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Edited Transcript of G1A.DE earnings conference call or presentation 10-May-19 12:00pm GMT

Q1 2019 GEA Group AG Earnings Call

Bochum May 26, 2019 (Thomson StreetEvents) -- Edited Transcript of GEA Group AG earnings conference call or presentation Friday, May 10, 2019 at 12:00:00pm GMT

TEXT version of Transcript

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Corporate Participants

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* Fabian Kirchmann

* Helmut Schmale

GEA Group Aktiengesellschaft - Former CFO

* Stefan Klebert

GEA Group Aktiengesellschaft - Chairman of the Executive Board & CEO

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Conference Call Participants

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* Daniel Gleim

MainFirst Bank AG, Research Division - Director

* Frederik Bitter

Hauck & Aufhäuser Privatbankiers AG, Research Division - Analyst

* Jack O'Brien

Goldman Sachs Group Inc., Research Division - Equity Analyst

* Lucie Anne Lise Carrier

Morgan Stanley, Research Division - Executive Director

* Max Yates

Crédit Suisse AG, Research Division - Research Analyst

* Nika Zimmermann

Deutsche Bank AG, Research Division - Research Associate

* Peter Reilly

Jefferies LLC, Research Division - Head of Capital Goods of Equity Research

* Peter Rothenaicher

Baader-Helvea Equity Research - Analyst

* Sebastian Growe

Commerzbank AG, Research Division - Analyst

* Sven Weier

UBS Investment Bank, Research Division - Executive Director and Analyst

* Wasi Rizvi

RBC Capital Markets, LLC, Research Division - Analyst

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Presentation

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Operator [1]

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Good afternoon, ladies and gentlemen, thank you for standing by and welcome to today's GEA First Quarter 2009 (sic) [2019] Conference Call. (Operator Instructions) I must advise you that this conference is being recorded today Friday, the 10th of May 2019. And I would now like to turn the conference over to your first speaker today, Fabian Kirchmann. Please go ahead, Sir.

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Fabian Kirchmann, [2]

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Good afternoon from Düsseldorf and welcome to the GEA analyst call on the first quarter results that we have published this morning. I have with me here our CFO, Dr. Helmut Schmale; and our CEO, Stefan Klebert, who will jointly guide you through the presentation. After that, they will be happy to answer your questions. So let me pass on to Stefan Klebert.

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

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Thank you, Fabian. Good day, also from my side and welcome to the first quarter analyst conference call. Start with the executive summary with the key figures of the first quarter. We had a solid start into the year 2019, with the order intake of EUR 1.186 billion, which is a plus of 7.6 % compared to the previous quarter and which gives us a very good start, I would say, into the year of 2019. Sales was slightly above the previous year, with 1.7%, we ended up at EUR 1.057 billion. And you can see that there are some tailwind from FX impact, EUR 6 million in order intake and EUR 8 million in sales. However, this is quite a small number I would say. And it is underlining that it is really a kind of solid start into 2019.

Let's have a look at the EBITDA. You know that we are now reporting a new EBITDA what is a change compared to the previous quarters and years. This is a EBITDA where we don't exclude any more so-called strategic projects. The only thing we exclude are restructuring costs, and we include the effects from IFRS 16. You will find also on our homepage some more information about the changes and the bridges to find out how we come up with this number, how does it compare to previous years and quarters. But all in all, this is full in line with our expectations. It's slightly below the previous year, and we ended up with EUR 75 million. EBIT is EUR 27 million, which is also in the range of our expectations and the ROCE is on 12%. So all in all, as I said, this is all in the frame of our expectations, and it was for us a solid start into the year 2019, which is a kind of transition year for GEA. I now hand over to Helmut to give you more details.

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Helmut Schmale, GEA Group Aktiengesellschaft - Former CFO [4]

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Yes, a warm welcome, also from my end. Thank you, Stefan. I would like to give you some more details on our main key figures and the developments during the quarter 1. Let's start with the order intake. BA Equipment achieved an order intake of EUR 683 million, which is down by 2.6% over prior year. The new machine business in Milking, Dairy Farming, trended weaker here. And that was the case in particular in North America. But also the new machine business in separation held below last year's volume. In contrast to that, the new machine -- in contrast to the new machine business, the Service Business developed well almost across the board of all regions and product groups for Business Area equipment.

Turning to BA Solutions. BA Solutions reached an order intake of EUR 573 million, so this is up 24% over prior year. Almost all applications are up compared to 1 year before, especially, APC Dairy contributed to that growth, whereas one should bear in mind that last year's quarter 1 was an extraordinary low comparison for Dairy. Larger orders, we were awarded to in the area of food, coffee, dairy and chemicals. Sales is all in all up 1.7% over quarter 1. The BA Equipment had grew here by 1.3%. Please have in mind that BA Equipment had a positive onetime intake from the transition to IFRS 15 in the year 2018 that was EUR 19 million additional volume for the food processing and packaging business, which lays the benchmark for the comparison here in the year -- to year 2019. All APCs of all BA Solutions are up compared to prior year.

The only exception here is Dairy, which is down by about 9% or about EUR 10 million. The operating EBITDA, as Stefan also mentioned already, finally was EUR 75 million for the first quarter and slightly down over prior year, but meeting our expectations. The margin at BA Equipment increased. The positive volume and margin development is owed to our Service Business, which explains by and large profitability growth of about 145 basis points to 13.8% for the Business Area Equipment. Also currency impacts were slightly supportive.

However, on the other end, the margin for BA Solutions declined. The drop in the quarterly EBITDA amounts to some EUR 9 million. The reduction mainly originates from a lower gross margin year, in particular from the Dairy business. Altogether the margin is down by EUR 4 million as well as we have seen in the result of Business Area Solutions an increase in overheads of about EUR 10 million. This is partially balanced by also a couple of other positive impacts, including foreign exchange. We included in the quarter 1 results a EUR 10 million risk provision following a deeper dive into execution risk in the backlog of BA Solutions, what we have already announced that we will do that as of March.

