrastructure in that aspect. And so we are very optimistic that there is also very limited impact. And as I said, the biggest challenges are, how the Service Business develops. And of course, in a longer period of time, if we also need to install machines and equipments at customer side. It's always a question how customers are reacting and can we bring our people in. We also have some topics, for instance, that we cannot fly now to the U.S. when we have to finish projects over there or we have to send special welders to the U.S., things like that. There might be an impact. But at the moment, it is -- it looks still quite good, but the situation, as you know, it's extremely volatile and dynamic.

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Sebastian Ubert, Societe Generale Cross Asset Research - Equity Analyst [52]

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Okay. And then maybe one follow-up question also with regards to the news [curve] of your organization. Will we get some more additional data such as order backlog, EBIT by division and maybe also the share of services? That will be quite helpful.

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Stefan Klebert, GEA Group Aktiengesellschaft - Chairman of the Executive Board & CEO [53]

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Share of service, probably not, but we will disclose more information about the divisional structure and also numbers when we (inaudible) our capital Market Day because, as you know, we just started. We also -- I mean, changing our organization with 20,000 people, all service, not some which goes from one day to the other. So we need to have clarity about the numbers. And this will be at the middle of the year. And at the Capital Market Day, you can expect more details.

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Operator [54]

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Next question is from the line of Akash Gupta.

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Akash Gupta, JP Morgan Chase & Co, Research Division - Research Analyst [55]

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I have 2 questions, please. My first question is regarding your project business. Can you talk about risk of liquidity damages or penalties from customers in case if you have delays in finishing projects?

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Stefan Klebert, GEA Group Aktiengesellschaft - Chairman of the Executive Board & CEO [56]

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Normally, we have in our contract (inaudible) clause. And everybody knows about the overall situation. So far, we have not any negative impact out of that.

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Akash Gupta, JP Morgan Chase & Co, Research Division - Research Analyst [57]

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And I have a follow-up on your CapEx and IT investments this year. Can you talk about what sort of flexibility do you have on both CapEx and IT investment? And if the current situations and we enter in a bit of slowdown, do you have room to delay some of these investments into next year and beyond?

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Marcus A. Ketter, GEA Group Aktiengesellschaft - CFO & Member of Executive Board [58]

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We don't see this that we have to delay any investment right now. So at the end of last year, we bought the necessary SAP licenses. This year, it's going to be not that much CapEx as we are programming and setting up the processes for the new SAP template, and our other IT projects are actually on their way. We don't have any liquidity shortage right now. We don't see any material -- as we said earlier, any material deviation here of revenue currently. So we don't see the need actually to postpone that. On the other hand, we are watching that situation, of course, closely preserving liquidity there. But we will be, actually, right now executing on our IT strategy.

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Operator [59]

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(Operator Instructions) And our next question is from the line of Lars Brorson.

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Lars Wauvert Brorson, Barclays Bank PLC, Research Division - Director [60]

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I've got a few, if I can take them one by one. Following up on the service operations, Stefan, and the challenges of getting service technicians on site. I mean obviously an unchartered territory, but just in light of these lockdowns and broader limitation of movements, I wonder whether there's some way for you to help us understand and quantify the impact. And again, I'm fully appreciating what fluid dynamics meant. But for example, if you look at, say, the number of Service Business in Italy over the last couple of weeks, say, what does that look like relative to the same period last year?

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Stefan Klebert, GEA Group Aktiengesellschaft - Chairman of the Executive Board & CEO [61]

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Lars, I have to tell you that I cannot answer this detailed questions because, of course, we are installing some -- or let's say, many at their reportings about illness, about tested people, about home office numbers and so on. But as I said, the situation is very dynamic. And it also can change from day-to-day. So far, I was also in touch with our division heads and regional heads yesterday and today. So far, it is very limited. But as I said, and so know that during the last 2 or 3 days, the measurements, the activities, which were set in place from all the governments. Fortunately, I have to say, got stronger because I'm fully convinced as more consequent everybody now is as faster we are through this crisis. If we adopt and adjust all the measures step-by-step, it will take much longer time. So I think we -- the companies are doing a very good job, doing -- handling the case very, very consequently. If public would do it in the same way, I think we would have been through much faster. If you look now around, if sun is shining, people are still sitting in (inaudible) and still hanging around in restaurants. So -- and this is not good, and it also makes no sense that we send people to home office and that our service technician cannot access sites while public is still dancing. So we hope that this will be changed quickly because this is the only way how we can get rid of the whole corona disaster in a very short time.

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Lars Wauvert Brorson, Barclays Bank PLC, Research Division - Director [62]

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Understood, Stefan. I'm going to try another maybe slightly unfair question around the COVID-19 impact on your guidance. And I will applaud you for at least attempting to come up with some guidance, most other industrial companies don't. But what you're doing in your sensitivity table in Page 153 in the annual report, where you try to gauge specific economic risks and the associated EBITDA impact. You're obviously categorizing COVID-19 as a "moderate risk" and I [pin] that to be a EUR 20 million to EUR 70 million impact. I would have thought it needs to say it right up in the right-hand corner of your matrix, i.e., at least EUR 120 million impact for 2020. Maybe to ask a little bit differently, if you think back 2 months ago, as you started to think about the 2020 guidance, EBITDA guidance that is, can you give us some sense for what you were thinking pre-COVID-19?

