Andritz AG

VSE:ANDR

Earnings Call Transcript 2018-Q2

[Operator]

Dear ladies and gentlemen, welcome to the Half Year Results 2018 of ANDRITZ AG. At our customer's request, this conference will be recorded. [Operator Instructions] May I now hand you over to Wolfgang Leitner, CEO of ANDRITZ AG, who will lead you through this conference. Go ahead, sir.

[Wolfgang Leitner, executive]

Thank you very much. Good morning, everybody. Welcome to our half year conference call. Overall, however, I think we are satisfied with the results we are showing in Q2 and also for the first half year. And obviously, especially satisfactory has been the order intake in Q2 with over EUR 1.7 billion, very high value. Now we have seen an increase in quarterly results in order intake. And also looking backwards, obviously the last time we exceeded EUR 1.7 billion order intake in a quarter has been 3 years ago.

Sales have developed as expected into the right direction compared to Q1 2018, an increased EBITA result and profitability overall satisfactory. However, 2 big differences between the business areas with especially one business area, meaning Metals, certainly substantially below compared to what we expect.

And during the quarter, obviously as you have certainly followed, we also have made a few acquisitions. I will not comment on the biggest one on Xerium, which currently is under execution. And we expect that to close in the fourth quarter of this year. But to the smaller ones, I'll come back in a few minutes.

If we move on to the presentations on Slide 2. As said, group order intake ran more than EUR 1.7 billion, very favorable, particularly driven by Pulp & Paper. And within Pulp & Paper, the main driving force has been green energy production orders both based on biomass and on sewage sludge but also on the recovery boilers for the pulp industry.

Sales increased to nearly EUR 1.5 billion, so making good the shortfall of the first quarter. EBITA in Q2 increased compared to Q2 2017 if we adjust Q2 2017 for the one-off effect from the sale of the Schuler Technology Center in China plus the sale of the real estate of Schuler in the Waghäusel Germany, in the aggregate EUR 25 million. However, we have not been able to completely compensate the Q1 EBITA shortfall.

If you look at the business areas, Pulp & Paper, excellent profitability; Hydro and Separation, good and stable profitability; and as already mentioned, weak performance of Metals. Obviously, with a big order intake, we also have been able to increase the order backlog.

On Slide 3, other details, order intake on the left side, Q2 year-to-year, plus 43% and first half year, plus 18%. If you look at the business areas on the upper right-hand side, you see that in Q2 but also for H1 across all 4 business areas, we have seen an increase of order intake.

Order intake by region, maybe worth to mention is that China, the share of China has gone up from 15% to 21% and the share of North America, despite President Trump's efforts to invigorate the economic activity, went down from 23% to 15%. Overall, we certainly are satisfied with the split between the developed markets and emerging markets, which basically is half and half, which we think is a very healthy split, avoiding any substantial dependence on any one of the regions.

On Slide 4, sales increase of 6% in Q2 practically compensating the minus 7% from Q1. So overall, we are minus 1%. We see quarter-to-quarter an increase in practically all of the business areas. And for the first half year, a slight decline in Metals. Similar picture on the geographic split with North America still being higher in sales, especially on sales of 20%, and China still at 14%, which obviously will change as the orders are going to be executed in the next 1 to 2 years.

Slide 5, earnings development for the quarter. Year-on-year overall, minus 14%. However, after adjusting for the EUR 25 million one-off in the last year, we are plus 9%. Profitability-wise, excluding the one-off event, from 6.2% last year to 6.4%, including it, 7.9% down to 6.4%.

Slide 6, first half year. And also after adjusting for the one-off event last year, we are still minus 9% compared to last year, basically caused by the low profitability of Metals this year from 6.6% to 6% or 7.5% to 6%.

