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Edited Transcript of OERL.S earnings conference call or presentation 6-Aug-19 11:00am GMT

Q2 2019 OC Oerlikon Corporation AG Pfaeffikon Earnings Call

Zurich Aug 13, 2019 (Thomson StreetEvents) -- Edited Transcript of OC Oerlikon Corporation Ag Pfaeffikon earnings conference call or presentation Tuesday, August 6, 2019 at 11:00:00am GMT

TEXT version of Transcript

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Corporate Participants

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* Andreas Schwarzwälder

OC Oerlikon Corporation AG - Head of IR

* Jürg Fedier

OC Oerlikon Corporation AG - CFO

* Roland Fischer

OC Oerlikon Corporation AG - CEO & CEO of Surface Solutions Segment

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Conference Call Participants

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* Armin Rechberger

Zürcher Kantonalbank, Research Division - Analyst

* Christian Arnold

MainFirst Bank AG, Research Division - Analyst

* Fabian Haecki

UBS Investment Bank, Research Division - Executive Director and Senior Analyst of Swiss Small & Mid-Cap Equity Research

* Michael Foeth

Bank Vontobel AG, Research Division - Head of Industrials Team

* Wasi Rizvi

RBC Capital Markets, LLC, Research Division - Analyst

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Presentation

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Operator [1]

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Ladies and gentlemen, welcome to the Oerlikon Q2 2019 Results Conference Call and Live Webcast. I'm Sandra, the Chorus Call operator. (Operator Instructions) And the conference is being recorded. (Operator Instructions) The conference must not be recorded for publication or broadcast.

At this time, it is my pleasure to hand over to Mr. Andreas Schwarzwälder, Head of Investor Relations at Oerlikon. Please go ahead, sir.

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Andreas Schwarzwälder, OC Oerlikon Corporation AG - Head of IR [2]

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Thank you, Sandra. Good afternoon, ladies and gentlemen, and welcome to Oerlikon's conference call on the results for the second quarter and the first 6 months of 2019. Your host today, as usual, Dr. Roland Fischer, the group's CEO; and Jürg Fedier, the group CFO; and myself, Andreas Schwarzwälder. As a reminder, all related documents on the Q2 and half year results, including the interim report and the following presentation, are available for download on our website.

Today, we will follow the well-known agenda. Roland Fischer will start with an overview and an update on the segment's performance, followed by Jürg Fedier, who will comment on the group's financial performance and the adjusted full year guidance. After the presentations, as already announced, we will hold a Q&A session to answer your questions. Having said that, it's now my pleasure to hand over to Roland.

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Roland Fischer, OC Oerlikon Corporation AG - CEO & CEO of Surface Solutions Segment [3]

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Yes. Thanks a lot, Andreas, and good afternoon to everybody on the line, and thank you for joining our second quarter and half year 2019 earnings call. As you can see on the slide for the second quarter of 2019, Oerlikon delivered resilient performance and maintained top line growth despite the challenging market environment. Group sales went up by 5.3%, reported to CHF 700 million. For the first half year of 2019, sales were up 4.3% and order intake was down by 5.7%, compared to the same period of last year. This is mainly due to the high level of order intake from Manmade Fibers in the beginning of 2018.

The robust top line result was driven by the Manmade Fibers Segment, which recorded record sales levels in the second quarter, while we continue to see high levels of demand prevailing. The Surface Solutions segment, on the other hand, was facing lower levels of both orders and sales, due to the adverse market environment in some of our major end markets.

In the second quarter, we delivered an EBITDA margin of 17.3% for the group. The margin represents a very robust level for an industrial company that is investing significantly in growth initiatives while facing challenging markets. The group margin result was, again, driven by the Manmade Fiber segment, which reported an exceptional EBITDA margin of 17.8% in Q2. This high-margin is primarily attributable to the strong operational performance of the segment, but also a very favorable product mix, and we also have -- we had customer onetime effects. The EBITDA margin on the Surface Solutions segment came in at 16.8% and is clearly below our own targets. Weaker-than-expected industrial production has negatively impacted volumes, and the downturn in the automotive, tooling and general industries persisted. This has impacted on the margin quality of Surface Solutions driven by higher proportion of lower-margin businesses and increased -- an increased impact from additive manufacturing. And secondly, and as announced in earlier calls, we incurred higher operating expenses as we continue to execute significant investments to secure future growth.

We are fully committed to this investment, and consequently, we are prepared to bear the related operating expenses. And in addition to the aforementioned investments in our growth, which is a key element of our strategy, we have taken further strategic actions. We continued to strengthen our footprint in Surface Solutions with new customer centers in the U.S. and Sweden. We also continue to believe in the importance of partnerships and in the importance of innovations and R&D. And in this slide, together with Safran, the CNRS and the University of Limoges, we intend to drive the development of enhanced surface treatment solutions forward. Application here is aerospace, mainly.

We have reported a resilient set of results today. At the same time, we have started to see weakening in our Surface Solutions businesses, reflected in the top line the margin and in the margin quality. In light of current geopolitical and market uncertainties, and given that anticipated market recovery for our Surface Solutions business in the second half of the year is not visible, we are adjusting our guidance for the full year and expect to deliver around the same level of performance as for the full year 2018.

Given the rough market conditions we are facing, we believe the new guidance will still provides strong message for the second half of the year. And Jürg will give more details later on that.