Let's then turn to the next 2 pages, which are well known to yourself. That is rolling order intake and the book-to-bill ratios. Just quickly touring these 2 slides, what you see here is that the Dairy Farming business trends weaker again and with further -- with that further downward trend it fell below the group average now. Dairy Processing, the order intake now has stabilized. However, sales declined because of the weakness in the order intake, which we have seen in prior quarters. The Beverage business, here you can observe that the sales remain weak. However, order intake looks now much better. And on last 4 quarter basis the intake for Beverage improved and almost switched the gear, average now again. So there is, of course, then to anticipate and assume that sales will follow suite the development of the order intake.

Food growth for quite some time also driven by the instant coffee business, which is mainly likely to cool down a bit in the near-term future and be -- please be also aware that we have included our recent acquisitions into the development here in the food business.

Pharma and Chemical. We see a general upward trend for a couple of years now. However, also showing some volatility. And the Chemical business was driven in the recent past by some lithium orders due this period as an observation, which helped the overall development of that business. The book-to-bill ratio, just to shed some light here quickly. What we can observe in terms of geographies that the region DACH and WEMEA they've fared slightly below 1%.

Asia-Pacific is positively impacted by the strong order intake growth from China, here in particular in Dairy Processing. In terms of industries, most of them are above 1%. However, Dairy Farming let below 1%. And I have to say the oil and gas industry remains difficult for some time now. However, that reflects only about 1% of our sales, as you will find it in the lower part of the tabulation.

Working capital. At the reporting date, the working capital increased year-on-year by some EUR 70 million. In the sequential perspective, we see a seasonal increase like in many other years. And the working capital ratio increased to 7.2% in LTM perspective, but also in -- as of reported date. But I have to say as well that it is not the highest level which we have seen in working capital, and we will certainly focus also with our new organization and focus on the components and entities that you will manage in the future further down the working capital level.

If you split then the working capital to -- into its components, then you find that in a year-on-year comparison, the inventories increased by about EUR 80 million, which is development, which is by and large related to the development our Business Area Equipment. It includes raw material, work in process, merchandises and embraces the development in our large factories, but also in the regional sales organization. The sequential increase of inventories applies to both the BAs, however larger part, yet again, is related to Business Area Equipment.

The other big change here in the quarter-on-quarter development is the change or the swing back of the trade payables. That is something which we see as a usual swing back from the year-end always through the first quarter. Then let's turn to the liquidity, which as you find here the liquidity comparing these 12-month period, end of March 2018 with end of March 2019, has all in all not changed much. We are now at the end of the reporting period at minus EUR 155 million. Most of the items in this bridge are somehow self-explaining. However, what you still find here that is in that period under review delta working capital is cashed away now. And on the other end, if you strip out for the cash out for restructuring which were in that period about EUR 60 million, you'll find that our cash flow generation was about EUR 229 million, excluding those cash outs for restructuring.

With the dividend being paid out, we are then on a net cash position of minus EUR 155 million, which is slightly better compared to prior year.

Finally, the Service Business, that is a real good situation which you find here. We are growing here in the area of Service Business by about 6% altogether. The share is about 31% for the whole GEA business. Both businesses grew in the last 4 quarters period. And as I mentioned before with regard to Business Area equipment that was the part which generated the positive development of margin and net result for the Business Area. And that concludes my part of the presentation. And then I would like to hand back to you, Stefan, to give and shed more lights on the outlook.

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

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Thank you very much, Helmut. I also want to say double thank you, not only thank you for the presentation, I would also like to thank Helmut because this was now his last call. He is about to leave GEA next week, and his successor will come in, Marcus Ketter, as you know, and I would like to take the opportunity to thank Helmut for a really smooth and good handover period and a very supportive -- being a very supportive colleague in that phase. Thank you very much, Helmut.

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Helmut Schmale, GEA Group Aktiengesellschaft - Former CFO [6]

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Many thanks, Stefan. It was really a pleasure to work with you.

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Stefan Klebert, GEA Group Aktiengesellschaft - Chairman of the Executive Board & CEO [7]

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Thank you. So you also could see in the press release that we are taking some important measures in the BA Solutions to support the turnaround of solutions, and we made a check in solutions during the last weeks. And this is what I promised you also in March on the analyst conference, that we are having a detailed look into the backlog of BA solutions, and we will inform you about some findings. We did that during the last week as I said. Team was busy and looking at this order. And the outcome was that we booked EUR 10 million additional provision in Q1. There might be the need also in Q2 to do a number in the same area, but we will see how it end up. At the end, we got a good picture now about everything we do in solutions, and we have to say that the provision we booked is mainly allocated to complex large project. The vast majority of them were order intake in '15 or '16 , so where obviously some projects are coming in, which are very challenging. But we are sure that we can handle it, and that we bring it somehow to an end.

And at the same time, we looked at the capacity in BA Solutions, and we identified very quickly that we have about 200 to 250 FTEs, idle capacity, which we can identify quite quickly, and we will cut this jobs within the next, let's say 1 or 2 months. We will identify that we will talk to the people, to the work councils in those countries where it is necessary. But this is a kind of idle capacity, which we can take out in quite a reasonable time, I would say. And this will support the turnaround. We need some restructuring expenses for that, of course, it will be in the area of EUR 30 million to EUR 45 million. This is not only personnel cost and cost for making people redundant. It might also include some other costs which we have to write off.

Let's have a look at the guidance again in the next chart, please. This is the guidance we gave for the business year 2019, which we can prove today. There's -- we see no risk that we cannot keep this guidance, and we confirm that for all 3 guidance parameters, which is, I think also important information. Let's have a look at the last slide. This is a roadmap for 2019. You also know this roadmap already from the press conference, and now we have the Q1 numbers with the new guidance parameters, EBITDA and ROCE in that week. After next week, Marcus Ketter will join us 20th of May, after he will be released from his task as a CFO at Klöckner where the Annual Shareholder Meeting will be still next week. And then we will come back to you with update of the divisional structure organization. This is now determined for the 24th of June.

So the 24th of June, we will publish the new divisional organization, which will be a big step ahead in bringing much more entrepreneurship, reliability to GEA and that a lot of things I hope and I bet could be managed much better than during the last years. August 6, we'll inform you about Q2 numbers and in September, we will have our first big Capital Market Day with the new management, and we will inform you about the activities. We intend to do and we need to do in a medium to long term to really stabilize the business in GEA and to make GEA even more profitable company. That's from my point of view. Thanks a lot for listening, and we are now open to your questions.

