NORMA Group SE (NOEJ) Earnings Call Transcript & Summary

Ladies and gentlemen, welcome to our quarter 2 2020 call. Together with me today is Andreas Trsch.

Hello.

Quarter 2 and even the whole first half year of 2020 is a very exceptional half year. It's characterized by a crisis, by an infection by corona with a lot of negative implications on social life and also on economy. But we also see from the business side some positive signals, and I'm sure we will touch it later on. If I start with an overview on Page 2 of our presentation that we sent out and put on our homepage, we see that in Q2 2020, we have EUR 191.5 million in sales versus EUR 289 million last year, which means we are 33.8% down versus last year. And out of this EUR 191 million of sales, we have an adjusted EBITA of negative minus EUR 22.5 million versus last year, EUR 40.9 million. We have to see that this EUR 22.9 million minus also include the costs for our Get on track program, so that these costs of the change program of EUR 21.5 million are included in that negative EBITDA. So without that, we would have been nearly flat in the second quarter 2020. Adjusted EBIT of minus EUR 24.6 million also impacted by the Get on track and by the COVID implications. Net operating cash flow was positive at EUR 1.9 million. Last year, we had EUR 28.8 million, and we also have to see here that definition of operating cash flow, it also includes the EUR 21.5 million costs related to the change program Get on track. If we would exclude that, we would have been at EUR 23.4 million in terms of net operating and cash flow. Balance sheet. We have an equity ratio of 40.9%, a slight decline versus last year December, which was at 41.6%. Net debt went down versus December, EUR 414 million versus EUR 421 million. We had our Annual General Meeting this year in June. We changed the date based on corona implications as well. All agenda items were approved by the AGM including the dividend reduction to EUR 0.04 minimum dividend that we paid. The guidance for 2020 is based on the impact and the coming developments of the COVID-19 pandemic. From today's perspective, still not possible. It cannot be reliably estimated by the time of our publication. And so far, guidance for fiscal year 2020 Q2, that current market volatilities and securities, what is going on with COVID wave x is not yet possible. If we move on to Page 3, our top line development. You see that the EUR 191.5 million of Q2 sales in 2020 show an organic reduction of 33.9%. And for the full half year, with the sales of EUR 445 million, we see an organic decline of EUR 21.7 million based on the COVID-19-related shutdowns. We have a weak EJT and DS business in all regions. But you also have to keep in mind a good topic, a good signal that we have, a nice growth, a nice organic growth in the U.S. water business with our subsidiary, NDS. EUR 0.4 million or 0.1% positive currency effect in Q2. You see the regional split, an increase in Asia Pacific to 15% of our sales in Asia Pacific; Americas at 43%; in EMEA, 42% as an overview on the sales development. And we go in a couple of details on the next page, Page 4. Here we see the organic development of our sales in the different regions for Q2 and even for the first half year. And there we see that the second quarter organic growth in EMEA is at 45.5% negative. The EJT business was heavily impacted by the production reductions in the consequence of the COVID-19 shutdowns, which led to that organic decline. And in the first half year, an organic decline of 29.4% versus last year, last quarter 2020, 52.6%. We had, in Americas, an organic decline of 30% in the quarter, 20.6%. What we see in Americas is what I mentioned regarding the water management business growing at 4.4% in the first half year 2020, which is a very good development. The water management in U.S. was defined as critical infrastructure as important business for the global infrastructure. So we see a very good development in our water management business, Americas. APAC region, we have an organic decline of 7.2%. Already showing some growth in Q2 2020 for the EJT business, where we see that after the COVID-19 shutdowns, a nice recovery, meanwhile. So that we have overall