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Edited Transcript of RIEN.S earnings conference call or presentation 13-Mar-19 9:00am GMT

Full Year 2018 Rieter Holding AG Earnings Call

Winterthur Mar 27, 2020 (Thomson StreetEvents) -- Edited Transcript of Rieter Holding AG earnings conference call or presentation Wednesday, March 13, 2019 at 9:00:00am GMT

TEXT version of Transcript

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Corporate Participants

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* Norbert Klapper

Rieter Holding AG - CEO

* Relindis Wieser

Rieter Holding AG - Head of Group Communication

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Conference Call Participants

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* Alessandro Foletti

Octavian AG, Research Division - Financial Analyst

* 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

* Nicolas Hardou

* Reto Amstalden

Baader-Helvea Equity Research - Analyst

* Samuel Emch

* Stefan Frischknecht

Schroder ImmoPLUS - Portfolio Manager

* Vincent Normant

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Presentation

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Operator [1]

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Ladies and gentlemen, welcome to the media and analyst conference call. I'm [Meade Onada], 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's my pleasure to hand over to Ms. Wieser.

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Relindis Wieser, Rieter Holding AG - Head of Group Communication [2]

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Good morning, dear ladies and gentlemen. A very good morning from the Rieter Headquarter in Winterthur. Thank you very much for having followed our invitation. I also would like to extend a warm welcome to those of you who are following today's conference online.

Now, it's my pleasure to hand over to our CEO, Norbert Klapper. Norbert, may I ask you?

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Norbert Klapper, Rieter Holding AG - CEO [3]

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Thank you very much, Relindis. Good morning, ladies and gentlemen. Good morning, everybody, on the phone and online. Welcome to Rieter's annual media and investor conference. Let me introduce the Rieter team real quickly. Relindis, who made the introduction, I don't have to introduce to you, most of you have met her. We have [Patrick Weiner] also on the podium today. [Patrick] is the Head of Group Controlling. He will support me on the financials, if needed. As you know, Joris Gröflin, who has been in charge as CFO for Rieter for more than 8 years, he had his last day with the company on Friday, last week. His successor Kurt Ledermann will join us in early May, 1 month earlier than originally communicated.

Please follow me. I will jump to Slide 3. In the first place, the key messages. We already told you in late January that the order intake was suffering from a weak market. This led to a 17% decline in 2018. What was particularly weak was the first -- fourth quarter. And what I can say today is that there was no positive momentum in the market for new machines and systems in January and in February. So the slow market continued.

The sales number increased by 11% last year. The EBIT margin, as already communicated in late January, we had 4%. And the net income came out at 3% of sales. The free cash flow is good news. Free cash flow is at a level of CHF 64 million, roughly. And the proposed dividend, which the Board of Directors will propose to the Annual General Meeting, will be CHF 5, at the same amount that we had last year.

I'm moving on to Page #4 -- 5, the financials, the highlights as an introduction, as a summary. I already told you about the order intake, 17% less than last year. And the fourth quarter was particularly weak. Sales, 11% up compared to 2017. A strong second semester helped here, CHF 560 million of sales. EBITDA and EBIT, 7.8% margin and 4% margin. And these numbers are lower than last year's numbers, if you take out the restructuring in Ingolstadt, which we had in the '17 numbers. The reason why the additional sales could not be converted into higher profits are the following: Number one, the product mix in the Machines & Systems business. We sold a lot of conventional ring spinning instead of compacting systems. Number two, the onetime cost for the logistics setup that we did in Europe for our After Sales business. Number four (sic) [three], the slowdown in the fourth quarter, we saw already in the sales numbers of After Sales and Components and, of course, the contributions from these sales numbers are missing. And what we did in addition is we did not reduce our R&D budget. We went up again with our R&D expenses and these 4 reasons together are the root causes for the fact that our profits, outside the restructuring in Ingolstadt, did not increase, although we had higher sales.

Free cash flow, I will come to that point a bit later. Higher net profit, lower net working capital and disciplined CapEx policy led to a free cash flow of almost CHF 64 million. As a consequence, the net liquidity of the company went up to a level of CHF 150 million. And the dividend proposal, I already introduced to you, it will be CHF 5 per share.

On Page 6, we have the order intake by business group. And here, we see clearly that the business group Machines & Systems was suffering from the weak market for new equipment. The order intake went down by 30%. Business group After Sales also had a little decline. And the reason here is that in the After Sales business, we also report the installation services for our new equipment. And as a consequence of the order intake of the Machines & Systems business, the order intake in After Sales went down as well. For the business group Components, we can report that their area of order intake went up and here, of course, the acquisition of SSM helped.

