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Edited Transcript of WAC.DE earnings conference call or presentation 6-Aug-19 10:59am GMT

Half Year 2019 Wacker Neuson SE Earnings Call

Aug 22, 2019 (Thomson StreetEvents) -- Edited Transcript of Wacker Neuson SE earnings conference call or presentation Tuesday, August 6, 2019 at 10:59:00am GMT

TEXT version of Transcript

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Corporate Participants

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* Martin Lehner

Wacker Neuson SE - CEO & Member of Executive Board

* Wilfried Trepels

Wacker Neuson SE - CFO & Member of Executive Board

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Conference Call Participants

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* Aliaksandr Halitsa

Hauck & Aufhäuser Privatbankiers AG, Research Division - Equity Analyst

* Jasko Terzic

Metzler Equities, Research Division - Research Analyst

* Jonas Blum

Warburg Research GmbH - Analyst

* Marc Gabriel

Bankhaus Lampe KG, Research Division - Research Analyst

* Patrick Horch

MainFirst Bank AG, Research Division - Associate

* Stephan Klepp

Commerzbank AG, Research Division - Head of Small and Mid Cap Research

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Presentation

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Martin Lehner, Wacker Neuson SE - CEO & Member of Executive Board [1]

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Hello, everybody. Welcome to our first half year conference call. I would start to give you overview -- first, overview about our key figures then I will hand over to my colleague, Wilfried, to give you more details on the financials.

Yes. Here you have the key figures, the results for Q2 2019 and for the first half year 2019. Overall, we achieved a very good growth in revenues also in Q2 2019 with plus 14%. The EBIT margin is in Q2, a little bit below last year. For the first half year 2019, revenue grows 15% and EBIT margin growth is 7%. Generally, we had a very strong development in sales, which has increased in all our major product lines, market shares and we had, once again, a very strong growth in agriculture with plus 32%.

We see the first half year, especially in Q2, a significant improvement in the global supply chain. We had a lot of issues last year and also in the beginning of this year. This situation improved significantly. We made progress in reducing our unfinished machines, which we reported continuously last year. Also, the restructuring in U.S. is progressing as planned, and the SG&A costs are well under control. Weak point in the development is our net working capital. We have both in inventory and trade receivables 2 high levels. Here, we have set a lot of actions and measures to bring these levels down to reasonable values till end of the year, Wilfried will explain it a little bit more in detail.

Yes. Then I will hand over directly to Wilfried to give you the details on the financials.

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Wilfried Trepels, Wacker Neuson SE - CFO & Member of Executive Board [2]

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Good afternoon, ladies and gentlemen. On this slide, you see the revenue and the earnings development. And when we look to the top line and the developments quarter-by-quarter, it was really a strong development. Revenues increased by 15.2% and FX adjusted by almost 14%. We have seen growth across all reporting regions and segments, and we have to note that the compact equipment was growing overproportionately at a rate of 32% year-on-year.

When it now comes to the gross profit. Yes, the gross profit has increased by 9.7%. But when we look to the quality of earnings, the margin is decreased by 1.3 percentage points. We were facing increased costs in the production and logistics. We have had additional efforts due to higher production and material volumes, handling and rework of unfinished machines and change in product mix.

I'll give you an example here. As you might know, Caterpillar contract is running out. And the volumes were reduced, if we compare this year with last year, by around about 50%. And we were able to balance this with increase in dumpers and excavators. And you might understand that this cost is, of course, more power, which we need to handle this compared to the Caterpillar business.

Furthermore, restructuring of the U.S. plants is going on. The good message is here, we are well on track.

If we now have a look to the income statement excerpt, which you see on the left-hand side at the bottom of this slide, you see in the third line, the gross profit as a percentage of revenue, and it is 26.4% in the quarter compared to 28.4%. And for the half year, it's 26% compared to 27.3%.

What is the major difference here? The major difference here is that we have had round about EUR 13 million higher unabsorbed production costs. And then I give you an example regarding the June situation, which was -- especially when we compare June to June, especially negative. We have had, first of all, more public holidays, which had a negative impact on our rental business and has, therefore, a negative impact on the quality of earnings.

Secondly, we have reduced -- or we have slowed down our productions in some of our plants, and this always has a negative effect because there is always a time delay, at least, of 2 weeks to adjust the variable costs, you need minimum 2 weeks to get the personnel, which is leasing personnel in the first run to get these people out. So that gives you an idea why we are here behind the previous years and behind our own plans.

Now coming to the overhead cost, the SG&A, including other income and expenses, and the development here is positive in the way that it is disproportionately, when we compare the rate with the increase of sales. And we can state that we have a moderate increase in headcounts, but we have had additional costs compared to last year.

Regarding the bauma, the big fair. The costs for this were approximately EUR 4 million, 1/3 we have booked in the first quarter and 2/3 have been in the second quarter of this year.