for H1, 0.7% decline for the EJT business, but in Q2, an EJT-related growth of 5.4%. So that we -- with the view on water management business in the U.S. and already starting automotive business in APAC, especially in China, we see some positive impacts; EMEA and Americas automotive still extremely weak. If you have a look on the margin development on Page 5. We see that EBITA margin was, of course, highly influenced by the costs related to the change program Get on track, which we do not adjust. So these costs of EUR 22 million are included in the second quarter and in the first half year. EBITA margin, excluding these costs related to the change program, EUR 22 million is at 5.9% in the first half year. And EBITDA, if we exclude the Get on track one-off costs, is at nearly 11% for the first half of 2020. So this gives an overall overview on the first plans. And if you go into some details of the margin on Page 6, we see that gross profit margin decreased in the second quarter if you compare it to the second quarter 2019. We have some destocking and a quite stable material cost ratio. Personnel costs in Q2 are at 44.6%. We have to keep in mind that the far most portion of our Get on track restructuring measures and also costs are related to personnel aspect and so far, a quite high personnel cost ratio in relation to sales, as mentioned, mainly related to our change program, Get on track. OpEx, operating income and expenses ratio only increased to 15.4% in Q2 '20 mainly based also -- or mainly due to the reduction of temp workers, which reduced the increase of OpEx in that area. We had a significant reduction of employees mainly also temp workers in Q2, so that other operating income and expenses only increased to 15.4%. Adjusted EBITA margin in H1 then decreased 1%. Adjusted EBIT margin by -- to 0.1% in H1 and once again, this includes EUR 22 million costs related to our change program, Get on track. On Page 7, where we show the operational adjustments. You see what we mentioned. Meanwhile, a couple of times, we do not adjust these costs for Get on track. So in the EBITDA line, you see no adjustments, 0. So reported EBITDA and adjusted EBITDA is the same. You see in the EBITA area, depreciation from PPA, EUR 1.5 million, and you will also see in the EBIT area, amortization PPA of EUR 11.3 million. So overall, EBIT impact is EUR 12.8 million. So we only adjust for M&A-related costs, no other costs anymore in 2020. The net profit impact out of these purely PPA-driven adjustment is EUR 9.6 million. So earnings per share adjustments, EUR 0.31 so that adjusted earnings per share is minus EUR 0.22 per share. This is also reflected on Page 8, when we are showing the earnings per share. Adjusted and reported EPS are, as also the profit lines, negatively impacted by the COVID-19 pandemic and costs related to the change program, Get on track. And we paid, you see it on the right-hand side, EUR 0.04 per share as dividend, which is the minimum dividend we have to pay, which was approved by the annual general meeting, which was held virtually. On a debt and liquidity side, which starts on Page 9, we see that cash increased versus December last year to now EUR 190 million -- EUR 193 million cash. And the net debt overall was reduced to EUR 414 million coming from EUR 421 million, so that we have a reduced net debt and an improved cash position, which is an important basis for these volatile and unsecure months and weeks. So from a liquidity perspective, we believe we are well positioned. We have to see that leverage is at 3.7. And we also have to regard that regarding the contract definition of the leverage, we can exclude for the leverage calculation based on the financing contracts the costs related to the change program Get on track so that the relevant leverage for the financing contracts amount to 3.1, end of June 2020. The covenant for the financing contracts, and this is what we see on Page 10, which we included to see the solid liquidity profile, the covenant is at 3.75. Once again, 3.1 is our leverage in comparison to these contracts currently. We showed, on Page 10, the maturity profile of our financial instruments, which shows a very solid development and solid situation. So that