Andritz AG

VSE:ANDR

Earnings Call Transcript 2022-Q3

[Michael Buchbauer, Head of Corporate Communications]

Good morning to everybody. I would like to welcome you to the Andritz Conference Call on our Q3 2022 results. I hope you all are well and safe.

Before we start the presentation conducted by our CEO, Mr. Schonbeck; and our CFO, Mr. Nettesheim, I would like to give you some brief rules and procedures for this call to make the best out of it. Please switch off your microphone and turn off your camera. I think this would be very good. After the presentation, we will have a Q&A session. [Operator Instructions] And finally, this meeting will be recorded. The recording will be available afterwards on our website and also the presentation material is available on our website.

So much about the basics and I would like to hand over now to our CEO, Joachim Schonbeck,

who will guide you through the presentation. Joachim, the floor is yours.

[Joachim Schonbeck, CEO]

Thank you, Michael, for the kind introduction. Good morning to everybody in the call.

I think few comments before we start going into all the numbers. I think we had another quarter full of events. Unfortunately, the war in Russia did not stop and further disruptions in the supply chain globally, also our supply chain.

We have seen inflation rates apparently are not well under control, so surging further and I would say, energy commodity prices have rather declined, then further increased. But the uncertainty on the outlook definitely is a bit of a question to us, of course, but I think much more to our customers who are going to invest.

I would say these challenges have been definitely hit us in our business and is reflected in the numbers that we present to you. Overall, despite these challenges, I think we can [technical difficulty] the outlook also and that's good.

So despite these challenges, we look very good. The order intake, backlog, sales, and EBITA increased favorably for Andritz and basically across all business areas, which is really good. There was the euro weakness, definitely gave us a bit of a tailwind and that's around 3% to 5%, depends a bit on the currency basket of each of these businesses.

Furthermore, we had a - were successful in three important acquisitions for Andritz in the third quarter to strengthen our portfolio with respect to the green products to provide more sustainable products and solutions, which help our customers to meet their challenges ahead. We acquired a small service company in Finland, who was doing services for the flue glass cleaning systems.

We acquired that is definitely was very important for us, Italian company called Sovema, which together with Schuler now at least we have the target to become a leading supplier for battery cell manufacturing lines for the automotive industry and for other sectors. There is a huge demand and we believe that, in this combination, we will have a very good value proposition to these customers.

Just few days ago, we could close the acquisition of pressure part manufacturer in Croatia. It's one of the leading European manufacturer of customized pressure parts and for the development of our sector for renewable energies, they have a strong record in providing boiler parts and complete boilers for biomass boilers and for waste to energy applications. So we believe through that we definitely could strengthen our portfolio into areas where we can expect more growth in the time to come then in other areas.

So to summarize, we were quite pleased with the development in Q3 and we expect for the remaining months also a further on solid project activity. So if we go to the detail, who has -

Mike, do you have control on the screen?

[Michael Buchbauer, Head of Corporate Communications]

Yes.

[Joachim Schonbeck, CEO]

Very good. So we had a very high order intake of EUR2.7 billion. That's the fourth quarter in a row with an order intake above EUR2 billion, which is really good. On a quarter-to-quarter view, the Pulp and Paper doubled the order intake. Metals was strongly up, mainly driven by Schuler and Hydro as well as Separation have also solid increase quarter-on-quarter. That all cumulated to a record high order backlog of almost EUR11 billion, which is 30% up compared to end of last year.

Also the revenue grew by 24% to EUR1.9 billion. And also, here all four business areas did participate. The EBITA rose strongly. The margin was constant at 8.1%. Here, we had all four business areas contributed to that. Profitability in Pulp and Paper was a bit dropping because of the product mix, which came to sales. In Hydro, we could solidly increase the margin level. And Metals, here mainly driven [technical difficulty] by Schuler continues the positive margin trend. And also Separation developed [technical difficulty]

Can we go to the next slide, please? So here you could see a closer view on the order intake. Pulp and Paper, up from EUR600 million to EUR1.5 billion in the quarter three, and if we compare Q1 to Q3, we have an increase of about a bit more than 50%. Metals is nicely up. Hydro is growing and we believe that this is a trend reversal as you know that the Hydro market was pretty much going down over the last couple of years, rebounded end of last year, and we see with a strong position of hydropower in the renewable sector that this will continue because hydropower is a necessary part of this energy changes that need to be done.

