GEA Group Aktiengesellschaft (G1A) Earnings Call Transcript & Summary

Ladies and gentlemen, thank you all for standing by, and welcome to this GEA Group Second Quarter 2020 Conference Call. [Operator Instructions] I must advise you all that this conference is being recorded today, Wednesday, the 12th of August 2020. And without any further delay, I would like to hand the conference over to your first speaker today, Mr. Oliver Luckenbach. Please go ahead, sir.

Yes. Thank you very much, and good afternoon, ladies and gentlemen, and thank you for joining us today for our second quarter 2020 earnings conference call. With me on the call today are Stefan Klebert, our CEO; and Marcus Ketter, our CFO. Stefan will begin today's call with the highlights of the second quarter 2020, and Marcus will then cover the business and financial review, before Stefan takes over again for the outlook 2020 and our key priorities. Afterwards, we open up the call for the Q&A session. As always, I would like to start by drawing your attention to the cautionary language that is included in our safe harbor statement as in the material that we have distributed today. And with that, I hand it over to you, Stefan.

Thank you, Oliver, and good afternoon, everybody. It's my pleasure to welcome you to our conference call. I hope you and your families are still doing well in this extraordinary time. Considering this extremely challenging environment, I'm pleased to say we have also achieved a good second quarter, with significant EBITDA growth despite COVID-19-related declines in order intake and sales. This shows that the restructuring measures we introduced last year are now bearing fruit and that our new organization has got off to a successful start, enabling us to raise part of our guidance for this fiscal year. I will come back to that later. Let me now focus on a few key financials. Order intake and sales were down 9.8% and 6.6%, respectively, mainly related to lower activity and demand due to COVID-19. The book-to-bill ratio was 0.89 versus 0.92 in the second quarter 2019. Nevertheless, our EBITDA before restructuring measures increased significantly by 26.6% to EUR 140.4 million. This strong performance was driven by 4 out of our 5 divisions and includes some crisis relevant windfall savings like lower travel costs. In addition, we have improved ROCE strongly by more than 400 basis points to 14.8% and turned our net debt position of EUR 330 million a year ago into a net cash position of EUR 92 million this quarter. I would also like to comment on COVID-19, which continues to affect our business, employees and actually also the way we work. Our highest priority during the global coronavirus pandemic was and still is protecting the health and safety of our more than 18,000 employees and that there is a large impact on societies and individuals as well. We supported also numerous local initiatives with donations. The reason why we have been able to achieved this very solid financial performance in the first half, with sales being only down 2% and EBITDA before special items up 32%, are the strong effort of our global crisis management team, the task force we put in place already at the beginning of the year and in particular, our employees. Our employees have been very disciplined in complying with hygiene and social distancing requirements in the production site and offices, and many colleagues worked very engaged from home. I think we can say that GEA was really at the forefront of managing the crisis. We already had lockdown of all our canteens with sites, larger, 100 people, while football games with 50,000 people took still place here in Germany. We also benefited from our dashboard that provides the management team with all relevant KPIs to see GEA safely through this difficult time. So we know, on a daily basis, how many infections we have, how many are recovered. We know if and how many customer projects are delayed or have been postponed. We know about production capacities. We know about influence on supply chain. We know how many masks we have. And we do -- even though how many liter of hygiene liquids for disinfection we have in our company. So this gives us really a state-of-the-art transparency. The launch of a remote service tool was very helpful to facilitate cooperation with our customers when site visits were not possible. And we managed the supply chain smoothly by introducing safety buffers and second sources to secure supply. On the financial side, we profited from the early implementation of our liquidity initiative, with focus on accounts receivable, expense management and reduction of net working capital. On top, we implemented proactive savings measures, helping us to achieve the strong earnings development in the first half. This chart shows that the total uptime of our production site was not really affected by COVID-19 so far. In the second quarter, 14 out of our 61 production sites worldwide had to close due to COVID-19 regulations in the countries. In summary, the 14 sites were impacted by 159 closed days. While we managed the crisis well so far, the corona pandemic is far from over. Therefore, we need to be prepared in case there is a second wave, and we are, as you can see on this slide. All these measures will help us to secure business continuity if needed. With that, over to you, Marcus, to expand on the business and financial review.