If we now have a look to the financial results. And the financial result is EUR 0.6 million up on previous year. We have positive FX effects in the U.S. dollar, but also in currencies in some emerging markets. And the interest is slightly higher than prior year. And this is mainly due to the fact that we have the application now of IFRS 16 booked, and a further hint here, the increase in EBIT due to the fact that we booked IFRS 16 is EUR 1.2 million in the first half. And -- so we have a positive impact here on -- in the finance result, a negative impact. The full year effect on the EBIT will be EUR 2.4 million. So almost double of what we have seen in the first half.

Yes, ladies and gentlemen, then let's move on to the business development by region and business segment. The revenue in Europe is 15.5% plus, really positive development. We have had a rapid growth in the U.K., where we have significantly gains in dumpers and excavators. But also in other regions, above-average growth in France, Poland, Germany, Austria, Italy, Spain. And in most of these cases, we have increased our market shares and have outperformed compared to our competitors.

Also, here, the side note, the ag business is plus 32%.

When we now have a look to the revenues in the Americas, it's plus 13.7%. Adjusted for FX effects, it's only 7.2%. Main reason here is that some of our big rental firms and customers have postponed the deliveries. They have not canceled orders. We are on a very good level here where the order situation and the sale situation is concerned. We would have been able to make more sales, but they have postponed some sales into the third quarter. And that's the reason why it's only 7.2%.

We are facing continuous growth in the group business, where the anchor dealer business is running quite well. On the other hand side, we had a negative impact in Canada. We have reported this already in the first quarter. We have had pre-buys in Q4 '18, due to the change in emission legislation, that means machines become more expensive with the new -- which are fulfilling the new emission legislation, and, therefore, people buy if they have sufficient financing, they buy the machines in advance, the older ones.

In South Africa -- South America, good message is that the growth is double-digit there, however, uncertainties remains. Also, we have to note that we have closed the Brazilian plant, where we have produced generators. That happened in the first quarter.

The restructuring, as I said before, in the U.S. is continuing as planned. And regarding the development in the second half of the year 2019, it is important to know or to understand that last year, we had significant negative EBIT in North America. And due to the actual development of the restructuring, we are not expecting to have such an effect in the year 2019. So compared a much more positive development in North America in the second quarter to be anticipated.

The revenue in Asia Pacific is plus -- almost plus 20%. We are continuously ramping up our production in China, especially with our excavators there. Australia is behind expectations, but we are quite sure that we are getting here in line to our plans in the second half so that we are catching up here. One reason was the postponement of bigger order, which is now delivered in the second half.

The first mini and compact excavators have also be delivered to John Deere. But the negative one is -- and also John Deere is feeling here, I believe, the competition, we have severe price pressure in some areas of mini excavators in the Chinese market. The main driver here is Caterpillar, who have really dumped the market price for some products for some versions of our excavators.

On the next slide, you see the development of the components of the net working capital. Inventories are at EUR 645 million, and with 150 days, absolutely too high. We are -- we have implemented a couple of actions here to reduce that step by step. One point was the appropriate reduction of our production output.

So where do we want to stand at the end of the year? We want to achieve as soon as possible EUR 500 million. Realistically, I believe that EUR 570 million is doable or even more at the end of the year 2019. The target is: in 2020 to achieve 25% of sales; or in days, 125 days; or in numbers, EUR 500 million, as I said before.

Probably another word to the prebuy engines. The prebuy engines were EUR 40 million at the end of quarter 1, 2019. It was end of Q2 2019 EUR 30 million and a further EUR 5 million reduction is expected to happen until the 31st of December 2019, and then the rest will go away, will be produced, put into machines and then sold in the year 2020.

When we now have a look to the trade receivables. Also, trade receivables have increased significantly to EUR 413 million due to the increased volume of business, and we have an unfavorable regional and customer mix. As I said before, we have seen some postponement of the big rental firms. They have more affordable payment terms than the anchor dealers. And so we have a relatively negative mix of our accounts receivables, which drive the days of inventory at -- the days of trade receivables to 73 days, which is round about 10 days more than in average. This will be reduced over the course of the year, and we are expecting a further decrease of round about EUR 80 million up to the end of the year with a normalized structure.

The trade payables are increasing or have been increasing when we compare quarter 2 to quarter 2 '18 and '19 due to the fact that we buy more materials, of course. But on the other hand side, you see, since the end of 2018, a decrease from EUR 213 million to EUR 208 million and then to EUR 199 million, and that will go on during the course of the year because we are reducing production volumes, and so we need to also adapt here our raw material sales so that a trade payable decrease of EUR 20 million to EUR 30 million could be possible up to the end of the year.

So -- and if we now turn the slide to the cash flow development and the net working capital. The net working capital is at EUR 858 million. And to summarize what I said before, we are expecting to reduce this by EUR 125 million up to EUR 130 million up to the end of the year 2019 so that we will probably come out with EUR 735 million or EUR 730 million at the end of the year 2019, which will then be the net working capital of 39% of sales, and this is slightly higher. As we said in our outlook, Q1 '19, slightly higher than previous year, where we ended the year with 38%.