On Page #7, we have sales by business group. And we see that sales went up in the typical cyclical way in our Machines & Systems business. It was a little lower in the After Sales business. And in Components, we see, again, the impact of SSM. When you compare the 2 semesters, you see that in the first semester, we had sales of CHF 550 million, and in the second semester, we were at CHF 560 million, which is a decent number.

Let's go to the operating result, the EBIT by business groups. Here we see that the business group Machines & Systems went down, reported a loss of CHF 8 million. And the reasons are the 2 reasons that I already mentioned, the mix -- the product mix, which was in the sales number, and the higher R&D expenses. In the business group After Sales, we saw -- we also earned profits which were lower than last year. The main impacts here were the onetime costs in connection with the centralization of logistics in Europe. And the weakening of the demand towards the end of the year was another hit -- we took another hit from that on our EBIT in After Sales. Components can report an increase and again, the SSM acquisition helped here.

Net profit and dividend proposal. The net profit went up from CHF 13 million to CHF 32 million. Main impact here is that in the '17 numbers, there is the restructuring provisions for our project in Ingolstadt included, and we didn't have that in '18. So that is the major change here. The dividend proposal, I already told you about. We had CHF 5 per share in '17, and we will also approach the Annual General Meeting with the CHF 5 per share proposal, which is a payout ratio of our net profit of 71%.

The balance sheet. A couple of key figures from the balance sheet. What is important is that the net working capital went down to almost 0. We have this here on Slide #10. You see the net working capital in comparison to last year. We had almost CHF 38 million last year and in 2018, we were at almost 0. The long-term financial debt is another line that we have here that includes a bond that we have out there of CHF 100 million. And the shareholders equity ratio improved up to a level of 45%. Net liquidity, which is here, of CHF 150 million compared to CHF 130 million in 2017, I have already mentioned.

The net working capital development were based on a low order intake. You would expect lower inventory and lower advanced payments, so that is what we can also see here. Inventories went down, advance payments went down. But we had improvements in all other lines as well. So we were able to reduce the net working capital significantly. And we came out at a level of CHF 300,000 by the end of last year, 2018.

The free cash flow. It starts with higher net profit compared to 2017. The net working capital improvement, we can see here change in net working capital and provisions. The investment policy, we see in the CapEx number, CHF 29 million is at the same level as last year. And we had a sale of tangible fixed assets in here. The proceeds from sale of fixed assets, the CHF 11 million, this was a land sale in China, mainly.

Let me come to Page 13. Decrease in workforce. What happened here is we had in '17 an overlap between our manufacturing operations in Ingolstadt and the manufacturing operations in Usti because what happened in '17 and '18 was the transfer of manufacturing from Ingolstadt to Usti. This is over now. The overlap is gone and this is the major driver of this change that we see here.

On Page #15, I have one of the big strategic issues that we have on the table this year. You know, the priority for this year is to lead Rieter through this difficult year in terms of market environment and at the same time, continue to implement the strategy. And what we have here is a milestone in our innovation program, which is the cornerstone of our strategy. It is ITMA Barcelona in June, a little more than 3 months away. We have an investors meeting there also. Media, analysts, everybody is invited. You can sign an invitation on our homepage. And this thing is going to happen on the 24th, if I'm right, yes? Yes, so it would be a pleasure for us to see you there, and share with you the new machines, the new products that we're going to launch. This is a very important step in our innovation program.

And then is -- before I come to the outlook on Page 16, that is the second cornerstone of the strategy. What you see here is the result of our cost reduction initiatives. We took manufacturing operations out of Ingolstadt and we moved them to Usti, and as a result, we have a lot of free space in Ingolstadt. And what we did is we sold this piece of land to a group in Germany, and we signed the contract in 2018. We already communicated that we expect an extra profit on the net profit line from the sale of EUR 60 million. We anticipate that the transaction will be closed in the third quarter and this is also when the money will be on our bank accounts.

The outlook. The weak market environment also led to a low demand in the first 2 months of '19. The momentum has not changed. What does that mean? New business is slow. And the business that we have with spinning mills on spare parts and also wear-and-tear parts, this business is okay. The spinning mills are running. What is not at the usual levels is the investments into new machines and systems. We, therefore, expect a significant decline in sales, EBIT and net profit for both the first half of the year and for the full year 2019, all that not taking into consideration the extra profit on the land sale in Ingolstadt. Against this background, Rieter is working on implementation of capacity adjustments and cost reduction measures, as we announced it in late January. These measures include a reduction of our global workforce of around 5%. I told you in January that we are now going through what we call in Rieter the cycle management. First step is to curb the cost, to go into the cost [dependence], to look into the costs and say, okay, what do we really need and what's the rate. And the second level of our cycle management is to make use of the flexibility of our business setup, and we have the flexibility in our business setup which is significant. So we are working on that. And I told you that the third step, if the business goes on -- would go on that way as we saw it in the fourth quarter, is structural changes. And this third step is what we're going to do now. We're going eliminate, we're going to check -- we're going to set aside 5% of our global positions, in particular, in indirect area of the workforce.