Thank you, Stefan, and also a warm welcome from my side. Stefan already mentioned our very solid bottom line performance. Please let me put our Q2 '20 figures into perspective. This is currently an extraordinary challenging situation. We have seen leading economies reporting drops of their gross domestic products by about 10% in the second quarter. On the back of this development, I strongly believe that a decline in orders by less than 10%, a sales decline by less than 7%, and an increase in EBITDA even when adjusting for special items is a very solid development, of which we are proud of. On the strong development of EBITDA before restructuring measures, I want to share some more details with you on the next slide. Overall, our EBITDA before restructuring measures, improvement from EUR 111 million to EUR 140 million was driven by all but 1 division. However, excluding special items, all 5 divisions were operationally up. If we look at the main drivers, I think it is not surprising that volume was down in all divisions, with the exception of Separation & Flow Technologies. Both new machine business and service business suffered from COVID-19. The good news is that margin was up in all divisions, driven by new machines business this time. The key reason for the improvement is a generally better margin quality of the backlog. However, we also need to mention that last year's Q2 was burdened by the backlog review and EUR 30 million we took as accruals for project risks. SG&A costs were lower compared to last year's second quarter, due to windfall savings in the form of lower travel and marketing expenses but also due to the absence of special items amounting to EUR 9 million last year. In comparison to last year, we're to digest an FX headwind of EUR 7 million, with the majority coming from transaction. In order to enhance transparency, we show the positive effect of lower special items than last year of in total EUR 12 million and the negative FX impact of EUR 7 million separately. Therefore, we showed underlying operating improvement of EUR 24 million. Let me now turn to the divisions, starting with Separation & Flow Technologies. The division reported a decline in order intake but growth in sales and EBITDA. The decline in order intake was predominantly caused by the customer industries oil and gas as well as marine. Orders from the customer industries dairy processing as well as food were also down but less pronounced than the first 2 mentioned. Orders from the customer industries farmer and chemical were above prior year's level. Sales were up by 4% year-over-year. This growth was predominantly driven by the customer industry food. Service sales continue to grow but just slightly at a rate of 1.5%. As a result, the service sales share declined to 40.3% from 41.3%. The growth of EBITDA was driven by volume as well as improvements in gross margin. Overhead costs declined compared to prior year's second quarter due to a significantly lower burden from special items and cost cutting. Now let's go to Liquid & Powder Technologies. Order intake declined by 8.4% to EUR 335 million and included just 1 large order with EUR 18 million. The current situation is generally characterized by lackluster large order development due to COVID-19-related travel restrictions. Also, customers are delaying their order placements into the second half of 2020, as they are putting an increased focus on preserving their cash. Sales declined by 5.1% year-over-year. Due to travel restrictions, our engineers were not able to access some customer sites to execute projects. This was mainly the case in the business units beverage and filling as well as chemical. These restrictions also had an impact on service sales at Liquid & Powder Technologies, which were down by 6.7% and account now for 22% of sales versus 22.4% last year. EBITDA before restructuring, however, increased. Gross margin significantly improved due to a better market quality of the executed projects during the reporting period. Last year's EBITDA was burdened by the special items related to the backlog review of, in total, EUR 10 million to clean up our order book. Overhead costs are down, and this positive performance is resulting from the restructuring efforts, which we started during the second quarter of 2019. This pays now off in the form of lower personnel expenses. Let me now talk about Food & Healthcare Technologies. When looking at the performance, one should bear in mind that we have several legal entities in this division which are located in Northern Italy, in the region or close to the region which was most affected by lockdowns. The restrictions, for example, on travel had a significant impact on the ability to generate order intake as well as sales and EBITDA. Order intake declined by 13.5% year-over-year, mostly driven by the business units bakery, food solutions as well as slicing and packaging. Business unit pharma and health care stood out with good growth in order intake. Also, in the division, we experienced that some customers are delaying their final investment decision into the second half of 2020, as a result of the increased level of uncertainty related to COVID-19. Sales declined by 5.8% year-over-year. The lockdown in Italy was the most significant driver here and also temporarily impacted our supply chain, which itself resulted in a delayed execution of projects for us. As you might can sense, those business units with a high share of legal entities in the Northern Italian region, namely pasta and bakery businesses, were most affected. Service sales were down by 3.9% year-over-year, and that developed a bit better than the entire division, especially due to a stable spare parts business. The share of service sales increased slightly to 24.2% up from 23.7%. EBITDA, however, improved significantly from EUR 12 million to EUR 22 million. This improvement was driven by a slight improvement of gross profit and by lower overhead costs. The impact from special items is positive by EUR 6 million. Moving to Chart 14, to Farm Technologies. Order intake declined by 1.2% year-over-year. At the beginning of the quarter, some farmers had to dump milk due to a significant decline in demand and therefore, also declining milk prices. The situation has improved by the uncertainty regarding the future development of farm gate milk prices is still weighing on the sentiment of farmers to place orders. On top of that, our sales teams were not able to visit customers, which adds furthermore to the negative development. Sales were down by 9.7% year-over-year. First, the order backlog at the beginning of the quarter was about 10% below last year's starting point. Second, execution of some projects was delayed due to COVID-19. Service sales were, however, not that much affected, as we have a high share of products, such as spare parts and consumables, which can easily be shipped to customers. Therefore, service sales were roughly on prior year's level. But mathematically, the share on total sales increased strongly to 48.8% from 42.5%, still a clear sign of a robust service business. EBITDA before restructuring increased year-over-year due to better gross profit, especially for new machines. Also, overhead costs improved by EUR 4 million, resulting from cost savings initiatives implemented earlier and some windfall profits in cost savings, for example, less travel. That gets me to our fifth business. Order intake declined markedly by 30% at Refrigeration Technologies, most especially driven by delayed customer decisions in the business unit projects. Also, especially those regions which was strongly affected by COVID-19, such as Italy, recorded a deep decline. It should be also noted that the second quarter 2019 was an extraordinarily strong quarter in terms of order intake. Sales developed also negatively with a decline by 13.4% year-over-year, as some of our production sites were temporarily closed and thus caused delays in the execution of projects. The situation in Italy impacted our ability to generate sales as well as the temporary lockdown-related closure of a skid factory in China. This also affected service sales, which declined by 9.5%, and now accounts for 35.8% of sales, still up compared to 34.3 -- still down compared to 33.3% in the second quarter of 2019. EBITDA margin remained stable despite the strong decline of sales. The decline in sales volume could be partially offset by better margins of the executed projects. Also, slight reductions in overhead cost supported the EBITDA development. Let's now continue with net working capital on Slide 16. Almost exactly 1 year ago, we started our net working capital initiatives. And I think now is a good time to review the success of the new processes. The numbers speak a very clear language, in my opinion. On a year-over-year perspective, we improved our net working capital by EUR 276 million or almost 6 percentage points to 13%. This represents the best net working capital to sales ratio in a Q2 since 2015. From a divisional point of view, especially Liquid & Powder, also but to a lesser degree, Separation & Flow, Farm as well as Refrigeration Technologies contributed to that result. The significant improvement was driven by an improvement of prepayments, trade receivables and inventories. To sum it up, the new net working capital management procedures are clearly paying off. We expect to be below 14% of sales this year. Coming to Chart #17. Cash is very important, if not the most important topic in these days. Our cash generation is, in my opinion, another proof that the organizational setup is working really well. And this quarter's net working capital figure is a perfect proof for this. In Q2 '19, the contribution from net working capital was an outflow of EUR 72 million. This year, we have an inflow of EUR 64 million. This is a swing of EUR 136 million, and it shows how numbers improve when you make people responsible for their actions again. Let's move on to our new net financial position now. The dividend payment in this year's Q2 is significantly lower than in last year's Q2. We have postponed our AGM to November 26 but paid the maximum amount to our shareholders, which we can without an AGM. Our proposal for the remaining EUR 0.43 per share is still valid and will be up for decision on November 26. The key takeaway from this chart is our net cash position of EUR 92 million, driven by strong development of net cash flow. Chart #18. And before I hand it over again to Stefan, let me talk about our financial headroom, a key topic in the current environment. Let me start on the upper left. We have total committed lines of more than EUR 1.1 billion, of which we have only utilized EUR 422 million. Considering our cash of EUR 550 million, we increased our net liquidity to EUR 92 million in comparison to our net debt of EUR 330 million a year ago. Even if we consider that we plan to pay another dividend of in total EUR 77 million this year, it's still an improvement of EUR 345 million. Furthermore, our financial headroom amounts to EUR 650 million in credit lines. Despite our strong financial position, we decided to take precautionary measures to secure further funding by increasing our credit facilities. That means the existing credit line with the European Investment Bank was increased by EUR 100 million. Furthermore, a second syndicated credit facility was agreed upon, with a volume of EUR 200 million. We are also preparing ourselves to be potentially able to participate in a commercial paper program of up to EUR 500 million but only if needed. And at this point in time, I do not foresee that we really need these, as I said, precautionary measures. I can only repeat what I said in the past calls, GEA is very solidly funded on a diversified financing structure. And with that, I hand it back to Stefan.