The impact on cash flow is very clear. You see the development here, which is not in our favor. And so we're also not accepting this. So we have introduced our measures to get the free cash flow up to the end of the year to or at -- at least or at 0.

The impact on net financial debt and the gearing is obvious, you find this on the next page, a significant increase in net debt to EUR 484 million. This has to be reduced up to the end of the year to round about EUR 310 million. And the net financial debt to EBITDA should be also a target also to bring that down to 1.0, today we are at 1.5. The equity and the equity ratio, which we see on the left-hand side, at the bottom here on the slide in the corner, the equity ratio is significantly below last quarter's average of 53%. 2 percent points are due to the IFRS adoption -- IFRS 16 adoption this year and the rest is due to the increase of our balance sheet inventories, and accounts receivables are here the main driver.

Coming now to my last slide, this is about the share development. You'll see the development here shown in comparison to the SDAX, the DAX and the peer group. The dividend payout, I explained already last quarter. We paid the dividend as we promised here in -- at the end of May. Regarding the shareholder structure. There was a significant change. The family shareholders are now holding 58%. Before, it was 63%. So precisely 5.4% were sold, 3 million shares were sold by Mr. Neunteufel, 0.8 million were sold by a member of the Wacker family.

Reasons for that very clearly stated by the family shareholders. There were 2 reasons. One was the assets diversification and the second was the proactive inheritance -- or the proactive inheritance plans they have. However, the families have announced that they remain committed in the long term and intend to hold the majority shareholding.

And now I'm happy to hand over to Martin.

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Martin Lehner, Wacker Neuson SE - CEO & Member of Executive Board [3]

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Thank you, Wilfried. Now coming finally to the outlook. Here you see on the slide on the left side on the top the business index for the European construction industry and in the right side, the index for the European ag industry. Both index are coming down, agriculture a little bit more than the construction index, even if the construction index is coming down, it's still on a very high level. But nevertheless, in the last months, continuously the risk and some uncertainties in the global economy were continuously increasing. There is still no solution, the trade war between U.S. and China, and it's still escalating. Also, no solution was about the Brexit. So uncertainties are increasing. But nevertheless, our business is still in good conditions. We have continuous good order income and we still have very high levels of open orders on hand.

And with the growth in the first half year with 15%, we are still confident that we reach our guidance, what will likely increase to achieve instead of 4% to 8%, minimum 6% to 8% growth on the top line. And we are also confident that we achieve our result in the EBIT and the EBIT margin from 9.5% to 10.2%. We see, as Wilfried already explained, we expect further improvements in our U.S. business also on the bottom line and expecting here a positive development in the second half.

And yes, we are -- have, I think, really now set all the right measures and activities to bring the working capital down because this is really our big point so far. So overall, we are confident to achieve our guidance. And yes, with -- also for the midterm, if we look also in our markets, there is -- it's a moment not really as bad past few years or still a very good condition on the end markets. We are also -- what we already mentioned, we are -- we believe that we are not affected by the cyclicity as some investor maybe expect. Yes, we are in the construction industry, but we are not -- our products are not used in the big infrastructure projects. We are much more in the daily business, in maintenance, in servicing, and in repair business, in garden and landscaping. And we already have also 16% of our revenues in agriculture, where we have also a different cycle compared to construction.

And the most important point is that our new products what we brought to the market in the last years and also at the bauma fair in April, are really received extremely well. We have -- yes, we are really gaining market share with many, many products. We're also able to grow in markets, which are made -- actually a little bit under pressure, for example, in U.K., where we have still high double-digit growth because of really innovative products and where the customers are really willing to come to Wacker Neuson and to use and buy our products. And that is for us also the key for the midterm and long term to drive innovation further forward. And we are also confident if the markets are slowing down or even reducing, maybe in the future that we are able to further drive our growth in revenues and also in the EBIT.

Yes, that was the summary of our first half year results. And now we are open for your questions. Thank you.

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Unidentified Company Representative, [4]

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Yes. Thank you, Mr. Lehner. Thank you, Mr. Trepels. We will now start the Q&A session, and I would like to ask our conference call operator to give you a short introduction.

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Questions and Answers

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Operator [1]

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[Operators Instructions) And we'll go first to Patrick Horch with MainFirst Bank.

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Patrick Horch, MainFirst Bank AG, Research Division - Associate [2]

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I have 2 questions, if I may. So firstly, obviously, on your guidance. So your revenue, as you said, increased by 15% after H1. And in addition to that you said that your key markets continue to be in good shape and that the order intake also remained strong. So nevertheless, you did not increase your revenue guidance, and which the market apparently takes very negative. So are you expecting a substantial slowdown in H2? Or are you really only being extremely cautious here? That would be my first question. And then my second one is regarding the Americas region. Here, you expect a strong increase in profitability in H2. Can you give us a feeling what kind of margins you can achieve here in the second half of the year? Are even margins in the range of 3% to 4% possible?