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Questions and Answers

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Operator [1]

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(Operator Instructions) Your first question comes from the line of Lucie Carrier from Morgan Stanley.

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Lucie Anne Lise Carrier, Morgan Stanley, Research Division - Executive Director [2]

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Actually have 3 questions. The first one I would like to start with Dairy Processing, please. And just to have you -- sense around the rebound that we are seeing now in terms of orders, understand it hasn't happened yet in terms of sales, but we see now orders kind of rebounding quite consistently. So how -- what is your level of confidence that this rebound is sustainable and it is sustainable at the level we are seeing now, which is quite solid from what you indicating? And in relation to that, considering that you have announced the layoff of some staff in this specific business, is that a signal that you feel the rebound is not sustainable? Or is that simply you think that unit was simply kind of outsized for the market potential? That's my first question.

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

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Okay. Thanks for the question. So when we look at the order intake, which we expect for Dairy Processing and at the pipeline, it looks quite good at the moment. So we are quite optimistic that we can achieve a good order intake this year in this area to stabilize the situation. And when you are asking for the impact on the people order it, if it is a signal that we don't believe that this is the bottom line of order intake, this is not the case. We take the people out because we really have some idle capacities in various sites. But this is not a signal that we don't believe that we can get a better and stable order intake. As I said, we have some interesting pipeline for potential order intakes, and we hope that we are -- we will be lucky during the next months and get good order intakes in this field.

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Lucie Anne Lise Carrier, Morgan Stanley, Research Division - Executive Director [4]

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My second question was around the various initiative you had spoken about last quarter, and you had spoken about procurements at the time. You had spoken about developing further the services. You seemed to be speaking already a little bit more of some of the achievement on Services. I was just wondering, maybe you can give us a bit of color in terms of what you have kind of already implemented around those kind of areas? And in terms of your progress and how quickly should we expect progress notably maybe around the Service type of -- part of the business?

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

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I mean the topics I mentioned in the conference in March, we are mainly focused on ERP system, procurement, production footprint, these actions and we will say more about that and the potential outcomes of this projects at the Capital Market Day in September. The good development in Service we see might have something to do also with some actions which were taken last year, price activities, for instance, but as I said, the majority of the topics, I mentioned in March, will be addressed at the Capital Market Day in September.

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Lucie Anne Lise Carrier, Morgan Stanley, Research Division - Executive Director [6]

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So are you kind of saying that you haven't really started to address this different point yet?

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Stefan Klebert, GEA Group Aktiengesellschaft - Chairman of the Executive Board & CEO [7]

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We are working on those topics, of course. We are working on topics like ERP, procurement, production footprint, developing the concepts already, and working it out. But as I said, what explicitly we will do in the future, this will be communicated in September in the Capital Market Day.

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Helmut Schmale, GEA Group Aktiengesellschaft - Former CFO [8]

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If I may add a sentence here, Stefan. The first thing we will do as we announce is to find the right new organization, we'll come back to that with further details in June. To yourself and all what we are going to initiate on these various initiatives, which we were addressing needs, of course, to be embedded into the organization. And this is why we need also a bit lead time.

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Lucie Anne Lise Carrier, Morgan Stanley, Research Division - Executive Director [9]

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Okay. And my last question was around the backlog review. So I understand EUR 10 million provision in this quarter, which has impacted your solutions, adjusted EBITDA, potentially another similar amount in the second quarter, we will have to see. But are you -- as you now [fourthly] review all of the contracts within the company, and you are confident that this EUR 10 million or EUR 20 million provision related to the existing backlog is basically all we are going to have? I mean you feel that the rest is solid?

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Stefan Klebert, GEA Group Aktiengesellschaft - Chairman of the Executive Board & CEO [10]

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Yes. Of course, we made a thorough look at the order backlog. But I mean if you consider the big number of single orders we have, it is not possible to check every single order in the backlog. However, we are quite sure that we used the method that we really identified and has a really deep and thorough look at everything, which could be tricky or difficult. So we are very optimistic that this is now really a touch base.

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Operator [11]

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Your next question comes from the line of Max Yates from Crédit Suisse.

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Max Yates, Crédit Suisse AG, Research Division - Research Analyst [12]

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Just my first question would be around pricing on the orders that you've taken. I think when you -- when the guidance was initially given of EUR 450 million to EUR 490 million or slightly lower at that time, that there was some discussion of seeing some pricing weakness in the market. Could you just give a comment to sort of how that's trended in the quarter, whether there's any spots among your end markets where you're seeing weakening, or perhaps sort of strengthening pricing maybe in the Service? So just any concepts. That would be helpful.

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Helmut Schmale, GEA Group Aktiengesellschaft - Former CFO [13]

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Yes, maybe we take it from there that with regard to the pricing. In general, we have to say that the situation in all markets have not substantially changed. That is around the same what we had before. You may remember that we have taken special initiatives last year in 2018 in order to address the pricing in the markets in particular for the Service Business, in particular also in front -- on the background of the fact that we had this difficult currency environment at the beginning of 2018. Now these initiatives come somehow through in the pricing in our spare parts, in our service business that really help the Business Area equipment. But I would say the general price elasticity and the general price levels are no different to what we had a couple of quarters before. And I would say that take the example of the Dairy projects in the past when we had this big fleet and boom of large Dairy projects, definitely the pricing level was different to what it is today. And the -- today's pricing level in the Dairy business certainly in a more competitive environment compared to a couple of years before.

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Max Yates, Crédit Suisse AG, Research Division - Research Analyst [14]

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Okay. And just a follow-up would be I think your competitor SBX FLOW had talked about becoming more selective in dairy, thinking a bit more about what contracts they go out and win. Has that given you opportunities? Have you seen them sort of rolling back in terms of their aggression on bidding in contracts? And actually from a volume perspective, does that give you the opportunity to win more business other next sort of 12 months as they deemphasize that business, i.e., your market share in these larger dairy projects even if they are few and far between should be increasing? Is that something you're seeing?