In Separation, we were solidly up more than 20% in the quarter and also Q1 to Q3. So overall, it's a good development. Quite well balanced between Europe, North America, and emerging markets was around 50%. So we are not hedged against regional crisis, but we are at least balanced in that respect.

We go to the next. Basically the same applies for the revenue. We had an increase in each quarter against the previous year. We see an increase in the revenue by business area. And that's definitely the result of the strong order backlog. The revenue split between capital and service turned a bit towards the capital side. It's now 60-40. That's of course because of the large orders, that's capital business and is now starting to be reflected in the revenue as well.

To the next slide, here you see the split of the service business by business area. You've seen upward trend over the - average over the last four quarters for Pulp and Paper, which shows that not only capital, but service is nicely growing.

You see in Metals, we are still at a rather low level of 25% to 26%, increasing that is one of the key initiatives we have to consolidate in the Metals business area and also sustainably reach better margin levels.

On Hydro, we remain stable, while in Separation, service business is continuously improving and that is a very, very nice trend contributing to the good overall economic development of this business area.

We go to the next slide. You see the huge increase in order backlog, that's very natural. The orders come in one time and now we have to work it down. Are the EUR10.8 billion too much for Andritz? I can tell you, they are not. We can handle it. All projects are well staffed with good execution teams.

We are quite happy that looking to the uncertainties of the year '23, that we at least have a backlog that gives us a solid work to overcome any kind of light recession that might be ahead of us. And of course, the majority of the backlog is from Pulp and Paper and Hydro.

So the EBITA, you see the EBITA increased from EUR365 million to EUR426 million from '21 to '22 in the first three quarters. It's an increase of 17%. The margin increased slightly to 8.2%. You see that for completeness, we show to you the adjusted figures which are only slightly different. So no major one-offs in these numbers.

When we look to each of the business areas, you could see that we have - there is a slight drop in margin in Pulp and Paper, even though the absolute EBITA increase, that is because of the product mix of more larger orders which definitely have become under pressure from the cost explosion we saw coming with the war.

In Metals, we have a nice development, that's mainly driven by Schuler where the turnaround is really now done and we can see a very good development and we might expect further. Hydro is nicely growing with volume and in Separation, we remain stable at a very high EBITDA margin level.

Go to the next one and I ask Norbert to introduce the income bridge for us.

[Norbert Nettesheim, CFO]

Yes. Good morning also from my side and it's a good practice already from the last meetings, I've taken all this Group financial part, the next four slides.

When you compare it with the last meeting, we had the picture, this is same. The numbers are slightly different. So no surprises, very stable development. Depreciation with EUR131 million, a little bit up including an extraordinary depreciation of an asset, which we are not using anymore in the range of EUR6 million. So that's the only special thing to mention here in this picture. Amortization comes from Xerium and Schuler, as you are aware of the pharma acquisitions from the past years. The decline in the next year is because most of the things are written-off already.

Financial results was EUR20.6 million. Two effects included. One is the favorable development on the real interest side with the rising interest rates in Brazil and other countries, we could improve our interest income. On the other hand, we had to devaluate some fixed interest financial assets, but this is only a temporary effect as you understand, so currently this show a minus EUR20 million, including EUR8 million to EUR10 million one-time effects from the valuation, which come back when the investments will be paid back.

So overall, also here a good development on the interest side and taxes, you know we - quarterly we calculate with our expected average tax rate 26.5%, which we also see this year for the total year. Overall, now 5% net income which is exactly on the level which we communicated last year in the Capital Market Day as our target to achieve in short to mid-term.

All right. That's about the net income bridge. Going now to the cash flow, starting with EUR262 million net income, adjusting all the non-cash effects, coming to robust cash flow of EUR486 million. Also pretty stable development as you saw in the last quarter's last year's. Then from net working capital, in the first nine months, a tailwind of EUR93 million cash from working capital.