On Slide 7, once again the business areas. First half year for Hydro, stable development, practically unchanged. Pulp & Paper, excellent development from 8.5% to 9.2%. And clearly, we have been able to finish the -- finally turn over a few larger contracts. And therefore, profitability has been exceptionally high in the first half of this year, both in absolute terms but also in relative terms.

Metals, as already explained, negative development, very low profitability, 2.4% after 5.3% last -- first half last year after already adjusting for the EUR 25 million. And we will come back to that in a little bit more detail. And Separation, stable development. Typically, the second half of the year is substantially higher in sales. And therefore also we feel confident that we can slightly improve profitability of Separation until year-end.

On Slide 8, group order backlog, as I said, increased based on book-to-bill ratio, typical picture with Hydro accounting for about 40% of our backlog.

Slide 9, some more detailed numbers. If I comment briefly on the boxes that you find on the left side, financial result is down from plus EUR 3.5 million last year to minus EUR 10 million. Basically, the difference is evenly split between lower average net liquidity, as you see it further down, and then substantially lower interest rate in Brazil, where we used substantially high cash or liquidity [ dropping, ] being in the range of 500 basis points.

And the third one is interest expense for the bond for the Schuldscheindarlehen that we have issued in June of last year, which obviously for the first half of this year has come on top of the interest payments that we so far have been paying. So all 3 of them typically contributes to the same extent to the decline in the financial result. Then the cash flow from plus EUR 81 million to minus EUR 101 million is about EUR 45 million of that due to the decrease in the earnings and the EBITA and about EUR 210 million as a consequence of changing net working capital.

If we go down to the last bottom box, increase in net working capital from minus EUR 120 million to plus EUR 90 million, so a total of EUR 210 million. About EUR 100 million of that is due to an increase in inventory, and especially work in progress in connection with the contracts that are accounted for with a completed contract method. And about EUR 100 million or slightly more are caused by an increase of POC receivables/decline in POC payables.

So all factors went into the wrong direction, which caused a substantial increase of net working capital, which as we've discussed, I think, last time already, has become a focus of our [indiscernible] of our activities. We have started several projects to manage net working capital in a better and more stringent way. And we hope that in the next 2 to 3 quarters, we can show some improvement there. Also certain elements of that will take longer when payment terms are converting into sales.

Net liquidity is down from EUR 817 million to EUR 569 million, a consequence of lower customer advance payments as well as with some cost outflows, which has been reserved for already in the cost provisions. But obviously, once they become -- or has to be paid, the negative result from the net liquidity. So much for Page 9.

We then move on to the business areas on Slide 10. Hydro still unchanged. So there are projects, tough competition. We see also larger projects, other developments. However, it will take several quarters, not to say years, until a majority of those projects will be actually -- will go forward and will result in actual bookings of electrical and mechanical equipment.

Pumps continue to be -- show good project activity. As we have seen also today, we have announced the order intake in the range of about EUR 120 million for a very large rebuild of a hydropower plant in Tajikistan. It's the biggest hydropower plant in Central Asia. This has not been booked in Q2 but will be most likely be booked in Q3 of this year.

On Slide 11, we see the numbers for Hydro. The order intake was EUR 753 million for the first half of this year, substantially up. Also as you remember, up from a very low level last year. So with EUR 750 million, we are, I would say, at a reasonable level but certainly could also still be higher. Sales are practically unchanged and profitability is also practically unchanged.

Slide 12, Pulp & Paper. Good project activity, as I said, especially in renewable energy, in biomass and sewage sludge and then recovery boilers for pulp mills. Paper market, reasonable activity, also not really dramatically higher. And from a competitive standpoint, stable situation, large projects are definitely very competitive and sought for. But overall, price level, I think, is reasonable.

On Slide 13, the numbers, order intake, EUR 1.18 billion first half of the year, up 5%. Sales, up by 2%, especially with sales from service. And profitability, as I said, due to certain release of cost provisions, an excellent profitability with 9.2%.