And what is also important is this is not supposed to jeopardize the implementation of our strategy. It is to -- this year is difficult in the sense that the business is low, but at the same time -- which has an impact on the numbers, but at the same time, implementation of the strategy remains a key priority. And as you saw the ITMA slide that I showed you, the whole organization is working towards this goal. And the other parts of the strategy, the other areas, strengthening RAS and RCO, Components and After Sales, and reducing cost wherever we see that they don't generate customer benefits, this goes on and this is the context of the 5% that I'd like to -- that I want to share with you. All right.

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Relindis Wieser, Rieter Holding AG - Head of Group Communication [4]

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Okay. Thank you, Norbert. This will bring us to the Q&A session. We will start in Winterthur, and afterwards, open the line for the participants in the conference call. As usual, the Q&A session will be recorded. I kindly ask the participants here in the room to wait for the microphone, to mention your name and company and then raise the questions you may have. We will start with -- on the right side.

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Questions and Answers

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Alessandro Foletti, Octavian AG, Research Division - Financial Analyst [1]

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Alessandro Foletti from Octavian. I have 2, 3 questions. Let me start with 3, then I will go back in the line. On the markets, you have put in your presentation in the appendix the split of sales by market. Can you maybe give an indication, by market if possible, how do you think that you are in the cycle? I see Turkey, for example, was strong. Where you think it is, Asian countries? I remember in January you spoke about Uzbekistan, but there's India which was weak, China was weak. Can you maybe give an indication on every market, where do you think you are? That's the first question. My second question, maybe a little one. You spoke about ring spinning, that there was a lot of conventional. Can you tell in which markets that was? And then, on the M&A side, you'll have, with the income from Ingolstadt, around, I think, give or take, CHF 200 million net cash very soon. Do you see any possibilities to put that money at work in M&A? If yes, where? If you don't have the winder -- I don't know, ideas, I guess.

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Norbert Klapper, Rieter Holding AG - CEO [2]

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Thank you, Mr. Foletti. The markets, cycle by markets. The -- what is obvious to everybody of you is that in China, we have a difficult situation based on the trade war. So the Chinese customers have lots of projects. They're talking about this and they're talking about that, but in -- basically, the market is in a waiting mode. Everybody waits for the decisions, for the outcome of the trade war. I was in China 2 weeks ago, and I saw that nobody is pessimistic there. Chinese customers are optimistic and they have plans, but they are waiting for what the trade war will result in. This has an impact on Southeast Asia, which is the second region of the world which is important to us because there are strong ties between the Chinese textile industry and the textile industry in Vietnam, in Pakistan, in Bangladesh and also in Indonesia. So they follow this cycle, basically.

In India, where some of it is -- some of the cycle that we see in India, the low demand goes on the account also of the trade war between China and the U.S. And another portion goes on the account of the elections which are coming up in India. You might be aware of the fact that there is -- the federal government will be reelected this year. And this has an impact on the appetite of our customers for new investments.

In Turkey, we have a different situation, which has nothing to do with Asia, but which comes at the same point in time. You are all aware of what's going on in Turkey, the demand is quite low. It started last summer when the Turkish lira depreciated so heavily, and also our Turkish customers have projects and they have ideas what they want to do. But for the time being, they hold back investments as well. What comes on top for everybody is that it's quite difficult to get financing packages for new spinning mills at the moment. Although, the government in China and also the government in India have started to release money to make it easier for private companies to invest. But so far, we have not seen the impact in our order book. Is that okay, Mr. Foletti, as an overview market by market?

Ring spinning. Yes the overproportional ring spinning sales went into a couple of countries. I'd like to highlight 2 of them. This was Vietnam and it was Uzbekistan. And on the M&A side, you are aware that we have an M&A strategy. You have seen us making acquisitions which were in line with our strategy. And if there would be an opportunity this year, we would certainly look into it, as our -- as has been said, our balance sheet might allow for an acquisition.

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Alessandro Foletti, Octavian AG, Research Division - Financial Analyst [3]

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And the winder specifically?

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Norbert Klapper, Rieter Holding AG - CEO [4]

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Yes, the winder. There is 3 winder producers. This is Murata, this is Sclavos and this is Savio. And -- yes, I don't know whether any of them is willing to sell at a decent price. So far, no process in place.