we have a solid financial position currently based on EUR 193 million of cash and a credit line that we have of around EUR 130 million. So we also are prepared if there are some volatilities, whatever, call it wave x, we feel that from a liquidity perspective, we are very well positioned. A solid long-term maturity profile. No covenant breach possible at least until March 2021. Repayments are scheduled for 2020 are already repaid or prolonged. This is what we showed in our graph. And once again, overall available committed credit lines, EUR 130 million besides our cash of EUR 193 million. The cash flow development on Page 11 shows that we have a solid cash flow development in the course of 2020. We start in the definition of net operating cash flow with the EBITDA, and we have to keep in mind that this EBITDA decreased due to COVID-19-related shutdowns and costs that are related to the change program, Get on track, in the first half year at EUR 22 million. We perform a strict working capital management, which led to an inflow of EUR 20 million in Q2. We further reduced our factoring program from an overall perspective to EUR 51 million on June 30 coming from EUR 70 million in 2019 December. So we reduced that supply chain financing by EUR 90 million. CapEx, of course, were monitored very strictly. We have CapEx spendings that decreased to EUR 7 million in the second quarter and EUR 14 million in the first half year, so we have significantly reduced these CapEx spendings also in H1. And so far, we have a positive net operating cash flow despite a significant decrease in EBITDA. And once again, this EBITDA includes the EUR 22 million for measures for the Get on track program. As you all know, Page 12, we have a strategic performance indicator, which is NORMA Value Added. With the decrease in EBIT, also the NORMA Value Added is impacted negatively so that it goes to minus EUR 40 million in the first half year 2020. On Page 13, we show the actual information on our Get on track program, costs and benefits and the time line. We accelerated the Get on track program also in the course of the COVID-19 pandemic. We did some activities earlier. We have additional activities so overall, we accelerated this program. We had EUR 21.5 million costs in Q2 and EUR 22 million in H1 related to location projects, led to increased costs in 2020 full year of around EUR 30 million. We mentioned, in the formal presentation, an amount of EUR 10 million so we have accelerated and speed up in this program. First benefits include improvements in purchasing and product portfolio, so that we -- already in 2020, we'll see first benefits out of that program, so that we expect the net impact for the full year 2020. Out of that program, costs minus first benefits of around EUR 25 million. And we see that the positive impact of that program will amount to roughly EUR 50 million, 5-0, EUR 50 million. We see the positive impact starting in 2021, '22 and going up to EUR 50 million in 2023, so that we -- on the long-term perspective, we will see a positive impact per year of around EUR 50 million from that Get on track program, which is shown here as costs and benefits and time line in a net impact. As I mentioned earlier, the current situation driven by the corona pandemic is extremely volatile as an exceptional half year. And so far, the impact of the COVID-19 pandemic from today's perspective cannot be reliably estimated, which leads us to not guiding currently for the full year 2020. Guidance for fiscal year 2020 is due to that conditions, markets, pandemic, not yet possible from today's perspective. Overall, we see a lot of negative impact in H1, but also positive, very positive signals. If you look into our business, once again, water management business in the U.S., automotive business, China, very well prepared from a liquidity perspective. And if you would not have had EUR 22 million of -- or EUR 21.5 million of Get on track costs, our EBITA margin would have been at 5.9%. So that's the current situation, tough situation, but we expect for the second half year a more positive development for the next coming months. Thanks for listening. And of course, we are happy to get your questions and discuss with you.