For those of you who have the numbers from the last meeting on the table, you see that we have here a slight decline in the first half year, a better number. But this is the usual fluctuation, which you know from our business with huge down payments shortly after orders received and then we enter into the execution phase.

And then over the next, let's say, two or three quarters, this is, let's say, a positive effect in the other execution cash-wise will be then used for execution. We are now in these big capital projects, which we received earlier this year, especially in Hydro and in Pulp. We are now starting the execution with ordering of material, et cetera, also these down payments to suppliers.

So that's a normal effect that we then also use part of this cash. So it's - but still overall it's a benefit of EUR93 million for the first nine months in the cash flow. This is the other pretty normal effect on the interest side, dividends, et cetera to EUR442 million cash flow from operating activities. Then we used EUR120 million of that for CapEx, leads to a free cash flow was EUR322 million. Pretty normal picture overall I would say.

Coming then to the next slide, which shows net liquidity, constantly growing. We are at end of quarter three at EUR882 million net liquidity, sitting on nearly EUR2 billion available gross liquidity. So we are still the same picture as the last periods, which is, let's say, gives us a good basis for all kind of flexibility, which we need on the financial side. Shortly - quickly to mention, nearly EUR80 million paybacks of loans included in this number. So we are also working on shortening the balance sheet by constantly bringing back our external debt by using funds for this position.

So that's it more or less on the financials. And then you see the summary slide, which is more or less [technical difficulty] okay. You see here now the summary of all the numbers, most of them mentioned by Joachim. What I find out is simply of big positive numbers, so we brought the business credit to a higher level now in '22 compared to '23. Maybe the only a negative thing I'd point it out here, this cash flow from operating activities in the third quarter.

I have explained already execution of orders and the CapEx which is a little bit higher than in last year. This is simply because we are now back to the normal investing level, have started after corona is over now some growth investments in several areas. So this - and then you can see here in the increase in CapEx, but on the other hand, it's also a good thing that we can come back now to the CapEx initiatives.

So that's it from my side, quickly through the numbers. Turn back to Joachim.

[Joachim Schonbeck, CEO]

Thank you, Norbert, for the explanation.

Let's have a quick look on the business areas. Pulp and Paper nicely up in order intake. We could secure another large pulp mill from a customer who is relying completely on Andritz technology. I think that's confirmed our good and reliable position and for the pulp industry to provide higher performing plants.

The backlog is very solid and the revenue is going to be - is growing and it will be on a high level, also in the year to come. As mentioned before, we have strengthened this business area with two acquisitions Parpala and with Duro Dakovic.

So we believe that we can even more participate on the trend on renewable energy than we did before, of course, without neglecting our main activity, which is in Pulp and Paper. It might be worth to mention that not only the Pulp, but also the Paper business contributed significantly to the very nice development in order intake.

If we go to the next one to Metals, also here order intake sales backlog and EBITA are increasing compared to last year. You see we have a bit different split on the regional side. We have a two-third about in Europe and North America. That's definitely driven by the - strongly by the automotive or by the automotive industry. The positive development is mainly driven by Schuler.

However, we believe that in the Metals Processing area, we have reached the bottom and have now all our challenging orders under control that we can - that we do not see any further downturn from these business activities in the future. The order intake we had and the increase is definitely coming from a strong investment activity in the - of automotive industry towards electromobility and that is true for the automotive itself, but as well as for the supplier industry like battery lines.

If we go to the next one, the Hydro. As I said before, we see the very good development we see in the financials. We see this as a result of a change in the market trend. Also here order intake, sales, EBITDA, backlog are nicely up. We have a good and solid order backlog to enter into next year and we have continuing solid project work ahead of us.

So we believe that the importance of Hydro to make the change into new renewable energy is understood and we can see a favorable development in the future. You see here, we have a balanced regional split of revenue. We have a bit higher percentage from Europe, North America in the order intake and that is due to a large order we received from Mexico beginning of this year.

And if we move to Separation, you see also here our key figures are nicely up. It's true for order intake, backlog, revenue, and EBITA. And I think this is triggered both equally by the solid liquid separation division where environmental selection thing is becoming more and more important as legislation forces these sludges to be treated instead of being dumped or deposited. We are very well prepared for that.