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Operator [5]

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(Operator Instructions)

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Christian Arnold, MainFirst Bank AG, Research Division - Analyst [6]

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It's Christian Arnold, MainFirst. Also 2, 3 questions from my side. First on the Ingolstadt property. You announced that there will be a positive effect of CHF 60 million on P&L, possibly in terms of cash. Could you give us the number for the cash you will get there? And then on your outlook, you were saying significant decline in sales, EBIT and net profit for both the first half of the year and for the full year. The decline in net profit, does it exclude net loss? Could you become negative on EBIT level and on net profit level, especially in the first half? Maybe you can give here some insight? Or maybe the third question. The 5% reduction on the workforce, you mentioned that -- you labeled that as a structural change. The 5%, somehow it sounds like you would lose the workforce more or less equally all over the place...

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Norbert Klapper, Rieter Holding AG - CEO [7]

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You mean a haircut?

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Christian Arnold, MainFirst Bank AG, Research Division - Analyst [8]

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[I don't. Talking about not for] me, so what actually is changing structurally?

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Norbert Klapper, Rieter Holding AG - CEO [9]

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Thank you. Cash, [Patrick], I believe we're expecting roughly CHF 100 million in cash? CHF 100 million in cash is what we expect from the sale. Loss in the first half year or in the full year, well, that depends on how the business goes on in the coming months, in particular, the Components and the After Sales business. Can I say today that there is -- that there will be no loss for sure? I can't say that. It could happen. It could happen. For the full year, rather not because you know what's coming on an extraordinary basis, yes, so that would be rough to eat all that up in the loss, but we -- from the ongoing business, yes, it might happen. And you said -- you also asked the 5%, is it a haircut across all our sites? No, it is not. It is a specific program for the sites involved. We have approached the works council, the workers' representatives. We will now be approaching our people. That's all I can say today. But it's for sure not a haircut.

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Christian Arnold, MainFirst Bank AG, Research Division - Analyst [10]

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Okay. As a follow-up. The momentum, you're not commenting as you had previously in January and February. I mean, the Machines & Systems, the order intake in the fourth quarter, I think, was minus 80%, if I recall it correctly. Is it still the same magnitude in terms of decline in January and February?

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Norbert Klapper, Rieter Holding AG - CEO [11]

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Let me put it this way. In the fourth quarter, we had an order intake of CHF 120 million and this momentum continued.

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Relindis Wieser, Rieter Holding AG - Head of Group Communication [12]

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Over there? Okay, go ahead.

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Armin Rechberger, Zürcher Kantonalbank, Research Division - Analyst [13]

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Armin Rechberger from ZKB. You mentioned some influence in your cash flow statement of the sale of land in China. Was there any influence also on net income in your P&L from this sale? Can workforce just -- I mean, in addition to the before question, you mentioned an indirect influence on the workforce as something in your speech. What did you mean with indirect?

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Norbert Klapper, Rieter Holding AG - CEO [14]

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Oh yeah. White collars, white-collar people. The positions, the 5% of the positions which will go out are mainly white-collar positions. And the extra profit on the sale of land in China, there was no extra profit. We sold at book value.

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Relindis Wieser, Rieter Holding AG - Head of Group Communication [15]

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And now a question from Mr. [Litt].

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Unidentified Participant, [16]

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[Eric Litt] from Swiss Television. Could you say something about the job losses? I mean, you said 5% of the workforce. What does that mean for Switzerland? What does that mean for Winterthur especially? Could you elaborate a bit on that?

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Norbert Klapper, Rieter Holding AG - CEO [17]

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The reductions of jobs will go across our global sites. Winterthur will also be affected. We -- at the moment, we see Winterthur at a level of below 30 positions that will be gone.

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Relindis Wieser, Rieter Holding AG - Head of Group Communication [18]

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Okay. So Mr. [Meyer].

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Unidentified Analyst, [19]

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[Andreas Meyer] from (inaudible). How was the development of your market share? How did you behave in your markets? And how was the -- how did you [lop] the competitors [of you]?

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Norbert Klapper, Rieter Holding AG - CEO [20]

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So the market share, in terms of sales, last year was at good levels because the ROW, outside China, outside India, our market was strong. And that helps Rieter because our market share in ROW is quite high. The -- when you look into 2019, we look at the hit rate, yes, in terms of new business coming in. And our hit rate is at normal levels. So we don't see a move there. What is missing is volume in the markets, from the market perspective, not market share for Rieter.

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Unidentified Analyst, [21]

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So all your competitors are affected by this downturn the same way as you are?

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Norbert Klapper, Rieter Holding AG - CEO [22]

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That's what we understand. Yes. We understand it's an industry issue, not a Rieter issue.

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Unidentified Analyst, [23]

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How much is just normal cycle downturn and how much is this trade war?

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Norbert Klapper, Rieter Holding AG - CEO [24]

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I mean, that is difficult to say what a normal trough would be and how long it would take. It depends on the way things are going. I wouldn't dare to say the normal cycle is X and Y. I guess, we can't say that.