And now let's turn to the Surface Solutions segment's performance in the second quarter of 2019. The adverse trends in the end markets have impacted top line development in the Surface Solutions segment. No question about that. We have seen decline in orders and sales across all markets, especially the automotive market, most notably in China remains down a bit. Also tooling saw weak demand in China and in the U.S., while general industries with sectors like semiconductors and electronics recorded lower sales in Europe and in the U.S. The effects from the small-sized acquisitions and raw material surcharge was around minus CHF 4.2 million year-on-year. Including currency effects, this resulted in an almost flat organic sales growth of minus 0.7% compared to minus 3.8% on a reported basis. With -- on a positive note, we saw a good increase in the thermal spray business, also admittedly from low levels, and we are continuing to see successes in the uptake of our SUMEBore technology. And examples like these positive developments, all in the automotive end market, are examples we refer to as structural growth elements. And for the current quarter compared to Q2 last year, this effect was only minor, with about 0.4 percentage points. But on a sequential basis compared to Q1 this year, this effect was between 4 and 5 percentage points.

And in addition, we have already taken, as you can imagine, stringent cost-saving measures throughout the group, and especially in our automotive business. And still, given the significant decrease in production volumes, all these actions can only have a mitigating effect. Overall, profitability of the segment was negatively affected by the higher proportion of lower margin businesses in the mix, plus the before-mentioned execution of investments in future growth, such as the ePD Competence Center, and this lead to a higher operating expenses, which impacted the EBITDA margin.

Further, the Additive Manufacturing Business has weighted on the segment margin even more as a direct result of the slowdown of the industrial activity. The slower-than-anticipated adoption, too, is one driver; the resulting underutilization of the buildup capacity is another one. We currently do see dilution of the segment margin in the magnitude of around 300 basis points. And despite increased rate on segment profitability now, we remain fully committed to the business as we are convinced that this technology will play a key role in the industrial production in the future.

And looking now at the Q2 2019 numbers for the Surface Solutions business. The orders decreased by 5.3% year-on-year to CHF 374 million, and sales decreased by 3.8% compared to the second quarter of last year and stood at CHF 379 million. The EBITDA for the segment stood at CHF 64 million for the quarter, but is a rate of 16.8% of sales. The operating profitability is lower this quarter compared to Q2 2018. This is partly anticipated through investments, as I mentioned before, and partly impacted by product and regional mix. From an end market point of view, we observed reduced activity in the tooling industry, which is facing challenging end markets as well. The automotive business, as described already, is facing decreasing production volume, particularly in China and the rest of Asia. We also echo what is being reported about the industrial sector in terms of uncertainty in the global economy, slower trade growth and investment activities.

The aerospace market, on the other hand side, is seeing continued growth. Power generation remains a challenging market. From a regional point of view, we see an overall good business environment in North America, flattening activities in Europe and a clear slowdown in Asia and here mainly in China. Allow me to reemphasize that the segment delivered a resilient set of results in a very difficult market environment. Our business model remains sound. Our innovative strength and technology leadership are in place, and we are in a strong position to take advantage of opportunities as soon as markets recover. Having this said, let's move now on to Manmade Fiber.

The Manmade Fibers segment delivered an impressive performance in the second quarter and demonstrated its position as world market leader. Sales in the second quarter of this year represents the highest level of sales achieved by the segment since 2013. The order intake was up almost 6% year-over-year and continues to trail at a very strong level. The segment achieved strong growth in sales for textile applications, which is mainly filament and texturizing equipment. Also plant engineering with its polymerization business and a substantial increase in nonwoven systems supports the sales development of the segment. The sales growth was mainly led by business wins in Asia, in particular, here in China. This leads me to the -- to the Q2 2019 numbers, which show excellent results. Orders stood at CHF 298 million and versus same across almost all product lines. Sales increased by 18.5% compared to the second quarter last year and stood at CHF 321 million. The segment further improved its operating profitability. The EBITDA increased by 78% year-over-year to CHF 57 million, and the EBITDA margin stood at 17.8%, the highest level since the downturn. And this exceptional EBITDA margin this quarter is due to a strong performance of the segment, a very favorable product mix and also onetime customer effect. Let me emphasize, this has to be clear, that this margin level is, indeed, exceptional. In the second half of the year, we expect to deliver and to recognize a number of lower-margin projects from the down cycle and that recovering -- recovery period. And therefore, we do not expect a similar high EBITDA margin in the second half of the year.

At the world's largest textile machinery show, the ITMA, which took place in Barcelona this -- in June this year, Oerlikon demonstrated its power as one of the innovation leaders for automation and digital solutions in the production of chemical fibers. Several of our presented new product innovations created high customer interests at the ITMA. And before I comment on end markets, you may have noticed that we changed the end market split for the segment. We presented the new split at the analyst briefing on Manmade Fibers in June this year at ITMA, with the intention to cluster different product lines more logically. You can find historic numbers on the new split in the appendix.

And now back to the actual market developments. In the textile applications market, we see continued healthy demand for filament equipment from Chinese key players. There is increasing customer demand for automation solutions and our digitalizations offering. In addition, customer service activities create additional business for spare parts and upgrades. The texturing equipment market remains positive as well, as a result of increased filament activities, and we continue to see a robust demand on high levels for our texturing machine.

In the field of special filament, we have seen demand for our company-owned technologies to calm down after a strong 2018, as expected, following -- yes, as I mentioned, and based -- following a strong year 2018. We see, however, interests picking up for our new BCF S8 machine. And on IDY, which is Industrial Yarn, you see a stable, healthy market environment. And finally, for plant engineering, we have enjoyed a strong increase in sales for the nonwoven business, and that means Oerlikon nonwoven is now seen as a serious player with a strong commitment to the nonwoven industry. We also saw an increase in demand for staple fibers and the promising project pipeline for continuous polymerization solutions.