But also feed and biofuels sector, especially biofuel is a very hot commodity at the moment and investments is going on as the change from gas to more sustainable fuels, basically at least in Europe and all areas hit now by the high gas prices is definitely on the table.

So if we go, have a shot at outlook, so we can report that we have still a very solid project activity in our industries. We of course are bit cautious as we don't know what the inflation, high interest rates really do to our customers when it comes to investment decisions. But apparently demand is there and project activity is high.

The geo-economical challenges which we know, first and foremost, the Russian war and the implying sanctions, supply chain disruptions and inflation, we monitor closely and we prepare ourselves for new challenges to come up as we understood over the past three years that there is always something new even if we believe there is nothing more to come. We can confirm happily the guidance for this year. So, Group revenue will be up compared to last year. EBITA will be up from last year and also the net income will increase.

So that's about what I have to say. And if there is anything you'd like to ask, I'm happy to answer.

[Michael Buchbauer, Head of Corporate Communications]

Thank you very much for the presentation. We'll now move over to the Q&A session and I would like to start then with Sven Weier with UBS. Sven, unmute your microphone and go ahead with your question.

[Sven Weier, UBS]

Yes, good morning from my side and thanks, Michael, for taking my questions. The first one is actually on the Pulp and Paper business. Was just wondering the EUR1 billion year-on-year increase, if that was driven by a single project because I think you said the Paracel one is only booked in 2023? So that's the first one.

[Joachim Schonbeck, CEO]

Yes. There is - as I said, there was a new pulp in which was not Paracel of course, there is - there are also other smaller projects and none of that size, but in other large Pulp industry, yes.

[Sven Weier, UBS]

Okay. And regionally, is that - where was that? Was that South America or...?

[Joachim Schonbeck, CEO]

This was Asia.

[Sven Weier, UBS]

Okay. And then if I may on Paracel. I mean you announced the order, but you haven't booked it yet obviously, so is it really only the debt financing of the mill that is missing, because I thought the equity is there so that's completed? So is it really only the debt financing that was missing for you to get the firm order then or any other restrictions still?

[Joachim Schonbeck, CEO]

That's what we are told. We are active in supporting the customer in the talks with the banks and DCAs. That is going on. We do not have a full view, but from everything we hear from different sources, everybody is very positive about that. So - but I would say, your colleagues in the banks know probably much more than I do.

[Sven Weier, UBS]

Yes, that's probably right. So let's see. But your timing-wise, you would see that to come in the first half or is that the base case at the moment?

[Joachim Schonbeck, CEO]

I would say realistic would be mid of next year. But as I said, I think you really - the banks know much more than we do.

[Sven Weier, UBS]

Okay. And I mean, have you seen that this pulp mill going ahead has triggered more activity also on the other Greenfields in the region to go ahead?

[Joachim Schonbeck, CEO]

What we see is that there are several players active in South America. South America is extremely attractive for the pulp producers with Russia basically being kicked out of the market. And Russia was a major - maybe the major supplier of fibers or at least of wood to Europe.

So we see a lot of activity and we also see a lot of planting activities by our customers preparing for probably more capacity to edge. What we hear from the commodity markets, but also from our customers is that also biomass market is becoming tighter and tighter. So we believe that these activities are also focusing on that.

[Sven Weier, UBS]

Okay, thank you. The other question I had on the other divisions and in particular in Hydro, right. I mean, if you print another order intake like that in Q4, you will be almost back to the record highs you had quite some number of years ago, but you sounded like, on the back of climate change, the general structural activity is starting to pick up. So to me, it doesn't sound like this year is a bit of an exception. And then we go all the way back, but it sounded like we could continue on a high level also in the coming years. Is it the right perception from my side?

[Joachim Schonbeck, CEO]

I think we see - we can see a much better market than we saw in the last three to five years, that's for sure. We don't believe that we will now climb from record to record from quarter to quarter. As you know that, we also have other strong competitors in that market, but we see and we understand that there is the need and it is by the decision maker that's understood that hydro needs to be increased in order to meet the challenges that we have.