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Relindis Wieser, Rieter Holding AG - Head of Group Communication [25]

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Okay. Next question Christian.

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Unidentified Analyst, [26]

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Well, in my understanding, your outlook is rather depressing. So can you give us an idea where better news could come from? Is it China, is it India? I mean, we just heard everybody has been waiting for [fishing]. But where do you expect good news? Or [they are normally] expected?

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Norbert Klapper, Rieter Holding AG - CEO [27]

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Yes, there might be a development in the market. Let me -- #1, the elections. You don't know what the situation will be after the elections. Turkey comes first and then comes India. And the trade war, nobody knows when that will end. From my perspective, I'd say no matter where the trade war goes, our industry will handle it with any decision, but they need a decision. What is not good is the uncertainty that we have today. That means that everybody is waiting. If the trade war ends in a certain agreement or in no agreement or whatever, that is a decision. And that is what our customers can work with. And then it's another triggering event that might make a change in the market, this is ITMA. There is customers who are holding back investments because they are waiting for the new machines that the industry will present. So that might give a positive momentum to the demand of new -- for new machines and new systems.

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Unidentified Analyst, [28]

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About ITMA, I mean, I will join there, I will visit ITMA. So might I be disappointed by the news you will -- or is it really good news, big news, a new invent -- invention you are going to show or just rather a small step forward? How would you place it?

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Norbert Klapper, Rieter Holding AG - CEO [29]

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I'm convinced that our -- the products that we will show, the systems -- we will show innovations in all 4 systems: ring, compact, rotor and air-jet. I guess they will be attractive to our customers. And I don't think you will be disappointed.

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Unidentified Analyst, [30]

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That brings me to the last point, air-jet. What is the story there? Some new inroads on the market or nothing new?

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Norbert Klapper, Rieter Holding AG - CEO [31]

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The strongest market for air-jet is China. And in China, everybody is waiting for what's going on. Big projects on the table, in particular in air-jet, but so far nobody pulled the trigger.

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Relindis Wieser, Rieter Holding AG - Head of Group Communication [32]

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Yes, over there.

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Alessandro Foletti, Octavian AG, Research Division - Financial Analyst [33]

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Yes. This is Alessandro Foletti. Two follow-ups. Maybe on the 5% again, if there is any restructuring costs attached, if you can indicate? And the second one on the market. In the past, you were expecting about 30 million spindles that should have been more or less the normal average [masthead] volume per year. Can you tell us if, a, this is still this case, this kind of expectation in the mid-term? And second, where did we stand in 2018?

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Norbert Klapper, Rieter Holding AG - CEO [34]

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2018 was a normal year. So we were at these levels. This is heavily tracked. There's higher years, there's lower years. We were at this level, roughly. I have no [compliment] yet, but I -- the market was in normal shape in '18 from a sales and spindle installation point of view.

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Alessandro Foletti, Octavian AG, Research Division - Financial Analyst [35]

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Okay. Not from the other side.

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Norbert Klapper, Rieter Holding AG - CEO [36]

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Yes, not from a demand point of view. We needed always -- there is a difference between the 2. So for '19, we will be certainly lower for sure. And restructuring costs. Yes, there will be restructuring costs in the mid-single-digit range. And they will -- as far as we see at the moment, they will outweigh the savings that we will have from the restructuring in 2019. So the positive impact will kick in, in '20.

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Alessandro Foletti, Octavian AG, Research Division - Financial Analyst [37]

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From the restructuring -- to be specific, from the restructuring of the 5% [costs], not those from the [sheets] production from Ingolstadt to...

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Norbert Klapper, Rieter Holding AG - CEO [38]

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Let's keep it apart. Keep it apart. So the 5%, mid-single digits.

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Unidentified Analyst, [39]

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In the press release this morning, you were also saying that you have decreased the breakeven point. Can you give us a number there, what kind of sales you need to reach this breakeven point? And how much lower is it now?

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Norbert Klapper, Rieter Holding AG - CEO [40]

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I'm hesitating to give you a number now because we are in the middle of a very weak market. We will see how -- at what level we come out of this restructuring. I can't tell you a number today.

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Relindis Wieser, Rieter Holding AG - Head of Group Communication [41]

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Are there any other questions? No? Yes, again, Mr. Rechberger.

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Armin Rechberger, Zürcher Kantonalbank, Research Division - Analyst [42]

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Maybe, CapEx, your expectations for the -- for 2019? And the other housekeeping question, your tax rates?

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Norbert Klapper, Rieter Holding AG - CEO [43]

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Yes, the tax -- the big thing on the tax rate is the sale of land in Ingolstadt and, of course, we are working on that with our [drivers] and the tax authorities. It's hard to say what this is going to be this year. And, what was the first question?

