U.S. Markets closed

Edited Transcript of G1A.DE earnings conference call or presentation 29-Oct-18 1:00pm GMT

Q3 2018 GEA Group AG Earnings Call

Bochum Nov 5, 2018 (Thomson StreetEvents) -- Edited Transcript of GEA Group AG earnings conference call or presentation Monday, October 29, 2018 at 1:00:00pm GMT

TEXT version of Transcript

================================================================================

Corporate Participants

================================================================================

* Donat von Mueller

GEA Group Aktiengesellschaft - Head of IR

* Helmut Schmale

GEA Group Aktiengesellschaft - CFO

* Jürg Oleas

GEA Group Aktiengesellschaft - Chairman of Executive Board, CEO, Director of Industrial Relations & Labor Relations Director

================================================================================

Conference Call Participants

================================================================================

* Daniel Gleim

MainFirst Bank AG, Research Division - Director

* Denise Molina

Morningstar Inc., Research Division - Equity Analyst

* Felicitas von-Bismarck

Deutsche Bank AG, Research Division - Research Analyst

* Glen Liddy

JP Morgan Chase & Co, Research Division - Analyst

* Jack O'Brien

Goldman Sachs Group Inc., Research Division - Equity Analyst

* Klas Henrik Bergelind

Citigroup Inc, Research Division - Director

* Lucie Anne Lise Carrier

Morgan Stanley, Research Division - Executive Director

* Max Yates

Crédit Suisse AG, Research Division - Research Analyst

* Peter Reilly

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

* Sebastian Growe

Commerzbank AG, Research Division - Analyst

* Wasi Rizvi

RBC Capital Markets, LLC, Research Division - Analyst

================================================================================

Presentation

--------------------------------------------------------------------------------

Donat von Mueller, GEA Group Aktiengesellschaft - Head of IR [1]

--------------------------------------------------------------------------------

Yes. Good afternoon. Welcome to our third quarter conference call. Helmut Schmale, our CFO, will now comment the numbers before then. CEO, Jürg Oleas, and he together will answer analysts' questions. Thank you very much.

--------------------------------------------------------------------------------

Helmut Schmale, GEA Group Aktiengesellschaft - CFO [2]

--------------------------------------------------------------------------------

Good day, and welcome to our conference call. I would then like to start with the presentation of the key figures for the third quarter 2018.

So the first page summarizes, as usual, the key numbers. And the order intake from a year-to-year perspective grew by over 10% organically, not just large orders, among them, again, Dairy Processing even got a few orders, but all size brackets contributed to that.

Given the seasonal fluctuation that sees quarter 2 and quarter 4 regularly standing out, quarter 3 brought a certain sequential decline from boycott of the previous quarter 2 2018. However, we are cautiously optimistic about what we negotiate currently as part of the quarter 4 pipeline.

Sales increased moderately in organic sense by 2.8%. The headwind from currency translation of some EUR 25 million was overcompensated by about EUR 50 million contribution from the more -- most recent acquisitions, Pavan and Vipoll. Let me add that order intake and sales are on a new record level for third quarter.

The operating EBITDA amounts to EUR 138 million, which is comfortably up over last year. And let me add for the sake of clarity, on the level of the BA Solutions, we had a headwind of some EUR 40 million from the bottling provision last year. While on central level, we had EUR 7 million tailwind from real -- from a real estate disposal. On balance, a headwind of some net EUR 7 million in 2017 in comparative terms.

Let's go on then with some more details by business area. The Business Area Equipment reported 8% strong growth of order intake. Adjusting for FX and Pavan acquisition, the goal forward is still about 2%. The separation business grew strongly during the quarter 3 based on, for example, a strong business development in China.

Our milk and dairy farming business was somewhat down against a very strong comparable from 2017. Uncertainties among U.S. farmers about the outcome of the trade negotiations with Mexico, by far the biggest dairy export destination of the U.S. and Canada induced a fair amount of uncertainty, which now should be resolved as the consequence of the new US-Mexico-Canada Agreement, providing for enhanced access of U.S. farmers to the Canadian markets even.

On the other hand, as a late consequence of the drought, we might see some further fallout of the projected drought over the summer in our core European markets here.

Yes, the order intake for Business Area Solutions grew by 18%, or organically by almost 20%, even. With the exception of beverage and utilities, we observed strong growth in all APCs. Dairy contributed the most to us in terms of order intake. Dairy Processing for BAS now seems to have turned the corner, more on that later in the context.

With regards to sales, the reported sales increased by 5% or 2.8%, organically on the platform of the strong growth for BA Equipment of almost 13%. For BA Solutions, reported sales were down 1.7%. Sales in Dairy Processing were down in particular.

The EBITDA increased by some EUR 70 million, as I already mentioned, supported by the non-reoccurrence of one-off effects in 2017, which was on balance a net charge of EUR 7 million in the year 2017.

Some more details. For our Business Area Equipment, the volume increased, including the acquisition Pavan, explains by and large the growth in operational EBITDA. The profitability increased by about 50 basis points to 16.7%.

The improvement from BAS originates from what I mentioned with regard to the provisions for ABF technology on the one hand and on lower margins in Dairy Processing and Beverage on the other hand. But partially mitigated, however, by the improved margins for the remainder of the business and the good service ratio in the quarter for 2018.

The next page provides you with a better impression on the order intake and sales trend over time. In summary, we can observe that Dairy Farming order intake levels slightly dropping off further. While sales stopped surging, order intake and sales are catching up with the group growth over the last 4 years. Dairy Processing order intake has turned the corner, as I said already, sales will continue to drop for another couple of quarters as a late consequence of order intake falling until recently.

Beverages volatile sideways movement in orders for food, we observed that it is going for quite some time. Meanwhile, however, it includes our latest acquisitions as well. The Pharmaceutical and Chemical business sees a sideways volatility development for a couple of years with a recent slight upward strength. Overall, the other businesses remained stable.

Now the next page, we added freshly to our presentation of today to give you a bit more insights on the Dairy business. As a snapshot of the market conditions in Dairy Processing as far as it relates to the Business Area Solutions, we would like to offer these graphs here. For the avoidance of doubt, this excludes any components here of Business Area Equipment into Dairy Processing applications.

Since quarter 2 2018, the order intake is turning the corner, but it yet remains to be seen how sustainable that would turn out to be. As to the sales expectations of the next couple of quarters, mind the fact that since quarter 2 2017, the book-to-bill ratio has been smaller than 1, it will take a few quarters before the comparatively low order intake of previous quarters will have been absorbed by the -- in the sales development.

Among the new orders, we see good demand from emerging markets, for example, India, China as well as typical Western dairy surplus countries, such as Ireland or the Netherlands, who invest in whole milk powder or higher value-added downstream product, such as drink milk, cheese or infant or nutritional formula.

As usual, the book-to-bill ratios are highlighted on the next slide that differentiates the weighted average book-to-bill ratio of 1.04, by geographies and industries. The ratios are calculated on the last 12-month basis to smooth out seasonalities and random quarterly fluctuations.

To summarize the picture along its 2 dimensions. In terms of geographies, Latin America, Northern Europe and Asia Pacific have the highest book-to-bill ratio. North America and Western Europe are about 1, and German countries -- the Germanic countries like Austria, Switzerland and Germany, as such, and Eastern Europe are trailing a bit behind with 0.95.

In terms of industries, smaller industries such as chemicals, oil and gas and marine stand out positively, while every industry shows at least a book-to-bill ratio of 1.02. And as usual, the lower box gives you the weights of the cost sections.

Order intake development by product group and applications. For those of you who are interested in more detail, drill down information from the business area perspective, this slide offers a somewhat consolidated view on order intake trends by organizational units.

The dots on the left indicate the relative gross margin profitability of these businesses, including service vis-à-vis the group average. Green means in that sense above group average; red, of course, means then below. And more to the right, you see the approximated weight. To a transparency, we have, this time, indicated the exact numeric variances to the slides.

With orders matching sales in quarter 3, the backlog sequentially stayed put on the same comfortable level like in quarter 2. And the book-to-bill ratio here is indicated yet again with 1.04.

Now let's turn to working capital. While the last 12-month average is even 10 basis points below prior year, working capital is picking up again from the levels we had. As of reporting date, working capital increased year-on-year for both business areas, mostly from inventories and trade receivables.

The increase in inventories of about EUR 150 million is mostly related to Business Area Equipment on the background of working process, finished goods and merchandise. Most of this increase needs to be seen in conjunction with the well-performing order intake, the load in our large factories and the acquisition of Pavan.

The increase in trade receivables, on the other hand, of about EUR 95 million originates with about 2/3 from Business Area Solutions. The request of our clients for extended payment terms is one element in here.