And as communicated before, the magnitude of orders for the Manmade Fibers segment has resulted in a pipeline, with delivery lead times reaching into 2021 and '22. And we are starting now talking and discussing new projects for delivery already in 2023. And therefore, we expect the healthy demand and good order intake to continue in the upcoming quarters. And after this review on the segments performance, now let me hand over to Jürg for additional comments on the group's financials. Jürg, please, it's yours.

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Jürg Fedier, OC Oerlikon Corporation AG - CFO [4]

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Thank you, Roland, and good afternoon to everybody. Let me start with the group's financial review with a closer look at the second quarter, and commenting on the half year figures as well. The group order intake stood at CHF 672 million in the second quarter of '19. That's a slight reduction of 0.7% year-over-year on a reported basis, or up 2.1 percentage points after adjusting for currency developments. The decline in order intake in Surface Solutions was compensated by a strong performance of the Manmade Fiber segment.

Sales came in at CHF 700 million, that's an increase of 5.3% year-over-year, reported and up 8.3% on a constant exchange rates. Let me reemphasize that this is the highest level of group sales in more than 2 years in a challenging market environment. The book-to-bill for the group was exceeding 1 for the first half and was slightly below 1 for the second quarter.

The EBITDA reached to CHF 121 million in Q2, a strong increase of 7.1% and was driven, as mentioned earlier by Roland, by the exceptionally strong profitability of Manmade Fiber in this quarter. The EBITDA margin stood at 17.3% and came in slightly higher year-over-year.

When looking at the first half year numbers, the margin was slightly lower compared to the same period of last year. EBIT at CHF 70 million for the quarter, which corresponded to a margin of about 10.1%.

The development of exchange rates in the second quarter compared to the same period of last year was providing some headwinds to Oerlikon's top line, as I mentioned before. This is mainly related to translation effects as we report in the Swiss franc. The depreciation of the euro against the Swiss franc was only partially compensated by a stronger U.S. dollar against the Swiss franc. Assuming stable currencies, order would have been at CHF 691 million, a difference of almost 3% compared to the reported figure. And sales would have been at about CHF 720 million, also higher by approximately 3% compared to the reported demand. So currency development has an impact, again, of around 3% on EBITDA and the impact on the margin remains, therefore, minor.

When looking at the group sales plate, the strong performance of Manmade Fiber in this quarter becomes visible as the shares of the group sales in the second quarter 2019 increased to a level of about 46% compared to the same period of last year. When looking at the EBITDA split, the upturn in profitability from Manmade Fiber is visible as well. The segment accounted to date for 47% of total EBITDA in the second quarter, while Surface Solutions delivered about 53% of the group's operating profitability.

And from a regional point of view, our proportion of sales decreased slightly in the Asia Pacific region to approximately 45%, and in North America to about 14%, but increasing in Europe to a level of about 37%. Sales in the rest of the world remained pretty stable.

The share of our Services & Spare Parts business decreased about 36% on group sales in the second quarter '19 compared to the same period.

This concludes our comments on Q2 results. Let me continue with the first half of 2019 to guide you through the group financial statements. The group figures showed resilient performance in the first half of the year due to the strong comparable of last year in May. In May 5, the group orders were down 5.7%. Sales, on the other hand, were up about 4.3% and EBITDA improved by almost 3%, resulting in a margin of about 16.2% for the group.

Looking below the operating profit on the P&L. The net financial result was negative with about CHF 7 million, which is mainly related to interest expenses for lease liabilities following the application of IFRS 16 and a slightly negative foreign exchange net result. The tax result was coming in at CHF 28 million. The effective tax rate and earnings before tax amounted to 26%, and is mainly attributable to favorable country mix, also driven by the divestment of Drive Systems.

For 2019, we continue to expect to further convert the tax rate to a level of about 25%, which continues to be our target in the mid to long term. Results from continuing operation was CHF 80 million compared to CHF 91 million at the same period of last year, which is a decline of approximately 12%. Result from discontinued operation was coming in at negative CHF 179 million, compared to a positive of about CHF 20 million. The loss from discontinued operation is mainly accounting principle-related and a noncash effect from the reclassification of CHF 284 million of accumulated exchange differences that were previously recognized in the equity and that were realized with the disposal of the Drive Safety business. So in other words, a full recycle of the CTA through the P&L.

Net income for the group, therefore, resulted in a loss of CHF 99 million and is, therefore, reasonably not comparable to the CHF 111 million a year ago.

Our balance sheet continues to remain strong and healthy as well as unlevered, with a net cash position of about CHF 380 million. Our cash position at the end of June was CHF 717 million. And the equity amounted to more than CHF 1.8 billion, representing a ratio of about 48%. Overall, our financial position remains strong and provides enough room for us to maneuver and to further execute upon the strategy.

CapEx was at CHF 66 million. That's a reduction of about 16% compared to prior year level. Almost 80% of CapEx was allocated to the Surface Solutions segment and represented about 7% of sales. While we continue the expansion of the global coating center network as well as our investment for future growth, we have reduced investments in Additive Manufacturing compared to the first half year in 2018. We have adjusted certain investment activities as a response to the challenging market environment, which we experienced and which we have talked about. But let me be clear, we remain committed, as Roland already said, to investment to fuel future growth.

In Manmade Fiber, CapEx was slightly above the depreciation level and amounted about 2% of segment sales. Excluding the amortization of acquired intangible assets in the amount of about CHF 20 million and depreciation charges related to the application of IFRS 16, which were in the magnitude of about CHF 70 million, depreciation was up to $63 million, up 5% compared to the first half year of 2018, with the CapEx to depreciation ratio for the group of 1.05. Excluding the amortization of acquired intangible assets and depreciation charges related to the IFRS 16, we returned to our midterm corridor of 1 to 1.2 in the first half of 2019. We expect also due to the external environment to possibly cap the budget, and are expecting spending in the vicinity of about CHF 150 million to CHF 160 million for the full year also responds to the current market environment.