We've received the first question. It is from Ingo Schachel of Commerzbank.

My first question would be on your free cash flow performance benefited from a very strong net working capital release. And on top of that, you've been able to reduce factoring quite notably in the second quarter on both aspects, net working capital and factoring. Just wanted to get a sense of what you expect for the rest of the year, just a short-term effect relating to lower activity levels and we should expect a complete reversal in the second half? Or do you think some of those effects should be sustainable in the midterm?

Ingo, thanks a lot for the question. It also will have a positive impact midterm. Of course, we will see some impact when we expect. And hopefully, this will come higher sales in the second half year. So with that higher and growing business development, we probably also will see some cash needs. Nevertheless, we expect that over the full year, we will have a strong cash flow development.

Okay. On the factoring volume set on principle going to be at the same level or would you deliberately rather go for lower volumes in the future?

Well, we reduced the factoring. If you look on the couple of last 2, 3 years, coming from EUR 80 million, we reduced it the year before to EUR 70 million, are now going to EUR 50 million -- some level between EUR 50 million and EUR 60 million should be a, more or less, normal level, and we would use it flexibly but we would not increase it significantly. A normal level, EUR 50 million to EUR 60 million, we would assume is a good level.

And on your Get on track program, of course, you've reiterated the cost savings, you've even accelerated the time line. And I think there's currently probably Phase 3, you've got a lot of discussions and noise from some of the unions, especially in Maintal and Gerbershausen. And given that there's -- at this point, at least it looks like there's still a lot of resistance from employee representatives and maybe also slight complication in the process, whether the local workers councils being involved. I mean is there any risk that unions might still be stumbling block on the achievement of those cost savings? Or is there risk that maybe the cost that they are reducing on the Get on track pop up elsewhere by building up headcount in other areas where you have to transfer employees to? Or do you think the cost savings as you've communicated are basically set in stone and the current discussions are not an obstacle?

No, I think -- well, first of all, I think if we, in Germany, reduced headcount, unfortunately, have to reduce headcount. And if we join locations, this, of course, will cause resistance of the works council. So that's their function. And of course, this has to be kept in mind starting such a program, which was done. I think there's a lot of noise currently also regarding the clarification of who is a negotiation partner. So there's a lot of noise but I think that's a more or less normal development. We only want to have clarification, who is negotiation partner for the management of the NORMA Germany. So this is baked in. And so far, of course, it's a difficult project as we expected from the beginning, touching these topics but it's going its way.

The next question is from Andre Finke of HSBC.

I may be take them 1 by 1. The first one is related to the restructuring in terms of the provisions you have built and will build, how much of that will be cash effective this year already? And how much will be cash effective overall?

Yes. We would expect, from the restructuring amount, a cash impact of around EUR 3 million in the course of 2020.

And from the full amount of onetime costs, how much of that will be cash effective over the years?

Well, over time, it all will have a cash impact. It depends on the timing. So if you take EUR 22 million currently and EUR 30 million for the full year, we will have a cash impact of EUR 30 million. Out of that, EUR 3 million will be this year.

Okay. The second question relates to the performance in APAC, which was very strong on the bottom line, I think the highest Q2 margins in APAC on record. So I just wondered, I mean, you talked about government grants that supported that. Just wondered whether there are any other one-offs in there and what kind of sustainability we have also with regard to those grants, given the recovery in revenues in APAC?

Well, the grants that were given is not so significant amount. What we see is that the development in -- especially in China is very well developing, especially already in May and June. And so far, this China business is driving that development in APAC region.

So it means that the margin profitability is mostly sustainable, that's what you're saying?

Yes. This is what we are discussing with the APAC management. The fact that covenants support the margins should develop positively.

Okay. Very good to hear. The next question is on capacity utilization. I think you mentioned the number of 65% to 70% currently. Can you maybe remind us what kind of capacity utilization levels you look at on a sort of a sustainable level? And to what kind of level we went down in the financial crisis?

Well, in the financial crisis, if you shut down and don't produce so it's -- it depends on the single locations. It's partly 0 for the time being but this is an exception. Probably are currently at a level of around 60%, 65%, okay? But we're [indiscernible] increasing business in the second half, we would see a normal level of around 75% -- 70%, 75%, maybe 80% in the one other company.

Okay. And last question on covenants. First of all, just to confirm that the view on covenants, excluding restructuring, it's true for all kind of financial instruments where you have covenants on?

This is exactly true, yes, for the promissory notes. We do not have covenants in the SSA.

I thought there's a comment with regards to interest rates increase at some stage?

Well, if we have, as you pointed out, if we have a leverage of 3.25 and higher, we have an interest rate increase in the promissory notes, but we have a hard leverage in terms of repayment review at 3.75. And in the bank borrowings, we do not have a hard leverage in terms of repayment but a margin step-up of 50 bps.

And that is also excluding restructuring costs, yes? That margin step-up sort of view on that.

Exactly, yes.

Okay. And the second question is also on covenants related to that. I mean when we look at the current leverage, it's based on the last 12 months, and as you said, over the next review date will be in March. So just wondering what kind of periods under consideration we and your lenders will look at, whether there's a way to execute maybe the second quarter or to have a sort of a non-COVID underlying EBITDA, some sort of thought on that will be appreciated.

Yes. Andre, we are currently discussing with our promissory note investors so that the covenants might be canceled or even, let's say, or at least canceled for an interim period. So let's do the covenant testing, for example, end of '21 or mid of '21, but not in March, to have a more normal period. And this is what we are currently discussing with our promissory note investors.

Okay. And there's positive feedback on that so far?