The business areas have different working capital intensities. The BA Solutions in the single digits because of advanced payments, and BA Equipment in trends because of inventories. To the extent BA Equipment orders are outgrowing BA Solutions, just like at the moment, the working capital-to-sales mix was adversely affected.

The next 2 pages give a standardized view of the relative magnitudes of advance payments, inventories and receivables, including POC receivables. The surge in days of inventory outstanding is directly correlated to the strong recent increase in order backlog, and hence, a natural side effect of our otherwise welcomed growth. The advanced payments are a bit above the long-term benefit, which is, however, favorable as they are a liability.

On the next page, you'll find the receivables, the intensity is going up as a consequence of adverse changes in the payment term mix. As I said already, net of advances in POC liabilities, the increase is less pronounced.

Cash flow driver margin. The recent deterioration of the cash flow driver margin reflect the just discussed increase in the LTM working capital sales ratio mainly. Again, the orange curve is unadjusted for restructuring and other one-offs as usual.

We have free cash flow from continued operations over the last 12 months. Adjusted for expenditures for strategic projects, it's about EUR 125 million. Most of the items in this bridge are self-explanatory. The bucket other includes payouts for pensions of about EUR 40 million. Let me point out the consequence of above-average growth of our Business Area Equipment here, where our working capital sales ratio even the trends exceed the EBITDA margin in the teens.

Higher share of the BA in the sales mix of the group invariably results in absolute working capital growing faster than the EBITDA for the group. This is a mix, in effect, temporarily weighing on the net liquidity position. This effect would be eased in future, if, for example of argument's sake, BA Solutions would start to grow faster or BA it would slow down a bit.

On service, it's worthwhile to note that we have still a very good service share with about 31%. And we managed to grow the service business by about 5% in reported terms even 8% adjusted.

Then let's turn to the outlook. As amended already in the preliminary release on October 10, we have modified the 2018 guidance.

Before currency translation effects, we now expect for the full year 2018 the following. Revenues to grow by about 7.5%. And EBITDA margin of about 11.1%, which corresponds to an EBITDA margin of 11.3% in reported terms. And an operated cash flow driver margin of about 8.5%.

There's an additional information we added here, the slide on the strategic projects. All predictions for this year spent on strategic projects, be it OpEx or CapEx, has not yet changed. So we reiterate it here. In the next couple of weeks, we will tell if we will be at the lower end or just in the corridor.

Thank you for listening. That concludes my little presentation of the key set of numbers.

================================================================================

Questions and Answers

--------------------------------------------------------------------------------

Operator [1]

--------------------------------------------------------------------------------

(Operator Instructions) We will now take our first question from Klas Bergelind of Citi.

--------------------------------------------------------------------------------

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

--------------------------------------------------------------------------------

It's Klas from Citi. A couple of questions from me. I'll take them one at a time, if I could. The first on dairy. We have likely 1 negative and 1 positive ahead here. The negative being Dairy Farming and to what extent volumes can we get further into year-end, on tariffs, the European drought. And then the positive, which seems to be a growing pipeline of large orders in Dairy Processing. If you could comment on both, please. To what extent should we be concerned about further weakness in Dairy Farming? Whether the NAFTA agreement can provide offsets? How is October trending versus September in Farming? And what do you think in Processing? In the pipeline and by region please, is the activity in the pipeline higher now versus when we listened to you during the summer? I'll start there.

--------------------------------------------------------------------------------

Jürg Oleas, GEA Group Aktiengesellschaft - Chairman of Executive Board, CEO, Director of Industrial Relations & Labor Relations Director [3]

--------------------------------------------------------------------------------

Yes. Thanks for your questions. Let me start with Dairy Farming and Milking. It still is okay. But our view is that it will flatten out. There is a certain risk that it might go slightly down because of the issues you have mentioned. There are some counter effects, as Helmut Schmale has raised in his presentation. The agreements on the trade zones also regarding milk products between Canada and the U.S., which is resulting in some opening of CapEx there. But that's also, of course, limited. The other side, we also are aware that, for example, in New Zealand, Fonterra, the CEO has announced to his farmers that he will have to lower the milk price. So he has asked them also in that letter to save costs and to not invest too much CapEx because he said there is some rough time coming ahead in -- for Fonterra when it -- so they will not be able to process all the milk. So it's a mixed picture. I see that flat for the next 2, 3, 4 quarters with some risk that it could go downwards. When it comes to Dairy Processing from Business Area Solution, yes, we were able to book some nice projects now in Q3, mainly in September. It remains to be seen whether that's a single event or not. The going down of order intake in the last 2, 3 quarters, of course, has put some pressure in some dairy companies that they have to order and that they have to come to a decision. I would not be yet too optimistic on that. If we would see the development we have seen in Q3 for another 1 or 2 quarters, then we could talk about the stabilization. But I would like to draw your attention to that slide, which Helmut showed, that currently sales is turning down because order intake has been for 4 or 5 quarters way below sales. So that needs to be recuperated over the next 3, 4 quarters. And only then, hopefully, then sales is also recovering if order intake continues to be as it was now in the recent quarter.

--------------------------------------------------------------------------------

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

--------------------------------------------------------------------------------

Yes. That was helpful. Then my second one is on services, 8% growth the last 12 months. It's the highest growth in the 3 years. And it's a big step up if we back out the third quarter itself. To what extent is this only price increases by you to compensate for the cost headwinds versus volume improvement, which then should be driven by self-help and aging fleet? What I'm trying to gauge here is to what extent is the renewed service effort within GEA starting to pay off?

--------------------------------------------------------------------------------

Jürg Oleas, GEA Group Aktiengesellschaft - Chairman of Executive Board, CEO, Director of Industrial Relations & Labor Relations Director [5]

--------------------------------------------------------------------------------

We certainly can attribute a part to that to what you just said as latest, all the initiatives we have launched on the service with our -- together with our country organization. Well, that certainly shows some results for the time being. Then of course, also on the pricing level, I would say that 1% or 2% also we were able so far to introduce into the market. It's very difficult to push that into the market because in the Service Business, spare parts business, very often, customers do have price lifts based for certain validity. So we cannot just pull them out and replace them by new ones. We have to adhere to validities of price lifts, et cetera. But I'm optimistic on service, cautiously optimistic that our initiatives will start to work. And the focus is certainly there. And we are currently also even strengthening more the service organization. And we're also building up people in the serving organization, where we believe there are still opportunities. So I'm cautiously optimistic on the service side that it will continue to grow.

--------------------------------------------------------------------------------

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

--------------------------------------------------------------------------------

Okay. That's good. My final one is on cost. You have previously alluded to increased wage inflation on the back of wage creep in Europe, higher wages there. But now when we have a little bit more clarity on the tariffs and to what extent this can impact the cost line, can you guide a little bit maybe in terms of the impact from tariffs, both in terms of pure raw material increases but also from increased cost inflation through the supply chain, please?

--------------------------------------------------------------------------------

Jürg Oleas, GEA Group Aktiengesellschaft - Chairman of Executive Board, CEO, Director of Industrial Relations & Labor Relations Director [7]

--------------------------------------------------------------------------------

On the materials side, it's quite difficult because we have thousands and thousands of different commodities we buy, and not only commodity but also tailor-made products for us, which we then implement into our projects. So it's not that easy to make that. But certainly, we have seen in -- as we also said in the last 2 quarterly calls, we have seen since the second part of last year, increase in some or for us relevant commodities, prices such as certain alloys in steel and others and energy, et cetera, which we are trying to now to factor into the pricing, into the bottom up calculation. And I think we are quite successful in transferring that in the end to the top line, it means to the customer. When it comes to wage inflation, we have been able -- I mean, worldwide, we do assume currently that wage inflation for all our personnel costs or personnel expenses is trading around 2.5% and 3.25%. We did assume when we planned the current year, 2.75% wage increase per capita, compared to 2017. Of course, in Germany, where we have tariff agreements, which we cannot influence, it's above that. It's rather in the area of 3% to 4%. But then we have other countries, who are nontariff, that is, in Germany, where we can limit that increase to maybe inflation. If you look at the personnel costs per head in this year, they are currency trading almost at the same level as last year. So we have been successful to limit that increase also compared to the year 2016. But of course, that all has a certain limit. And we also, of course, are limited and reducing the contract workers to also gain some momentum or positive cost momentum on that side. So currently, we do have the wage increases under control. Also, the acquisitions of Comas, Imaforni and Pavan brought the average wages per capita slightly down because you can imagine in Italy, we pay less than in Denmark or in the U.K. or in Germany as an average. So that is diluting a little bit and helping us. So the wage increases per capita is currently trading at a very similar level as last year.

