Duerr AG

XETRA:DUE

Earnings Call Transcript 2020-Q1

[Operator]

Welcome to the conference call of Dürr AG. Ralf Dieter, CEO of Dürr AG, will present the Dürr Group's figures of the first quarter of 2020, followed by a Q&A session. I will now hand over to Mr. Dieter, CEO of Dürr AG.

[Ralf W. Dieter, Chairman of Management Board & CEO]

Yes. Thank you, Mrs. Pacona, and ladies and gentlemen, good afternoon or good morning for those of you in the U.S., and welcome, everybody. It is a great pleasure for me to present to you the Dürr's Q1 figures for 2020. Mr. Heinrich, our new CFO, will be starting his position effective August 1 this year. Therefore, being the interim CFO for the time being, I'm holding this presentation on my own today. I also would like to manage -- last time today with me is Günter Dielmann, our Head of Investor Relations. After many years working with me, he has decided it's time to look after his hobbies. And Günter, thank you very much for all these years, I think, it was a great job he has done with you and your team. And I think we will miss you. And the successor is Mr. Schaller, who will join us 1st of July. And Günter will hand over to him during the course of July, and then we have him in that position. So I will start as always by summarizing the highlights and providing an overview of our results for the first quarter, followed by more insights into our financials, and then I will outline our division's performance. We start on Page 3. The COVID-19 pandemic is having considerable adverse effects on the Dürr Group's business performance and outlook. After initially being largely limited to China until the beginning of March, the COVID-19 virus has since spread across the world. In China, the economy has returned to a recovery path since the end of the first quarter. And as a result, we were able to ramp up our activities to a level of 100% within a short period of time after temporarily shutting them down. We even got congratulations from the government that we were one of the first companies to open production again. On the other hand, the pandemic has triggered massive restrictions on social and economic activity in other parts of the world since March. We are forced to temporarily close our facilities in countries, such as Brazil, India, United States and Mexico. However, we have been able to keep consistently production going on in the last few weeks in our major plants in Poland and in Germany. And we managed very fast and well the shift to home office work. Many countries are now cautiously easing the restrictions in order to reopen their economies. At the end of April, we initiated in Germany, measures for a step-by-step return to office and to our usual business processes accompanied by strict actions to protect our employees' health. Financially, we are well prepared for this crisis. We held the liquidity near record high of over EUR 850 million at the end of March. And in addition, we could arrange with our banks, the increase of our credit facilities from EUR 500 million to EUR 850 million in the last few weeks. These credit facilities have not been drawn. Let's now have a look at our Q1 results. Order intake dropped by 24% in the first quarter of 2020, due adversely to the very high level in the same quarter of the previous year. And secondly, the postponement of a big-ticket paint shop project. Despite the lockdown in China, new orders in that market were strongly up in the first quarter. The 11% drop in group sales is due to the lockdown in China. And the fact that many of our automotive customers closed their facilities from March, meaning that we were restricted to deliver any machinery and equipment. At EUR 2.7 billion, the order backlog remained nearly unchanged at the very high level seen at the end of 2019. EBIT dropped by half due to the lower sales, reduced service business and higher restructuring costs compared to the previous year quarter. The strong cash flow in Q1 was remarkable and led to an improvement in our net financial status. This was the first time in several years that we generated a positive free cash flow in the first quarter. After years of negotiations, HOMAG acquired the remaining 75% of its sales arm in China, HOMAG China Golden Field. The acquisition price stands at maximum EUR 30 million in total, which is payable over the next 2 years. This acquisition is closing a strategic gap of HOMAG, and will make a positive contribution to HOMAG's earnings from 2021 onwards. The second quarter, we expect a strong drop in order intake and sales, and most likely, we will have a negative operating income. We are continuing our cost-cutting activities. And among other things, this will include an increase at the currently, at the moment, still a very low level of short-term working and selective capacity reductions. And however, we anticipate an improvement of our business in the second half of the year. Let's turn to Page 4 and have a look at our results. Incoming orders and sales declined in Q1 by 24% and 11%, respectively. EBIT before extraordinary effects declined by 40%. Operating cash flow was positive after a negative cash flow in previous year. Order intake, which is shown on Page 5, reached EUR 838 million, and the decline over the extraordinary strong year ago quarter was particular evident in automotive business. Regionally, China was strong, getting another 2 paint jobs from EV manufacturers. And HOMAG also registered a slightly increase in order intake in China compared to the first quarter of 2019. Page 6 sets out our earnings performance. It was hit strongly by the lower sales and the decrease of our spare part business, in particular, in the automotive business due to low capacity utilization and plant shutdowns. And as expected, the shutdown in China put pressure on our earnings. Although we were able to lower overhead costs by 3%, this was not sufficient to make up for the loss of sales. Our reported EBIT of EUR 23 million included extraordinary expenses of EUR 10 million compared to last year's EUR 6 million. Around EUR 5 million were spent on efficiency measures. You will find a detailed overview on Page 25 of this handout in the appendix. Let's now move on to Page 7. Net