Slide 14, Metals. And Metal Forming, good project activity. We are very happy that we've been able to book 3 Asian orders for forming lines or price lines for the automotive industry. For the new automotive industry, we continue to see good development of Yadon in China. And Metals Processing, in principle, low project activity. However, there are certain projects due to this low project activity, obviously very tough market with regards to pricing, where we definitely have to -- if we want to book an order, we definitely have to make compromises with regards to pricing and gross margins related to such projects.

Slide 15, order intake up, substantially up in Q2. And this comes predominantly from Metal Forming. But also Metals Processing was able to increase the order intake. Sales are down by 6%, especially in the Metal Forming sector with Schuler. And EBITDA or EBITA substantially down, main reasons are cost overruns on some projects and also low gross margin already when we book the orders, which are not being turned into sales.

And so all that leads to a decline, which obviously is best shown here if you deduct the EUR 25 million from the comparative figures from last year. But still it's a decline and definitely it's something that we are concentrating on. And we are looking into the need to further increase our capacity utilization to follow the project activity there, which we expect we will continue to gradually reduce capacities in Europe, mainly Germany. We're in the process of analyzing that. We do not -- currently, we have no plan yet. But currently, we do not expect any dramatic restructuring costs.

Our expected -- - best estimates are definitely preliminary, I would say, the cost of such capacity adjustments could be in the teens. And I said earlier, we will -- most likely when we hear from each other for Q3, we definitely will have an understanding of what our plans are for the related costs. But current estimate, in the teens in terms of euros.

Slide 16, Separation. Continuing good project activity in mining minerals. Lithium is active, where we are very active and we have a good position in Chile. Chemicals have become more active. Food, slightly better project activity. Municipal, as I said, sewage sludge is good. And competition is not our main problem, I would say. The market is big enough.

On Slide 17, order intake, substantially up due to a large order for sewage sludge drying, which is part of the Separation and incineration, which is part of Pulp & Paper for Shanghai, which obviously is a very prestigious order, apart from the fact that it adds substantial value to the order intake line. Our sales are slightly up, 5.8%. EBITA and profitability more or less unchanged as sales become further manageable and also increase slightly over the second half of this year.

To conclude, Slide 18, the outlook. In Hydro, as we said, unchanged now with the order intake of EUR 120 million to be most likely to be booked in Q3. And also for Q3, Hydro order intake looks reasonably okay. But clearly, we continue with our capacity adjustments and do not expect a substantial pickup of project activity short term.

Pulp & Paper, good project activity. On the greenfield side, we continue to believe that there will be most likely one project based on press releases and confirmations that have been published by our customers which would be in South America. Other announced projects most likely will not see the final go-ahead with orders in this year. But obviously, there is a pipeline for next year.

Metals. Project activity in Metal Forming continues to be okay, to be good. So we hope to continue with the reasonably good order intake in Metal Forming. And we will adjust capacities as discussed just a minute ago. And Metals Processing, no real change. We also do not see -- I mean, the margin for both part of the Metals business area will stay under pressure for the next several quarters on the Schuler side because of these 3 orders for automotive price lines in Asia, where we are [indiscernible] also optimizing the cost base. But that will only be visible to the full extent once we get the next orders for that. And in Metals Processing, due to the still low level of investment, pricing remains a big challenge. And therefore, the margins there will continue to be under pressure.

Separation, good market activity, the continent will be above last year both in order intake and sales and also in profitability.

So much my summary, and I look forward to your questions.

[Operator]

[Operator Instructions] The first question is from Jack O'Brien, Goldman Sachs.

[Jack O'Brien, analyst]

First question is just on the outlook for 2018. You've mentioned you expect stable sales relative to 2017. Obviously, the first half is flat. But if we look at the order intake, it's up 18%. So do you think there's scope for actually revenues to increase in 2018? That's the first question.