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Stefan Klebert, GEA Group Aktiengesellschaft - Chairman of the Executive Board & CEO [15]

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I mean we also follow a strategy in Dairy. I mean you know the legacy of Dairy Processing in GEA during the last 2 or 3 years. We also had some projects where we lost money. We also now make a provision for projects which will not end like -- they were precalculated. And as I said, and as I mentioned, we have a situation where we have a good order pipeline. And that's the reason why we also will be very selective and that we also will choose only those projects where we are sure that we have the know-how, the capacity and the right price to fulfill it because the main strategy at the moment is not in Dairy focusing on further growth. It's more stabilizing the margins, coming back on track, stabilizing the organization. And this is what we are looking for.

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Max Yates, Crédit Suisse AG, Research Division - Research Analyst [16]

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Okay. And maybe just a final question around the revenue guidance. If I look at your sort of 4-course average orders, you're running at about EUR 5 billion. Your backlog is up 6%. So I'm just trying to square what it is that you're seeing in your revenue -- well, in the revenue outlook for the remainder of the year that should mean that your revenues are down year-on-year for sort of EUR 4.8 billion level? Because when I look at the backlog and the order trends, it would take quite significant softening from here. So could you give us a sense of whether there is something you see out there that has really weakened that may bring that down? Or is it just a sense of -- obviously, I would understand why you wouldn't want to put out revenue guidance in this kind of uncertain environment. But is it specifically anything out there? Or is it maybe just being on balance a little bit cautious given the -- a lot of headlines we're seeing around trade, et cetera?

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Stefan Klebert, GEA Group Aktiengesellschaft - Chairman of the Executive Board & CEO [17]

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Yes. I mean you know that we are living in a very uncertain environment. We just had this week again discussion about the tax issues between China and U.S. and you know that many, many things are in the air, which could influence order intake and therefore, also sales. We will watch our order intake very carefully during the next months, of course, and we will check if there is a -- is there a need to adjust that. But we still have 9 months ahead of us, let's say or at least 8 months ahead of us. And therefore, the year is not at the end. And we are still, let's say, cautious to see what's going on. And whenever we see a need to adjust it we will do though.

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Helmut Schmale, GEA Group Aktiengesellschaft - Former CFO [18]

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And it will depend also a good deal on the development of our order intake in the equipment business. You have seen that the first quarter was a bit done. And here it depends on how the next couple of months will be and what it will tell us then for the sales volume of equipment towards the end of the year.

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Max Yates, Crédit Suisse AG, Research Division - Research Analyst [19]

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Is there any notable trend in April or May that you would comment on versus what we saw in Q1 and equipment?

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Helmut Schmale, GEA Group Aktiengesellschaft - Former CFO [20]

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No.

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Stefan Klebert, GEA Group Aktiengesellschaft - Chairman of the Executive Board & CEO [21]

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It's not the time to talk about the numbers of April or further numbers.

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Operator [22]

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Our next question comes from the line of Sven Weier from UBS.

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Sven Weier, UBS Investment Bank, Research Division - Executive Director and Analyst [23]

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It's Sven from UBS. A couple of follow-up questions. The first one goes back to the head count reductions you are planning. I was just wondering what type of head count you're cutting there? Because I remember that in the past the kind of engineering capacity, you definitely didn't want to reduce because an upturn, it's tough to find good engineers again. So is it really outside the engineering department that the idle capacity that you are mentioning? That's the first one.

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Stefan Klebert, GEA Group Aktiengesellschaft - Chairman of the Executive Board & CEO [24]

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It will be mainly in -- not only in engineering, but also a central staff in the BA solutions. And the fact is that during the last year or during the last 2 years, while having, let's say, a flat top line in solutions, we had a significant increase in personnel, which was not necessary in all areas, obviously. And we will now do a first step to adjust that.

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Sven Weier, UBS Investment Bank, Research Division - Executive Director and Analyst [25]

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Okay. The second question is basically relating to the Dairy pipeline you mentioned. I was just wondering if you could give some more detail on what type of dairy projects? So is it -- that's on the milk product side projects are coming back? Or where exactly do you see these big tickets coming?

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Stefan Klebert, GEA Group Aktiengesellschaft - Chairman of the Executive Board & CEO [26]

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Yes. It's variety we have -- we are talking about big milk powder project, but also other dairy projects. So it's a variety. It's also in different countries. And as I said, we have a -- quite a favorable and good order pipeline -- or offer pipeline.

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Sven Weier, UBS Investment Bank, Research Division - Executive Director and Analyst [27]

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Okay. Good. And the last question is just to understand the backlog review a bit better still because I was bit surprised you concluded this basically before the new CFO is trying, so should we expect your new CFO also to have another look at this? Or is this now basically completed then?

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Stefan Klebert, GEA Group Aktiengesellschaft - Chairman of the Executive Board & CEO [28]

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Well, I think when it is about the order backlog, it's -- even if I appreciate our incoming CFO very much, but the impact of checking the project might be very limited from the CFO side of point of view. It was more that we checked what is promised in the contract, what is the -- how is the calculation in terms of hours because the biggest issue when you have cost overruns is normally in such a project that you were looking too optimistic on the engineering side or installation side, that you have calculated too little hours because there was a high intention to get the order intake, things like that. So it's more that you have to have a look in the communication with the people who are working on that project, who are deeply involved in the job itself. And this is what we did.

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Operator [29]

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Your next question comes from the line of Sebastian Growe from Commerzbank.

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Sebastian Growe, Commerzbank AG, Research Division - Analyst [30]

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Three areas of questions from my side. Maybe you can take them 1 by 1. The first one would be on the services and on the pricing initiatives that you touched upon. How much of that is done as we stand now here at the end of the quarter 1? And related to that, can you also comment on potential tailwinds for mix? So has there been simply more spare parts sales compared to field services, which is eventually just really helping quarter 1 a lot? And then just generally on service, we have seen now roughly 5% growth in services over the last 3 quarters. Is that a reasonable run rate going forward? Or what would you think is a fair assumption here?

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Stefan Klebert, GEA Group Aktiengesellschaft - Chairman of the Executive Board & CEO [31]

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With regard to the tailwinds in the service business, there is no substantial change in mix of how it is composed. The 5% growth, of course, in a period where you'll see that the new equipment business is a bit subdued, you'll find that the service business is increasing. That is certainly also an element of that particular growth. But we also said already in the past that we are going to focus on the service business more than we did before, and we have also taken already in 2018 special initiatives to get feet on the ground and to enrich our service business.