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Armin Rechberger, Zürcher Kantonalbank, Research Division - Analyst [44]

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CapEx.

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Norbert Klapper, Rieter Holding AG - CEO [45]

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CapEx. Same level as last year, roughly.

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Armin Rechberger, Zürcher Kantonalbank, Research Division - Analyst [46]

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And R&D, are you going to expect to invest a lot again or lower levels, probably?

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Norbert Klapper, Rieter Holding AG - CEO [47]

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I would think R&D will be around CHF 50 million again because we are launching now all the innovations that we have developed over the last couple of years. And there is prototypes, machines to be built and so forth. So it will be at this level, from today's perspective.

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Relindis Wieser, Rieter Holding AG - Head of Group Communication [48]

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Are there any additional questions in the room? That, obviously, is not the case. So now I will start to open up the line for the participants in the conference call. May I also ask -- kindly ask you to give me your name and the company you're working for. We will start with the first question.

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Operator [49]

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The first question from the phone comes from the line of Reto Amstalden with Baader-Helvea.

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Reto Amstalden, Baader-Helvea Equity Research - Analyst [50]

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Question regarding Machines & Systems. There, you had a very weak order intake in the fourth quarter, maybe in the low double-digit million, and when we compare this to history, where you had about CHF 150 million in third quarter, we see there is a massive underspending in the Machines & Systems and in these markets. Where you do you see here more like a normal level when you look at, I would say, from the perspective of the replacement demand out of the big installed spindle base we have globally? Can you elaborate here a bit on that, what is more like a normalized replacement demand-related order intake for Machines & Systems at Rieter?

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Norbert Klapper, Rieter Holding AG - CEO [51]

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Well, thank you very much for the question. What I can say is that normal levels in the Machines & Systems business are about CHF 600 million sales, and that brings you to an order intake on a quarterly basis of CHF 150 million that we need in order to get that. And that is the normal replacement/capacity expansion at the market share of 30% in this business. That's the way we look at it. And as you said in the fourth quarter, we were significantly below that.

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Reto Amstalden, Baader-Helvea Equity Research - Analyst [52]

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Okay. Another question. I saw in the annual report that you had cost -- outbound freight cost to customer of about CHF 31 million. That was up from CHF 20 million in the previous year. What has driven this increase? And what are your expectations and what you see here on that cost line?

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Norbert Klapper, Rieter Holding AG - CEO [53]

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Yes, this is the -- let me say, the flip side of the success -- the coin of success in Uzbekistan. Uzbekistan doesn't have a port and it is not so easy from an infrastructural point of view to get the machines into the country in good shape. And that is what caused the additional costs. It's a matter of market. And when the -- as we said, we reported CHF 124 million sales in Uzbekistan, and what you see in the numbers that you just referred to are the logistics costs which are -- which relate to this sales number. There is -- we will see where -- the turnover this year, where the sales goes. It's hard to say whether the number will be lower or a lot lower this year, as it relates to where do we do our sales, where do we ship the machines to.

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Reto Amstalden, Baader-Helvea Equity Research - Analyst [54]

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Okay. And last question regarding Turkey. We know you introduced a new next-generation compact spinning system in Turkey. And normally, when you introduce these kind of machines, you have lower, let's say, gross margins. And this should then improve pretty considerably once this is more running smoothly and reaching a more mature level. Most -- or has this effect an impact on your declining EBIT margin profitability in 2018? Was this also a factor?

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Norbert Klapper, Rieter Holding AG - CEO [55]

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Yes. That is also a point that you bring up here. The launch in Turkey lead to a nice sales number. You saw it, CHF 154 million. But the margin with the new product is not what the margin of a mature product is. So the additional launch cost and the things that come along with such a launch, they were also included in last year's EBIT numbers. That's true.

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Operator [56]

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The next question from the phone comes from Fabian Haecki with UBS.

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Fabian Haecki, UBS Investment Bank, Research Division - Executive Director and Senior Analyst of Swiss Small & Mid-Cap Equity Research [57]

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So quick question to clarify, again, on the headcount cost. Sorry the line was a bit bad, maybe I did not understand everything. But -- so you've said this is the first phase in the cycle management. But it does not seem it involves temps workers. You talk mostly about white collars, right? So it means no temps in the factories affected or they're included in that numbers -- in that number? And I mean, if this is white collar, are these costs of 5% structural? Or will they come back if volumes recover again? This is my first question.

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Norbert Klapper, Rieter Holding AG - CEO [58]

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Yes. Thank you very much. Yes, as I said, the reduction of temporary labor, the making use of short-time work and of vacation accounts which are still filled, this is -- in our cycle management terminology, this is level 2, making use of the flexibility you have in the system. So the 5% jobs that will go away are permanent jobs, they are -- that are permanent positions. Will some of them come back when the business picks up again? Maybe, but it will not be a lot. It is a structural change that is supposed to last.