Yes, we already have, let's say, positive feedback for half of them roughly and we are in discussions.

The next question is from [ Bernard Friedman ] of F&I.

No, I'm sorry, I did not have a question.

Okay. Then we'll go to the next line. It is from Kai Mueller of Bank of America.

The first one is really on sort of your market outlook. You obviously mentioned there's some improvement in all areas going into the second half. Can you give us a little bit more detail in terms of what you're seeing from your auto customers as well going into the third quarter? Do you think the summer holidays are as normal? Or have there been shutdowns that have been prolonged or even maybe cut short? If you could give us a bit of color by region. And as a second question, your trucking area, obviously, has been a big part of your business. That's clearly under pressure. They've been now positive signs when we look at the truck manufacturer around the order intake. What do they communicate to you in terms of the volume flow going into the next half and then also into 2021?

Yes. Thanks a lot for the question regarding the market outlook. Automotive business, Q3, taking the LMC figures published 4th of August. And what we overall see after we had a light vehicle organic decline versus last year, 43%. The decline in Q3 will be reduced to 8% and in Q4 to around 2%. So the decline is a lot less sharper than what we saw in Q2. If we split that to a region, we expect for Asia Pacific, which was, in Q2, minus 20% -- minus 21%; in Q3, 8.8%; and in Q4, minus 3.5%. So it's less heavy declining than what we saw in the second quarter. And this is also the case in Europe for light vehicles. Where we had -- in Europe, according to LMC, 60.7% downturn versus last year. This goes to 7%, minus 7% in Q3 versus last year and around last year's level in Q4. So these aspects. Americas is still, let's say, more critical in Q2. We saw that the LMC figures versus last year, market figures was nearly 70%, 7-0, 70% below last year. That goes to minus 7% and around 0 growth rate in Q4. So what we saw in Q2 in the regions and overall was an extreme decline, which we at least had never before. In Q3, Q4, this will not revert but -- from a market perspective but will be significantly reduced. If we look into the Asia Pacific region, what we are seeing currently in China besides these LMC figures is that we have significant advantages from the contracts that we acquired during 2019 and partly in 2018, where we have a couple of new contracts with especially also local customers in new contracts, even in new energy vehicles. So this helps us a lot so that we are performing very well against the market already in the last month. And this is also what we expect for the next month and even years. Truck business, you're absolutely right, a sharp decline as well, especially also in the U.S., minus 60% versus last year. And where we do not expect for the truck business, that this will be reverted quickly. So also for Q3 and Q4, if we take truck business in the U.S., we expect 50% -- 45%, 50% decline versus last year. So this will take longer to be reverted for the truck business, which is more under pressure in the U.S. than what we see for the light vehicles.

And is this -- does that match sort of the communication by your customers when they talk about which capacities you need to have in place? Because obviously, we see IHS, LMC forecasts, but then the companies talk very differently.

Yes. It's a little bit challenging, put it in that way. Of course, also, our customers do not know when that volatility will end. And when the, let's say, increased phase will start again. So of course, they want to have their quantities and our delivering service within -- if they have some doubt, with higher quantities. So the communication, of course, is sensitive. It's not critical but it's sensitive because also our customers are heavily impacted by that high level of uncertainty and volatility. But I would not see critical topics. But of course, they also don't know what is coming. And if they have some doubts, they, of course, keep some higher quantities to be prepared than lower quantities.

The next question is from Philippe Lorrain of Berenberg.

So the first one is on the traffic follow-up on Kai's question. You mentioned something like 40%, 45% that you expect in production volume decline in -- is that in H2?

Yes. If you look at the LMC figures, U.S. for Q3 and Q4, there are still downturns organically versus last year Q3, minus 52%; Q4, minus 46%.

Okay. Great. Do you have like any view on Europe then? Because that's basically the other half of the truck business, if I'm not mistaken?

Yes. Europe in Q2, it was at 67.5% and this will go down in, let's say, lower declining rates in Q3 to 27% and Q4 to 18%.