And with regard to the pricing initiatives, I mean this is done. This is in the market. We saw now the aftermath in the comparison of quarter 1 '18 to quarter 1 2019 where we have seen now the increase in the margin of the service business, in particular in business equipment. Just have in mind, we were initiating these price increases more to mid of the year 2018. So you really compare a situation before price increases to what we have today.

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Sebastian Growe, Commerzbank AG, Research Division - Analyst [32]

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Okay. Fair. That's helpful. And then on working capital. And I was a bit surprised to not see prepayments going in a more favorable direction, especially when considering that on large projects, you had quite decent order intakes in the quarter. Why is that? Is there any general trends or change in the payment terms that you can achieve with clients? Can you comment on this one, please?

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Stefan Klebert, GEA Group Aktiengesellschaft - Chairman of the Executive Board & CEO [33]

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There is a general trend that the terms of the contracts are going to be more difficult. That is also if you compare our working capital with the past years we had in years like maybe '14 or '15 that the -- together, good cash flow is more difficult in these days compared to what we had previously. And that is something which we are also addressing with our organization. We always aim to stay cash positive also for the large projects. However, clients are more picky in that regard, and if we go into the balance sheet of some of our larger clients, which are officially available in the internet, you would find that they are also working on their side on the working capital. And hence, that come -- somehow then comes back to our situation. But definitely to answer to your question straightforward, it's more difficult compared to the past.

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Sebastian Growe, Commerzbank AG, Research Division - Analyst [34]

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Okay. Good. And then lastly on the performance measures, and sorry if you had provided the answer before. But have you given any sort of an idea, Stefan, on the number of sites that are affected by the planned fleet -- sorry, the planned staff reduction of 200 to 250 people?

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Stefan Klebert, GEA Group Aktiengesellschaft - Chairman of the Executive Board & CEO [35]

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Yes. It will be a number less than 10 sites in various countries. This is what we can say right now.

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Sebastian Growe, Commerzbank AG, Research Division - Analyst [36]

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Okay. And this indicated that it's not only really the personnel-related part behind the restructuring expenses. Would it be fair to assume that part of the 10 sites is going to be closed down entirely? Or is it just really taking out capacity personnel-wise in those very, very -- sites?

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Stefan Klebert, GEA Group Aktiengesellschaft - Chairman of the Executive Board & CEO [37]

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Yes. I cannot exclude that it might also be that we might have smaller sites where a company close down would make sense. This is what we are checking right now.

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Operator [38]

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And next question comes from the line of Daniel Gleim from MainFirst.

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Daniel Gleim, MainFirst Bank AG, Research Division - Director [39]

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The first one would be for Mr. Klebert. I've looked at the strategy update agenda for the Capital Markets Day, and I think the one thing that I was missing was new midterm guidance. Is that something that we can expect? Or are you yet undecided whether you will release in September an update on the future margin and growth potential?

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Stefan Klebert, GEA Group Aktiengesellschaft - Chairman of the Executive Board & CEO [40]

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To be honest, yes, we are still undecided if we are at that stage in a position to do so. We will think about that. But I think the most important message is we will give you in September, all these, let's say, the big leverages we have in purchasing, in production footprint, in ERP. And we will also put some clear numbers behind that what kind of savings we try to get or we believe to get in a certain time frame, which at the end might take -- bring you in a position to make a kind of good calculation and estimate what is the potential of this company.

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Daniel Gleim, MainFirst Bank AG, Research Division - Director [41]

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Mr. Schmale, could you confirm that the provision of the EUR 10 million was booked in the solution segment in Q1?

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Helmut Schmale, GEA Group Aktiengesellschaft - Former CFO [42]

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Yes. Definitely so. Why are you asking, sorry?

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Daniel Gleim, MainFirst Bank AG, Research Division - Director [43]

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It was not explicitly mentioned in the reports. And can you give us the restructuring lump by segment for Q1, please? And the PPA number? I wasn't able to derive it from the reporting this time.

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Helmut Schmale, GEA Group Aktiengesellschaft - Former CFO [44]

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Okay. So the restructuring efforts, which we have, were on EUR 5 million. And that was all about the dairy situation which we had. And then the D&A from PPA about EUR 8 million for the quarter.

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Daniel Gleim, MainFirst Bank AG, Research Division - Director [45]

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And a split by segment, please?

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Helmut Schmale, GEA Group Aktiengesellschaft - Former CFO [46]

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With regard to restructuring?

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Daniel Gleim, MainFirst Bank AG, Research Division - Director [47]

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Yes. Because -- just if there is in both segments. In the dairy...

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Helmut Schmale, GEA Group Aktiengesellschaft - Former CFO [48]

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It was -- we forgot to -- so this situation is solutions which we had.

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Stefan Klebert, GEA Group Aktiengesellschaft - Chairman of the Executive Board & CEO [49]

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Dairy processing, yes, to date is (inaudible).

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Operator [50]

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Our next question comes from the line of Frederik Bitter from Hauck.

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Frederik Bitter, Hauck & Aufhäuser Privatbankiers AG, Research Division - Analyst [51]

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I would have 3 questions, please. And let them do by -- one by one, please. The first one on solutions. Could you share some more details on the sort of what we call risky projects like the number of projects you either identified, the total sales volume of those projects? And did I hear it correctly that especially orders from 2015 and '16, so quite a while ago, I suppose they're already installed. So I'm just trying to understand a bit better about this kind of project.

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Stefan Klebert, GEA Group Aktiengesellschaft - Chairman of the Executive Board & CEO [52]

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Okay. Let's start with this -- with the question about the numbers, which is in the area of 50, 50 -- about 50 projects which are impacted with this provision. These are from the turnover point of view, it's between 10% and 20% of the total turnover of solutions. This is what I can say to this aspect. And concerning the order intake time, I can approve that. There are even some projects in which are -- where the order intake was before 2015.

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Frederik Bitter, Hauck & Aufhäuser Privatbankiers AG, Research Division - Analyst [53]

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Okay. And then another one on solutions. You obviously mentioned what kind of restructuring expenses you're budgeting for in terms of FTEs and other measures will have a -- still missing a bit the savings target you have? And is that basically a net savings target? So obviously, are you able to retain those savings?