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Marcus A. Ketter, GEA Group Aktiengesellschaft - CFO & Member of Executive Board [63]

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So this is Marcus. Lars, let me answer this question. Before COVID-19, of course, would have expected that revenue would be up. And we would have higher guidance, of course, higher range for EBITDA and for ROCE. Well, take a look actually here of the -- what's the result, what the effect is. So if we take what you suggested on the upper right corner, I mean, the financial here would be above EUR 120 million or significant would be at least EUR 70 million to EUR 120 million. When you look at page 154 at our risk metrics. And we don't see this at this point in time. We see that there probably will be an effect. And that's why we chose the range with a midpoint of EUR 455 million. And that's why we actually have it classified as we did here. But as I said earlier, we are monitoring the situation closely, and let's see how businesses around the world will be affected.

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Lars Wauvert Brorson, Barclays Bank PLC, Research Division - Director [64]

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Understood. If I can try a third and final one, please, just around working capital. You've done well, I think, in Q4 and 2019 to manage working capital as you laid out with your corporate-wide program in August last year. Specifically, if I can just ask to some of the smaller end markets like oil and gas and marine and shipping, although they're very small for you, but are you seeing stress among customers in some of these? And are you doing anything differently from a working capital standpoint, i.e., in terms of collecting receivables or otherwise?

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Marcus A. Ketter, GEA Group Aktiengesellschaft - CFO & Member of Executive Board [65]

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So far, we have not seen anything like that. But it takes a bit more time actually to at least come into a liquidity situation, unless they have a product which they sell cash and carry, which is not the case here with oil and gas and shipping there. So there might be some lag, but so far, we have not seen any constraints there. But as I said, we're monitoring also these customers very closely and see if there's going to be some effect. I would not exclude that there will be some effect in the future, simply, we have not seen any yet.

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Operator [66]

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The last question is from the line of Felicitas Bismarck.

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Felicitas von-Bismarck, Deutsche Bank AG, Research Division - Research Analyst [67]

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I have 2 more questions, please. The first one is, is it fair to assume that you're postponing the divestments that you have announced just because pricing you could get right now and the people who want to buy this right now is more difficult to find? And the second question would be, have you baked into the assumption, any recovery in this, like in Q3 or Q4? Or is that -- do you assume the impact is going to be negative for the entire year coming from COVID?

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Marcus A. Ketter, GEA Group Aktiengesellschaft - CFO & Member of Executive Board [68]

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We are still going forward with our divestments. However, also there usually we are monitoring the situation closely. We are monitoring the situation closely. We have got feedback from private equity companies actually that they are monitoring right now, full focus on their portfolio companies. So whenever there's private equity involved, we need to see actually if there's still an acquisition amount. So far, we are pursuing our divestments as planned. But with the caveat I just said, let's see, especially PE if what we're doing going forward. If they see this as an opportunity, this situation or if they have their hands for monitoring their subsidiary. Recovery. No, we have not baked in any recovery yet. But as I said, there is a range. So if there's a recovery that can have price increases, our range goes up to like EUR 480 million, it's getting worse. Well, our range is currently going down to like EUR 430 million. That's where we are. I mean, that's the best I can do -- that's the best we can do right now.

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Felicitas von-Bismarck, Deutsche Bank AG, Research Division - Research Analyst [69]

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Do you have a similar range for the growth as well?

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Marcus A. Ketter, GEA Group Aktiengesellschaft - CFO & Member of Executive Board [70]

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No, we don't have a similar range for the growth. As you said, slightly -- this is 0% to 5%. In that sense, we have (inaudible). But let's see if we're going to be at the lower end at 0% and the higher at 5%, we don't know yet either.

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Operator [71]

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There are no further questions. Please continue.

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Stefan Klebert, GEA Group Aktiengesellschaft - Chairman of the Executive Board & CEO [72]

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Okay. If there are no further questions, let me make some final remarks. I think what is important to mention that 2019 was a strong year for GEA, where we really could change many, many things, which put a lot of stress to the GEA organization during the last years. We established a completely new organization. We changed a lot of people in the management team. We are really now in a setup, which allows us to steer and control the company much better. And above all, I have to say this -- if there is corona or not, people need to eat and drink. And this is our business. We are producing the machineries, the processes, the equipment for our customers who are producing food and beverages and pharmaceuticals. So the long-term trend for our industry is brilliant, I would say. And that's why we are in the medium to long term, still very optimistic. We will use the time to do our homeworks. We now have to manage the corona crisis. This is what we do. We will protect our people. We will do everything to keep our good and qualified people. And at the same time, we -- our intention to limit, of course, the negative impact on our organization. But medium to long term, this is an excellent market in which we are in and therefore, we remain very optimistic.

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Oliver Luckenbach, GEA Group Aktiengesellschaft - Head of IR [73]

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That concludes our call today. Thank you very much for participating. And if you have further questions, then please come back to the IR team. Thank you very much, and talk to you soon. Bye-bye.

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Operator [74]

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So that does conclude our conference for today. Thank you all for participating. You may all disconnect.