[Wolfgang Leitner, executive]

Yes, I guess we prefer to stay with a stable sales outlook. Some of the orders or many of these orders that we booked in the first half year are sizable. And that means that the first 2 quarters, typically it's 3 quarters basically [ in engineering ] which obviously doesn't add a lot to the sales.

[Jack O'Brien, analyst]

And just thinking about through the rest of the year, you mentioned Hydro order intake through the third quarter looks okay sort of on preliminary level. Any other comments that you could make by division on how you're expecting order intake through the rest of the year and tendering activity and so on?

[Wolfgang Leitner, executive]

Yes. As I said, I think project activity is good, continues to be good. It's always difficult to say what will be our share of projects that are actually placed, orders that are placed. Obviously, we had a very good Q2, which we certainly cannot multiply by 4. And we also had a very good H1, which probably might be a challenge to multiply by 2. But I think having said that, we continue to see a satisfactory order level, project level. And therefore, we are expecting a reasonably good order intake for the second half.

[Jack O'Brien, analyst]

And just one follow-up, if I may, on the Metals division, obviously slightly more challenging there. Can you just give us a bit more color on these cost overruns and how long we should expect these to persist? Obviously, you've mentioned slightly lower margins on some of the new order wins and so on. But if we're thinking about some of the costs you're incurring, can you help us out there, please?

[Wolfgang Leitner, executive]

The main -- the cost overruns have been a main factor for the part of Metals, excluding Schuler. There has been some cost overruns in Schuler also, but the main reason was in the other parts. This project has started up. I mean, the [ plant ] has started up. It's running -- so far, it's running well. So hopefully, we know or we are -- we do not expect any more substantial surprises, any more substantial cost overruns on this one project. It's a combination of surprisingly low sales in certain areas on the Schuler side, which we are confident that partially can be recovered in the second half. But clearly, the orders for this new market at low margins, we have a plan to increase and improve this margin as we execute them. But obviously, we cannot yet account for that in the POC sales that are currently underway. And most likely, to the full extent, will only be visible once we get the next orders in this regard. So I think there is some hope for the second half on the Schuler side. Metals Processing, the other part, I would take into account the highly competitive pricing environment. I would be cautious on expecting too much of an improvement there.

[Jack O'Brien, analyst]

And perhaps just one final question on working capital. Obviously, quite a significant outflow given increasing inventories and service business, and you talked through 1 or 2 things there. Would you expect we could see some reversal in that by year-end?

[Wolfgang Leitner, executive]

Yes, we have become increasingly, let's say, paid increasing attention to that issue, which has, I think, to be honest has been under-managed by ourselves. Certain parts of that if they're managed more closely could show results quite soon. Others will take 1 or 3 years until they are fully realized as these respective orders are being executed. It's not really a change in payment terms. That large -- maybe there's one or another order that has somewhat delayed payments. But clearly, we are not incurring any payment risk from our customers, everything is being fully supported by bank avenues or similar things for Europe. But it's also that combination of several developments, this is POC, receivables have gone up, POC payables have gone down. And also, the completed contracts side, this has gone up. I think we are in the final stages of defining a plan what we want to do in this regard. I would hope that -- I definitely hope that this trend, it will continue. But it's too early to commit to any specific goals. But it certainly has caught our attention and we are working on that.

[Operator]

The next question is from Sven Weier, UBS.

[Sven Weier, analyst]

First one is just quickly following up on the metals comments you made, because I think I remember last time on the call, you said that in the medium term, you would see kind of 100 basis point dilution from what you've just mentioned. So last year, you had 6% margin. Does it mean that, let's say, in the medium term, this difference should go back to 5% or should we assume that with the restructuring that you're also now doing that this could also go beyond this kind of 5% level. That would be the first question.

[Wolfgang Leitner, executive]

If you allow me to ask (sic) [ answer ] in a diplomatic way, it's most probably or most likely based on our current expectation between the 2 numbers that you have mentioned.