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Martin Lehner, Wacker Neuson SE - CEO & Member of Executive Board [3]

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Yes. I would take the first question. Martin Lehner here. Regarding the outlook, I would say, we are cautious. So we don't see, at the moment, really slow down. But we follow the development on the global market. And so also you have -- if we see the development on this -- on the capital markets in the last -- yesterday or also today, and we see there are a lot of the uncertainty. And so we are cautious. But we don't expect now really a slowdown. As I already mentioned, in -- all our regions are, at the moment, in good shape. Our customers overall are positive, but the question is, yes, what's going on in the next couple of months globally.

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Wilfried Trepels, Wacker Neuson SE - CFO & Member of Executive Board [4]

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Okay. Further remark from my side, why are we cautious? Because, as you know, we are driving down and slowed down in some areas, the production in our production companies. And this is always something which is not good for the margins. And we need to react fast. And that's what we do. But nevertheless -- therefore, we are also a little bit cautious regarding the increase of our outlook. I think it was a very good outlook, which we made for the EBIT. And let's see.

Regarding the Americas. Yes, we should be able to come into a region of 3%, this year. Next year, it would be even higher. Up to 5% seems to be possible. And then after next year, 7% to 8% is our target, which should then come in 2021. Does this answers your questions?

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Patrick Horch, MainFirst Bank AG, Research Division - Associate [5]

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Yes.

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Operator [6]

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We'll go next to Marc Gabriel with Bankhaus Lampe.

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Marc Gabriel, Bankhaus Lampe KG, Research Division - Research Analyst [7]

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Also, in respect of your statement that the order intake is still on high levels, according to your statement and the report, could you elaborate a little bit more on this in detail, especially with regard to your outlook for the top line growth. It raises questions why you didn't lift up the guidance after 15% growth in H1, that implies that even if you reach the upper end of your guidance, there will be no growth for the second half of the year, year-on-year.

And the second question is regarding the restructuring in the U.S. As far as I understood that was the goal that the restructuring is finished with the first half of 2019 and now you stated that it is ongoing. And what costs have burdened here in the H1 result at the Americas? And what were the costs for the closure of the Brazilian plant?

And third question is regarding -- still on the net working capital. You don't make any progress on the working capital reduction. When will we see the first positive impact? I mean you mentioned that you want to reduce that by EUR 125 million to EUR 130 million, is that already visible in -- and then how much in Q3 -- maybe you can shed some of your thoughts here.

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Martin Lehner, Wacker Neuson SE - CEO & Member of Executive Board [8]

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I will take the first question, again, regarding our outlook and the order income. So if we look on our order income, we still see same level -- or yes, same level as we had last year, and last year was really a record level. So there is no slowdown. Overall, we see -- we have seen very strong order income in the first 5 months -- every month globally on the group level above last year. In June, we had a slowdown. This was the only month where we had less income compared to last year. In July, it was tipping up again. And overall, there we don't see any slowdown compared to last year. And you're absolutely right. With strong development, 15% growth in the first half year. And we had also a good revenues again in July. There is a question why we don't raise here our top line. But once again, the uncertainties in the global economy are increasing month-by-month and week-by-week and the situation between China and U.S. is escalating. So we are really cautious here.

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Wilfried Trepels, Wacker Neuson SE - CFO & Member of Executive Board [9]

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Okay. Further point, what we have explained so far was always, let's say, the same. The fourth quarter last year was extremely high. The fourth quarter in '18 was an increase compared to the fourth quarter in '17, of almost 20%. So when you look to the development over the course of the year 2018, we can't repeat this strong growth levels again. So compared with last year, yes, that's a good calculation. But as I said, keep in mind that we have increased in the fourth quarter sales by 20% year-on-year -- and not in December, sorry, in the fourth quarter. The second was regarding the restructuring in U.S., yes, we said it will be done at the end of the first half, and this is true regarding the main big topics. All the big topics are so far cleared. One -- the biggest one was the purchase prices for components in connection with our outsourcing. We have them now under control, and we will see step-by-step that also here, our margins will become better due to the success which we have had in the purchasing department. Anyhow, there are other steps which we need to go. There is, for instance, logistics situation. We have decided together with a third-party supporting company here that we are going to streamline our logistics and our inventory management, and we set up such a program. And we will start this in Q4. So there are also some things to come, but the big restructuring is done -- or was done in the first half.

What was the burden? The burden when it comes to, let's say, numbers, it's not so easy to give you exact or precise numbers, but indication is that the under absorption in the first half was round about EUR 6 million to EUR 7 million. And this is something which we need to avoid over the next couple of months. And especially next year, this will turn around.

Your further question was regarding the closure costs of Brazil. They were, I wouldn't say nothing, but it was not more than 100,000 or 200,000. It was not really a big issue, what we have had there. And there was a provision for it in last year, partly.