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Stefan Klebert, GEA Group Aktiengesellschaft - Chairman of the Executive Board & CEO [54]

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This is something we have to find out when -- once we have clearly defined in which country are these people now and depends on the levels. So I don't want to give you a number right now here. But you could maybe also make your own calculations considering that we take out 200 to 250 people. Yes, This is what will be a kind quick win, I would say, because as I said, we are very sure that we can take out this capacity without any influence on the projects and on the upcoming projects.

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Frederik Bitter, Hauck & Aufhäuser Privatbankiers AG, Research Division - Analyst [55]

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Okay. A follow-up, if I may, please. Just in terms of this number obviously you won't be able to share much more details on that since you're still in negotiations, et cetera, and it's a sensitive topic. But just -- and I think Sven asked about it earlier as well. Just in terms of the split if it's rather more like back-office functions, et cetera, et cetera, workers? Or is it rather engineers? So just maybe a -- for feeling, I guess. That will be helpful.

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

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I mean it's -- as I said, it will be a mix of people. But I would say the majority would be white collar.

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Frederik Bitter, Hauck & Aufhäuser Privatbankiers AG, Research Division - Analyst [57]

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And then Dr. Schmale, one question on the financing side. I saw that there is a basically a remeasurement of provision for long-term liabilities in the -- of the tune of like EUR 26 million positive impact in 2019, which we are going to see. I'm just trying to understand a bit about the background there, and if that's something that's basically sustainable. So will that be like a part of the organization going forward? Or is this more an issue for 2019 exclusively?

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Helmut Schmale, GEA Group Aktiengesellschaft - Former CFO [58]

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No, it's a change of methodology. So it has to do with the interest rates, which we apply on the eternity value of our long-term liabilities. And for that, we have used in the past an average of a 7-year period. Now we are going to change to 25 or 30 years period. It's not finally concluded. And hence, the interest rates is certainly different to that shorter period of only applying a 7-year at which -- for these eternity liabilities and the corresponding interest rates. So that is something which will then go on. And also in the future, it's adjust -- shift the level of interest. So we are applying a higher interest rate compared to the situation before. And of course, over time and over years, it will then fade out again. But I believe 25 to 30 years to apply that code of the mathematical calculation of the eternity interest rate is the more prudent approach compare to just apply a 7 years period.

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Operator [59]

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Next question comes from the line of Nika Zimmermann from Deutsche Bank.

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Nika Zimmermann, Deutsche Bank AG, Research Division - Research Associate [60]

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I got a couple of them. The first one is that you mentioned that dairy processing drove the China business or maybe also turnaround China drove the dairy processing business. Is that possible to say? And do you expect this to slow down going further -- going forward?

And the next -- and you also -- you mentioned that dairy processing kind of like bottom now, I mean you've been saying that for, I think the last half year or 9 months. Where do you see this going forward if China would be slowing down?

And the second question would be on beverage. The order intake was quite well and sales has not yet come up. Do you expect this to improve from now on? Or do you expect the sales and beverage to kind of stagnate at this for the next couple of quarters, and then we see a recovery in 2020?

And the third one, sorry. In the solutions business, were you -- or in the dairy processing and also in the solutions, did you do some order picking and trying to -- to try to kind of get only profitable orders? Or what was your approach there? Or have you not implemented one yet?

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

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Okay. I'm not sure if I got your last question correctly. But definitely what we are looking at here is that we only would like to take orders on board which are -- with regard to the profitability and the terms of the contract, living up to our standards. So we are not looking for volume at all, and we are not going to just increase the market share or to drive somebody out of the market. We are challenging really our teams on the profitability, and that is what is our, yes, top priority #1. Does that answer your question?

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Nika Zimmermann, Deutsche Bank AG, Research Division - Research Associate [62]

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Yes. It does.

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Stefan Klebert, GEA Group Aktiengesellschaft - Chairman of the Executive Board & CEO [63]

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Okay. Then you have a question with regard to beverage. You are right. Beverage, we had seen that order intake, that was, in particular, in December '18 where we got also larger orders in North American -- in the North American region. We see we have the order intake now that the sales volume will follow now during the execution of those orders. So after a little bit of a period where we are doing just the preparation and first engineering. Then later on with the percentage of completion, those orders would definitely come into play with regard to the sales volume.

And then with regard to China -- and China, I mean, we are happy about China in that sense that it is really a good business for us as we speak. I wouldn't read any trend into that. Just we had the situation that we got some larger -- some dairy orders there. But in -- I would say our business in China is a very broad-based business. It can be dairy today and chemical tomorrow. So this is not why I'm going to say there's any general dairy trends in China.

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Helmut Schmale, GEA Group Aktiengesellschaft - Former CFO [64]

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And let me add. If it is about, let's say, the good offer pipeline right now, this is not, let's say, triggered by China only.

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Nika Zimmermann, Deutsche Bank AG, Research Division - Research Associate [65]

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Okay. And then one last question is on the pricing. Is it already all in the books -- in the order books yet? Or do we expect some further value growth going forward?

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Stefan Klebert, GEA Group Aktiengesellschaft - Chairman of the Executive Board & CEO [66]

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I'm not sure to understand this. I mean definitely the price increases, which I at least was mentioning for the service business, that is something which now has shifted to price level. And we, of course, like to keep that on that level. Looking forward into the business, as much, we are not -- of course we wouldn't give in on the pricing level. Otherwise, with regard to the product groups and to the applications, as I said before, the world has not automatically changed with regard to the pricing levels, and it stays like it is. And the only thing which I, at least, observed is that at least for -- the larger projects gets, the more competition or the more intense the competition gets. And that certainly -- that limits the possibilities to further increase margins.

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Nika Zimmermann, Deutsche Bank AG, Research Division - Research Associate [67]

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Okay. Then my question was if the price increases have all been implemented. I understood now. Yes, they are.

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Stefan Klebert, GEA Group Aktiengesellschaft - Chairman of the Executive Board & CEO [68]

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Yes. They are. Of course we would do, year-on-year, a new round of price increases because you'll need to pass through the material price escalation, all the wage inflation that is continuous, a hurdle which we have to overcome.