[Sven Weier, analyst]

Okay, good. The other thing I was wondering, you also said, it's probably a bit challenging to take first half times 2. But I mean, given that -- I understand you that you think the [ Aralco ] project is going to be awarded still this year. So is that a comment, a challenge that without winning that project but with winning it, it would be easier, obviously?

[Wolfgang Leitner, executive]

As you know, we always need some large orders to fulfill our basic order level. So I would not want to exempt or exclude any specific project from our forecast. But obviously, if we would end up getting 100% of the [ Aralco ] project, which, so far, nothing indicates that, so there's no reason to be more than 50% probability or actually make it less because obviously, it's -- there's also a probability it would be split and then the question I should get, after taking your -- theoretically you would get all of our outcome and obviously, I would be more optimistic on the H1 times 2.

[Sven Weier, analyst]

Okay. But without the -- yes, it's a bit more challenging, okay. And then you also said there are a few projects obviously coming in the next couple of quarters. So would you say that's then more loaded to the first half of next year, those decision makings? And how many projects do you think we'd talk in total on the greenfield side?

[Wolfgang Leitner, executive]

I would not see them -- I mean, it must be -- because I don't want to communicate my personal subjective assessment of client announcements or customer announcements. So that would be inappropriate. So I would see them split over the full year and I would not -- I'm not saying that we are very close that more project would go ahead. If not this year, then in the first quarter of next year. And I would not say that now. I think it's evenly split, over next year.

[Sven Weier, analyst]

And maybe as a follow-up, I mean, on the more base kind of business, refurbishment business on the pulp side, are you also seeing that maybe clients are delaying this at the moment? Because they are so busy and highly utilized that they just can't afford any downtimes? So does it mean that there's still a bit of a tailwind once that situation normalizes? Or what's your perception?

[Wolfgang Leitner, executive]

No, I don't think that's the case. I think the other way around. Obviously, we have an excellent situation on the pulp side with our -- for the next 2 years, no new capacity coming on stream. On short-fiber with the [indiscernible] we are, [ virtue ] of our takeover, we have now with 11 to 12 million tonnes, by far we're beating market leader, which -- and together with the APP Group with 7 million tonnes, these 2 are really having a very strong quotation. And so I wouldn't say the expectation that the pulp price stays at reasonable level, not that high today but at attractive levels is very high. It's driven to a large extent also by the limitations of white paper imports into China. So the Chinese paper producers are very anxious about securing their raw material base, we see a buoyed market is dissolving pulp replacing cotton. So all that clearly is, I think, is a very good background for projects for the pulp industry.

[Sven Weier, analyst]

Maybe to put my question slightly differently because what they really meant is that couldn't be your order intake even higher but some clients are so highly utilized at the moment that they couldn't do any -- no brownfields, let's say.

[Wolfgang Leitner, executive]

Yes, brown -- yes, but it's our -- even also large brownfield is -- takes 1 to 2 years. Yes, obviously, they currently are producing as much as they can. So could that have an impact -- any negative impact for us? Yes, but we rather see -- it may in the end then delay the final decision but currently, we see many projects that are under development, under analysis, what could be done in expanding, in adding a second line or similar things. So the current project activity certainly is not limited by lack of attention or lack of time to develop this project. Again, it maybe, but on the other hand, if the prices continue to be higher, the earlier you have the capacity running. And we usually -- the related shutdown -- even the second line, the shutdown of the first line if at all it's very short and also, I mean, we have been doing very large refurbishments in Northern Europe and the shutdowns have been very, very short because everything is being done to keep that as short as possible.

[Sven Weier, analyst]

I mean, are you seeing yourself gaining a lot of market share because if I compare your results to Valmet, they have both been quite weak in pulp for some time, so you have been doing quite a bit better than them for a couple of quarters now. So is that also your observation that you get a higher share of wallet?

[Wolfgang Leitner, executive]

No, I don't think so.