[Sven Weier, UBS]

And do you also see more activity now in the US because hydro is also subsidized by the inflation reduction actives that are helpful and also for activity in the US or doesn't that not really make a difference?

[Joachim Schonbeck, CEO]

North America is very active. Yes.

[Sven Weier, UBS]

Okay, thank you. And the last question from my side, if I may, is on the financials. I think Mr. Nettesheim mentioned the EUR6 million extra write-down, I was just wondering was that in Q3 or was that in the first nine months?

[Michael Buchbauer, Head of Corporate Communications]

You have to unmute.

[Joachim Schonbeck, CEO]

You are muted Norbert.

[Norbert Nettesheim, CFO]

Sorry. It was in Q3 and it's a normal housekeeping activity.

[Sven Weier, UBS]

Okay, thank you all. That's it from my side.

[Michael Buchbauer, Head of Corporate Communications]

Many thanks, Sven. Thank you. Let's move on then to Ingo from BNP. Ingo, go ahead with your question.

[Ingo Schachel, BNP]

Yes. Thanks for taking my question. The first one would be on your market outlook. I think you've done a very small change to your wording. In Q2, you spoke about a solid activity and order pipeline and now is it solid in the next months? Just wondering why you've decided to edit to this caveat that it's a few months, you've talked about uncertainty. But I think uncertainty was even higher at the time of Q2 results. So curious to hear why you saw the need to add that wording now. Is it that it's because of, for example, on the Pulp side you've already converted more of the pipeline with a big Asia contract and Paracel and now you are less confident in the second half for next year or any other reason?

[Joachim Schonbeck, CEO]

The main reason is that we saw the challenges three months ago, but we do not see that solutions are adequately provided. So the uncertainty did not decrease and a lot of that is out of our hands. It's in the environment. It's the way the Central Banks handling interests. It's the way how energy prices are countermeasures by the governments.

So we don't see a very easy corridor of relief. So having that for an extended period now for more than half a year, we're getting a bit more cautious. As we know, we are depending of future investments by our customers and we know that if uncertainty comes into play, these investments will be held back. That's the reason, but we don't believe in doom day next quarter.

[Ingo Schachel, BNP]

Okay, very clear. And maybe one question on an aspect that is more under your control, the Metals Processing related challenges. Can you clarify whether your Metals Processing margin was negative in the third quarter and also whether, let's say, the incremental deterioration of margins in Q3 compared to Q2, is this more a function of energy and quality price inflation or whether the execution of those projects has also been more challenging than you had expected?

[Joachim Schonbeck, CEO]

We had a few challenging projects in our backlog, which hit last quarter. That was the impact and we believe with the measures we have taken over the past nine months basically of this year that we have the situation under control, that we see - that we can see a much more stable future for the Metal Processing area.

[Ingo Schachel, BNP]

So any relative indication you can give us for margins in the quarter for Metal Forming versus Metal Processing?

[Joachim Schonbeck, CEO]

I would not do that now.

[Ingo Schachel, BNP]

Okay, thanks. Maybe just a quick one on the very strong nine month cash flow and the M&A pipeline. You've obviously done a few small and medium-sized deals for the next quarters. Do you also see an improving pipeline of M&A targets in light of the changed capital market conditions?

[Joachim Schonbeck, CEO]

You will be among the first to hear about that if we have anything to report. And as I said, we are constantly looking. We believe that we have a good portfolio on the sustainable products and solutions, but we definitely want to strengthen that further, because we see more growth opportunities there than in some other areas. So we will continuously look and the market on that side is okay.

[Ingo Schachel, BNP]

Okay, thanks very much.

[Michael Buchbauer, Head of Corporate Communications]

Thank you, Ingo. Thank you for your questions. Let's move on to Akash Gupta from JPMorgan. Akash, please go ahead with your questions.

[Akash Gupta, JPMorgan]

Yes, hi. Good morning, everybody. My first question is on your capacity situation. Q3 was pretty strong, more than EUR2 billion in orders and it was fourth successive order with more than EUR2 billion order intake. Obviously, there are various businesses here. And the question I have is that, are there areas where you might be maxing out in terms of your capacity and therefore, either you are not able to take further orders, which may have some impact on the coming period order intake? And also, are there any need for increase in CapEx in light of the strong orders that we have seen? And probably I think your message earlier was also that some of these trends will likely continue with Paracel order going in the P&L next year?