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Operator [69]

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(Operator Instructions) Your next question comes from the line of Peter Reilly from Jefferies.

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Peter Reilly, Jefferies LLC, Research Division - Head of Capital Goods of Equity Research [70]

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I've got 2 questions, please. Firstly, the new structure coming on the 24th of June. I know you obviously don't want to talk about details, but how radical are the changes? Is this mainly a cosmetic thing, so we just get a new reporting structure? Or is it a more radical change where you're going to empower the new segment heads, whoever they are, to have full P&L responsibility and therefore drive a major cultural change? So maybe you can help us understand a bit more about the sort of the steam of what you're driving towards if you can't share the details.

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Stefan Klebert, GEA Group Aktiengesellschaft - Chairman of the Executive Board & CEO [71]

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I mean what I can say to you right now is that it will be a divisional structure. We will have 4, 5 or 6 divisions. And what we will also have is the things which are good from OneGEA, for instance, having one single country organization that this is something we will combine with the new divisional structure. So it will be a matrix organization at the end where we have clear P&L responsibility in a division and also a clear P&L responsibility in each country. This is what I can tell you now. And the divisions, they will be very much oriented also on legal entities that will make us able and put us in a position to steer the new organization in a reasonable time.

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Peter Reilly, Jefferies LLC, Research Division - Head of Capital Goods of Equity Research [72]

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And if I can ask you a question just about the longer term. So being there for a bit over 6 months now, I guess you travel around seeing all of the group. Which regions do you think have got the greatest growth potential? And I'm thinking particularly in terms of Asia because I think it's fair to say the growth has been a bit disappointing in Asia and China over the last 3 or 4 years. So do you think there's still a lot of growth potential in emerging markets? Or do you see more growth potential in mature markets where maybe you're stronger and better established?

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Helmut Schmale, GEA Group Aktiengesellschaft - Former CFO [73]

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I mean the share of emerging markets for us is hovering around 38% to 40% for quite some time now. And that's certainly a correct observation of yourself. There are certainly potentials. We lately observed that in Latin America, for example, where we saw some more potentials coming up. And obviously, you have a new organization, sales-wise, having one face to the customer, certainly you can address better the emerging markets. But this is a long-term issue which you don't change from one day to the next.

Certainly, I believe it also needs maybe a review of which type of products you are offering. Can you strip them down to the needs of those markets? Because it's certainly somewhat different with regard to the features which you are forced to offer compared to more mature markets. That will be -- that is continuously addressed. But I believe, as a general trend, certainly we have opportunities in the emerging markets. I wouldn't say only in Asia.

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Operator [74]

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Your next question comes from Peter from Rothenaicher (sic) [Baader-Helvea].

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Peter Rothenaicher, Baader-Helvea Equity Research - Analyst [75]

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Peter Rothenaicher from Baader Bank. Two questions. Firstly, you mentioned now EUR 30 million to EUR 45 million restructuring for the solutions area. Is it fair to assume that more will come in the course of [said] year? Can you give us here some more details?

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Stefan Klebert, GEA Group Aktiengesellschaft - Chairman of the Executive Board & CEO [76]

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You mean what we are doing with this action, if it's a kind of quick fix, let's say, in solutions to really take out the ideal capacity? I personally believe very much in the new organization, which we will disclose end of June and will bring to life in the second half of the year 2019. Because what got lost somehow in the current organization, and this might be the biggest problem of GEA, let's say, is really having this kind of entrepreneurship, having people really managing businesses which they oversee. And when we are having again, let's say 40, 50, 60 managers in place who are managing their area of responsibility, I'm very optimistic that there will be much more focus on the right level of capacity to the workload.

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Helmut Schmale, GEA Group Aktiengesellschaft - Former CFO [77]

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Yes. It's -- one sentence with regard to your question. What is the timing of this potential expansion? I mean that is a clear process, which we need to follow here. We need to structure and frame the initiative, then we need to discuss it as case, maybe also the newer representatives. And then it needs to be -- yes, it needs to be handed into the employees concern so that everybody really knows who is concerned what are the number of people which will be concerned from such a restructuring. And only once you have done this, then you can book the legal restructuring expenses. So it -- that puts a label on the question mark of the exact timing of operations.

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Stefan Klebert, GEA Group Aktiengesellschaft - Chairman of the Executive Board & CEO [78]

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But I mean we are very optimistic that we can go through this process in the next weeks. And what is also important to mention that this will be excluded from our EBITDA, as we said, because our restructuring cost. But we will give you then a full-fledged information once we have this project ready.

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Peter Rothenaicher, Baader-Helvea Equity Research - Analyst [79]

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Okay. But to make it clear, sir, the final amount in 2019, which you will adjust in your EBITDA, will be perhaps even much higher than these, let's say EUR 40 million, EUR 45 million?

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Stefan Klebert, GEA Group Aktiengesellschaft - Chairman of the Executive Board & CEO [80]

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No. I mean this is a speculation. I mean what we are doing now is we take out this 200 to 250 people. These are the costs which we assume to have for the restructuring. And this is what we are doing right now.

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Peter Rothenaicher, Baader-Helvea Equity Research - Analyst [81]

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Okay. Because in this about EUR 5 million you adjusted in the first quarter, this is not part of the EUR 30 million to EUR 45 million you mentioned now.

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Helmut Schmale, GEA Group Aktiengesellschaft - Former CFO [82]

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No. No, that's a different topic. No.

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Peter Rothenaicher, Baader-Helvea Equity Research - Analyst [83]

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Okay. My second question is on IFRS 16 and the net debt. So you put in your report an EBIT -- and that figure, I think of EUR 155 million in the balance sheet, you have a much higher amount now coming from IFRS 16. Do you intend not to include this? Because on the other hand, you have some positive impact on EBITDA. And therefore, I would personally put it in, in my, let's say enterprise value calculation.

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Stefan Klebert, GEA Group Aktiengesellschaft - Chairman of the Executive Board & CEO [84]

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Yes. That is what we also discussed already that maybe we need to consider that also as net debt. It's not a quite traditional bank loan which you'll see there. I mean on the other hand, you also have the pension liabilities, which are not in the minus EUR 155 million, which are also debt. Maybe you are right, with regard to these lease liabilities, we should consider to introduce that also into the net position. But I will leave that to my successor.