[Sven Weier, analyst]

Okay. The last question from my side, more of a housekeeping because you mentioned some provisional releases in pulp, on the other hand, we had some cost overruns in Metals. But is it fair to assume that both were kind of a wash and doesn't really have an impact net-net?

[Wolfgang Leitner, executive]

Yes, they are.

[Operator]

The next question is from Andre Finke, HSBC.

[Joerg-Andre Finke, analyst]

I don't know if they've been answers already. Maybe 2 follow-ups on pulp. You mentioned the wastepaper ban in China has been supported for pulp prices but you did also see domestic pulp production in China being -- becoming more of a topic on the back of that paper ban? And maybe likewise for Russia, I think you indicated the last call there's more political support for pulp production in Russia again.

[Wolfgang Leitner, executive]

I mean, Russia is -- there's always been political support to create more value added in Russia and not export -- rather than exporting wood, export pulp or export paper. So that has always been the case, whether one or the other project goes ahead, remains to be seen. In China, I don't think there will be more pulp projects. I think there will be -- maybe more investment on recon processing wastepaper in -- outside China in the adjacent countries. And import is then as pulp's market -- recycling pulp into China. There may be, as we've seen from the acquisition of [indiscernible] performance [ pulse ] of APP Group, for better performance and excellence which is part of the APP Group in Brazil. So I think this type of investments will see. There's also been an announcement that the APP group has acquired pulp company in Brazil with the goal to build a second line or new line there. [indiscernible] has announced plans to do something there. So I think we will rather see a continuation of new pulp capacities, conventional pulp but also dissolving pulp in Brazil where there is still plenty of land available and also there has been under development plantations. So I think that supports the trend that we will continue to see this project in Brazil, gradually maybe in other countries in South America, but I would not expect -- it's complicated to be expected [ events ] in China. It's better to produce pulp where the wood is growing rather than shipping wood chips, which would be the [ feasible track ] we'd seen if you would want to produce pulp in China.

[Joerg-Andre Finke, analyst]

Okay. And the second question also relates to China. You mentioned last time that -- or you received the order in Q3 I think on the pumped storage power plant, the reentry into the Chinese market, you sounded quite confident to see more orders in 2018, 2019 at the Q1 call. So is that still the case? Do you expect more activity in China in Hydro?

[Wolfgang Leitner, executive]

I will slightly rephrase it. We hope to book something in China for the rest of the year, but we wouldn't be too positive to say we expect it.

[Joerg-Andre Finke, analyst]

Okay, very clear. And last question from my side. M&A, you said, I think in this call that you would like to comment on a few [indiscernible] maybe on the pipeline as well?

[Wolfgang Leitner, executive]

Yes, Xerium I think we have covered, it's a very good fit into our Pulp & Paper aftermarket businesses, it's high-tech product, it's consumable, so I think it has all the ingredients of fitting strategically to us. Obviously, the price, as I would say, has been the full price. The other acquisition we have announced is Diatec that maybe sounds a little bit surprising to you. Their manufacturing machines, equipment to produce diapers, both baby diapers but also adult hygiene products. And it's a natural extension of what we are doing within Pulp & Paper already. Approximately EUR 200 million of sales -- of our sales in Pulp & Paper going to machines to produce nonwoven fabrics. And substantial part of this nonwoven fabrics goes into diaper production. So to be able to control or to basically from understanding the technology not only is nonwoven production but also following diaper production, we hope that we can provide additional value to this industry. We have acquired a small manufacturer in this industry with about EUR 40 million, EUR 50 million sales. But we think it has a good potential and we hope to be able to develop it from there over the next several years. We acquired 70% management of Xerium, [ and the ] shareholder we have a 30%, obviously we have put cost in place. But we think that this is a very good addition to our Pulp & Paper business. The third one is a very small one, obviously, Diatec is [ dry ] technology for tissues, we'll go back to discussing details. On the pipeline, obviously, with Xerium acquisition we were not particularly eager from a balance sheet standpoint to make another big acquisition very short term. So we concentrate definitely next several quarters on continuing to support Xerium to integrate them cautiously. There is very, very little overlap. But clearly, it's been integrated into our Pulp & Paper organization. It adds many locations, there's 20 manufacturing locations, which produce [ for the ] equipment, but also serves as service locations, which hopefully creates some leverage with our existing paper business. So should you expect another acquisition of this size in the next few quarters? I would say the chances are very low.