[Joachim Schonbeck, CEO]

So we do not - as I said, we have all projects, we could staff with excellent teams and these teams are working well as they have to fight the challenges we see on the market. We do not see CapEx increase due to that and at the moment, we also are not in the position that we have to decline orders. But we need to stagger definitely the time schedule. But we are discussing that with the customer because we are not - it's not our policy to provide unrealistic time schedule.

So if there is a constrain on our side, we will be very, very clear and transparent there. But we don't see that this will be a major part. We have increased our manufacturing capacities in China in the last year for several of key products, key components for the Pulp and Paper. And in hindsight, I can tell you this was an excellent decision because a few months after startup, these lines were already fully loaded from the orders we received.

[Akash Gupta, JPMorgan]

Thank you. And my second question is on Pulp order. I think Paracel is a big turnkey order and probably the largest order you have got in the Pulp business. We have seen some of the previous orders were split between you and Valmet while this time around you have gone for the entire full turnkey order. The question was that, was that the customer decision to give the entire turnkey to single supplier, like was it customer choice or was it your decision to go for the whole rather than going for part of it? Like how shall we see this and maybe if you can talk about risk in getting the whole turnkey project? How do you see risk in the project?

[Joachim Schonbeck, CEO]

At the end, it's always a customer decision, but it's - we definitely have to be ready to take that. I think the market, especially on the pulp side, the market has seen that, if the technology comes from one hand, that usually execution and startup and also optimization of the production goes much smoother.

We have with our Metris technology, we have an overall automation and performance improvement system which is tied in into our technology. And I think this really pays off. If you look at the start up curves, we could realize in recent projects, I think that is a strong argument. And so at the end, you have to ask the customer what was driving the decision. We believe that we can - that we have quite a good value proposition there.

[Akash Gupta, JPMorgan]

Thank you. So just to double check, there is no change in the risk profile from Andritz side, it was more of the technology that played a role rather than risk?

[Joachim Schonbeck, CEO]

Sorry, can you repeat?

[Akash Gupta, JPMorgan]

Yes. I mean, I was like just confirming that there was no change in the risk profile from your side that you are willing to take more risk than before and it is more driven by the technology which you just mentioned.

[Joachim Schonbeck, CEO]

No, we are not - in general, the business model we have contains certain degree of risk and we are not hungry to increase that, for sure not. And if you - for example, as you ask about Paracel, one of the dominant parameters they had in the - for the decision making was that they would not accept any new technology.

So everything we offer is something we have basically in the same size for the same application for the same batch already in operation somewhere in order to exclude all the technological risk, which would then add to the project risk there is anyway.

[Akash Gupta, JPMorgan]

Thank you.

[Michael Buchbauer, Head of Corporate Communications]

Thank you, Akash, for your question. Now I would like to ask Daniel Lion from ERSTE Bank to go ahead with the question you have. Daniel, are you there?

[Daniel Lion, ERSTE Bank]

Yes. Hi, good morning. Thanks for taking me. On - I would have a few ones. Could you help me understand what size this large greenfield order that you mentioned roughly has in the order intake in the third quarter? This was nothing that you communicated, right, or did you?

[Joachim Schonbeck, CEO]

No, we just told you.

[Daniel Lion, ERSTE Bank]

Really.

[Joachim Schonbeck, CEO]

So it's a good three digit million number.

[Daniel Lion, ERSTE Bank]

Okay. And then having a look at - yes, we were actually really good in passing on the input cost pressure, input price pressure to your clients obviously. Now, we are slowly seeing prices to decrease despite continue of course in maybe even next year also due to the economic slowdown maybe. Do you see chances that you could even increase your profitability as the prices are now passed on to the customers and your input prices could start to decrease?

[Joachim Schonbeck, CEO]

Frankly speaking, we do not see that. As for the large orders, for the one we just talked about and for the large order from Suzano which we booked beginning of the year, they were basically we had to move into supplier commitments exactly in the phase when the war started and the material prices hiked.