Thank you, Marcus. Let me now come to our outlook for the fiscal year 2020 and our key priorities. Let me start and share with you the latest value-add output forecast for our customer industries and industrial production in 2020, based on the latest data from Oxford Economics. First of all, we can see on the left chart that our customer industries, with the exception of dairy farming and dairy processing, are expected to be down in the second quarter of 2020. However, the declines are much lower compared to the overall industrial production, which is a minus of 8.6%. This shows that our customer industries are much more resilient. And if you especially look at dairy farming, dairy processing, which is a big part of our business, that also looks here quite good. On the right chart, Oxford Economics' forecast for the full year 2020 are shown. They expect a stable development for dairy farming and dairy processing as well, with a growth of around 0.5%, which is approximately at the same level of pharma, with an expected growth of 0.7%. So the value-added output for the segments food, beverage and chemicals is expected to decline but is still doing much better than the industrial production with a minus of 5.5%. Following the overall good first half result, especially the EBITDA before restructuring performance, we have decided to raise part of our guidance for the 2020 fiscal year despite the fact that due to COVID-19, the overall situation will remain challenging in the second half of the year and difficult to predict. We will still expect sales to be slightly down versus last year's figures of EUR 4.88 billion. However, due to the strong first 6 months and our restructuring measures bearing fruit, we are now forecasting EBITDA before restructuring measures to be, at a minimum, at the upper end of the previous range of EUR 430 million to EUR 480 million. For ROCE before restructuring measures, we now expect a number between 12% and 14%, up from former guidance of between 9% and 11%. Before I close with our road map for this year, let me focus on our key priorities for 2020. First and foremost, we will manage the impact of COVID-19 internally and on our operations. On the business side, the strongest focus is, as in the first half, on order intake and sales as well as on managing cost and securing liquidity. Second, we will push to realize the savings from the new global procurement and supply chain organization. Third, we want to conclude the reduction of our workforce by, in total, 800 FTEs. Fourth, we will continue to increase our operational efficiency. Fifth, we will divest our earmarked low-margin businesses to focus our efforts on the remaining operations. So we are confident that achieving these key priorities will be another step to further restore credibility of capital markets into the GEA Group. Let me finish with our road map for 2020. Our next reporting date is November 5 for the release of our Q3 numbers. And on November 26, we will hold our Annual General Meeting, which was originally planned for end of April. With that, I hand it back to Oliver for the Q&A.

Yes. Thank you very much, Stefan, and thank you very much, Marcus, for your comments. [Operator Instructions] With that, I think we can open up the Q&A lines for the Q&A session. Operator, please take over.

[Operator Instructions] Our first question comes from the line of Klas Bergelind from Citi.

This is Klas from Citi. So my first question is the -- on the savings and better margin out of the backlog. So on the EUR 32 million margin impact on Slide 10, Marcus, you have EUR 16 million reversing from last year's review. So clean impact is EUR 16 million. And then it could be price/mix in there, as you say, that the back margin has improved. And then you have some productivity improvements in the volume number years before that. And then finally, we have a clean SG&A saving. So I get this around EUR 30 million, EUR 40 million, perhaps. What -- if we try to break this down, it would be very helpful. How much was savings out of the 800 program in LPT, less travel, bonuses and so forth? Because getting that number will be pretty important for us when we model the margin into the second half and into next year. I will start here.