Okay. Perfect. Then I've got one question on your EBITA margin sensitivity. Could you provide us with some scenarios for, let's say, 15% sales decline, 20% sales decline and perhaps 25% sales decline on a full year basis, especially after you step up the expenses for the Get on track program?

Yes. If for example, we can use the first half year as a sensitivity basis and can also transfer that to the full year. If you look on the first half year, around minus 20% sales down. And if we would exclude the Get on track costs, we are at roughly 6% of EBITA margin. And so far, this sensitivity, minus 20% in terms of sales, around 6% of EBITA margin is a basis that we use.

So if I get that correctly, it hasn't really changed from what you were saying in Q1?

Exactly. This is what we are discussing, I think, since February.

Okay. That's great. And then another point, just like on the new setup regarding the Get on track program. What I see is that you stepped up your costs by about EUR 5 million. But it seems like you're changing slightly your view on the benefits that you're going to generate out of that by EUR 5 million to EUR 10 million. So what's the -- I mean, pretty differently, perhaps what has changed between this version now of the Get on track program and the previous one? Are there any kind of areas where you see further improvement or, let's say, firmer savings possibilities? So yes, that's basically the question here.

Well, if we look into the costs, overall, of course, we had, in the past, EUR 45 million to EUR 50 million. We have increased these costs. If you take that amount, EUR 10 million, EUR 20 million, EUR 55 million that we currently have and the benefits of around EUR 50 million, formerly was EUR 40 million to EUR 45 million. So we see significantly more savings based on these activities, so that we see per year, EUR 50 million. Where does it come from? We have that part of closing one location and joining functions. We have a very important impact in the purchasing area. So that the -- with these main 2 topics, we'll generate these plus EUR 50 million in benefits.

The next question is from Christian Ludwig of Bankhaus Lampe.

Just one question left from my side, just for my understanding. As most of your Get on track provisions this year is not going to be cash effective, is there kind of a risk that if it comes all early next year, that could be a real hit to your covenants because obviously, your net debt would increase significantly? So do you have a timing issue that you need to push out those payments basically in the second half of the year? Or do you believe that's all going to be covered by your discussions with your debtors anyway?

Well, first of all, this will not come all in, let's say, in 2021. We have -- we are planning -- we have -- I have to be cautious in the concrete phrasing. We are planning to have these activities until mid of 2022, so we will have around 2 years to go for these projects in Germany/Czech Republic. So it will be covered over the next 2, 3 years. And so far, we baked it in and I would not see a risk on that cash development then for the next year. Once again, assuming that there is no COVID wave X again, but we see a growing business in the future.

Maybe a slight different question. Could you give us basically similar to what you gave us with the P&L effect, also a cash effect of your onetime cost? Because I would assume if we see the big jump in basically net benefits next year, that also major chunk of the cash would have to be spent because these fees will basically have to be -- have to leave, so you must pay the severance cost.

Well, that's still part of the negotiations, of course. And of course, we put it in our cash flow planning for the next years. But I would not see a huge onetime impact that would then hurt us on the covenant discussion.

The next question is from Nicolai Kempf of Deutsche Bank.

Nicolai Kempf from Deutsche Bank. So my first one would be, again, on the underlying market. You already mentioned the LMC forecast. And I think also the IHS forecast is kind of the same level of minus 11% for Q3. But from Conti, we heard this morning that they are a bit more negative, more like minus 22% or minus 20%. What do you expect? Do you think it's -- you can be more like in the range of IHS, LMC or more like Conti going to minus 20% for Q3?

Well, it's a good question. If we have the assumption, there is no wave 2, I would currently take the LMC figures for the global market development. It depends a little bit which special aspects Conti can see and how there is a portfolio impact. What we take currently is the LMC impact. And based on the LMC impact, we would assume for the next quarters, as mentioned, Q3, LMC shows worldwide, minus 8% for light vehicles and minus 20% for the truck business. This is what we want to take as a market assumption.

Okay. That's clear. And maybe a bit also for the longer term. I mean NORMA has been famous for showing double-digit margins. When do you think you can come back to those levels?