Coming to the cash flow statement. Cash flow from operating activities before changes in net current assets was trading at about CHF 194 million. Change in net current assets amounted to negative CHF 206 million, mainly attributable to the decrease of contract liabilities, which is partly driven by the previously mentioned strong sales development in Manmade Fiber. Cash flow from investing activities was positive CHF 547 million, mainly reflecting the disposal of the Drive Systems segment, and cash flow from financing activities amounted to a negative of CHF 678 million, which, of course, is mainly attributable to the dividend payment, which we executed in April and the repayment of the bonds that matured in June of this year. This results in a decrease in cash and cash equivalents of about CHF 142 million to about CHF 770 million at the end of June '19. And let me reconfirm that we continue to focus on redeploying cash and balance sheet in line with strategic priorities in the future.

Return on capital. The group's second quarter performance resulted in a rolling 12 months return on capital of about 9.5%. The decline in ROCE is mainly the result of the first time recognition of leasing assets under IFRS 16. Oerlikon's return profile continues to run at the high level and reflects our commitment to create value while executing upon our strategy.

Ladies and gentlemen, let me conclude with the 2019 outlook before we start with our Q&A session. In a difficult market environment, we delivered the resilient performance in the second quarter and first half of the year. We recognize the slowdown in global economic growth and ongoing uncertainties in the geopolitical and trade environment. As we do not see the anticipated market recovery for our Surface Solutions business in the second half of the year, we are adjusting our guidance. Despite the challenging environment in which we operate, we project group orders, sales and EBITDA margin to be sustained around the same level of performance as we had in 2018. That means order intake is expected to be in the vicinity of about CHF 2.7 billion. Sales expected to exceed the mark of 2.6%, and the EBITDA margin around 15.5% for the group.

Of the response to adverse market conditions, we are down adjusting our CapEx, what I mentioned before, the target for the full year to around CHF 150 million, CHF 160 million. And let me repeat that our commitment to invest in future growth remains solid and in place. Same applies to smaller bolt-on acquisitions that continue to be included in our guidance.

When looking at the underlying segment assumptions, we are keeping expectations for Manmade Fibers unchanged, as mentioned and discussed before, especially profitability levels will be impacted by lower margin project in the second half of the year, resulted -- resulting in a projected '19 EBITDA margin improvement, which we guided earlier of about 100 basis points for the segment, compared to 2018. And in the Surface Solutions segment, we expect order intake and sales at year-end to be maintained around 2018 levels despite the ongoing challenging market environment. In terms of segment EBITDA margin, excluding Additive, we keep our midterm target corridor for the segment unchanged at about 21% to 23%. Further, we expect the AM business to be dilutive with some 300 basis points, as mentioned earlier by Roland, which consequently brings the midterm target corridor for the reported segment EBITDA level back to about 18% to 20%.

The weak market environment as well as global political and trade-related uncertainties are expected to impact volume and margin quality. At the same time, we continue to execute our investments for future growth, increasing operating expenses in the short term. We are, therefore, guiding for the full year 2019 EBITDA margin of 17% to 18% for Surface Solutions.

Ladies and gentlemen, summarizing the second quarter and half year results. Oerlikon's has once more proven that we can navigate through more challenging weather conditions. We succeeded to deliver a resilient set of results. We also achieved to deliver a healthy profit margin of 17.3%, thanks to Manmade Fiber and against the challenging market backdrop and in light of the significant investments we are making for the future growth in our company. As the global economic slowdown is expected to prevail in the second half of '19, and that we do not see signs of recovery yet in the major end markets of our Surface Solutions business, we are adjusting our guidance for full year to maintain around prior year levels. And given the rough market conditions, the new guidance provides a strong message for the second half of the year.

This closes our comments on the second quarter and first 6 months of 2019. We thank you for joining us on the call, and we are happy to open the lines now for questions. Operator, please go ahead.

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Questions and Answers

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Operator [1]

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(Operator Instructions) The first question comes from Michael Foeth from Bank Vontobel.

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Michael Foeth, Bank Vontobel AG, Research Division - Head of Industrials Team [2]

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Two questions from my side regarding Surface Solutions. First of all, you mentioned one of the reasons for the -- still sort of a lower margin, higher operating expenses. And my question here is whether those expenses are in line with what you had planned at the beginning of the year? Or if there was incremental expenses that occurred in the second quarter, which were not expected previously? And the second question would be an update on your investments in the ePD Competence Center. Where do you stand in this sort of process of building up that competence center? Are there more investments to come more? Or is most of it already done? And how are the relating revenues developing in ePD?

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Jürg Fedier, OC Oerlikon Corporation AG - CFO [3]

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Concerning -- let me start on the cost side in order. No, there is no surprise to additional operating expenses, the way we have been guiding. When we talked to you in March, we were indicating that we're probably going to run at a level of about CHF 25 million or up to CHF 25 million. And I think I can confirm that based on the various projects, which are being supported in that regard, among others, leading to the ePD question, that we are in line with our own expectations. And I pass on to Roland for any the ePD.

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Roland Fischer, OC Oerlikon Corporation AG - CEO & CEO of Surface Solutions Segment [4]

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Yes. The second part of the question concerning ePD, I think here, we are as well on track. We are right now in the midst of building up this competence center. The ePD business is developing. We do have 2 machines in commercial operation. A big German premium car OEM has ordered one. But for sure, it's -- I think we have to be realistic that the growth rate, which we expected here, has to be revised, and because the recent impact from the automotive market development. This is what we expect, what we do not see yet, but this is something -- what we have in mind.