Okay. Klas, we have seen approximately travel expense reduction in the margin only of EUR 10 million. We have seen another EUR 50 million in the OpEx and the SG&A expenses. However, the EUR 10 million which I just said, most of that is usually chargeable to customers. So the effect of less travel in the margin is not that significant really because we -- as I said, we can charge this. So the way to look at here, the margin analysis is really that we have seen here an impact special items of EUR 16 million that needs to be deducted solely here on the margin improvement of new machines. So the EUR 34 million which we are showing for new machines, you need to deduct the EUR 16 million and derived at a net figure for the improvement in margin of new machines. And then perhaps of the EUR 10 million, it's perhaps EUR 2 million around that number, plus/minus, perhaps only -- that would perhaps not be chargeable, so it's really a lesser amount. Most of it should have been chargeable.

Yes. Okay. And then on the SG&A. Because I get that -- when I strip out on both ends, I get it to the EUR 16 million, 1-6 million impact, clean. So how sustainable is that?

So well, we -- as I said, we have seen approximately here, EUR 50 million for less net level, less marketing expenses, less fare. That means -- and that is really savings on the SG&A side because that is not chargeable to any customers. Additionally, you asked for the headcount, 800 program. That is approximately EUR 6 million per quarter. And we have seen purchasing also around -- yes, it's EUR 6 million also in that.

Okay. That's very helpful. And maybe sort of my second one, and I promise only 2, is a follow-up on the sustainability of the margin LPT. So in LPT, we nearly do a 10% margin and the target is 6.5% to 7%. And it used to be a low double-digit margin business during the dairy boom years, the super cycle. And I understand that you are, obviously, gaining from both actions last year in LPT and also COVID-related savings. Let's assume that this business would start growing again, not dairy boom, but you see some growth. Is this a 12% margin business relatively quickly? Can LPT soon deliver double digit -- double its margin target? Or any reason for why that wouldn't happen, obviously beyond macro?

Yes. Klas, Stefan speaking. I think -- I mean in the project business, we had to make a lot of changes, and we are still doing many changes. You know that we changed -- we started to change the management team. We really were much more cautious in what we take in. And it is, of course, I would say, our most complex business. That's the nature of project business. So I would not expect that in a very short time, we will end up as a number which you say. So it will take more time. We need to stabilize the organization more. If we look at the single project, on average, we are becoming better. But we also still see sometimes projects where we wish to be better, to say it in that way.

Our next question comes from the line of Lucie Carrier from Morgan Stanley.

I just maybe wanted to ask around the guidance because you seemed to have done so well in the first half of the year. We are now kind of already mid-August. So I'm guessing you have good visibility into the second half. But it seems that you are guiding for a second half lower than the first half from an adjusted EBITDA standpoint. So I just, I guess, would like to understand whether this is extra cautiousness or whether this is something you are seeing in your orders, or whether this is something you're seeing in the mix.

Thanks, Lucie, for this question. Stefan speaking. I mean we are living in a very, very uncertain time, and this is also reflected in our guidance. So despite we are very happy and also proud of what we could achieve in the first half of the year, we need to be and to remain cautious for the rest of the year, especially if you look at the numbers during the last days and week of the COVID cases all over the world. And also in Europe, it is really putting a lot of challenges on all of us. And it's -- the crisis is not over. And therefore, we simply want to stay cautious, and we have to see how this year will end.

Okay. And I guess maybe a bit more of a longer-term question. When you think about the development of the different buckets of your -- of the portfolio between products, between projects and between services, because you are showing today a very strong performance on the margin side even though the service business has been not necessarily growing a lot because of the condition, obviously. But when we think about that, when we think about those 3 categories, where do you think you have the most opportunity in terms of margin uplift in the future? Is that in the project management? Is it on equipment with better mix? Is that on service? And maybe related to that, are you able to give us maybe a range or some quantitative indication of the margin differential between your service and the rest of your business?

I mean we believe that we can do better in all 5 divisions. We also have a lot of activities going on and ideas what we need to improve. Liquid & Powder was in the last years, I would say, a pain point for GEA, as you know. This was mainly the form of business area solutions. And if you look in detail to this project, we see very good projects, very stable projects. But we always see a handful of projects, which are going completely south and which is killing a significant part of the margin. And this is where we're working on. This is what we need to establish. This is where we change also some stuff, where we are working on stabilizing processes. And therefore, this is an area where we also expect significant increases. But as I said before to Klas, also, this is not a quick fix. You cannot expect that within 6 or 12 months, we can turn it around completely. It is rather a journey of 2 or 3 years until this is really on a very professional level again. But then, we will be doing much better.

Next question comes from the line of Akash Gupta from JPMorgan.

My first question is about FX, and maybe if you can tell us what sort of euro-dollar exchange rates you have used for guidance. And given euro-dollar is now at 1.17, 1.18, what shall we expect in terms of full year impact from FX, which was EUR 7 million in Q2 where you also had like EUR 5 million roughly from FX transaction?

Yes. We don't disclose our FX rates, but I'll give you an answer, nevertheless, on that. When we did the guidance -- first time the guidance actually, we assumed that we will not have an FX gain of EUR 20 million as we had in 2019. So we said that's going to be 0 there. So right now with the increased value of euros, especially against the U.S. dollar, you have seen that we have year-over-year comparison, the first half, EUR 13 million FX loss, which is just year-over-year there. So this year, we're not going to only have, I think, minus the 20 million, not FX gain year-over-year but probably a EUR 5 million plus, I would think if the dollar stays that high, perhaps EUR 5 million to EUR 10 million even, less or more FX expense in comparison to last year. But this is only, as I said, year-over-year comparison. Did I make myself clear, Akash?

Yes. And my second one is on cash flow. So here, if you can provide some additional comments on working capital. I mean you are guiding less than 14% for the year. Your medium-term plan is 12% to 14%, we are at 13%. So like is it fair to say that this level of working capital would be driven by the level of sales activity? So let's say, if we have some kind of prolonged impact of COVID-19 and if you have lower sales, then we should expect working capital to be lower? Or like -- so if you can provide more moving parts -- like more details and moving parts in working capital in the second half, that would be great. And then on CapEx, which was 1.4% of sales in first half, and you are still guiding 3% for the full year. So shall we expect a CapEx rebound in S2? Or could there be some upside on 3% CapEx for the year?