So that is - and once the commitments are made, the project is going. So there is little you can do. I would say, it was a bad timing, but it would be even worse for our customers and also for us if we would delay the project speculating on material prices to drop. So we are working hard to bring it in with the margins we have. We do not expect an improvement there. But of course the new projects coming will be based on the outlook. And that is then, if we can keep it and don't pass it on to the customers, that could help. Yes.

[Daniel Lion, ERSTE Bank]

Actually, I was, of course, not really reflecting on the capital business because obviously, you're partially also hedging your input costs when signing these orders. But what about after sales business components that should become cheaper? So business that's more or less your everyday business and services business. For this part, this is also true?

[Joachim Schonbeck, CEO]

Yes. This is - we had - I think we had - for some areas we had price increases two and three times in the course of this year. And now we see that also we have to move down from that a bit as there is a request from the customer side. I think there is, of course - I will say, there are more chances on the aftermarket side as the duration periods are not that long, looking at that.

[Daniel Lion, ERSTE Bank]

Yes. And then one final question in terms of Metals business. How crucial will it be to increase the services share of the division in order to bring your profitability to the desired levels?

[Joachim Schonbeck, CEO]

That's very crucial. So that is one of the main - there are two main initiatives. One is to avoid project crisis and the other is to increase the service. And then of course to adapt the portfolio to growing markets like we have done now with these battery manufacturing lines. So these are the three - that's basically the three things you need to do.

[Daniel Lion, ERSTE Bank]

And do you need further acquisitions in order to bring up the services business or can you do it with the current portfolio as well?

[Joachim Schonbeck, CEO]

I think we can look - we are looking for both. Yes.

[Daniel Lion, ERSTE Bank]

Okay, thank you very much.

[Michael Buchbauer, Head of Corporate Communications]

Thank you, Daniel. Thank you. Final question we have from Richard Schramm from HSBC. Richard, are you there?

[Richard Schramm, HSBC]

Yes, good morning. Hope you can hear me.

[Michael Buchbauer, Head of Corporate Communications]

Yes.

[Richard Schramm, HSBC]

I have a follow-up on Pulp and Paper first. Due to these big projects you now have booked, is this a sign that there is a risk of some over-capacity building up in this market or would you say that these projects are more kind of catch-up still from the previous crisis and we're already in the long-term planning of customers so there is not a risk that there will be in the foreseeable future kind of, let's say, demand collapse in the market? That would be my first question.

[Joachim Schonbeck, CEO]

Yes. I think very good question. On short-term, there can be a demand collapse. On the medium term, definitely not. Demand on fibers is high. If we see all the product changes that are done in packaging and other industries where there is a move from plastics to monitor products that's in hygiene, that's in packaging.

So we see a trend there. All these new projects that we are now talking, they come into the market in '24 or later. So we don't know what the situation is there. And I would say the next important impact to the market will come from the start-ups in South America, which we will see in the first quarter next year most probably. So then we can see also how stable and how solid the market is.

[Richard Schramm, HSBC]

Okay. But can you confirm that there are still projects in the pipeline you're negotiating so that we have a chance to see still reasonable order inflow also next year in this segment here?

[Joachim Schonbeck, CEO]

We believe - So we can confirm there is project work. As I said, we don't know under these geo-economic conditions when really a purchase order is placed, whether it's six months earlier or six months later. This is definitely not in our hand.

[Richard Schramm, HSBC]

Yes, of course, but there are at least some projects going on and...

[Joachim Schonbeck, CEO]

Yes.

[Richard Schramm, HSBC]

So far there is the chance at least for some interesting bookings there. Okay. Then my question concerning Metals and here the Metal Processing side, how do you see the best opportunities there in the coming quarters here? Isn't that an area where we should see especially very reluctant investment mood due to the current problems, especially from the supply side in this industry?

[Joachim Schonbeck, CEO]

I think that the Metals industry, especially steel industry is definitely under high pressure from the energy prices. They are under high pressure from the CO2 point of view, but they also under high pressure from their customers. And if you look into automotive development, the major driver to increase fuel efficiency still is the decrease of weight and the decrease of weight is basically driving the business also of our Metals Processing area.