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Operator [5]

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The next question comes from Fabian Haecki from the line, UBS.

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Fabian Haecki, UBS Investment Bank, Research Division - Executive Director and Senior Analyst of Swiss Small & Mid-Cap Equity Research [6]

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A few questions, one after the other. So again, on the Surface margin. I mean, you said you had the 300 bps of AM burden this year. I think in the last years, it was normally about 200 bps. So incrementally, 100 bps higher. But we talked about the margin drop of 340 bps totally. And not to forget, we had -- you had the 100 bps IFRS 16 benefit, so that results actually in 440 bps decline. I mean, with all your mix effect and stuff you mentioned -- I mean, I'm still not understanding how -- I mean when you look at on an EBIT, your EBIT just halved. I mean, you're saying you have a very defensive, resilient business model at Surface Solutions. But when I look at your EBITDA and your EBIT, it's just not the case. So can you just further explain how that sharp drop in the margin? And also the overall drop -- I mean just this downtrend we are seeing now for a while, I just think that needs further explanation.

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Jürg Fedier, OC Oerlikon Corporation AG - CFO [7]

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Well, that's absolutely correct. It's obviously very difficult, in aggregate, to decompose that, so let me start with Additive Manufacturing per se. Your observation is okay. The impact, in fact -- well to take higher in the 300, we said that we will adjust the dilution effect to about the level of 300. That's the first thing. And I think that's all related to the investments, which have been done in the infrastructure, which we reported back on that, to a certain extent, obviously, related in the weaker environment and the slower adaptation to the underutilization of some of the manufacturing assets, which have been coming on stream. That's one part of it. Then we saw -- needless to say, you're absolutely correct. There was impact on mix and margin in all the businesses. And in particular, what we have seen on the friction side is that we have seen, due to the disproportional loss in the volume in the quarter, that we have seen significant, more declines there. I'm not sure whether that helps you because the other question which you raised was that we needed to set an addition on the development here in terms of quarter-to-quarter, perhaps you want to make a comment, Roland?

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Roland Fischer, OC Oerlikon Corporation AG - CEO & CEO of Surface Solutions Segment [8]

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Yes. Maybe there is one aspect, which we used -- I used it 2 times in my speech, there is a mixed component here as well. Normally, it's used to explain lower results or lower figures, what is not the case in Manmade. And -- but here in the Service Solution area, it's really -- a matter of fact, we do have a weakening market and lower volumes in China and India, which do carry a proportional high margins here. And of course, we believe -- I don't want and I will not disclose details here. But CHF 10 billion top line in India has a complete different contribution, really complete different one, just as an example, than in the U.S. or here in Central Europe and Germany. And this is also an effect.

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Fabian Haecki, UBS Investment Bank, Research Division - Executive Director and Senior Analyst of Swiss Small & Mid-Cap Equity Research [9]

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Okay. I mean just in general, just trying to understand a bit how you think. I mean it seems a bit that you're thinking no matter what happened, we just continue to invest in growth, we just continue to invest in Additive Manufacturing. When -- I mean Mr. Fedier, when you make an NPV calculations of all the investments and also when I calculate 200 to 300 bps every year of your Surface, that's about CHF 45 million of -- in extra costs? I mean how can you come to a positive NPV when you make the proper calculation?

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Jürg Fedier, OC Oerlikon Corporation AG - CFO [10]

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Well, I mean I'm not going to debate with you now on NPV calculation. But I think the statement which you made that the we behave as if nothing has happened, if that impression you got, that is completely wrong. I mean I told you before that we're obviously looking very diligently in managing the cost base. There are certain measures which have been implemented. We obviously look at the big consumers of those resources, which are fueling future growth and trying to adapt to it. As Roland said, in light of expectation in terms of offtake and adaptation to the market that not only goes for additive, that goes for ePD and other projects as well. So I think the statement that we behave if nothing happens is probably not the right one. Our hope is that we're going to be able to make that visible to you.

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Roland Fischer, OC Oerlikon Corporation AG - CEO & CEO of Surface Solutions Segment [11]

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Yes, we should. We think twice or 3 times before we enter into new locations, new sites.

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Fabian Haecki, UBS Investment Bank, Research Division - Executive Director and Senior Analyst of Swiss Small & Mid-Cap Equity Research [12]

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Okay. Yes. Coming a bit or more cheerful topic, Manmade Fibers. Can you also elaborate a bit on the pricing trend? I mean that's obviously quarter-by-quarter, quite a volatility-based on product mix and also a bit on pricing, timing mix. But the overall trend, which seems to be moving upwards, and then looking into 2020, is there -- a 15% EBITDA margin seems to be kind of within reach that we move in that direction. How do you see that?

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Roland Fischer, OC Oerlikon Corporation AG - CEO & CEO of Surface Solutions Segment [13]

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What we see on the Manmade Fibers business is a moderate increase in the price levels, supporting our midterm guidance of being somewhere in the mid-teens, around 15%. It can be 14%, it can be 16%. I think this is one element, which is contributing. And just the other one was we had some onetime effects here, but what was mainly carrying it was the rollout mix. And now here, as an example, that rollout mix normally -- or here creates a much better view on the business. And it is important to understand that the business itself is -- the demand is healthy. The underrecognition environment in China is -- we don't see any changes here. I gave an indication, first projects are discussed, not yet signed, but discussed and negotiated with customers for delivery in early 2023. That means it's healthy. But yes, and we stick to the midterm guidance, 15%, around 15% EBITDA.