Yes. Okay. Net working capital, let's go -- let's visit that first. So it's -- when you look here at our sales in the first half of the year, actually, we are only down 2%. Of course, here in the last quarter, we're a bit further down. So the lower net working capital is not really driven by lower sales. It's really driven by the measures we are having. It's driven by lower accounts receivable. It's a different payment terms for the accounts payable and also, of course, the advance payments we are receiving, especially at LPT. So these are the main reasons for the lower net working capital. Now for the second half of the year, so in total, we said we expect to be below 14%. And of course, I mean, potentially, if sales guide us that way, that would mean that net working capital also in the second half of the year would go down a bit. But do we expect really below 14% for the full year, considering that in the first quarter, we were above to 14%. CapEx. There's not going to be any major CapEx rebound in the second half of the year. We are cash conscious. Nevertheless, we do CapEx where we see that it is needed and it helps our efficiency. Then we are also spending CapEx, but it's not that we are expecting a rebound. So I would not necessarily expect that we're going to be at 3% for the full year.

And would this then less than 3% CapEx mean that could there be more high CapEx next year? Or that is like a savings that could be more permanent than this is?

We haven't made our CapEx budget for next year yet. So we need to see this. At this point in time, we have not made any decisions to move CapEx from this year to next year.

Next question comes from the line of Felicitas Bismarck from Deutsche Bank.

Yes. I still have a question on your credit line extension. I think -- I mean you have a really great liquidity position. You still have quite a lot of open lines. And you're quite confident on your cash flow generation going forward. So why did you increase that now, whereas all the companies were actually doing it rather in Q1? And related to that question, do you feel now comfortable in your structure and in your position that you would also consider some M&A?

Okay. First question. Well, with experience comes, you need to have the umbrella with the banks when you don't need them. And as I said, we don't foresee that we actually need them, but you do this in a time when you don't necessarily need them. The ones who actually already did it in Q1 were the ones who were basically in search for real help. We didn't need that help, so we took our time actually to negotiate our conditions with the banks because we -- as you said, we have the cash and the liquidity of the lines unutilized to do that. So that's to your first question. And second one was?

Acquisitions.

Acquisitions. We will actually look at acquisitions again. And let's see how the M&A market is going to be in the next 12 to 18 months. But we are not only divesting, but we will also be actively looking to do acquisitions.

Okay. So just one quick one. How much factoring -- or did you do factoring this quarter? And how much factoring would that be?

We do factoring, but it's not a whole lot. It's in the very low 2 digits.

Okay. And that hasn't increased in the last couple of months?

That has not increased in the last couple of months. No.

Next question comes from the line of Joerg-Andre Finke from HSBC.

The first one relates to the order intake trends, maybe on a more sequential basis and going into July. Maybe you can comment whether you have seen, say, on a month-to-month basis, rather stable development of orders into July and the beginning of August, or whether we see some orders falling off the cliff, given your comments on a challenging H2? And maybe also some color on the regional split on order intake? That will be very helpful.

Yes. I mean if we look at the current order intake every week, it is, let's say, we are -- I would say, on the new normal, yes, what we saw also in Q2, we don't see the bullish order intake at the moment, which we got in Q1. We, on the other hand, are still quite optimistic because, to our knowledge, there are only a very, very few projects really canceled. So the majority of customers are postponing or waiting. And this is also -- it's also the fact that we are in close negotiation and discussion also for medium-sized and larger projects. So it does not look different, let's say, like the average in Q2, I would say.

Okay. That's very helpful. And my second question, coming back to the windfall savings. You mentioned in your -- in the bridge already the savings on the SG&A side. But maybe you can give, let's say, an overall number on windfall savings, including furlough schemes? So if you could provide, that will be helpful.

Well, the windfall savings actually were really in travel marketing and fares, which I said was EUR 15 million; in SG&A, another EUR 10 million. And as I said, by far, the most of it would have been chargeable to customers. So it's really the EUR 15 million. So far, we have short-time workers, just very little. So the savings out of that is really in the low single-digit million, if at all, if at all. We have seen that somehow in Italy…

Very little. Very little.

In Germany so far, nearly none.

The next question comes from the line of Lars Brorson from Barclays.

Maybe 1 follow-up and 2 questions, if I can. Just on that prior question, Stefan, with regard to order intake. You're saying it looks very much like Q2, so call it EUR 1 billion or so per quarter. Obviously, Q2 was characterized by pretty strong April albeit driven by one large order and then should we say double-digit declines in May and June. So just want to clarify the cadence, if you like, in your short-cycle business in base orders. There hasn't been any meaningful uptick there as you exited Q2 and into Q1. That will be question one. And then question 2 related to that. Any more visibility around some of these larger orders that you keep saying are delayed into H2, I guess, both in LPT and RT? You're talking about delays here. Do you have some visibility of getting them over the line in Q3?

I mean I know that this information are very, very important for you and also, of course, for us, but it's a really, really very volatile situation. I mean we see that customers are postponing very quickly, and we also see that they are coming back to the table to discuss quickly. So it's -- I mean it is not a normal year. And therefore, it's also very, very difficult to predict. I can only tell you that we have a solid project funnel, that there are interesting projects, which we are talking about. I cannot tell you how the world looks like in 8 weeks and if this will encourage or demotivate our customers to place an order or not placing an order. Therefore, it's hard for me or almost impossible to give you really a clear guidance. The only thing I can say at the moment today, we don't see that it is really becoming worse or that we want to be too pessimistic.