--------------------------------------------------------------------------------

Operator [8]

--------------------------------------------------------------------------------

We will now take our next question from Max Yates of Crédit Suisse.

--------------------------------------------------------------------------------

Max Yates, Crédit Suisse AG, Research Division - Research Analyst [9]

--------------------------------------------------------------------------------

Just my first question is on Dairy Processing. And I think you talked about when you lowered the guidance, the effects of lower earnings in that business, and I presume that's coming from lower sales. So what I wanted to understand is now that book-to-bills have turned positive and it seems like sales growth will come back in maybe a few quarters time, is the diluted or is the impact on margins just a function of low utilization of the engineers? Or is there anything actually in orders that you're taking, which suggests that pricing is worse? So what I'm trying to get to is will there be a natural margin uplift just because the people will be utilized that previously haven't been working? Or do we then have to wait for pricing to pick up to actually see a meaningful step-up in margins on the sales in Dairy Processing?

--------------------------------------------------------------------------------

Jürg Oleas, GEA Group Aktiengesellschaft - Chairman of Executive Board, CEO, Director of Industrial Relations & Labor Relations Director [10]

--------------------------------------------------------------------------------

It is both. On one side, as I mentioned, I think 6 months ago, we cannot just lay off our engineers due to the declining order intake, which we did observe and which you can see in that curve, which Helmut has presented. So the occupation of those engineers was much more into standardization quotations, et cetera, so-called nonpaid activities by the customers so not into the gross margin. But I think it's good to do that. The higher number of quotations, of course, also has to do with the tougher fight on the market for the remaining dairy projects, where it needs more investments to win them. And last but not least, unfortunately, you also have to compromise when it comes to the bottom up calculation when the volume and the available projects out there in the market is being reduced and competitors are still the same. And to my knowledge, nonrelevant competitors have restructured this. And then so the overall capacity of engineers, GEA plus the others is still there, and they are fighting for lower volume. That, of course, leads to a negative pressure on the gross margin in that area. Will it go naturally up? Of course, if the order intake will develop as we see it on that side, which Helmut presented, that would be, of course, very nice. Because then our engineers would work more for the direct gross margin and less for quotations and standardizations. By the way, standardization is, of course, something which is absolutely needed, and it's good. But the number of quotations per order intake has become worse, and that goes to the detriment of the profitability. And it remains to be seen if it would go up as it is here. That would be, of course, good news for the APC Dairy. But as I said a minute ago, it remains to be seen whether that's a stable uplift for another 1 or 2 quarters before we draw our conclusions out of that.

--------------------------------------------------------------------------------

Max Yates, Crédit Suisse AG, Research Division - Research Analyst [11]

--------------------------------------------------------------------------------

Okay. Just as a follow-up to that. Could you give us a sense within your sort of 2018 EBITDA guidance of EUR 550 million, whether the Dairy Processing part of Solutions will actually be profitable in the second half of the year? Just to try and understand sort of where margins have come to and how dilutive this business is. So will it be making money in the second half within the guidance?

--------------------------------------------------------------------------------

Jürg Oleas, GEA Group Aktiengesellschaft - Chairman of Executive Board, CEO, Director of Industrial Relations & Labor Relations Director [12]

--------------------------------------------------------------------------------

We usually do not disclose margins or profitability of individual APCs. But what I can tell you is that if you take new machines or new projects, APC Dairy, it is currently trading below sale. But of course, you always have to see that in combination with service. And if you add on service, then it is profitable. Not highly profitable, but it is profitable. But you cannot detach the service and the new machines or the new projects. But new projects is not that good for the reasons I just explained.

--------------------------------------------------------------------------------

Max Yates, Crédit Suisse AG, Research Division - Research Analyst [13]

--------------------------------------------------------------------------------

Okay. And just my second question would be around working capital. Obviously, it has increased in Q3. But I think within the cash flow driver margin guidance, it is implied that you will have a much better development in Q4. So maybe if sort of not commenting on average working capital but if you could talk a little about where you would expect year-end working capital to be relative to where we were at the year-end of last year?

--------------------------------------------------------------------------------

Helmut Schmale, GEA Group Aktiengesellschaft - CFO [14]

--------------------------------------------------------------------------------

Helmut here, if I may take that question. Then with regards to the working capital, I gave some explanation during my little presentation on why it has developed the way it is. What we are looking further -- if we are looking further into the quarter, what we are aiming is to bring that working capital down, let's say, about EUR 100 million. So to grow substantially below the number you see now in quarter 3 2018, which should then also have an impact on the cash flow driver in order to achieve that around 8.5%, which we set.

--------------------------------------------------------------------------------

Max Yates, Crédit Suisse AG, Research Division - Research Analyst [15]

--------------------------------------------------------------------------------

Okay. And just the very final one on IT investments. So I think you said sort of a few years ago part of the IT investment was bringing all of the different entities onto a sort of singular SAP system. Could you maybe give a little bit of color around how that process is going? How many of this sort of 100 entities had been brought onto the same system? And maybe just a little bit of a color around what it now has allowed you to do that you haven't previously, that potentially makes the business easier to run than where we were a couple of years back?

--------------------------------------------------------------------------------

Helmut Schmale, GEA Group Aktiengesellschaft - CFO [16]

--------------------------------------------------------------------------------

Thank you. What we have done meanwhile is that we have fixed the burning platforms, as I would call it. We have some down-tier migrations into a well-functioning existing systems of GEA. And by that, we have addressed about 25 sites in order to facilitate this. And with regard to the new one, ERP template, we have done so far the collection or blueprint of what is the future demand for such a system in order then to think about the process horse and to also build up the necessary governance structure in order to handle such a system. And then we will start from next year onwards to away from the implementation -- with the implementation of 1 ERP template. That is a little -- it is delayed compared to what we initially were targeting. However, we have achieved a lot with the down-tier migrations, which we needed to do first in order to fix the burning side so to say. And as we've said previously, then it will be an exercise over the next couple of years that we are going to further harmonize the ERP landscape for GEA. So we are in the middle of the process.

--------------------------------------------------------------------------------

Max Yates, Crédit Suisse AG, Research Division - Research Analyst [17]

--------------------------------------------------------------------------------

Can you give any sense of how much of the organization is now on a unified SAP system? Because I think there was a target out there, I think it was 80% by the end of 2019. Correct me if I'm wrong. But any progress? Any status of where you are relative to that target?

--------------------------------------------------------------------------------

Helmut Schmale, GEA Group Aktiengesellschaft - CFO [18]

--------------------------------------------------------------------------------

No. We are not yet on a harmonized platform. As I said, we are harmonizing to the big systems, which we have still, which are well functioning and which are mostly SAP-based or Axapta-based. And we have started that process to whole in the first step of the burning sides into that platform. And we never said that we will have harmonized power by 2019 to that degree already, our ERP landscape. What we said is that up until 2025 or 2027, we would like to go there.

--------------------------------------------------------------------------------

Operator [19]

--------------------------------------------------------------------------------

We will now take our next question from Lucie Carrier of Morgan Stanley.

--------------------------------------------------------------------------------

Lucie Anne Lise Carrier, Morgan Stanley, Research Division - Executive Director [20]

--------------------------------------------------------------------------------

The first one actually is a follow up on the previous question we had on orders. And I was wondering if you could give us an idea of what is the current margin in your order backlog. And how does that compare with the margin you are expecting for 2018? So a little bit around -- a bit more than 11%. So how do we trend in the margin, in the orders? And then the question I had is, I remember earlier in the year, you had some issue of kind of benchmarking the move in FX. It may be increasing prices for raw materials because it was not fully kind of included in your contract. And so I was wondering whether you have kind of slightly changed the terms of your contract? How does that -- how could that reflect better, the potential changes you are seeing around sourcing and FX? So that's question number one.