So we see, despite these challenges, that there will be investment done and we have seen some particular examples. If you don't invest for a period of three to six years, it is difficult then to comply with the specifications of the customer. And that is why we believe there is demand and there will be demand.

[Richard Schramm, HSBC]

Okay. And in respect of the margin side, do you feel, let's say, much pressure from customers? Do they pass this on to you as equipment supplier or can you push through your necessary prices for a decent margin level?

[Joachim Schonbeck, CEO]

I can tell you that the capital business is a buyer's market, you will not be surprised about that.

[Richard Schramm, HSBC]

Okay. Thank you.

[Joachim Schonbeck, CEO]

Thank you.

[Michael Buchbauer, Head of Corporate Communications]

Thank you, Richard. Akash, you may have a follow-up question?

[Akash Gupta, JPMorgan]

Yes, hi. Thank you for taking my follow-up. That was on M&A. And if I look at your announcement, I think you announced four deals in the second half. Can you give maybe a rough ballpark number in terms of the cash outlay for M&A this year and in total?

[Richard Schramm, HSBC]

Norbert?

[Norbert Nettesheim, CFO]

We have a general budget for these things, for small acquisitions, which is somewhere in the area of EUR50 million to EUR100 million and we - also in this year in this range.

[Akash Gupta, JPMorgan]

Thank you.

[Michael Buchbauer, Head of Corporate Communications]

Thank you, Akash. Now move on to Peter Rothenaicher from Baader Helvea. Peter, go ahead with your question.

[Peter Rothenaicher, Baader Helvea]

Yes, hello. Also on the acquisition, so I think yesterday you announced this Croatian acquisition. Can you give us a little bit more on details? Is it a profitable company? I have seen sales are around EUR60 million. What are your expectations? Do you see here some chances for cost savings and yes, profitability about this?

[Joachim Schonbeck, CEO]

Yes, it's a profitable company, suffering a bit under the war. But definitely profitable, high quality manufacturing and high quality engineering supplier in Europe with a good capacity. And we see - so we open our - we widen our portfolio for certain types of boilers, the grate boilers, which we do not have in our portfolio.

So we are opening the fields for the smaller boilers based on biomass, which are very much asked for now from the, I would say, the general industry in Europe who are converging their gas power plants to, for example, biomass or sludges.

Then it is also important for us one of the lessons learned from the recent crisis that we debottleneck our supply chain a bit in this - on this pressure part side where we very much heavily depend on China at the moment. So in that case that's also securing our ability to perform when we have - when we see some supply chain disruptions on that side. And it's a location - it's only three hours' drive from our headquarter in Graz. So it really fits well also with our engineering activities. So we are extremely happy with this acquisition.

[Peter Rothenaicher, Baader Helvea]

Okay, thank you. Another question would be on the wage development. So, in Germany, we see ongoing negotiations and trade unions are demanding 8% increase. Can you give us what is the situation in Austria? Have you already agreed wage increases and how - are you able to cope with this wage increase in 2023? Might this have a negative impact on your margins?

[Joachim Schonbeck, CEO]

We - it's an excellent timing. On the Metris side, they just - 2 o'clock tonight they reached agreement. I think they - I did not have time to study deeply, but I would say it's around 7% increase, if you want to have a ballpark. We have provisions for that. So we do not see margin deterioration from that source.

[Peter Rothenaicher, Baader Helvea]

Thank you.

[Michael Buchbauer, Head of Corporate Communications]

Hi, many thanks, Peter. Any further question from the auditorium for the audience? This is not the case, then I will then finish the Q&A session. I would like to thank all of you for participating in this call and maybe handover to Joachim again for final words.

[Joachim Schonbeck, CEO]

Yes. Very good. Thank you for your interest. Thank you for the questions. As I've said, outlook is stable project activities, we are cautious on our outlook, but we are ready also to take more orders. You shouldn't be concerned about that.

[Michael Buchbauer, Head of Corporate Communications]

Okay, thank you very much.

[Joachim Schonbeck, CEO]

Thank you very much.

[Michael Buchbauer, Head of Corporate Communications]

Thank you. Bye-bye.

[Joachim Schonbeck, CEO]

Thank you. Bye-bye.