Your third question, of course, is absolutely clear, regarding net working capital. We are absolutely not happy with the development here. And your question was further when will we see first positive impact? The first positive impact will come in July. It will be relatively small. A big one will come in August because we have in August decided to increase the vacation by an additional 1 week. And so we will see -- when we come out with the Q3 numbers, we will see already a good move in this -- in the right direction. Does this answer your questions, Mr. Gabriel?

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Marc Gabriel, Bankhaus Lampe KG, Research Division - Research Analyst [10]

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Yes. But that implies also that there is no improvement in the margin in Q3. Is that right?

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Wilfried Trepels, Wacker Neuson SE - CFO & Member of Executive Board [11]

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Yes. Q3, as I said before, there is 3 weeks shutdown of the production. And this will burden, of course, the gross profit margin.

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Operator [12]

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The next is Stephan Klepp with Commerzbank.

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Stephan Klepp, Commerzbank AG, Research Division - Head of Small and Mid Cap Research [13]

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I'm quite surprised by the closing statement of your presentation that you say that you're not cyclical. Just a reminder, 2016 when fracking in the U.S. went on hold, you had negative development. And as well in 2009 and 2010, when the rental fleets have been cutting their CapEx, immediately, you were impacted. So I would like to understand how much is your sales to rental fleet? In my mind, it's 15% to 20%. And you mentioned that these guys have been postponing, particularly in the U.S., I would like to understand what's going on there? And then I would like to understand if we would go into a rather negative economic environment, and you want to aggressively reduce your net working capital and clients are not buying, how likely is that you can achieve that? Yes, how likely is it that you can achieve that? And what's the outlook then for 2020, actually? Because -- well, let's say, 2019 is good, is 2020 good as well on a very high comparable base for the first half of the year?

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Martin Lehner, Wacker Neuson SE - CEO & Member of Executive Board [14]

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Okay. First part from my side. Gas and oil is nice to have. If you have it, you're happy, and this is the icing on the cake. So yes, if -- not if -- in 2014, we had a significantly increase because it was a such marvelous business in oil and gas -- in oil and gas. And then in the following year, it dumped. Yes, but this is not cyclicality. I would say this is part of our business. And it is -- and it was not a big move down. We were able to come to balance a significant part of it. Second of -- second comments to what you said. In 2009 and 2010, gentlemen, we are not talking about a cyclical market. We were talking about the severe -- the most severe crisis we have had since 1928, and it was not a normal economical crisis. It was a crisis where the roots were in the financing sector. And to address this to put us into the chapter, we are cyclical, I think that is not fair, to be very clear here.

And your second question was regarding what happens if we run into a crisis? Then we are prepared because then our inventories will be on an acceptable level. And that is the reason why we are now really are pushing here hard to come as soon as possible to EUR 500 million. And then if markets would go down, we always said, we are very clearly prepared from the cost side that we are able to handle round about 20% to 25% plus, or in this case, minus in the market, and we would still be 0 on the EBIT side. And if you look to the numbers in 2 9 (sic) [2009] and 2010, and I come back to this, because at that point of time, the adjusted EBIT margin was quite good for this reason, and the increase in net debt was not so significant because we were able to sell our good stuff. And that is the positive thing of Wacker Neuson, we have good inventories. So the only thing we need to do in a crisis is to adapt our production as soon as possible, and we are fine because we can sell our stuff, which we have on stock. There's nothing specific customized stuff. This is stuff, which

(technical difficulty)

every day to every customer.

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Stephan Klepp, Commerzbank AG, Research Division - Head of Small and Mid Cap Research [15]

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But you would have to sell it to a large discount if you want to actually get rid of it in case clients are not buying because they're holding back because your DNA of your clients are normally small- to medium-sized construction enterprises that are probably as well owner-run and probably rather hesitant to invest if they read the newspapers every day, and things are saying, like, things are going to look down, isn't it -- is that not right?

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Martin Lehner, Wacker Neuson SE - CEO & Member of Executive Board [16]

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As you said, probably. Yes, but at the moment, we don't have this situation. So our margins are still in good conditions. So our customers are still buying, though they have maybe midterm, some headaches what is the future development on the global economy. But short term, in the next couple of months, they are really booked very, very well. Also, in U.S., there was a big investment now will be open soon in the U.S. regarding infrastructure. And also, if we speak with our big customers here in Europe, they are expecting a lot of infrastructure investments in Germany. So that the moment, they are still confident, and they have also high order books. But for sure, it is a situation.

Long term, it's not improving, on global economy, this will affect also the construction industry for sure. But at the moment, they are -- our customers who are really in a healthy condition, we are already negotiating contracts, bigger rental contracts with European rental companies. They already starting to order -- the first company is already starting to place orders already for the investments for next year. But for sure, it's too early to give you a guidance or an outlook about 2020. If you can tell me what is the global economy in 2020, we can be more precise on 2020. But as I said, our equipment is more in repair, in maintenance, in servicing, in garden and landscaping. And we are not in the big infrastructure projects, which you can postpone for several months or probably for several years. We are in the daily business.