--------------------------------------------------------------------------------

Jürg Oleas, GEA Group Aktiengesellschaft - Chairman of Executive Board, CEO, Director of Industrial Relations & Labor Relations Director [21]

--------------------------------------------------------------------------------

Yes. The order intake margin is good. And it's in line with what we expect for the remaining part of -- or has been in line because basically, the order intake is almost already in the books for the remaining 3 months of this year in Q4. So I do not expect any surprises from the margins because of the order intake, the very little one which remains to be catched to generate sales before the remaining 3 months. When it comes and then looking forward for the next year, I think we have put a lot of effort in standardizing pricing activities besides the normal pricing activities. It means just passing forward wage increases or material price increases. So as you may remember also in the value project, we have so-called value pricing initiatives. And we have pushed also culture now within GEA that all the managers are aware that pricing is a key item at GEA because we have good products, we have good technologies and the customers, they do like our -- most of our products and solutions. And that's what I'd call slow-pricing initiatives. So provided that the global economy is not turning down or cooling down and provided, of course, that we do not have a further fit back in Dairy, et cetera, as we have suffered in the last 4 or 5 quarters, I'm optimistic that the pricing will support the margins into the future. When it comes to FX, in the Business Area Solutions we mostly, mostly do bottom-up cost-plus calculations. So there is a very little exposure on the FX there. Of course, we usually when the contracts are signed, the FX rates are fixed, so the exposure there is very little. On the equipment side there, where we have price lifts, et cetera, we have to still educate our customers that we have the flexibility to adjust those price lifts when it comes to FX-translation impacts, which then of course also has a transaction impact. We are working on that also to have more freedom to renegotiate the prices, which sometimes has a little -- it usually takes 12 months in order to -- if something happens on the FX front that we have more flexibility there. So I think the FX, which compared to the dollar has calmed down a little bit, but we have other currencies like the ruble, like the Brazilian currency, et cetera, not to talk even about Turkey and other countries, which is still an issue. And the problem is even if we pass through those currencies, we hear quite often, for example, now in Argentina and Brazil or in Turkey that our salespeople are telling us that, "Look, whatever you calculate here with the right FX rates, the customer cannot afford that. So they may even postpone projects." And they're doing this because they say, for us in Turkish lira or in Argentina in pesos, this is, by far, too expensive, and we do not have the budget. That's the downside of it. But I think we will not have an FX exposure, a relevant FX exposure in the future.

--------------------------------------------------------------------------------

Lucie Anne Lise Carrier, Morgan Stanley, Research Division - Executive Director [22]

--------------------------------------------------------------------------------

And just if I could come back on your comments for 2019. Are you confirming that the orders you have taken this year so far in 2018, that will be executed in 2019? Because some of them, especially in Solutions, have a longer lead time. Do those orders have a stable margin versus what you are seeing in 2018?

--------------------------------------------------------------------------------

Jürg Oleas, GEA Group Aktiengesellschaft - Chairman of Executive Board, CEO, Director of Industrial Relations & Labor Relations Director [23]

--------------------------------------------------------------------------------

Overall, for all of GEA, I would say yes. But then of course, there are differences between the individual product groups and APCs. And as I also explained some minutes ago, in the APC Dairy, of course, we had to compromise more often on the pricing or on the margins in order to stabilize that business and to have a doable business volume in that APCs. So there are certain areas where, of course, we still have to compromise. But overall, I think for GEA, the pricing of the quotations we have done and which we have converted or are converting now in orders is fine also for the future.

--------------------------------------------------------------------------------

Lucie Anne Lise Carrier, Morgan Stanley, Research Division - Executive Director [24]

--------------------------------------------------------------------------------

My second question is coming back to your Slide number 10, where you very helpfully give us the detail in terms of order momentum by application and businesses. I mean, clearly, the driver in the quarter is very much on the BA Equipment, around the food processing and packaging. And I was just wondering whether this 44% we are seeing year-on-year, how much of that is really organic? And how much is really driven by your M&A business? Just to try to get a better sense of what the end market is really contributing to you on an underlying basis.

--------------------------------------------------------------------------------

Jürg Oleas, GEA Group Aktiengesellschaft - Chairman of Executive Board, CEO, Director of Industrial Relations & Labor Relations Director [25]

--------------------------------------------------------------------------------

Yes. There is, of course, there is quite an impact on the -- out of the acquisition of Pavan in there as it just passed the extrusion of milling. And Pavan in itself, compared to the business plan, is running on a very high level when it comes to the order intake. So we are happy with that. However -- but also the so-called food processing and packaging, which in the past we called convenience food or food solutions, is in many areas also running on a very high pace, which is driven in many cases by the poultry chicken business. We do observe that globally, there is a high demand for products derived from chicken. And all that has to do with chicken, be it nuggets or pieces or for sandwiches, et cetera, we are also nicely profiting there. But it's not only Pavan. But of course, the big part is Pavan, but also in food processing, we did see a double-digit growth in some of the last quarters due to a high demand for mainly chicken.

--------------------------------------------------------------------------------

Lucie Anne Lise Carrier, Morgan Stanley, Research Division - Executive Director [26]

--------------------------------------------------------------------------------

And then just my last question, it's more kind of comparing what you usually disclose and the new information. At the back of the presentation, you have, I think, put in a completely new slide around your maximum leverage and what is now to your standpoint available -- your EUR 161 million available cash. Can I maybe just ask, what is really the message of the slide? Does it say that there is not much more room in terms of capital allocation that you can do in terms of return to shareholder? Or there's not much room in terms of M&A? Just to understand a little bit more the meaning of this new slide, please.

--------------------------------------------------------------------------------

Helmut Schmale, GEA Group Aktiengesellschaft - CFO [27]

--------------------------------------------------------------------------------

Yes. Helmut Schmale, if I may take that. We continue to repeat that we believe it is important for the company to stay within the investment grade. And this is why we have added that slide to the deck here, in order to highlight 2 things. One thing is that, of course, the actual working capital increase, which we have seen takes away some of the financial flexibility as it called for to be funded by the use of cash. And the other main impact is that there is a remainder of about EUR 160 million of cash available if you'll take it from a strong rating point of view. And then of course, you can use then for even grow further the business or you can use it for any other potential consideration of cash allocation. But the point for me, it's important to highlight that it has certain limitations at the point in time based on the fact that we have already on a high gross debt because it's not -- it includes, of course, all what is added back for pensions and operational lease, which are opted to be reflected and considered in what is our financial leeway. So this is why we added that slide to the set of information here.

--------------------------------------------------------------------------------

Operator [28]

--------------------------------------------------------------------------------

Our next question is from Denise Molina of Morningstar.

--------------------------------------------------------------------------------

Denise Molina, Morningstar Inc., Research Division - Equity Analyst [29]

--------------------------------------------------------------------------------

Just a couple of questions on the -- actually, on the working capital in terms of the receivables. You alluded to the fact that there might be some noise in receivables, that the underlying receivables may have improved. So I was just wondering if you could talk about your efforts to improve the receivables? And if there is a way to give us an indication for that, a quantification of how much of that 115 is not the underlying? Is it actually much lower than that? And then the second is on the manufacturing footprint, whether or not you've made any steps to shrinking that any further?

--------------------------------------------------------------------------------

Helmut Schmale, GEA Group Aktiengesellschaft - CFO [30]

--------------------------------------------------------------------------------

Thanks for your question. I mean, as I've said during my presentation, that this is driven by payment terms. That is one element in there. And you have certainly heard about other peers telling the same, and you can read also into the new slew of our customers there. They are also or from their side being picky on the working capital development as such. And what I would maybe like to add here, it is not an issue that the overdue receivables, in particular, more than 90 days are growing up further. We've worked that down, in particular, also during quarter 3. And it's more from the underlying business that, that development, to have them before anything else.

--------------------------------------------------------------------------------

Denise Molina, Morningstar Inc., Research Division - Equity Analyst [31]

--------------------------------------------------------------------------------

So if you look at what you exited at 7 -- '17 was you had a few I think you had some receivables that were more than -- much more than 90 days even as much as 12 months. Have those been paid now? Have you actually been able to recover some of those receivables?

--------------------------------------------------------------------------------

Helmut Schmale, GEA Group Aktiengesellschaft - CFO [32]

--------------------------------------------------------------------------------

As I just said, if you take the overdue receivables, which are overdue more than 90 days, you would start as a -- with more than 3% of our sales. End of last year or the beginning of the year 2018, we are now down to 2.5% of our sales for that bucket. And that is the development we actually observed. So we are actively aiming to work that down.

--------------------------------------------------------------------------------

Denise Molina, Morningstar Inc., Research Division - Equity Analyst [33]

--------------------------------------------------------------------------------

Okay. Great. And then the manufacturing footprint?

--------------------------------------------------------------------------------

Jürg Oleas, GEA Group Aktiengesellschaft - Chairman of Executive Board, CEO, Director of Industrial Relations & Labor Relations Director [34]

--------------------------------------------------------------------------------

Yes. Particularly, your question on manufacturing because I have a difficult line here.

--------------------------------------------------------------------------------

Denise Molina, Morningstar Inc., Research Division - Equity Analyst [35]

--------------------------------------------------------------------------------

I'm sorry. Yes. I'm just wondering if you've been able to shrink the manufacturing assembly footprint. You had a target you talked about in the last Capital Markets Day, so just wondering if you made any progress on that.