[Operator]

The next question is from Graham Phillips, Jefferies.

[Graham Phillips, analyst]

A couple of questions, please. First of all, just on Paper & Pulp. Can you talk a little bit about how much of the business you are focusing more around biomass and energy and sewage sludge collection and so on? Because clearly that part of the market has got some very interesting dynamics around flue gas sulfurization (sic) [desulfurization] and so forth. Can you give us a flavor how much the sales split or your order split between those 2 areas as opposed to Paper & Pulp is? And what the growth rates look like between the 2?

[Wolfgang Leitner, executive]

Yes. I mean, on the energy side, which also includes the recovery boilers for pulp business, so that's core of the pulp mill, but they can -- all the complete energy side is probably about 1/3 of our order intake in the first half of this year, it was -- it would fall into this energy category.

[Graham Phillips, analyst]

And have you specifically made a target to move more into energy as a complement to this business? Because clearly I can see the synergies there, I mean, it's on the Paper & Pulp but clearly, it's moving into a totally different market.

[Wolfgang Leitner, executive]

No, technically, it's very similar. I think it's more driven by a very active market. For example, in the biomass side, Japan has -- we've been very successful in Japan after having booked the first order probably 1 or 2 years ago. And now we've booked one of the order -- I think the orders, I think it's more driven by being successful and being able to, yes, increase our market share in the biomass side. And the sewage sludge Shanghai project is I wouldn't say a one-off but obviously, we are happy to receive this again, this large sewage plant. So definitely, we are not -- neither are we moving away from core Pulp & Paper into energy nor do we want to be specifically focused more -- and attention, whatever, around is [ very next ] projects, and in the pulp project I think we go after each of [indiscernible] projects that are accessible to us from fact, figures standpoint, from [indiscernible] standpoint. And I would also not expect this year to continue at this level, I think maybe probably some the -- currently some of the-- although the projects activity while it continues to be good so I would not -- I don't want to be negative on energy. But I think clearly, it's been -- first half of this year has been very active on the energy side.

[Graham Phillips, analyst]

Are the margins in this area any different to the remaining 2/3 of the business in Paper & Pulp?

[Wolfgang Leitner, executive]

No, if you are -- I mean, these are capital orders so obviously, the service part is especially higher-margin but comparing to the other capital, deviation is the same.

[Graham Phillips, analyst]

And then my second question was around Xerium, I know you said you didn't want to comment much more about it but can you talk about how the business will be financed, how you're going to pay for it? And when we look at your net cash position, clearly some of this position relates to customer prepayments. What is your debt borrowing capacity? What will the sort of expectation for interest rates be once we assume the full cost if this goes into your balance sheet?

[Wolfgang Leitner, executive]

Yes, we're going to pay cash. Cash purchase price is about EUR 200 million or $240 million, I guess. We're also going to look at the balance sheet and optimize that. So clearly, our net cash position will go down. We have no substantial restrictions with regard to customer down payment because obviously, we have -- on other side, we have -- on the asset side, we have [ Q3 ] receivables and we also to certain extent -- so there is no concern. I'm not sure I understand either your concern or your question. And last year we have issued the bond [ or this would change ] the other end, which you are familiar with at 1.55%, 1.6%. So currently, we continue to see good interest rates being available. We would certainly plan to -- or if you want to raise additional money on the fixed interest. So it's -- and I think we would still be in this range. So if there are more decrease, it would be needed we are confident we could pay that at very competitive, still very competitive interest rates.