And if you look our -- also the investment in our products in light equipment, the average sales price is around EUR 1,800. The average price on the compact equipment is around EUR 32,000. So these -- it's not really these high numbers in investments what we are speaking about. So it's more easy and more affordable for the customers that they are buying. And then we have also different development in our products on the -- in the life cycle. In Europe, compact equipment is still immature -- it's already a mature market. But if we look in U.S., compact equipment is still on a very early in a very early development stage. So also the long order -- long-term forecast regarding development of compact equipment everyone sees further growth in the next years and the strongest growth in the United States. And that is what also we expect because it's in an early stage of the life cycle of these products.

Also, China, we are facing, as Wilfried already mentioned, with our mid-sized -- with our compact excavators 5 tonne to 8 tonne. Some challenges regarding price pressure. But on the other hand, we have also the smaller equipment, our mini excavators, where we were one of the first who is really localizing production there. We have -- the markets with what we are serving in China already with these smaller units, also already double-digit market share, and we are getting reasonable prices and margins, and that is the next steps that we continuously develop here further, also, our products in China. China is not only work bench for us, China -- this is -- it's the same strategy as what we are following since 60 years in the United States, in the region, for the region. So we have also an R&D center here. We have a good team, really experienced R&D staff experienced in construction equipment.

And for sure, China will take us a longer press. We are a newcomer in China with compact equipment. There is a big competition, but also we believe here that it is the same situation as it is here in Europe or in United States that we are able to find our place and that we can grow also continuously in this market through innovation. And also, that Chinese are really looking what they are buying. They are requesting high quality. They are requesting extremely low fuel consumption and reliable strong machine. The average working out of the year is much higher in China than in Europe. And our first products, what we developed in China for China, are received very, very well. So we are confident here that in midterm, we will find our way and that we step-by-step are becoming more and more an important player here also. We have a really -- very modern factory. We have an extremely strong and hungry and engaged team and very experienced R&D staff there. And the first signs are positive. But nevertheless, we know exactly China is not an easy market. It's a big market, but a difficult market. But we will take on this challenge. And I think we are prepared to compete there. And one thing...

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Stephan Klepp, Commerzbank AG, Research Division - Head of Small and Mid Cap Research [17]

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Sorry.

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Martin Lehner, Wacker Neuson SE - CEO & Member of Executive Board [18]

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Yes?

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Stephan Klepp, Commerzbank AG, Research Division - Head of Small and Mid Cap Research [19]

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Sorry to interrupt. I was not asking about Asia Pacific, in particular, which is 3% to 4% of your sales. I was wanting to know about your rental fleet, and that is probably 15% to 20% of your sales. So that's more important for me what's happening there at the moment.

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Martin Lehner, Wacker Neuson SE - CEO & Member of Executive Board [20]

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In a situation where the market is going down, the rental business is not highly impacted because everybody is going to rent instead of buying new machines. I'm not talking about the crisis -- you're talking about the crisis, the severe crisis in 2009 and 2010. And in this situation, you were absolutely right. They bought almost nothing from us at that point of view. This is right.

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Stephan Klepp, Commerzbank AG, Research Division - Head of Small and Mid Cap Research [21]

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Yes. But how much sales is it at the moment? Rental fleet.

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Wilfried Trepels, Wacker Neuson SE - CFO & Member of Executive Board [22]

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We're not reporting on that.

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Martin Lehner, Wacker Neuson SE - CEO & Member of Executive Board [23]

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And it's also difficult to say. We don't have a key figure for that because we have, on the one side, rental business with some key accounts, but -- actually, also every dealer is -- has a rental business. So it's really difficult to say. And -- but our target here for sure is that we know that market will not grow forever. There will be a slowdown in the market, or also the market will be reduced. And the answer for us is -- the answer can be, for us, only if we want to grow, we need really innovative product. And I think today, we already can show that with our products, for example, our dumper, where we are really gaining market share in the U.K., for example. At the moment, we started now to introduce this product also in other countries. And if you have a product where you can really offer additional value to the customers, then you will be also in a weaker market, able to sell. And that is what we are aiming for. And yes, hope we could answer your question.

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Stephan Klepp, Commerzbank AG, Research Division - Head of Small and Mid Cap Research [24]

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Yes.

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Operator [25]

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We'll go next to Aliaksandr Halitsa with H&A.