--------------------------------------------------------------------------------

Jürg Oleas, GEA Group Aktiengesellschaft - Chairman of Executive Board, CEO, Director of Industrial Relations & Labor Relations Director [36]

--------------------------------------------------------------------------------

Yes. We continue with that project. And as you have seen from the announcements, we achieved a big milestone with our marine separation factory in France, which we could find an agreement with another company to not have to close. But they're taking it over, and we will have some contract manufacturing agreements with them for a very -- for a certain short period of time, and then we will go out of that. We preferred that solution instead of closing it. First of all, it comes as a bit more costly for us. And secondly, we also safeguard the working places for the employees and do not cause any irritations there. And we're working also on all the other initiatives to downsize or contemplate and to do the multipurposings. So that's on track. But I think one of the biggest milestone was that site in France to get that behind us. It has been closed. The transaction has been closed beginning of this month.

--------------------------------------------------------------------------------

Denise Molina, Morningstar Inc., Research Division - Equity Analyst [37]

--------------------------------------------------------------------------------

Okay. Great. Do you expect to announce any more closures in the next, I would say, 6 to 12 months?

--------------------------------------------------------------------------------

Jürg Oleas, GEA Group Aktiengesellschaft - Chairman of Executive Board, CEO, Director of Industrial Relations & Labor Relations Director [38]

--------------------------------------------------------------------------------

Yes. We will have -- not all of them being complete closure, but the downsizing optimizations, putting together all sites. And then, of course, also transferring some of those things to our factory in China. Also what I have just said, from that products which we have been doing in France, we are gradually ramping up the production of those pieces and elements in our Chinese factory.

--------------------------------------------------------------------------------

Operator [39]

--------------------------------------------------------------------------------

We will now take our next question from Sebastian Growe of Commerzbank. It appears Sebastian has removed himself from the queue.

We'll take our next question from Peter Reilly of Jefferies in London.

--------------------------------------------------------------------------------

Peter Reilly, Jefferies LLC, Research Division - Head of Capital Goods of Equity Research [40]

--------------------------------------------------------------------------------

A question for you, Jürg. This is probably your last presentation, I guess, as CEO. I imagine the next one's going to be done jointly with Stefan Klebert. And two questions. One is, what advice are you going to give the new CEO in terms of his priorities? What are the things he needs to focus on given the problems over the last couple of years? And secondly, does it mean that until he takes over and gets fully in charge of the company, there's going to be very little strategic progress because a lot of stuff has to be put on ice until he can come in and take his own decisions on where the company is going?

--------------------------------------------------------------------------------

Jürg Oleas, GEA Group Aktiengesellschaft - Chairman of Executive Board, CEO, Director of Industrial Relations & Labor Relations Director [41]

--------------------------------------------------------------------------------

Yes. Thanks, Peter, for those questions. Of course, it's going to be a great moment when Stefan Klebert is taking over. As you know, he's going to join us in about 2 weeks. We are preparing currently, together with him, a very extensive tour to our customers, our own sites and the production sites of our customers so that he, as quick as possible, gets a deep insight into the business and the products which we are doing. We're already, of course, sharing with him a lot of numbers, et cetera. So I have no doubt that his onboarding will be very fast and very successful because he has also a very good track record of what he did in the past. When it comes to the question of whether priorities will be different or whether some of the strategic actions will come to a stop. I -- as far as I have learned to know him now, he's a very hands-on manager, I don't see that. I think he is a type of person who will not analyze for months or for years before he then take his own actions. I think he's the type of CEO who will, of course, understand the issues and the challenges, set his priority and then act. I personally don't believe that those priorities will be very different to what we have been doing in the past 2 or 3 years. But nevertheless, it's, of course, up to him. And it's always good to have a third view from the sides from somebody coming from the outside, and he may see certain things a bit different than what we have seen so far. But be assured that the character, the type of Stefan Klebert is somebody who is hands-on and will address the issues quite fast.

--------------------------------------------------------------------------------

Peter Reilly, Jefferies LLC, Research Division - Head of Capital Goods of Equity Research [42]

--------------------------------------------------------------------------------

And are you happy to say what you think his priority should be in terms of manufacturing footprint or culture or IT systems or improving staff morale? Or is it a combination of all those things at the same time?

--------------------------------------------------------------------------------

Jürg Oleas, GEA Group Aktiengesellschaft - Chairman of Executive Board, CEO, Director of Industrial Relations & Labor Relations Director [43]

--------------------------------------------------------------------------------

It's all of those what you have said basically at the same time because pricing is very important. The global manufacturing footprint, I think he comes from a heavy manufacturing company at Schuler. So I believe he will see that quite fast that this is a crucial issue that we have too many factories, too much scattered around and that we have an issue with the wage costs also not only but also because of our high concentration of manufacturing here in Western Europe. And so I don't see any reason why he would see that different.

--------------------------------------------------------------------------------

Peter Reilly, Jefferies LLC, Research Division - Head of Capital Goods of Equity Research [44]

--------------------------------------------------------------------------------

And if I can just please come back to the issue of the overdue receivables. It sounds like you still have a lot of receivables, which are a long way past their due date. When do you decide you have to take a write-off? As I look at the long-term trends, your DOS was a long way above where it was 2, 3 years ago. Presumably at some stage, you have to bite the bullet and say, actually, we're not going to get this money back and so we have to take a write-off. Are you getting close to that stage?

--------------------------------------------------------------------------------

Helmut Schmale, GEA Group Aktiengesellschaft - CFO [45]

--------------------------------------------------------------------------------

No. I mean, every time and every quarter and year-over-year, we are assessing the overdue receivables individually. And that is done during the closing procedures. And hence, the way which we have provided for, we believe, is in line with what needs to be in place. And I do not see from today's point of view that there is a massive move in that particular issue.

--------------------------------------------------------------------------------

Operator [46]

--------------------------------------------------------------------------------

We will now take our next question from Glen Liddy -- from Sebastian Growe of Commerzbank.

--------------------------------------------------------------------------------

Sebastian Growe, Commerzbank AG, Research Division - Analyst [47]

--------------------------------------------------------------------------------

Two questions, one on service, one on Business Area Equipment. On service first, and this is a follow-up from last question before. Again, because you truly pointed to a 5% organic growth in the service business, the target which you now have reached in the third quarter from LTM share. Can you give a sense how much of the intended price hikes have been implemented? Or put differently, what is the average contract tenure of service contract with the idea that the lesson we have is there is eventually still a certain headroom around and then we'll just get your thoughts on how much simply has been done and what still might be done? And then on the equipment business area and the organic order growth has been slowing quite remarkably from 11% in the first quarter to now about 2% in quarter 3. I was wondering what the drivers here. So is it pure hesitation in light of greater macro uncertainty? Or do you see eventually a link to the price hikes that you have been talking about before? And is there any regions or end markets that are sticking out here that you, yes, might comment on?

--------------------------------------------------------------------------------

Jürg Oleas, GEA Group Aktiengesellschaft - Chairman of Executive Board, CEO, Director of Industrial Relations & Labor Relations Director [48]

--------------------------------------------------------------------------------

Yes. You have to interrupt me if I have understood you wrong because we have here a very bad line. So I'll try to answer the questions which I believe I understood from you. Service growth and pricing, if pricing initiatives are in place. The -- some of the growth I think it come through pricing. It's very difficult to earmark them. How much is volumetric growth and how much is pure lifting the prices. But certainly, there is an impact in there. The important thing is that many of those tools, the focus, the culture is now fully there. And it's fully on the focus to ask for the right prices. We will also -- we have many other initiatives in service to improve even more service with customer surveys, et cetera, make it more easy for the customer to make it ordering process to order some spare parts or whatsoever in order -- because customers have told us that the easiness of ordering is very important also for them when it comes to the more commodity type of spare parts, so the more simple solutions. So as I said also to one of your colleagues, service initiatives are on track. We are making a fine-tuning of the structures now also in service, learning the lessons from the past 2 years where maybe not everything was yet perfect. We are fine-tuning this. And I'm quite optimistic for the service. I have mentioned that also on other occasions, GEA, if you want to look at from a different side, is a service company, leaving out of service to 50% or 75% depending on what type of margin you'll take. And we need the new equipment or new projects to generate installed fleet and to make it grow. So it's -- GEA is very much depending on service that's why we are putting so much emphasis. On the order intake growth on equipment, we did see some weaknesses in new projects beside service in dairy farming, as I just said recently. Remains to be seen how that develops into the future, then we also do see that in some areas like the dairy component separators, et cetera, for the dairy industry also have been suffering lately in the order intake. It's not a, let's say, one-fits-it-all answer for the slower momentum in growth of equipment. Of course, the question remains to be seen, has it to do with the pricing? Some of our salespeople would complain and say, yes. I'd rather believe not -- that's not the relevant thing. I think also the global economy, the cooling down of the global economy has also to do with slowing down of the very strong momentum we had in the last 4 quarters because it already started in Q3 and Q4 last year with organic order intake in equipment.