That leads me on to my sort of first question, really, which is your -- the implied second half development in your business as it relates to your divisional guidance for the year. And again, I'll give you credit for giving us guidance even at the divisional levels. Many other companies obviously don't, so thank you for that. But I had 2 specific questions within that on FT and on your FHT business. On Farm Technologies, firstly, I mean you're now looking for a significant decline for the full year, which leads me to suggest that, that implies a mid- to high single-digit decline in H2. I'm struggling a little bit with that after a 6% order growth in the first half. And I think you yourself mentioned the external forecast earlier in your presentation that suggests growth overall for the farming business. So what is it within your business that seems to be getting worse in the second half as is implied by your guidance?

Okay. Thanks for this question. I mean, yes, we have also the guidance here for the individual divisions. You have to know that when we say we are slightly declining, then that means maximum minus 5%. And if it is above minus 5%, if this is our perception, then we are talking about a significant decline. And this is what you have to know. So there is nothing in-between, between slightly and significant in our language, which makes it maybe a bit more dramatic than it is.

Yes. That was -- I understand that. I understand how you are categorizing. I'm just trying to understand divisionally, what is it that seemed to be getting sequentially worse, specifically in Farm Technologies.

I mean it's simple that Farm Technology is -- these are individual investors. These are the farmers. They are sitting at home, at their table and making the decision. And they always invest when they see that cash is coming in. And we have some uncertainties about the milk price, and therefore, we are cautious here.

And on FHT, if I can, you're now guiding down significantly at the sales level, but obviously, EBITDA significantly higher. Can you also give a little bit of divisional commentary? I know it's very granular, but I'm just curious. I mean FHT is 50 -- sorry, 80% food. I wonder what it is within that, that's getting worse, but conversely, what it is that's delivering better cost savings for you. Maybe specifically, if you could comment on Pavan within that, that would be helpful for me.

I mean you have to know that a big part of our business in FHT is Italy. And that is also here reflected in our guidance, that we might also be not as good as originally expected in conducting all the sales.

When you look at the first half year, we're down by 5.3%. And if you prolong this actually also for the second half, you end up above 5%, which means significantly. I mean that's what we are looking at when we say significantly here.

Can I, thirdly and finally, just check a couple of the key items for the bridge as it relates to your guidance for the full year at the adjusted EBITDA level? If I understand things directly, you're now saying FX, you expect to be a negative EUR 25 million to EUR 30 million year-over-year. Your headcount savings should come in close to EUR 25 million for the full year. You said EUR 6 million per quarter. Something similar for procurement savings. Can you help me a little bit with other key items in your bridge, specifically special effects, if you can help me there? There's, obviously, EUR 9 million in the quarter. I wonder how we should think about the second half. And also just clarify whether there's anything incrementally coming this year as far as ERP IT is concerned. I have that at 0 in my bridge. Obviously, there's a big investment phase ahead of you beyond 2020. But can you help me a little bit with some of those key items as it relates to this year?

Yes. Well, we don't expect to see any outstanding expenses or extraordinary expenses, put it this way, for our SAP project. That's all built into the guidance, and that's running on track. So don't expect anything there. What we said that we also had in the first half of the year, we took an allowance for -- potential allowance basically, or allowance for potential bad debt, which was EUR 7 million. And when I said once how to derive to the EUR 480 million, I said bad debt allowance could be up to like EUR 25 million. We don't have that in there yet. But as I said, we took a EUR 7 million charge in the first half of the year as a precautionary measure. And then, of course, we had an estimated corona effect in there for EUR 480 million. And so far, our EBITDA has been quite strong. So let's see in the coming months. As Stefan put in, let's stay cautious for some more months there. With -- in regards to the special items there, I can't make any predictions for the coming months. They come as we incur them. And the 2 special items we had in the first half of the year was really here. The bad debt allowance, I just mentioned, was EUR 7 million. And there was a legal case, which we settled at FT. That was slightly below EUR 2 million. These were the only special items so far we put here on the list. So -- and you know the special items actually from our presentation from 2019. Do I foresee anything in the second half of the year? Yes. The only thing I said we are watching potential bad debt reserves, which we have to take carefully. But that's the only thing I can see right now.

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

The first one is around dairy processing. You showed the sales growth for that particular channel with 3% in the quarter. However, there's a lack of disclosure when it comes to orders. And then my interest is around really the order funnel, particularly in China. Because someone looks at the details on the regional order trends, then obviously, China is still doing extremely well with the book-to-bill of 1.16 for the last 12 months rolling. So any color on the pipeline there? What every pros, in particular, would be much appreciated. And on your earlier comments for the execution part within dairy processing, can you give us a sense, at least, how much of the portfolio currently is doing not well, i.e., what you indicated as weak project execution, which needs time to be fixed, et cetera? To just get a better sense of really how much is in fire in a way. And the last one is around portfolio. I think back in the days when you took over as CEO, CFO at GEA, you said that you wanted to fix the house first before returning to an organic growth. So what are the strategic target areas that you have in mind? Is it more the regional or more the technology level? And any color there would be great. And does any M&A also require further exit of the non-greatly performing parts of the portfolio? That would be interesting as well.