Of course, Nicolai, that's a very good question. Well, we do not have a guidance meanwhile for 2020 because the situation is so volatile and so unsecure. And of course, it's even more difficult to give a clear assumption for the longer future. So that I will -- cannot give a clear figure or year. But we will catch up quickly. We have a good program in place. And we see also already for 2021, once again, assuming there's no second wave, a very good increase versus this year. But we will catch up very quickly and significantly but it's hard to say concrete year and it's even harder to say concrete month.

Yes, yes, sure. I mean understood. That's helpful. And maybe just my last question would be on electric vehicles and new electric vehicle startups, especially in China. Can you give us some indication how much that can contribute maybe this year or next year? Is it rough number, like the low double-digit million number? Or is it less than that?

Well, we see a significant development in that area but it's hard to put it only on electric vehicles. As you may recall, we announced that we have a very nice contract, PS3 quick connector with a huge French customer. And this quick connector, for example, is used for all powertrain applications on that platform. So if it's a battery electric vehicle, if it's a hybrid engine or even a combustion engine, these products partly go -- mostly go in all of these powertrain components. What I can say is that a huge number, meanwhile, of our new contracts, even in China is related to new energy vehicles, even with the mild hybrid or plug-in hybrid or even electric vehicles.

The next question is from Peter Rothenaicher of Baader Bank.

First, let's start. What was the performance in July? Have you already seen here sequential improvement versus June?

Well, we are just closing the month of July. What we see is that the positive development of June is still a little bit more positive in July.

Okay. And you had good reduction in costs for personnel in the second quarter if we strip out the Get on track program. What is your expectation for the third quarter? To what extent are you still proceeding short-term work? And if you compare the personnel costs of the first and the second quarter, what is the expectation then for Q3? Are we somewhere in between here?

Well, it can be a good assumption. The Q2 was an exceptional year in cost relations and overall. So taking an average -- or let's say, some in between of Q1 and Q2 can be an assumption. Of course, if the increase of our business volume in Q3 further, what we would assume from today's perspective, we also will see that we need the one or other additional headcount in the direct labor area. But on the other hand, we have reductions in fixed cost areas, which we will not increase. So there will be a positive impact in Q3. Nevertheless, in the direct area, we probably also will have some higher numbers.

And short-term work, to what extent are you still proceeding it?

Well, short-term work, we have in July and also in August but we probably will reduce it further in September, but we still have short-time work. Currently, we use short-time work of, I think, 50% -- 40% in July and August.

Okay. Then with regards to the margin quality of new projects, is there any change or are you still able to keep your overall, let's say, margin quality of orders?

The margin quality of orders is okay. The order structure did not change. We have a volume impact that we see. I'm -- when I get some new contracts even in the EV area and look on the margin profile, this is quite fine.

Okay. And in this environment, I think some of your competitors have definitely much, much bigger problems. Do you see here already some impact, perhaps in the new project activities of OEMs, do you see here the opportunity or first sign that you are able to gain market share?

Yes, we see that a couple of smaller, partly competitors are having some problems, so we partly see some positive impact for us out of that scenario. But it's hard to predict and hard to quantify it in millions. But overall, NORMA Group's position in the market, although, of course, currently, we have a critical overall situation with NORMA Group's position is, from my point of view, very good. We are very well prepared and have a good position also from a liquidity perspective. So there are chances for us. There also might be chances in terms of M&A views maybe also next year, but we have to see what this will mean. In principle, yes, but hard to quantify.

And in the DS area, is the same trend true what you're talking about EJT that you see also sequential improvement and also a much lower decline in Q3 and Q4?

Yes. It's also the case in the DS business, which was heard by the overall GDP development. As soon as the overall GDP situation will improve, we also expect the same for the DS business. For water, we have it -- we have it already significant DS growth but also for the broad industry business, as DS business, we expect that for the next month with a growing GDP and better overall economic situation, also, that type of business will improve further.

Okay. And then my last question on NDS. You mentioned a really excellent performance. Is this also true for the margin? Has the margin, which you, in the past mentioned, at least on the level of the group at the times where you had 17% margin, is this also at a stable level then?