[Graham Phillips, analyst]

Right. Okay. So you're paying EUR 200 million, you're absorbing a lot of their debt to make up that EV figured that we were given. So there obviously -- you already got borrowings out there, and I guess my question is how do those interest rates as well compare to what you may be paying, is there's some scope for refinancing?

[Wolfgang Leitner, executive]

Yes, definitely yes. Yes.

[Graham Phillips, analyst]

Okay, and another question was around the Hydro business. When we think of the 8.5% to 9% margin corridor? Can we get to there with the current size of the business? Clearly, it's been shrinking over a number of years, or do we have to think that, that is very, very much a long-term number and we're not going to get there for a long time without another major round of restructuring? Because the employee level numbers are actually basically flat in this business.

[Wolfgang Leitner, executive]

Yes, they are, but they are [ -- almost ] are influenced a lot by [indiscernible] people higher up versus specific construction sites. So that is an indication that we are not reducing our, let's say, [ considering all the execution ] people. So we are -- we definitely, I think, reduced that and continue to reduce that. I would not discount yet the earnings target because what we see is that we definitely meet -- besides having, to a large extent adjusted, and I think we are in the final stages of this adjustment and will be done next year, our capacity to [ add ], we also see substantial potential to improve our order execution. We still have too many deviations. Now we have deviations both in the negative and on the positive side, which on the net effect is okay. But if you look at it from the level of our cost accurate -- our cost estimations, how accurate is our over execution, that's clearly not sufficient and we are starting substantial reorganizations. We also have made one of the other management change there, and we will continue to do that. So there is substantial. If we succeed in maintaining positive our positive deviations but reducing our negative deviations, without being unrealistic we will always see these deviations in large projects. But if we can reduce it to, what I would call, an acceptable level, then the margins that we have [indiscernible] our goals still will be feasible. It is a challenge but I bet that this will be achieved by the end of this year. But I think if all the measures are in place, hopefully, we can see an improvement of the current margin level.

[Graham Phillips, analyst]

And just finally, you were very helpful in talking about why working capital and net cash was lower-than-expected. There is 2 other items really from the first and the second quarter. I can see the provision reversal on the cash flow statement, minus EUR 33 million in the first quarter, minus EUR 25 million in the second quarter. So almost another 60 million there. What is that exactly? And in which division is this coming through? And is this where you're actually physically paying cash for restructuring, removing people? Because obviously, it's a reduction in the profit.

[Wolfgang Leitner, executive]

No, it's basically, it's project water related.

[Graham Phillips, analyst]

So it is what -- it's projects where you had to -- you had to pay something out in the final completion of some projects where you have underestimated the [indiscernible].

[Wolfgang Leitner, executive]

As always, we had to payout something that has been provided during the earlier quarter or where we have released provisions -- we have weighted earlier quarters that which would have been booked as our -- upon the liability side. So that reduced our working capital. And has been reversed and goes into profit. Obviously, the net working capital will increase because the liability side would decline.

[Graham Phillips, analyst]

Yes, I'm not talking about -- yes, the numbers coming through the working capital line, I can see. But these are new numbers in the top bit of the cash flow statement, and what's the guidance for the remainder of the year in that number? Because that still has been quite sizable in the first and second quarter.

[Wolfgang Leitner, executive]

I don't think it will disappear, but I think Mark will probably get back later on that on the guidance.

[Mark von Laer, executive]

I will get back to you soon.

[Operator]

As there are no further questions, I would like to hand back to you, Mr. Leitner.

[Wolfgang Leitner, executive]

Thank you very much. And we look forward to our next appointment in 3 months approximately.

[Mark von Laer, executive]

Thank you.

[Wolfgang Leitner, executive]

Thank you.

[Operator]

Ladies and gentlemen, thank you for your attendance. This conference has been concluded. You may disconnect.