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Aliaksandr Halitsa, Hauck & Aufhäuser Privatbankiers AG, Research Division - Equity Analyst [26]

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I just have one question left. I was a little bit surprised that you haven't specified your EBIT margin guidance to the upper end, despite suggesting that the second half should be much stronger in terms of profitability. The way I look at it -- even if you are able to get your North America -- or Americas region in the second half of the year to breakeven that will allow you already to get to somewhere around 9.5%. So to the lower end of the guidance. But you're actually targeting around 3% EBIT margin. And then we also know that there is potential in Europe as well as in Asia Pacific, which could potentially comfortably get you to the level of 10%. So I was just wondering if you could give us a little bit of color why are you rather cautious with regards to on that front.

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Wilfried Trepels, Wacker Neuson SE - CFO & Member of Executive Board [27]

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As I said before, we are reducing or adapting our production to reduce our inventory levels or quite high inventory levels. And this is one reason why we are here a little bit cautious and not too aggressive. So you can say, we are probably too conservative.

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Operator [28]

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We'll go next to Jonas Blum with Warburg Research.

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Jonas Blum, Warburg Research GmbH - Analyst [29]

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Just 2 quick questions from my side. So I was wondering, first of all, so you talked a bit about your rise in accounts receivables, mainly it relates to European rental. But is this perhaps also an indication of a weakening sector overall in Europe and could you perhaps also just give us an incremental impact of this customer group, what account -- what was the incremental impact to your accounts receivable from European rental? And the second question, just a quick one on Asia Pacific. I mean you mentioned increased pressures from Caterpillar. And is this perhaps a factor which puts your breakeven target of this region at risk? And could you perhaps also quantify what you expect here on your top line drag for -- which -- what should we expect in H2 from this change in the pricing environment, in this region?

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Wilfried Trepels, Wacker Neuson SE - CFO & Member of Executive Board [30]

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Yes. First of all, the accounts receivable situation is regarding the mix in North America, not in Europe. And as I explained before, it has an impact of round about 10 days, when we come back to the normalized average, we will be able to achieve also the 64 days, which we have had in the year before. And no, it's not a sign that accounts receivables are not paid in due time. Absolutely not. So our -- the payment behavior of our customers, this still the same as it was before. Just the change in the mix. The second question was regarding Asia Pacific, and the price pressure. And if this has an impact on our breakeven situation, and what do we expect in the second half year regarding the development?

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Martin Lehner, Wacker Neuson SE - CEO & Member of Executive Board [31]

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Yes. We have planned to be for 2019, coming to breakeven in our Chinese factory. First half year, we are quite on track. We are still in the ramping up phase. We have in the first half year minus -- a loss of EUR 1 million on the EBIT, in the EBIT line. Maybe it's becoming -- it looks like that it's becoming difficult to reach already this year, the breakeven. But probably, we are slightly in red, but we don't see a huge impact on our overall results regarding the development in our China -- now our Chinese factory.

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Jonas Blum, Warburg Research GmbH - Analyst [32]

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Okay. So this is no sustainable change of a pricing environment here? Or what do you expect?

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Martin Lehner, Wacker Neuson SE - CEO & Member of Executive Board [33]

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We have to go more in detail. For example, we had, let's say, not the best timing when we introduced our products, but we are -- started to produce locally in China. When we went in, we started our production beginning last year. And so we started end of 2017, beginning 2018, placing our orders for -- in the supply chain. And at that situation, the market was extremely strong. Every supplier was booked very, very good. So it was not the best timing to get the best pricing on the purchasing side. But that is changing now. Or to here, we are making improvements in -- on our cost side. And on the other hand, we have further products in development in China, where we see further improvements on the profitability. And on the other hand, also -- plan is also to use our Chinese plant, not only for the Chinese market to balance this more on -- with revenues through the whole Asian market.

So we are already starting also to sell products from our Chinese factory to Australia to Indonesia, hopefully, soon also to Thailand and also to balance this development in revenues and not to be only in -- on to Chinese market. So let's say, challenge is a little bit higher now than we expected a few months ago. But still, once again, what has really makes confident midterm is that our products are really received extremely well. And so probably, we are slightly in red could be -- not yet sure on that. But overall, it would not have a really big impact on our group results.

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Operator [34]

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We'll go next to Jasko Terzic with Metzler Capital Markets.

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Jasko Terzic, Metzler Equities, Research Division - Research Analyst [35]

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Some questions left from my side. Maybe first of all, current trading, you mentioned that June was not that good, but all other months were good. And if you look into the capital goods universe, especially June was the key point of concern in this -- the negative surprise. And I didn't really understand if you are now more concerned than before? Or do you think that you don't fear of no weakness at all currently? So you're not concerned about your June performance so far.

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Martin Lehner, Wacker Neuson SE - CEO & Member of Executive Board [36]

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No. It was 1 month, as I already mentioned. And so for us, it's not a tipping point. We have seen in July, once again, a good development. And we are in July, back on the same track at what we were last year. And as already mentioned, also, we -- also, in July, we got already some orders from some bigger rental companies here in Europe. So that -- this is showing also that also the rental industry also in Europe is all overall still quite positive for the development also in next year. They will not -- they would not place orders in July for 2020 if they want to stop spending.