Yes, our water management business, or NDS business is a great business, growing and very good margin profile. And even in these difficult times, it grew. Imagine that people -- people are quarantined. They sit at home. They can, meanwhile, order significantly via Amazon and e-commerce channels and can do some work in the garden. So the overall situation helps NDS also in that development. So clearly yes, on your question.

We now received a follow-up question of Andre Finke, HSBC.

2 short follow-up questions, the first one is also related on NDS. I think you signed market intelligence and your report seeing sort of growth in 2020 and a stagnation in 2021. I think 1 year ago, that was rather suggesting flat markets already in 2020. So the impact from coal was positive you said. But do you see a risk with regard to 2021 that the water business can fall off a cliff or at least meaningfully lose momentum? That's my first question.

From today's perspective, I would not see that risk because all long-term drivers support our NDS business. Put water at its place, water is a scarce resource. Water has to be handled efficiently. We have the storm water drainage systems. With the number of storms and the size or, let's say, significance of storms, this will further grow. Landscape irrigation systems having growth periods shows the necessity of safe water. Irrigation system of NDS saves around 60%, 6-0, 60% of water consumption versus an old sprinkler solution. So all megatrends are supporting the NDS business. And I would not see, after this situation, 2020, to have that risk in 2021. But of course, it's probably too early to give a concrete idea on the sales development.

Okay. And my second question just relates to investments. And you mentioned that CapEx has been reduced significantly in H1. And maybe you can give some sort of indication for the full year and also beyond with regards to CapEx spending?

Well, CapEx spending in the first half year was monitored very strictly, and we also will follow that strict CapEx monitoring in the second half year until we see that we have and we prove that we have additional volumes and capacities underneath these CapEx. So a strict CapEx monitoring will go on. You know, Andre, that in the past, we had around 5% of our sales in CapEx. Currently, we have a lower range of around 4%. So this is what we will do also in the second half year. And as long as we do not see a significant improvement in 2021, we also will keep that strict monitoring in 2021.

The next question is from Andres Gujan of Carnot Capital Zrich.

I have 2 questions with regard to the cost structure. First, about material costs. Was there a positive mix effect in H1? And how much was the effect from the destocking, the negative effect from destocking?

Well, if we look into the destocking effect, I think we have EUR 1.7 million. If I look into the half year report, minus EUR 1.7 million last year and EUR 8.2 million this year. So this indicates the destocking impact, EUR 1.7 million versus EUR 8.2 million in H1 2020. This characterizes the situation, and material costs are quite stable. There would not be a structural change.

Okay. Now the raw material costs have decreased the first half. Would you expect a slight decrease of the material costs in the second half of the year?

Well, we will have -- we will see some positive impact from our purchasing projects over the next years. From this 41% material cost, as we show on Page 6, I would not expect a percentage of sales to have significant changes coming from this EUR 41 million (sic) [ 41% ].

And maybe a question about personnel cost. What was the P&L effect, the positive P&L effect from the governmental aid in H1?

Governmental aid in H1 was around, I would assume, EUR 3.5 million to EUR 4 million.

Okay. All right. So what would be a reasonable estimate for personnel cost in H2? Is that EUR 145 million or so or will that be higher?

That depends, of course, a little bit on the business development. Of course, fixed cost should be fixed but we also will see based on the variable costs, a development probably if sales are increasing. Although, of course, we have some efficiency impacts. We would assume if business is going up again. Also an impact on personnel costs that we would assume. And of course, direct labor is somehow variable, part of the indirect labor, salary costs are fixed.

There are no further questions at this time. [Operator Instructions] We haven't received any further questions. I would like to hand back to you.

Yes. Thank you very much for your participation and your excellent questions. Once again, of course, NORMA hits in the first half year by the critical market situation. Nevertheless, very well prepared for the next steps, a good liquidity situation. And within long term, a clear growth scenario based on water industry business and even mobility and new energy solutions. This is what we will drive on a long-term perspective. And for that, we are excellently prepared. Thanks a lot, and see and hear you next time and stay healthy.