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Fabian Haecki, UBS Investment Bank, Research Division - Executive Director and Senior Analyst of Swiss Small & Mid-Cap Equity Research [59]

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Okay. So this the level 1, the permanent jobs, mostly overhead, and the level 2 will be temps reduction, right?

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Norbert Klapper, Rieter Holding AG - CEO [60]

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No. First level is to look into your cost and determine, okay, do we really need to do that or not? The hiring freeze is also the part of the first step. The second step is making use of the flexibility of the system. For example, temporary labor, we talked about that already. And the third step is structural changes. And this is where we are at the moment. We have seen that number -- step 1 and step 2 will not be enough, so we need to go into step 3.

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Fabian Haecki, UBS Investment Bank, Research Division - Executive Director and Senior Analyst of Swiss Small & Mid-Cap Equity Research [61]

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Okay. Okay. Step 3. Okay. So I did not understand it properly. Another question on the savings on Ingolstadt. I also didn't get this properly. So you always talked about CHF 15 million of savings from that closure and relocation. How much has already materialized in 2018? How much is still to come? And is CHF 15 million still a valid number we can count with?

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Norbert Klapper, Rieter Holding AG - CEO [62]

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In 2018, the cost that we had, which were not covered by provisions and the savings, were at par. This year, the savings will kick in. And in a normal volume scenario, it is CHF 15 million of savings. In a low-volume scenario, the volume-related portion of the savings will obviously not kick in.

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Operator [63]

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The next question from the phone comes from Stefan Frischknecht with Schroders.

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Stefan Frischknecht, Schroder ImmoPLUS - Portfolio Manager [64]

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My questions are around the After Sales and Components business, in terms of the sales and the margin. Could you please shed some more light why the After Sales number has been lower in 2018 compared to 2017? When I look at it on a sequential basis, then your machinery sales have increased. And so I don't exactly get where the mechanism between the After Sales and the machinery sales that you mentioned should be.

And then secondly, you had quite a weak second half, and you stated it's the fourth quarter in Components. What was particularly weak in terms of demand for Components? Was it also the trade war that was holding your customers back? Or what is behind this piece?

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Norbert Klapper, Rieter Holding AG - CEO [65]

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Yes. Thank you very much. After Sales profitability, you saw in comparison to the previous year that we had a profit which went down by CHF 8 million. Some of it is volume-driven. The majority of it is onetime cost-driven, the onetime cost that we had for the new setup -- for putting up the new setup of the logistics in Europe. We closed our logistics operations in Ingolstadt, and we moved the warehouse to a central warehouse in the Netherlands. And this was the project that we -- that cost the onetime cost last year. Yes? Components. Weaker in the fourth quarter. Components, the majority of the business of Components is wear-and-tear parts. And as I said, this business is going on because the mills are running. They also have a project-related portion in the business. This is when they sell components to original equipment manufacturers in connection with new equipment. The Components sales -- these components -- there are components in that sense to Rieter, but also to other OEMs. And this business went down in connection to the lower demand for new machines and systems.

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Operator [66]

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The next question from the phone comes from Vincent Normant with Pascal.

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Vincent Normant, [67]

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I have 2 questions. The first one is on Components business, if you could comment -- give us some comments about SSM business and how it behaved in '18 compared to '17, both on sales and on margin, because their contribution you're mentioning, so CHF 34 million additional coming from SSM in H1 seems rather lower compared to what you underlined when you acquired the business. That's the first question. And the second one is again on the logistics center. Could you give us a flavor of the over-costs you had for this move from Ingolstadt to the Netherlands so that we can figure out the underlying margin you had in After Sales?

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Norbert Klapper, Rieter Holding AG - CEO [68]

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Thank you very much. SSM had a good year in '18. At the moment, they are suffering from the low demand in new machines -- for new machines and systems the same way our Rieter machines business suffers from it. It's the same mechanism. So that is what they have -- they are working at the moment. '18 was good for SSM. And the logistics center, yes. If you do the math and you try to eliminate the volume impact from the numbers in RAS, you come up with onetime costs in the order of magnitude of CHF 7 million, and this is what approximately happened. You take the volume impact out, margin in this business is roughly 50% from a ballpark perspective. And if you take this impact out, the remaining gap is roughly CHF 7 million.

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Operator [69]

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The next question comes from Nicolas Hardou with Equigest.

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Nicolas Hardou, [70]

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Just a follow-up question on the After Sales business. So I tell you, you look quite confident. I guess you would expect an increased operating profit this year because there will be no one-off cost. Sure, the installation revenue will go down, but you look more confident on the parts revenue, which probably has a higher margin. So my question is, would you expect the operating profit in After Sales to grow up this year?