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Fabian Haecki, UBS Investment Bank, Research Division - Executive Director and Senior Analyst of Swiss Small & Mid-Cap Equity Research [14]

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Okay. Two financial questions. Again, on your net working capital level is quite negative in H1. Is there any chance this could reverse in the second quarter, looking -- making free cash flow look a little bit more positive?

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Jürg Fedier, OC Oerlikon Corporation AG - CFO [15]

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Yes, absolutely. I think that's one of the major focus points, which we have raised the business. I mean the change was significant, as you pointed out. There are actually 2 factors which are impacting that. The biggest part is the reduction of the prepayments and the liability coming out of Manmade Fiber, as we discussed, which is impacting, in a reverse way, the working capital. While we have seen some build in receivable and inventory position, which were temporary builds which we are working to bring down. So yes, absolutely, not only that you should expect we commit that we're going to turn that position around because that's one of the probably weaker points in the overall cash flow, which you point to. Absolutely correct, but fully recognized.

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Fabian Haecki, UBS Investment Bank, Research Division - Executive Director and Senior Analyst of Swiss Small & Mid-Cap Equity Research [16]

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Then just a last financial question. The IFRS 16 impact on your balance sheet that has reduced your net cash position. Does this have an impact on the bank's CEO or kind of -- or you see higher, powerful M&A or how the banks -- credit banks to your balance sheet?

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Jürg Fedier, OC Oerlikon Corporation AG - CFO [17]

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No, absolutely not. I mean that's an interesting, interesting point, which you bring up. I mean you could throw in innovation to that to pension liability and all that. But de facto, no. I mean the impact was, as you have seen, not insignificant. As we report, the liability resulting from this IFRS 16 change in the magnitude of about CHF 170 million. We have more than CHF 200 million assets reclassified for that matter. But it has not been and will not be what we are planning to do, an impact in terms of creating a burden or restriction from a financial metrics point of view. No, I cannot confirm that.

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Operator [18]

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The next question comes from Armin Rechberger from ZKB.

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Armin Rechberger, Zürcher Kantonalbank, Research Division - Analyst [19]

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First question, Manmade Fibers. You had these 2 big Chinese orders of -- together, CHF 540 million. What was the share of these 2 big orders in this order intake for Q2? Then Additive Manufacturing, what was the sales amount you realized in Q2? And my last question, actually, 2 questions regarding Manmade Fibers. You mentioned a onetime customers effect, or onetime customer effects, plural, in the EBITDA margin. Can you elaborate on this a bit? How much was the effect and why? And then also, Manmade Fibers, you mentioned projects with lower margins coming up now. Why is that?

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Jürg Fedier, OC Oerlikon Corporation AG - CFO [20]

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Perhaps, I start with the number side, and then I'm glad to pass on to Roland. So the order intake out of these huge orders, [Shanghai Dafangwuyu] that we talked about, we're running in the magnitude of about CHF 76 million for the quarter, which have been recognized. The longtime effect I was referring to was amounting to about -- for the half year, was amounting to about CHF 5.8 million. And those are basically recoveries from very old bankruptcy cases which went through litigation or where -- a part has been redistributed to the owner, right? But those are really onetime things which are dating back years or almost, I would say, right? And then on the...

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Roland Fischer, OC Oerlikon Corporation AG - CEO & CEO of Surface Solutions Segment [21]

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And then on the Additive part, I think is a very short no. I have to disappoint you. We don't disclose Additive revenue per quarter. But I indicated that overall, the additive development is a little bit lower than actually what we expected. This is -- and again, this is a matter of -- how to say it in a proper English? Customers, the industries are a little bit shy to move into new technologies in these days, right? And this is the phenomena we see an Additive. This is a phenomena we see in other new innovations. And yes, that's it.

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Armin Rechberger, Zürcher Kantonalbank, Research Division - Analyst [22]

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Well, in earlier stages or half years, at least, you were telling us how much sales you were able to gain in Additive Manufacturing, so that's a change now.

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Roland Fischer, OC Oerlikon Corporation AG - CEO & CEO of Surface Solutions Segment [23]

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No, I'm not aware, sorry. I think we don't -- never disclosed comments on business unit level, no.

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Armin Rechberger, Zürcher Kantonalbank, Research Division - Analyst [24]

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Okay. And the other part of my Manmade Fiber questions, projected lower margins coming up now. Can you elaborate on this?

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Roland Fischer, OC Oerlikon Corporation AG - CEO & CEO of Surface Solutions Segment [25]

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Yes. I think the other -- I think Jürg mentioned it, this existing [Dafangwuyu] and projects, which we took at a trough of the cycle. And now it turns into revenue and showing us the lower contribution. And this is a phenomena, which we will see in the third and the fourth quarter and, to a certain extent, early next year as well. But again -- then again, it's a mix of -- the project mix, yes. And fortunately, and luckily, we don't have just low-margin one.

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Jürg Fedier, OC Oerlikon Corporation AG - CFO [26]

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But I think it's important, if I may, just to add a comment because I think you said it before, that we have to pitch it together. Sequentially, for new order intake, we continue to increase the contribution and the profile of the margin, right? Now just timing calls for taking off out of the pipeline, some lower margin, which will happen in the second quarter, and hence, the compression on the margin profile. But the quality of the business per se continues to improve.

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Operator [27]

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The next question comes from Wasi Rizvi, RBC Capital Markets.