And the same situation also is what we are receiving in U.S. from our customers, especially also from the rental industry that they are expecting also growth in rental revenues and also in CapEx spending in the next few years. If not something special happens, for sure, yes? So -- and -- I don't know what's will going on between U.S. and China in the next couple of weeks or so. And this could have a negative effect, could have also a positive effect that some uncertainty will be released, hopefully, soon. But we don't know. But that's the reason why we are cautious and that why we want to really fast get our inventory under control, and that's the reason why we have 1 week more shutdown in August. In most of our factories, not in every one. But in most of our factories, normally, we have 2 weeks shutdown, we have some factories 1 week more. And we are using the overtime, what the people increased in the last couple of months, end of last year and also beginning this year, and now we're coming to a normal -- much more normal situation. No sign now that we are -- absolutely no sign that we are on a tipping point.

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Jasko Terzic, Metzler Equities, Research Division - Research Analyst [37]

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Okay. So for the guidance, which is implying a stable or declining revenues on sales is just a certainty -- a caution due to the fact that something happens that you don't have all the new numbers you see. Well, you explained that there is no reason to believe that you can face a cyclical decline also. So you will grow anyhow?

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Martin Lehner, Wacker Neuson SE - CEO & Member of Executive Board [38]

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So far -- once again, as I said, the uncertainties are on -- if you look on China and U.S., once again, it's escalating week by week, the situation. So -- and if this is going on and further escalating, it will be probably getting more and more difficult. And that's the reason why we are cautious.

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Jasko Terzic, Metzler Equities, Research Division - Research Analyst [39]

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Okay. And maybe back -- coming back to your rental business. You explained that rental will be in favor, if demand for new equipment will decline. I assume you mean your own rental business. So could you give us a feeling if rental customers are bigger than your own rental business? Or is this the other way around?

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Wilfried Trepels, Wacker Neuson SE - CFO & Member of Executive Board [40]

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Yes, you're right.

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Jasko Terzic, Metzler Equities, Research Division - Research Analyst [41]

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So your own rental business is bigger than the business you have with external rental?

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Martin Lehner, Wacker Neuson SE - CEO & Member of Executive Board [42]

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No. No, it's opposite, yes. But what Wilfried mentioned is if the customers are not sure how it's going on -- in the midterm, yes? And if they are not sure if they should invest or not, they will increase the investment in renting business -- in renting equipment. So what Wilfried mentioned.

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Jasko Terzic, Metzler Equities, Research Division - Research Analyst [43]

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Understood. And my final one is on your consolidation line, on EBIT level. And if I go back, I cannot find a year except 2015 where you had such a negative consolidation contribution. Could you help me out? What is driving the negative development here? And what should we expect for the second half of the running year?

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Wilfried Trepels, Wacker Neuson SE - CFO & Member of Executive Board [44]

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Yes. You're right. And the consolidation which you see there is exactly coming from the increase of our inventories. And so you could imagine how the profitability would have been in the first half. And we think that we will release a significant part of this during the second half of the year.

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Jasko Terzic, Metzler Equities, Research Division - Research Analyst [45]

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So can we assume if you achieve your targeted goals for working capital that you, at least, show a figure for fiscal '19 on the same level you achieved in '18 or slightly below?

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Wilfried Trepels, Wacker Neuson SE - CFO & Member of Executive Board [46]

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Let me have a look what the exact number is.

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Jasko Terzic, Metzler Equities, Research Division - Research Analyst [47]

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It was minus 2.2 last year.

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Wilfried Trepels, Wacker Neuson SE - CFO & Member of Executive Board [48]

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And now it is...

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Martin Lehner, Wacker Neuson SE - CEO & Member of Executive Board [49]

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Minus [24].

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Wilfried Trepels, Wacker Neuson SE - CFO & Member of Executive Board [50]

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Minus [24], and we could probably release up to EUR 17 million. So in the calculation that would lead then to the number, which you have mentioned for the comparable year.

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Operator [51]

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And we'll go next to Marc Gabriel with Bankhaus Lampe.

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Marc Gabriel, Bankhaus Lampe KG, Research Division - Research Analyst [52]

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Yes. Maybe 2 follow on -- follow-ups. The number of unfinished machines by the end of June and as of today, could you share this with us? And then in addition, I have a question regarding that situation in China. The dumping of Caterpillar in China with the mini excavators does not happen by chance, however, with the models you built for Cat or...

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Wilfried Trepels, Wacker Neuson SE - CFO & Member of Executive Board [53]

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I answer the first question. At the end of June, together with the Americans, we are down to 690 units in the unfinished machine sector.

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Martin Lehner, Wacker Neuson SE - CEO & Member of Executive Board [54]

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So regarding Caterpillar, it's not -- what Wilfried's spoken about, the Caterpillar dumping prices. It is on machines 5 tonne up to 8 tonnes. So these are not the products what we are still producing for Caterpillar, these are bigger ones.