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Norbert Klapper, Rieter Holding AG - CEO [71]

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Thank you very much. That's a tough one because it depends on a couple of things. Why parts? While I expect the parts business for the time being to go on, on normal levels, they have already also in their results the impact of the installation services for the Rieter machines business, which is a question mark at the moment. We don't know how that will turn out during the course of the year. And the second uncertainty is their project business. They have projects as well, not only part by part, single part sales. They have upgrade projects. They have quality improvement projects and again, here, where we come into the project type of business, customers are reluctant to place orders now. So it is difficult to say what the results will be this year.

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Operator [72]

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The last question from the phone comes from Samuel Emch with Radio SRF.

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Samuel Emch, [73]

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I would like to focus on Winterthur just a little bit, and just how many employees really you have in Winterthur after restructuring, after your level 3 changes? And then a little question to the project that you have there. You are building a new headquarters or you're planning to build a new headquarters. I'm reading that you will decide on the second half of this year on this matter. Previously, it was communicated it will be in May. So are there any delays in that project?

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Norbert Klapper, Rieter Holding AG - CEO [74]

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Yes, thank you very much. So regarding Winterthur, I guess your question in a way that -- you wanted to know how many positions will be affected in Winterthur? And as I said, we will be below 30. We will be below 30.

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Samuel Emch, [75]

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That may...

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Norbert Klapper, Rieter Holding AG - CEO [76]

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Yes?

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Samuel Emch, [77]

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How many will you have -- how many employees will you have after restructuring in total? Do you have a number there, a specific one?

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Norbert Klapper, Rieter Holding AG - CEO [78]

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At the moment, we have in Switzerland roughly 1,000 positions. And in Winterthur, it's 700.

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Samuel Emch, [79]

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Then the second question is regarding the project of the headquarters, the new one.

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Norbert Klapper, Rieter Holding AG - CEO [80]

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Yes. We are still moving ahead with this project, and it's going well. We have some delay in the planning. That caused the delay that you were talking about, but we are still confident that we will be able to make the decision in the second semester.

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Samuel Emch, [81]

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Can you elaborate on the delay a little bit, where it came from?

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Norbert Klapper, Rieter Holding AG - CEO [82]

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Well, I mean, it's planning, yes. It's planning a new building, and you want to erect it in a place which has been used for industrial purposes for more than 100 years. That is the answer. It starts with archaeologists, is that the right pronunciation of this word. And it ends with things that need to be disconnected between the buildings and so forth and so forth. It's not so easy to do this here, where we have been producing machines for more than 100 years.

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Relindis Wieser, Rieter Holding AG - Head of Group Communication [83]

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Thank you. So I have received information that we have no more questions, any more online? An additional one in the room. So may I ask you to give Mr. Rechberger the microphone again?

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Armin Rechberger, Zürcher Kantonalbank, Research Division - Analyst [84]

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Yes, ITMA, again. There are costs related to this exhibition. How big are they? Can you put a number, a price tag on the ITMA?

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Norbert Klapper, Rieter Holding AG - CEO [85]

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Too high. Too high. No, these exhibitions are expensive. But I mean, I don't have a problem with that as long as we have something good to show, yes? It would be a waste of money if we haven't a good program for our customers. And I'm quite confident that this is not going to be the case.

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Armin Rechberger, Zürcher Kantonalbank, Research Division - Analyst [86]

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If you can give us the number?

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Norbert Klapper, Rieter Holding AG - CEO [87]

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No. High, too high. But Mr. Rechberger, the R&D cost in order to get prepared for this is what counts, not the booth and the travel and that type of stuff. This is also money, but what is really important and what is a lot bigger is the R&D cost that we'll have upfront to this show. And this number, you know, right? Sorry.

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Christian Arnold, MainFirst Bank AG, Research Division - Analyst [88]

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Just a follow-up question on the cost saving, out of the production shift away from Ingolstadt, this CHF 15 million saving you were targeting, so you said that you still believe in that, based on normal volumes. What is the normal volume related part of this CHF 15 million? Could you quantify that?

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Norbert Klapper, Rieter Holding AG - CEO [89]

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That's difficult to say, yes? And to be very honest, in order -- I don't want to give you the split due to competition-related reasons. Is that fair?

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Relindis Wieser, Rieter Holding AG - Head of Group Communication [90]

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Is there any questions? No? That's not the case. So thank you very much.

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Norbert Klapper, Rieter Holding AG - CEO [91]

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I have to thank you. Thanks a lot. Thank you very much for having come here. Thank you very much for having dialed in. Thank you very much for your interest in Rieter. Thanks a lot.

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Operator [92]

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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.