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Wasi Rizvi, RBC Capital Markets, LLC, Research Division - Analyst [28]

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One on Surface and one of Manmade Fibers, please. Just on Surface Solutions, if I look at your guidance, it implies higher growth in margins in H2 than in H1. I was just wondering what that was based on? I mean is the higher growth just a function of softer comps? And then in terms of the margin, is there a - do you have an idea of product mix for the second half? Or -- just trying to understand what that's based on. And then on Manmade Fibers, slightly broader question. I mean have you seen any customers similar to what we've seen in electronics start to make any -- kind of start to dip their toes and paying some incremental capacity in -- outside of China. Is that something that could potentially be a trend in the coming years?

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Jürg Fedier, OC Oerlikon Corporation AG - CFO [29]

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Do you want to go ahead and comment?

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Roland Fischer, OC Oerlikon Corporation AG - CEO & CEO of Surface Solutions Segment [30]

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No, I'm not sure whether I really got the second Manmade Fiber part. You're asking for...

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Jürg Fedier, OC Oerlikon Corporation AG - CFO [31]

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Whether we have seen similar trends of production relocation out of China...

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Roland Fischer, OC Oerlikon Corporation AG - CEO & CEO of Surface Solutions Segment [32]

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No, no.

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Jürg Fedier, OC Oerlikon Corporation AG - CFO [33]

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Like we have seen in (inaudible)

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Roland Fischer, OC Oerlikon Corporation AG - CEO & CEO of Surface Solutions Segment [34]

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No. Because you have to see our products, our portfolio and our equipment in line -- in a bigger line. It starts with the trucking of crude oil-producing polyester. And then our equipment kicks in to produce the [yarn]. And that means -- then we talk about the potential relocation, you relocate the entire process chain to a different place, what is not such easy, starting from a pipeline, oil supply on the very beginning. That means no, a clear answer, no. And the second -- the first question was the increasing profitability for the Service Solutions business in the second quarter. And I think this is...

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Jürg Fedier, OC Oerlikon Corporation AG - CFO [35]

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Second half.

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Roland Fischer, OC Oerlikon Corporation AG - CEO & CEO of Surface Solutions Segment [36]

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Sorry, second half, is a product mix topic and the contribution costs exactly, that means our internal setup to a certain extent. That means we do -- we implemented measures.

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Operator [37]

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The next question comes from [Dominic Cerces] from [Intelsat].

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Unidentified Analyst, [38]

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And in regards to the measures you have taken to reduce costs. Can you please elaborate a bit on that? And also let me know, staff-wise, how the development has been recently during the first half and what your expectations there are for the second half.

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Roland Fischer, OC Oerlikon Corporation AG - CEO & CEO of Surface Solutions Segment [39]

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The first part is not a surprise. You talk about the usual suspect. We talked about a very conscious hiring pattern in terms of building up resources. I don't say we don't do it anymore, but we do it in a -- on a much lower level and just very stringent to the cases where it's unavoidable. We do have cost-out activities, simply in spending projects. And at the end, it covers everything in our group. But it's also important to understand, we are not in a survival mode. We are cutting down costs in a smart way, not limiting our future. And future means innovation, technology and stuff like that.

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Jürg Fedier, OC Oerlikon Corporation AG - CFO [40]

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Perhaps one concrete number to your people question, yes, we had a change of approximately 2% higher people compared to the first half 2018. But please understand, this is mainly related to the projects, activities like funding the competence or sourcing the competence center in ePD, finalization of the structure in Additive and all the other projects, which are ongoing. But that's triggering the change, but it was mainly about 2% year-over-year, so they are important, right?

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Unidentified Analyst, [41]

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Okay. So what's the figures then? The concrete figure, please? 2018 was -- first half...

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Jürg Fedier, OC Oerlikon Corporation AG - CFO [42]

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2018 about 10,700. And we are talking about 11,000. Then -- yes, about 11,000.

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Unidentified Analyst, [43]

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Can I ask one question about visibility? Really, I mean, will you say -- I mean, it's really difficult probably to -- at the moment, at least, it seems clear that the recovery is not really -- recovery is not on the horizon. So what is your expectation? I mean could we expect longer, maybe longer than the second half? Or -- I mean what do we have to prepare ourselves for, really?

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Roland Fischer, OC Oerlikon Corporation AG - CEO & CEO of Surface Solutions Segment [44]

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I think you don't expect us to predict future, right? But what we see is, first of all, we don't see the recovery into third and to fourth quarter. And for sure, not in the automotive area, that is actually what we expected earlier this year. And this is nothing what we see today, we don't have the indications. We do see some negative indications in the general industry. And what was carrying actually in terms of vertical industry was aviation industry, which was quite strong. Now with -- and I think you referred to Boeing. We have to be a little bit more cautious here as well. It's still substantially growing, but we are preparing ourselves for -- also a year of 2020, which is not substantially above the level of today. This is what I would say, and this is what we are doing. And yes -- and then let's see.

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Unidentified Analyst, [45]

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And that's overall? You mean not only in aviation or the -- that you are preparing for a year?

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Roland Fischer, OC Oerlikon Corporation AG - CEO & CEO of Surface Solutions Segment [46]

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No, we are very...

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Unidentified Analyst, [47]

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That's just aviation? Is that the aviation? The last point you're referring to, or overall?

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Roland Fischer, OC Oerlikon Corporation AG - CEO & CEO of Surface Solutions Segment [48]

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No. For our service solution business because automotive, I don't see a recovery, channel industry. And then on top of that, we have our -- this political uncertainty, what is -- which I saw early this -- yesterday, actually, right, early this week. And this is something -- what we have to keep in mind.

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Operator [49]

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The next question comes from Christian Arnold from MainFirst.