--------------------------------------------------------------------------------

Sebastian Growe, Commerzbank AG, Research Division - Analyst [49]

--------------------------------------------------------------------------------

Okay. Very helpful. And if I may just quickly follow up on service again. Can you give us a sense on the average contract tenure? I.e., what's the duration normally of these service contracts? So when do you get really a hand on renegotiation the term? And then as a very little -- as a follow-up, I think when looking at equipment, in particular you are running -- it's close to EUR 1 billion of last 12 months rolling service revenue. So is there a physical limit to a certain extent? Or how should we think about the measures that can still eventually lift the growth here? And yes, how should we think about that?

--------------------------------------------------------------------------------

Jürg Oleas, GEA Group Aktiengesellschaft - Chairman of Executive Board, CEO, Director of Industrial Relations & Labor Relations Director [50]

--------------------------------------------------------------------------------

Yes. Service timing is not a simple question to be answered, because we do have very simple, very highly standardized spare parts, which customers can even order via the Internet. And that goes immediately like in Amazon, over the desk. So over a couple of days, they receive their spare parts or their replacement and then it goes up to revamping, debottlenecking projects, which, especially, in service solutions can take up to 12 months, those type of projects. And then you have the whole variety in between. So the answer is not that easy. However, having said that, we usually do assume if we put all that together and make a very broad, very rough estimate that time lag between order intake and sales volume and service for all, if you put everything together at GEA, is around 2 months.

--------------------------------------------------------------------------------

Sebastian Growe, Commerzbank AG, Research Division - Analyst [51]

--------------------------------------------------------------------------------

Okay. Very clear.

--------------------------------------------------------------------------------

Jürg Oleas, GEA Group Aktiengesellschaft - Chairman of Executive Board, CEO, Director of Industrial Relations & Labor Relations Director [52]

--------------------------------------------------------------------------------

And then you asked about the capacity of service and equipment. Yes, it has been growing quite fast. We do have limited projects where -- or business cases where our people is bringing this up here when they want to invest more people. And we are hiring currently in different areas of service, and there is some countries, but also in the business areas, people. So we are expanding the personnel capacity there, of course, always following a reasonable investment case. We have a project, which is called internally feet on the street, which is a service project where we say that in the areas where we can prove or people can prove to us, it makes sense to increase 10 or 20 employees, then we allowed for that. And by that, we are constantly expanding the capacity currently in the service organization.

--------------------------------------------------------------------------------

Operator [53]

--------------------------------------------------------------------------------

Our next question is from Glen Liddy of JPMorgan.

--------------------------------------------------------------------------------

Glen Liddy, JP Morgan Chase & Co, Research Division - Analyst [54]

--------------------------------------------------------------------------------

Just wanted to come back to pricing. It's -- you were quite clear that price is going up in places like Turkey. Because of currency, we're making things unaffordable for some customers. If you look at the more mainstream markets, the price rises that you're putting through to recover raw material costs. Is that resulting in delays or cancellations of orders?

--------------------------------------------------------------------------------

Jürg Oleas, GEA Group Aktiengesellschaft - Chairman of Executive Board, CEO, Director of Industrial Relations & Labor Relations Director [55]

--------------------------------------------------------------------------------

No, we don't see that. Of course, I'm always told by one sales guy out there in the world that he lost an order because we asked or we pushed for too much prices. But then you have to look very carefully at that. But I don't see that at this moment in the normal markets, with the exception of Brazil or Turkey, et cetera, normal markets we are losing orders or positions are being delayed. However, so far, the economy was good. It remains to be seen whether with all the uncertainties out there in the world, this continues to be like that.

--------------------------------------------------------------------------------

Glen Liddy, JP Morgan Chase & Co, Research Division - Analyst [56]

--------------------------------------------------------------------------------

And in places like Turkey, are customers having problems getting financing even if they are placing orders?

--------------------------------------------------------------------------------

Jürg Oleas, GEA Group Aktiengesellschaft - Chairman of Executive Board, CEO, Director of Industrial Relations & Labor Relations Director [57]

--------------------------------------------------------------------------------

Yes, because we would want them to pay in euro. So we are also forcing, in some other critical countries like Argentina, et cetera, we are forcing our sales force to make mainly, not exclusively, but mainly contracts in euro. And that creates for them sometimes difficulties to get the euros in order to pay us in euros. Because we do not want to hedge this. We just would want to have in these very volatile countries contracts in euro.

--------------------------------------------------------------------------------

Helmut Schmale, GEA Group Aktiengesellschaft - CFO [58]

--------------------------------------------------------------------------------

So I may add that, Helmut now speaking, the level of cancellations which you have in the year 2018 is clearly below the level we have seen in the year 2017. So there's no indication from that point of view that we see an increase in the level of cancellations of orders.

--------------------------------------------------------------------------------

Glen Liddy, JP Morgan Chase & Co, Research Division - Analyst [59]

--------------------------------------------------------------------------------

But has it increased in recent months?

--------------------------------------------------------------------------------

Helmut Schmale, GEA Group Aktiengesellschaft - CFO [60]

--------------------------------------------------------------------------------

No, it hasn't. That -- what I said is also because it's from selective quarter.

--------------------------------------------------------------------------------

Operator [61]

--------------------------------------------------------------------------------

Our next question is from Wasi Rizvi of RBC Capital Markets.

--------------------------------------------------------------------------------

Wasi Rizvi, RBC Capital Markets, LLC, Research Division - Analyst [62]

--------------------------------------------------------------------------------

Firstly, on China. I was interested in what you're seeing, generally, to start with because I could see the last 12-month order growth is unchanged. But we don't know what's gone in and come out. So if you can maybe talk about what you're seeing kind of more recently. And then secondly, on to dairy processing that's kind of also China linked. could you talk a bit about the various components within it? And in particular, I'm kind of asking about infant milk formula. Because if you listen to some of the manufacturers, they're worried about some of the restrictions on indirect selling coming in, in China, whether you're seeing any change in confidence or activity there?

--------------------------------------------------------------------------------

Jürg Oleas, GEA Group Aktiengesellschaft - Chairman of Executive Board, CEO, Director of Industrial Relations & Labor Relations Director [63]

--------------------------------------------------------------------------------

Can you maybe repeat the first part of your question? Sorry for asking.

--------------------------------------------------------------------------------

Wasi Rizvi, RBC Capital Markets, LLC, Research Division - Analyst [64]

--------------------------------------------------------------------------------

Just what you're seeing generally in China because I can see the last 4 quarter ordering -- book-to-bill is 1.28 from the slides at the back. But obviously, we don't know what's come in and come out. So could you just tell us what you're seeing maybe this quarter and last quarter, just the more recent kind of view as to what China looks like for you in terms of growth?

--------------------------------------------------------------------------------

Jürg Oleas, GEA Group Aktiengesellschaft - Chairman of Executive Board, CEO, Director of Industrial Relations & Labor Relations Director [65]

--------------------------------------------------------------------------------

Our country manager of China is also quite optimistic for the fourth quarter. We do believe that the year -- the full year will be a very good top line year for China. The reason behind that is some internal issues but also some external issues. Internally means that we have divided the region internally, the management of the region, Asia Pacific and China into 2 parts. China, one country manager and the rest of Asia Pacific, another manager in order to give allowance for both of them to focus very strongly on either China or the rest of Asia Pacific. So I'm optimistic, fortunately, for China because momentum has been so strong that I don't believe that it's going to continue with that strong momentum into next year. When it comes -- could you please repeat your second question?

--------------------------------------------------------------------------------

Wasi Rizvi, RBC Capital Markets, LLC, Research Division - Analyst [66]

--------------------------------------------------------------------------------

I was just interested in dairy price that you're seeing.