Okay. Let me just start with the question of order intake in LPT. This is, of course, impacting our overall order intake situation significantly because we also see here projects in the size of EUR 10 million, EUR 20 million, EUR 30 million. We still have, like I said, an interesting project pipeline. It's not that we don't see any projects in the pipeline. It's rather the question, are the customers going to order this now? Are they going to wait? Is it postponed? And this is I have to say really impossible for me to say what will happen because the situation, the COVID situation is so volatile and so unpredictable that I really cannot tell you how good it is to have all these projects in the pipeline or what is really the value of having these projects in the pipeline. This is as very much, let's say, depending on how the COVID situation continues and how willing the customers are to jump and to order. Concerning the bad project, this is which we see in the project management in LPT. This is not, let's say, that I can say this is coming from one company or from one special business. Of course, we have businesses which are quite good margin-wise. Others are a bit lower. But it is more that we see when a project is not really managed, when a project was not really precalculated, then we have things to see which we don't like to see. So it's more about now introducing the right processes, approval steps, project management. But it's not associated with a specific, let's say, business within LPT. And then the third question was about the portfolio and the disinvestments. I mean we said very clearly, when we started here as a new management team, first of all, we have to fix the company. We have to change the organization. We have to create transparency. We feel that we are really moving forward here. The new organization is really, really making a huge difference here in the organization. And we are starting, like Marcus already said, to look what kind of acquisitions could be interesting for us. It is, I would say, still too early to expect any major acquisition within the next 2, 3, 4 months, but we are starting to think about that. And we are looking what could be a good fit for GEA. We also will continue to do the disinvestment of the underperforming units, which we want to get rid of. However, you can imagine that it is not so easy during these COVID times. I mean there are a lot of cooperations who are very reluctant in acquiring companies. So banks are also not so pushy in making loans -- and giving loans and debt out to private equities. So it's also here a very difficult situation. And normally, if we are going to disinvest companies which are not really the outperformers, it's not a prime asset. So this all comes together and makes it difficult. Anyway, we believe that we can still, this year, also report some successes here. And we are quite optimistic that we can, despite the very difficult situation, report successful disinvestments in due time.

Okay. That is helpful. If I may just briefly follow up on the magnitude really for the dairy processing, which is not going well. So we're talking a run rate EUR 900 million, give or take, in terms of revenues annualized. So how much of the EUR 900 million revenues is not greatly managed, be it the project execution part? So just get a rough idea of what sort of is the upside opportunity. And the other question on the portfolio. When you talk about significant, what does it mean in terms of potential deal size? Can you just share some thoughts around that with us?

I mean the first question is really, really extremely difficult to answer. I mean if I look back the last 2 years, we, of course, saw projects where we lost high single-digit million number in one single project. But this is not the normal. But we see -- if we, let's say, collect all these negative projects together, it is a significant number which would make a huge difference in the profitability of LPT. If we simply imagine that we execute all projects like we calculated, then we would have a huge upside potential. And this is what we are looking for. Deal size for disinvestments. We are -- when we talked about disinvestments, we disclosed that we are going to sell GEA Bock. We are in final negotiations with potential acquirers. And that is something we are quite optimistic that we can that we can execute that. And the assets we are thinking about are normally smaller ones. When we look at the other side, when we are talking about acquisitions, what could be interesting for GEA, we are definitely looking for rather larger acquisitions than smaller acquisitions like GEA used to do in the past. So we are used to buying very often companies, EUR 20 million, EUR 40 million, EUR 80 million turnover. It's not that we say we don't do that at all, but we are looking more on rather on larger corporations because we believe and we think that this would make a bigger difference and also could be handled better than doing the small acquisitions.

I think a follow-up question from Klas Bergelind from Citi.

So just on net working capital, again, Marcus. I just want to understand this a bit better. You say that it's purely a structural improvement, but you typically release working cap a bit when demand is weaker. And so -- but you say structural. Could you explain a little bit in terms of why you can collect quickly right now, why the payment terms have improved? So what has changed in the organization to improve it structurally?

Well, we set up last year, a net working capital project. I mean when you look at networking capital, that we have a project office for that. So since last -- since August of last year, we are changing actually our internal processes for that. And we can see actually how much we are collecting, how much we have in overdues. We can also see how the accounts payable are and all the advanced payments went, especially at LPT. So if you say sales are going down -- net working cap is going down due to sales going down, the net working capital ratio wouldn't change. But when you change the net working capital ratio not only for 1 quarter, you are changing structurally the net working capital you need. That's the answer, Klas. I mean, otherwise, you always have like 14, 15 or whatever percent of sales. When sales goes down, then net working capital in absolute terms goes down. But in our case, it went down as a ratio quite significantly, as I said, by 6 percentage points, if you take a look at year-over-year. And that was the main reason why we had such a strong net working capital reduction. We're changing our processes. And additionally, what I said, this is how -- when you make people responsible again, and now the divisions, the business units below are not only responsible for their P&L, they are also responsible for the balance sheet, especially what they can influence and manage, which is their net working capital. And they're incentivized on EBITDA, and they're incentivized on ROCE. And the moving part in capital employed, which they can manage is, again, net working capital. So this is also in line with the incentivization we put in place.

Yes. Very clear. Very good. I just want to confirm. And then my second one is for you, Stefan, and the comment you just made on M&A. You say that you are ready for larger deals, or you rather prefer doing large deals than small. But was that a general comment? Or is that something that you're actively looking for right now? Because I was previously under the impression that you wanted to achieve your strategic targets before doing deals. So just want to understand the timing and what you meant for that comment.