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Christian Arnold, MainFirst Bank AG, Research Division - Analyst [50]

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Question on the low-margin orders you were mentioning, transferring to sales, having this negative impact on margin at Manmade Fiber in the second half. I got the impression that it's -- I mean, you were mentioning that you will have this negative impact, actually, also beginning of next year. I wanted to ask you if you could really time this development? Or rephrase maybe my question. Do we have to go for similar margins in the first half next year, like we are going to see in the second half this year in Manmade Fiber? That will be my first question. And the second question on the Surface Solutions, on Additive Manufacturing, you were reducing your reported margin corridor to 18% to 20%. So this dilution effect of 300 basis points looks that it's not only occurring this year, but also next year. Is it also a midterm issue you have here? So for how long do you expect this 300 basis points negative impact?

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Roland Fischer, OC Oerlikon Corporation AG - CEO & CEO of Surface Solutions Segment [51]

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Let's start with the Manmade Fiber business. I tried to indicate already that the sequence, when we are creating revenue based on this low comparable, low margin projects, heavily they are -- purely depends on the delivery schedule. The delivery schedule is one element in a bigger development plan of these industrial plants, again, starting from crude oil tracking to polymerization, producing to polyester and then our equipment kicks in. That means, yes, we will see delivery modules out of these contracts also in 2020. We, of course, you can imagine, we are trying to maneuver and manage that in a decent way and limit the amount to a certain extent, not deteriorating the result at the end. And again, this is a matter of time. I think by end of '20, there should be not too much left over. And from that perspective, again, we believe on this thing and we are confident to be in the guided corridor of around 15% EBITDA. That means it's a temporarily effect. The second question, Additive Manufacturing, Surface Solutions. Yes, now we have the impact of 300 basis points but is driven by the underutilization of the assets. We build up and the nature of the business is, quite simply here, as the better we can load, the better we can fill the plants with volume, whether it's the production volume on printer parts or whether it's the material production in our Troy facility, the better it will be. That means it will be an effect for sure for '19, and there will be an effect in '20 and beyond '20. It's difficult to give prognosis, but as better we do in terms of volume, the slower the effect will be. I think that's all I can say right now, right?

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Christian Arnold, MainFirst Bank AG, Research Division - Analyst [52]

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Maybe just on the Manmade Fiber question. So the -- do we see the biggest negative impact in H2 '19? Is that a fair assumption?

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Roland Fischer, OC Oerlikon Corporation AG - CEO & CEO of Surface Solutions Segment [53]

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An improvement...

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Christian Arnold, MainFirst Bank AG, Research Division - Analyst [54]

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No, the negative impact from this low-margin orders. Do we see the biggest negative impact in H2 '19? Or ...

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Roland Fischer, OC Oerlikon Corporation AG - CEO & CEO of Surface Solutions Segment [55]

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In H2 '19, yes. Yes, yes.

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Jürg Fedier, OC Oerlikon Corporation AG - CFO [56]

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Yes. And then there will be, let's say, a less negative impact, but still negative, in H1 '20 and remaining negative impact in H2 '20. And after 2020, we shouldn't have a negative impact from that side anymore.

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Roland Fischer, OC Oerlikon Corporation AG - CEO & CEO of Surface Solutions Segment [57]

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Not -- yes, maybe there is something spillover left, but not the major one, yes. Again, it depends on the schedule of the plant, right? This is beyond our control.

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Christian Arnold, MainFirst Bank AG, Research Division - Analyst [58]

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Okay, okay. But then is it also a fair assumption that the 15% midterm margin target, that is not what we are going to see in 2020, but rather later.

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Roland Fischer, OC Oerlikon Corporation AG - CEO & CEO of Surface Solutions Segment [59]

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Yes, we said around '20. And I think this year, we indicated already 100 basis points. That means we are coming close to whatever, 13%, and then it's additional improvement in '20 coming closer, closer to 15%.

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Operator [60]

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The last question comes from [Daniel Culao] of [First Insider].

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Unidentified Analyst, [61]

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I have just a few questions. Well, basically, it's just one question, but composed of different elements. I'm trying to figure this margin effect and bring it together with your exposure in China, and your exposure to the automotive industry. And I am -- I have in front of me your half year report, Page 18, German version. And I can see there results (inaudible) China going down from CHF 70 million to CHF 56 million. I cannot read the same, obviously, in the statistics above, that we take in the half results Asia Pacific, almost stable. Then I go down and find on Page -- just on Page 22, the same report, your turnover in automotive, up 8% or something, automotive, but very strong effect on your earlier margin? I'm trying to bring that all bit together. And as you can imagine, not very successful with that.

Maybe you can help me a little bit bringing this together. Automotive seems to be your most lucrative business. Exposure in China looks relatively, I don't know, I cannot tell, I cannot really figure your exposure in China from your statistics because, as far as I understand, on that metric, nonstandard or Chinese local producers. And not the foreign producers -- not foreign companies producing in China. Maybe you can help me a little bit, what is your exposure to China? What is your -- automotive, your most lucrative business. And therefore, your exposure is bigger than it looks like at first sight, that's a bit -- the question I figure from this.

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Andreas Schwarzwälder, OC Oerlikon Corporation AG - Head of IR [62]

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This is Andreas Schwarzwälder speaking. May I recommend that we maybe take this offline to give you the details and closing the call now. And I'll give you a call in a minute to give you the various effects. I think that would be too far here in the call.

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Roland Fischer, OC Oerlikon Corporation AG - CEO & CEO of Surface Solutions Segment [63]

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Well, ladies and gentlemen, that would conclude our Q2 half year call. As indicated, we are happy to answer further questions both -- individually. And other than that, we'll hope to speak to you soon again, latest on November when we disclose the Q3 numbers.

Thank you very much for participating, and speak to you soon.

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Operator [64]

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