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Operator [85]

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The next question comes from the line of Wasi Rizvi from RBC.

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Wasi Rizvi, RBC Capital Markets, LLC, Research Division - Analyst [86]

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Just a couple left. Firstly, where -- we'll see the new divisional structure in June. Would that be a reasonable time to then expect an update on your thoughts on the portfolio, and which things fit and which things perhaps don't fit? I'd have thought that's perhaps a natural time to hear about that.

And then second question was more on cultural change. And we've talked about what you need to do, and you mentioned maybe the divisional structure helps. But I assume incentivization is another area which you will use to drive that. How quickly can you change the incentivization structure? And what is the -- can it be done? Have you already done it? Can it be done quite quickly or does it need to be done quite slowly?

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Stefan Klebert, GEA Group Aktiengesellschaft - Chairman of the Executive Board & CEO [87]

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I mean let's first talk about the portfolio adjustments. Let me repeat what is already said on public. For the time being, we will do no acquisitions because we will focus on all the homework we have to do and allocate the management resources on the issues to fix them. At the end of June, we will release the organization, and at the Capital Market Day in September, we will then talk about portfolio issues. And we might talk about smaller adjustment within these divisions whenever we think that there are some parts which we will not continue with forever. This is the plan you can expect.

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Wasi Rizvi, RBC Capital Markets, LLC, Research Division - Analyst [88]

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And in incentivization?

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Stefan Klebert, GEA Group Aktiengesellschaft - Chairman of the Executive Board & CEO [89]

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Yes. Incentivization, I can say that for this year, we have for the -- for almost 1,000 managers worldwide a system in place that those managers are incentivized by the parameters you see in our guidance, which is EBITDA and ROCE. And -- but we might also think in the future to do it a bit more different or more sophisticated. But for the time being and for this year, everybody in the company in the management level is aligned to EBITDA and ROCE.

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Operator [90]

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Next question comes from the line of [Lelo De la Goine] from [One Investment].

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Unidentified Analyst, [91]

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Just one little clarification on the IFRS and the restructuring. Just to clean the number of EBITDA -- I mean the adjustment that you made on IFRS for last year, is that the number that, on a normal basis, should we see for -- on a -- on the next quarter? And what about the relationship with the D&A which spike up in terms percentage of sales this quarter even adjusting for that?

And on -- just a feel on restructuring. If you exclude the EUR 30 million to EUR 40 million that probably you're going to book next quarter, what is the normal measure that you expect for the remainder, so the one that is driven by the minus [5] that we see already in Q1. So just the big picture of the restructure at this point in time, which is -- which will not affect the EBITDA clean figure that you post.

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Helmut Schmale, GEA Group Aktiengesellschaft - Former CFO [92]

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This change of this restructuring expenses which we have booked in the first quarter, that is high-level, I would say, management change in these solutions in our business structure. And that is what we are -- have recorded. It has nothing to do with the capacity adjustment which we are talking along the year, which about is EUR 30 million to EUR 40 million. So there's a lot of separate steps going towards the first step.

And did I correctly understood that you did ask for the strategic projects which we have in the first quarter, that was about EUR 6 million which we had in the first quarter which we have absorbed now in the EBITDA, which we would have broken out in the past year's strategic projects which are now within the EBITDA, which is purely correcting for restructuring expenses.

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Unidentified Analyst, [93]

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And just on -- to clarify on D&A excluding all these effect, so just the fee that you report on one of your table. Is -- why we have saw the spike if -- there is a table when you report EUR 48 million compared to EUR 34 million last year, and this is not including the IFRS effect if I understood correctly. So why the spike here?

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Helmut Schmale, GEA Group Aktiengesellschaft - Former CFO [94]

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There is an impact from IFRS 16 in the D&A which is EUR 16 million which raises the bar there which is a depreciation on the lease assets.

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Helmut Schmale, GEA Group Aktiengesellschaft - Former CFO [95]

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Maybe some last words from...

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Stefan Klebert, GEA Group Aktiengesellschaft - Chairman of the Executive Board & CEO [96]

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Okay. Maybe I'll try to -- no, there is some more question coming up?

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Operator [97]

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The next question comes from the line of Jack O'Brien from Goldman Sachs.

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Jack O'Brien, Goldman Sachs Group Inc., Research Division - Equity Analyst [98]

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I just wanted to clarify one point on the restructuring costs of this EUR 30 million to EUR 40 million. Should we be expecting that to deliver a savings number fairly similar to the cost? And what proportion would you expect to drop in -- therefore in 2019? I'm just thinking about my earnings bridge for the year.

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Helmut Schmale, GEA Group Aktiengesellschaft - Former CFO [99]

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I mean that is too early to finally judge on that. I mean we need to work out the details and definitely calculate the payback and who and where we exactly will do that. And this is something which we will come back to you at a later point in time. Let's first do the details, and now we have an idea when we need to do it and what it is about. But let's do the business calculation and the payment calculation before we are indicating anything here. Sorry if I cannot answer that today.

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Stefan Klebert, GEA Group Aktiengesellschaft - Chairman of the Executive Board & CEO [100]

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Okay. So then let me make some final remarks or let's -- to try some summary. I mean what is important to mention or to stress, I think it was a solid start for GEA into 2009 (sic) [2019] with the Q1 numbers which gives us high confidence that we can keep our guidance for 2019 and stick with these promises. We addressed in BA Solutions the necessary reductions of ideal capacity which we will take out in a very short time and which will help us to improve the situation and to introduce the turnaround for solutions.

And then about 6 or 7 weeks end of June, we will inform you about the new organizational setup which will bring us much more entrepreneurship back in the organization. But of course, I have to say, not everything will change immediately after the announcement of the new organization because 2019, as I mentioned also in March, will be a year of transition for GEA. It will take some time to bring this organization to life. But we are very optimistic that in -- with the year 2020, we will then really full start with the new organization, having the new management teams in place and being -- and that the new management teams also prepare their own budget, which they are going for then in 2020. So thanks for joining us for this call, and I wish you a nice weekend.

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Operator [101]

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Thank you. That does conclude our conference for today. Thank you for participating. You may now all disconnect.