--------------------------------------------------------------------------------

Jürg Oleas, GEA Group Aktiengesellschaft - Chairman of Executive Board, CEO, Director of Industrial Relations & Labor Relations Director [67]

--------------------------------------------------------------------------------

Yes. The components of dairy processing, yes. So the biggest part is powder, the conventional powder. And that's actually the one which has mostly been affected in the past when we complained about dairy. Then we have other things in there. For example, cheese. Cheese is developing. It's, of course, much smaller than the dairy powder, but cheese is developing on a good pace. We had some restructuring efforts there but -- and some negative developments from the top line in the past but I think, currently, developing as it should. Then we do have in there infant formula, special proteins, et cetera. We -- of course, in that area, we do not disclose now for each of this. We call it internally the sub-APCs. That, we do not disclose to the markets, the development of those. But I can tell you what is powder related is one which is the most effective. So it's, as I said, the conventional milk powder, then -- where we also have seen in the recent past downturn is in market milk products. Where we do see the stabilization or even growth is in nutritional formula, in -- it's in other dairy products which are very small, small issues then. It's rather flat. And the rest is actually rather flat. The big setback, which we have seen now for many quarters or even years is conventional milk powder. And unfortunately, that's our biggest sub-APC nutritional formula. And infant milk is a tricky thing because, yes, especially in China where they have forecasted a lot of order intake for infant formula, then they have to say that it's to consolidate to put much more pressure on quality issues to safeguard the delivery of quality into China itself. And that has stalled a lot of investments. We do hope that this would then come back as soon as they have assured themselves, the government that -- and the rulers that quality is being secured and is there. Because from the fundamentals, China needs that infant formula. But currently, we do not see yet a relevant upturn in that.

--------------------------------------------------------------------------------

Wasi Rizvi, RBC Capital Markets, LLC, Research Division - Analyst [68]

--------------------------------------------------------------------------------

Okay. And could I just follow up on the pricing question earlier just to come at it from a different way? I mean, you're currently putting prices through. And I think your peers have also said they're putting their prices up. So do you think that there -- was -- is there any element of people buying ahead of the price increases as well in the quarter? Or you don't think that's the case?

--------------------------------------------------------------------------------

Jürg Oleas, GEA Group Aktiengesellschaft - Chairman of Executive Board, CEO, Director of Industrial Relations & Labor Relations Director [69]

--------------------------------------------------------------------------------

No. I don't believe that this was the case or the reason for our strong order intake.

--------------------------------------------------------------------------------

Operator [70]

--------------------------------------------------------------------------------

Our next question is from Daniel Gleim of MainFirst.

--------------------------------------------------------------------------------

Daniel Gleim, MainFirst Bank AG, Research Division - Director [71]

--------------------------------------------------------------------------------

Your leverage is on the volume trends that you see coming for the next couple of quarters. Also you mentioned that in terms of current order growth margins, you would expect them to be more flat? I just wanted to make sure that I understand this commentary correctly on the margins that there will be no meaningful impact from procurement and pricing measures for the gross margin in 2019.

--------------------------------------------------------------------------------

Jürg Oleas, GEA Group Aktiengesellschaft - Chairman of Executive Board, CEO, Director of Industrial Relations & Labor Relations Director [72]

--------------------------------------------------------------------------------

Well, we do have our measures to reduce through our supply chain activities, procurement activities as a part of the value project to optimize. And by that, of course, trying to reduce purchasing prices for many of our components which we source outside. So -- and that we will continue to do. Of course, peers are doing the same. And then it remains to see how much you can keep for your own balance sheet, for your own P&L and how much you have to make concessions to the customer because others are doing, I would assume, a similar exercise. So the key question is -- and we have invested now also a lot of effort in order to make sure that we can have a good control on how to make sure that some of those initiatives are then partially kept in our pocket and not flown to the customers. But of course, we are not alone in the market. And we see, of course, competition out there. And some are doing better than in the past. Some are doing not so good so they will fight more also on the pricing front. But be assured that we will fight very hard to keep the savings from our initiatives in our pocket. And only as really required, give it to the market in order to stay competitive compared to our peer group.

--------------------------------------------------------------------------------

Daniel Gleim, MainFirst Bank AG, Research Division - Director [73]

--------------------------------------------------------------------------------

So the gross margin might be a neutral or a slight positive into '19? Is that a fair summary of your statement?

--------------------------------------------------------------------------------

Jürg Oleas, GEA Group Aktiengesellschaft - Chairman of Executive Board, CEO, Director of Industrial Relations & Labor Relations Director [74]

--------------------------------------------------------------------------------

While the gross margin for GEA depends on many things, it depends also very much on the product mix. We do have product lines and APCs with very high gross margins as you can see from one of our charts with the colored dots. And then we -- you have some of them with below-average gross margin. And then it remains to be seen which APC or product group is outgrowing the others or shrinking. So that on the gross margin, if I look backwards for the last couple of years, the biggest impact on positive or negative on the gross margin was the relative growth between the different product groups and the APCs. However, also the growth -- the different growth between new equipment and service because there, we also have, as you may understand, a very big difference in the gross margin between new machines and service. And that depends, of course, how much service relatively would grow compared to new machines or new projects. But nevertheless, we have these pricing initiatives. And all being equal, I'm confident if the economy stays as it was in the last 9 months that we will see an impact on the gross margin. But I have to emphasize, all equal means also the relative mix of our product groups and applications and that versus service.

--------------------------------------------------------------------------------

Daniel Gleim, MainFirst Bank AG, Research Division - Director [75]

--------------------------------------------------------------------------------

Very clear. And maybe on the overheads into next year. If you could briefly touch upon both the operating business and the central functions. I recall you had some costs doubling for the time of the transition of the organization. Will we see some relief in '19 over '18 on that front? Also you have the measures underway for the production footprints. Will we already see some net savings in '19 over '18? Or is this something more a medium-term perspective?

--------------------------------------------------------------------------------

Jürg Oleas, GEA Group Aktiengesellschaft - Chairman of Executive Board, CEO, Director of Industrial Relations & Labor Relations Director [76]

--------------------------------------------------------------------------------

When you will look at the P&L at the end of the year, you will see a phenomenon which we will explain that there will be a shift between gross margin and SG&A. As you may remember, we have launched some time ago the OneGEA finance project, which is coming now almost to an end. We have almost introduced all our legal entities into the OneGEA finance. And overall -- and OneGEA finance amongst others has to do that we have standard definition, unified definition of all kind of cost items, whether it's in New Zealand, in Argentina, in Sweden, in Denmark or in Germany. So at any place of GEA, we have accepted the same definitions now. But we have observed that this leads to a shift, a bit lower gross margin and at the same time, a bit lower SG&A. So you will see that when you look at the P&L. And of course, it hasn't changed for the EBITDA. But you will see a shift from the gross margin to the benefit of the SG&A. And that's only due to the full standardization now of all the cost line items. There are 100,000 of cost line items, which have been standardized now. The -- so the overhead, we are working on that. And all things equal, I also believe that the overheads would go down. I say would because we have -- on the other side, we have headwinds from other things. As you know, we have with -- in the IT platform, I think we explained that also once that lifting and shifting all our software and tools, IT tools, into the cloud costs us quite a lot of money which goes into the P&L. In the past, that money was spent as CapEx for our hardware service spread around the world. Now we're closing down more and more of those hardware service and everything is being shifted into the cloud. And that costs -- of course, it's money. And secondly, we also will have to invest and are currently investing or have invested into data protection system, et cetera. This is additional burdens which goes into the out -- overhead coming from the outside, from outside covenants requirements. And of course, we are following that very carefully and diligently. But I also have to announce that to you that this costs money. So this is a headwind into the overheads. On the other side we have, of course, savings. We also are constantly negotiating and monitoring the spendings towards Accenture, our shared service supply, in order also there to benchmark that constantly with service quality and try to -- the bigger we are to have lower cost per FTE or per computer, et cetera. So the overall overhead, I don't see that, that will grow. It will be a shift between the things, the savings I have told you, and some additional costs from the IT and governance systems, et cetera.

--------------------------------------------------------------------------------

Daniel Gleim, MainFirst Bank AG, Research Division - Director [77]

--------------------------------------------------------------------------------

Will the headwinds be only reported below the operating EBITDA line?

--------------------------------------------------------------------------------

Helmut Schmale, GEA Group Aktiengesellschaft - CFO [78]

--------------------------------------------------------------------------------

No. Things like these are going to the cloud with the networks and service systems. And that is in the initiation phase. Yes, we label that for this year. But it will be something which is a kind of one-off looking forward into the years to come. Of course, at a certain point in time, we will have then reached a kind of normal situation that you need to consider that is in the normal result. Or during the phase of the set of office, you consider that as a strategic project. Same we will address with regards to the data protection, that is yet to be seen how much that will cost GEA. And that is too early in the phase of the budget process to share something today.

--------------------------------------------------------------------------------

Jürg Oleas, GEA Group Aktiengesellschaft - Chairman of Executive Board, CEO, Director of Industrial Relations & Labor Relations Director [79]

--------------------------------------------------------------------------------

Yes. The cloud services, they are all ready today in the ordinary operational business, so that's not below the line. It was in '16 and '17 when we installed and made the whole set up and preparation work. But for example -- and that's quite a high number. It's in the high end of single-digit millions, which goes full into the EBITDA. And that's in the operational EBITDA. So that's just an example.