Yes. I mean, as I said, don't expect that we are closing any deal within the next 2, 3, 4 months. What I said is when I started -- when we started as a new management team, we said it's first about fixing the house. It's first about bringing the organization in order, creating transparency, building up trust again at the capital market, things like that. And we feel that we could really make a difference during the last 1.5 years. And if you look at the numbers, also at the earnings we see now, I think we are on the right track. We are, on the other hand, also believing that there are a lot of interesting targets around which could make -- which could have a big impact and which could really fit to the group. And what I said is that we are starting to look out and that we rather look for companies with a 3-digit turnover instead of companies with a 2-digit turnover, because if you a solid due diligence, it's, at the end, the same job you have to do. And if you think how you can manage this company, it's much better, as larger the company is, normally as more stable it is. And if I also look back at the history of GEA during the last 5 or 10 years, GEA bought a lot of very small companies, very often owner driven. Then the owner stepped out, 2, 3 key people left and then the mess began. And this is also different if you buy larger organizations. And therefore, even if I don't exclude that we also might buy sometimes a smaller company if it is an ideal fit, if we can consolidate a market or whatever, but going forward, we will look much more on larger cooperations which could make a good fit with GEA than buying all the small companies around.

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

Yes. The first one is a clarification question for Stefan. You mentioned that you're in the final stages of negotiation of -- with potential buyers for the divestments of the business. At the same time, there are some COVID-19-related hurdles, including the refinancing of a potential deal by the banks. So could you clarify whether the divestment of the EUR 200 million, EUR 300 million is still the right size to think about it and whether you think that could materialize in the second half? Or is that something we should rather expect for 2021? That is question number one.

Yes. I mean we will not be able to manage and disinvest still this year EUR 200 million or EUR 300 million turnover. We might end up in a 3-digit number at the end of the year, but also here is the same valid -- like I said, for order intake, it's a very volatile situation. We are quite good on track. However, the deal is done when the deal is done.

But there is no change with regards to your intention to sell it? Or might you eventually keep it on board?

No. No. There is no change, no -- in intention.

So the second question is for Marcus, more big picture one qualitatively. When we think about the Capital Markets Day presentation and all these cost saving potential that you envisage now flowing in the COVID-19 situation, has there been any changes with regards to the time line and the magnitude of the savings? That would be the part number one. And secondly, as we have moved along the time line, are there any meaningful incremental pockets of savings, like the ones that you mentioned with the bad projects, that you could end? Is there anything else you can tell us at this stage with regards to total savings on the upper end?

So savings-wise, time line, I would say, is such a situation with COVID-19. It expedites things significantly. And it makes everyone in the group, and we are a widespread group, really aware that they need to bring in the savings. So that's most important. It's really getting the right mindset into the company. So in that sense, such a situation is, as a matter of fact, helpful in achieving the savings. So there has been no change in volume. But we are running as fast as we can, and hopefully, much faster than what we said at the Capital Markets Day with getting the savings in. After being here for more than a year there, and longer when I was there at the Capital Markets Day, I think the company has significant potential everywhere there. And there's, of course, also potential, what you said in the project execution at LPT. We said this before, we see there that we can reach there a good margin. We're not saying when, as someone asked before, and how much. But there is additional potential actually to improve our margins significantly when you look at the overall company, and that was just an example. Did that answer your question? I can't get more specifically actually than that.

Yes. We're looking forward to some more elaboration on that. But maybe on the first part, when you say much faster bringing in the savings, what time frame do you have in mind? How much faster?

Yes. There's no new time frame which we give out. But as I said, we are running as fast as we can because you never know how order intake will be in the next 6 to 9 months. And we have -- and if the order intake stays, then it is great. We're going to have better EBITDA. If the markets would deteriorate further, as a potential, we need to have the savings in as quickly as possible. Anyway, so as I said, we're running as fast as we can right now to bring the savings in. And as I said also, it's helpful that, that's the right mindset with that. The sense of urgency is everywhere.

One last question comes from the line of Joerg-Andre Finke from HSBC.

Yes. Just 2 follow-up remaining. The first one is a very quick one on the tax rate, which has gone up. Should we expect 30% to be the tax rate also going into 2021?

No. Into '21, it could be a bit lower actually. We are looking right now at more than -- around 28% approximately for '21. But this year, it's 30%. And it will depend on actually where our earnings is going to be next year, but we do not expect anything higher than 30%. Perhaps that's a little bit downward potential, down to like 28% for next year. But we need to see where the earnings will be then.

Okay. Very clear. And the second question is just a follow-up to your comments on net working capital, as you mentioned, the prepayments on LPT quite a few times. To which extent is the outlook for this year and the midterm target is dependent on a large project inflow, given that probably -- I mean as we see now, at least for the moment, the large project activity is somewhat stalling?

Yes. We factored that in when we said this year, we expect to be below 14%. And we can also be still within our range of 12% to 14% without a strong order intake of big projects with a lot of advance payments. If we can get that, that's, of course, very helpful. It expedites our net working capital reduction. And of course, the magnitude would be higher. But as I said, with the net working project in place and the new processes, we are able to manage actually within the range of 12% to 14%. And depending on advanced payments, you'll be more at the lower end or at the higher end. But for this year, we feel comfortable with less than 14% already.

No more question at this time. For our closing remarks, please go ahead, Stefan.

Yes. Thank you. So, I would like to thank you all of you for participating, for your interest in GEA and for your great questions. Let me summarize it. I think we had a very solid start into the year. And the first half year was a good one. Despite we had a decline in order intake in sales, we could -- in the Q2, I mean. And in the half year, we had even an increase of order intake and only a slight decrease in sales, which is for a machine building company, I would say, quite good and outstanding. And now the profitability increased. We are quite good on track with all our measures we put in place to improve the performance of the company. The new organization is really working great and is very well accepted from our employees and managers. So the big question mark remains the COVID situation. It is a very volatile period of time. And we all hope that this COVID situation will disappear, hopefully, in some months; that the vaccine is found, and that we can go back to normal life. But the situation will remain very volatile. So be careful, stay healthy, and talk to you next time. Thanks.

Thank you. And that does conclude our conference today. Thank you all for participating. You may all disconnect. Stay safe, everyone.