--------------------------------------------------------------------------------

Daniel Gleim, MainFirst Bank AG, Research Division - Director [80]

--------------------------------------------------------------------------------

So just to get the key takeaway from your statements, it's more likely to note that next year, we will not see a net positive in fact -- impact on the adjusted line as of yet?

--------------------------------------------------------------------------------

Jürg Oleas, GEA Group Aktiengesellschaft - Chairman of Executive Board, CEO, Director of Industrial Relations & Labor Relations Director [81]

--------------------------------------------------------------------------------

You mean below the operational EBITDA?

--------------------------------------------------------------------------------

Daniel Gleim, MainFirst Bank AG, Research Division - Director [82]

--------------------------------------------------------------------------------

No. In the adjusted line because you mentioned the headwinds will be included in the adjusted figure as well. I'm just wondering whether we will see any move from the -- on the margin side from the points that you just mentioned. It seems like it will not because you're not breaking them out next year.

--------------------------------------------------------------------------------

Helmut Schmale, GEA Group Aktiengesellschaft - CFO [83]

--------------------------------------------------------------------------------

Well, there will be strategic projects also next years, for example, from what we are still going to do with regard to our manufacturing footprint. What is then operational business like, normal license fees for things which you are using up from Accenture, for example, that is and will stay within the operational result.

--------------------------------------------------------------------------------

Operator [84]

--------------------------------------------------------------------------------

Our next question is from William Turner of Goldman Sachs.

--------------------------------------------------------------------------------

Jack O'Brien, Goldman Sachs Group Inc., Research Division - Equity Analyst [85]

--------------------------------------------------------------------------------

It's actually Jack O'Brien here from Goldman Sachs. Just a question on -- if we cast our mind back to the end of 2016 when you had the first profit warning. You also had pointed to factors like execution issues, some technological issues. Can you just comment on where we are with those during 2018? Because it strikes me that gross has been okay for 18 months or so, but you continue to disappoint on the margin. So I'm almost more interested in the other factors that could lead you to continue to disappoint. I mean, just my second question would be on the beverages side. Yes, 10% of sales or so. Obviously, sales are pretty tough there. And if we look at competitors, they're not really making any money. So have you thought about strategically disposing of beverages?

--------------------------------------------------------------------------------

Jürg Oleas, GEA Group Aktiengesellschaft - Chairman of Executive Board, CEO, Director of Industrial Relations & Labor Relations Director [86]

--------------------------------------------------------------------------------

Yes. In things comparable to 2016 where we had to report some technical issues besides the EBIT also in some prototype of projects, which we booked early in the year 2012 and '13. But then at the commissioning test, at the very end of the projects, we did found out that we have to put some more effort in some of those projects. That's what we reported in those times when we did the profit warning. Amongst other things, we explained those -- the profit warnings at that time. In 2018, so far, we have had no major technical issues. We reported the last ones with the provision for the ABF, a little modest in September last year where we made that -- from Helmut's address, provision of EUR 13 million or EUR 14 million. So far, we do not have made -- you have always technical issues, challenges, et cetera here and there. But we are talking here in the order of magnitude where you have to make provisions of EUR 1 million or EUR 2 million in order to fix certain technical issues, but not in a magnitude as we had to do it in '16 or also, as I just mentioned, in '17. The disappointment this year besides, which you addressed, the good volume is that currency development which started to be a real headwind for us as of end of last year and then was a major challenge in Q1 in order to -- the pricing issues, all what we have just discussed. And of course, a very disappointing volume then towards the end of this year when it comes to the application center dairy. There are, of course, always execution issues. You have them all. But I think rather we have been increasing. And we are still doing that risk provisions, et cetera, to match the risk profile, et cetera. But I also have to say that in some of the larger projects, customers have become -- have also changed their behavior. It has become more a business between lawyers from our side and from their side. And some years ago, it was more a business between engineers from both sides. Also, customers have invested a lot in contract management and in reps and warranties, et cetera. So the issue we are becoming very careful in taking these larger contracts because we do observe, besides the working capital issue which Helmut addressed, the payment terms which have also quite worsened with these larger projects. We are becoming very selective and we may have to become even more selective on these mid, large projects because the behavior of the customers has definitely changed. When it comes to beverage, yes, it's a tough environment. I think we have good technologies. With the acquisition of Vipoll, we acquired also a unique technology, which has developed very nicely as soon as we consolidated it into GEA. We also -- and has exposed -- sorry, exposing that into the trade fair that -- which is called Brew, a goods technologies. So we are trying to convince customers to pay for a decent risk-reward profile by offering superior technologies. And also they are being very selective because the environment is, as you described it, some peers are even making money or maybe only after 5 years service, et cetera. Have we considered to divest that? No. Because beverage comprises a lot of things. We are currently analyzing the portfolio. As I have said, I will not like to disclose what is in that analysis. But I think beverage is in the areas where we are active. It's a good business and we have to limit that. And we have to be careful with the larger projects because their contract conditions are certainly deteriorated.

--------------------------------------------------------------------------------

Operator [87]

--------------------------------------------------------------------------------

Our next question is from Felicitas Bismarck of Deutsche Bank.

--------------------------------------------------------------------------------

Felicitas von-Bismarck, Deutsche Bank AG, Research Division - Research Analyst [88]

--------------------------------------------------------------------------------

I still have one follow-up on the working capital. I'm really sorry. But did I understand correctly that you said you're going to turn it around by around EUR 100 million in Q4? And if so, could you just mention how you're going to do that?

--------------------------------------------------------------------------------

Helmut Schmale, GEA Group Aktiengesellschaft - CFO [89]

--------------------------------------------------------------------------------

Yes, that is what we are looking to now with the normal exercise to be a bit more cautious in our trade payables, for example, that we address that to our favor more than like our clients are doing that with us. And if you observed some years in the past, we did it as well in the past that -- by that, we were able to decently measure also all working capital, as customers do on the other side as well.

--------------------------------------------------------------------------------

Felicitas von-Bismarck, Deutsche Bank AG, Research Division - Research Analyst [90]

--------------------------------------------------------------------------------

Okay. But the product mix issue, for example, is not really going to go away in Q4, right? So it's the usual thing of turning it around in the Q4, but it's not something where you'll really introduce some new measures or anything like that?

--------------------------------------------------------------------------------

Helmut Schmale, GEA Group Aktiengesellschaft - CFO [91]

--------------------------------------------------------------------------------

No, no, no. That is the cost of business and focus of the organization.

--------------------------------------------------------------------------------

Felicitas von-Bismarck, Deutsche Bank AG, Research Division - Research Analyst [92]

--------------------------------------------------------------------------------

Okay. And the other question I still had, when you're looking into 2019 in terms of growth, especially equipment orders are slowing down and, I mean, for a mixture of reasons apparently. But that doesn't really seem to be a temporary thing. And solutions will be a drag in 2019. So is it fair to assume that we are again missing the 4% to 6% organic growth that was once planned for in the midterm guidance?

--------------------------------------------------------------------------------

Jürg Oleas, GEA Group Aktiengesellschaft - Chairman of Executive Board, CEO, Director of Industrial Relations & Labor Relations Director [93]

--------------------------------------------------------------------------------

Well, I would not like to disclose now the discussions we have for the budget for 2019. We are currently in the alignment meetings with our regional salespeople and -- to find what we believe is the right volume, organic volume for next year. There are, of course, plus and minuses, as you just said. And it depends a little bit also on the economic environment, development of potential trade wars, further development embargoes. We are currently observing, of course, a massive slowdown of our business in Iran. Hopefully, Saudi Arabia is not going to also be on that band list. And we have some other trade barriers because of the currency like Argentina, Turkey, Brazil is one. But on the other side, we also have a lot of initiatives such as, as mentioned, some of them on service area, et cetera, which then are positive for the volume. We do see that our acquisitions which we integrated beginning of this year are developing very nicely so they will also contribute in the future to a further organic development.

--------------------------------------------------------------------------------

Operator [94]

--------------------------------------------------------------------------------

It appears there are no further questions at this time. I would like to turn the conference over to Mr. Jürg Oleas for any additional or closing remarks.

--------------------------------------------------------------------------------

Jürg Oleas, GEA Group Aktiengesellschaft - Chairman of Executive Board, CEO, Director of Industrial Relations & Labor Relations Director [95]

--------------------------------------------------------------------------------

Yes. Not much to say. Thank you very much for the very interesting questions and your patience, and we will continue as always work hard on the year to also to close this year with good results. Thank you very much.