financial status improved by EUR 34 million to minus EUR 65 million. As you can also see in the chart, our cash flow was influenced by a decline in net working capital of EUR 18 million. And in Q1 '19, net working capital rose by EUR 87 million. This caused mainly the swing in free cash flow. In the first quarter of 2020, we achieved a positive free cash flow of EUR 46 million after a negative EUR 66 million in first quarter last year. Factoring and forfeiting had a minor impact on cash flow as usual. Page 8 deals in detail with the structure of our net working capital. Within net working capital inventories and total contract assets increased by EUR 159 million compared to year-end '19. This is due to the fact that -- although we continue to work on orders in project and mechanical engineering business, we were not always able to deliver the finished products due to customer shutdowns. And on the other hand, total contract liabilities rose substantially due, among other things, to customer payments. The overview on Page 9 of our work in process in comparison to progress billings shows a reduction in our payment balance to minus EUR 31 million. In other words, the net prepayments overhang of our customers has slightly increased. We consider a level between minus and plus EUR 50 million to be normal in the future. Page 10 shows further key financial items. Equity was stable, but the equity ratio declined due to the expansion of the balance sheet. As already mentioned, we were able to improve our net financial status. And our total liquidity, that means cash and time deposits, reached a very high level of EUR 857 million. Page 11 provides an overview of our funding structure and the maturity structure of our liabilities. At the beginning of April, we received the proceeds of EUR 115 million from the sustainability Schuldscheindarlehen instrument that we had issued in March this year. At the beginning of May, 2020, we secured an additional credit facility of EUR 350 million to additionally improving our financial flexibility. The credit facility was arranged ahead of the refinancing necessities next year. The corporate bond for EUR 300 million issued in 2014 will be maturing in April '21. At the same time, a tranche of EUR 50 million under the Schuldscheindarlehen instrument, issued in 2016, will also be due for repayment. So if we are unable to arrange any long-term follow-up finance in the capital market in sufficient time, we will be able to fall back on this facility. If you add our cash pile of EUR 850 million and our unused credit facilities of EUR 850 million, we have liquid funds of EUR 1.7 billion for disposition. Let's now move to our division overview, starting with Page 12. The business unit, Automotive Filling and Testing Systems with sales last year of total EUR 170 million and with EBIT of EUR 70 million, were transferred to the Paint and Final Assembly Systems division as of January 1 this year. The shift was done in order to bundle our automotive final assembly related activities to better capture the upcoming opportunities of plant refurbishments to integrate electrical vehicles in final assembly lines. We have, therefore, adjusted the 2019 figures for comparable reasons, too. Order intake in the Paint and Final Assembly Systems division dropped by 43% to EUR 250 million in the first quarter, whereas business in the same period in the previous year had been dominated by an extraordinary big paint shop order received in North America. A larger paint shop project was postponed for technical reasons and not for corona reasons to the fourth quarter this year, shortly before it was due to be awarded. Sales dropped by 15% despite the higher order backlog as many automotive plants and construction sites were temporarily closed down, preventing us from executing the planned work. This caused EBIT to decline by 35%. By contrast, the gross margin was up in the first quarter of 2020 compared to the previous year as orders with higher margins, they are now executed and as a result of the positive effects from the FOCUS 2.0 optimization program. Turning to Page 13. In the Application Technology division, order intake and sales were also substantially lower in the first quarter, dropping by 27% and 13%, respectively. The book-to-bill ratio was just under 1. There were 2 main reasons for the 61% decline in EBIT. First, is the sharp fall in profitable spare parts and service business as well as extraordinary expenses of EUR 2.2 million in connections with the closure of a small loss-making production facility in Germany. And just now, in the view of the current, rather difficult economic situation, I would like to draw your attention to an award that underscores our technology leadership in our application business. At the beginning of April '20, we received the German Innovation Award in the large companies category for our new breakthrough EcoPaintJet robot painting system. It features the following advantages: 100% of the paint now lands on the surface without any losses; 2 color coatings are possible without any problems in the process, that is faster and more energy-efficient and less labor-intensive than before with reduced resource consumption; in automotive production, the EcoPaintJet simplifies product customization considerably. For example, decorative stripes or contrasting colors and roofs can be applied to the body fully automatically and highly efficiently. The core element is a very innovative applicator fitted to a robot. Unlike conventional rotary atomizers, it applies the paint with the aid of a nozzle played similar to, imagine, like an inkjet printer, but it's not an inject printer. This innovation meets a strong demand of our automotive customers and is without competition yet. Let's move to Page 14. Clean Technology Systems performed quite well in the first quarter, as you can see, the division reported a small decline of only 3% in order intake. And in this division, it seems so that corona has no impact. There are also plenty of exhaust air purification technology projects in the pipeline, which currently appears to be largely unaffected by corona, as I said. With sales dropping by 7% to EUR 82 million, the book-to-bill ratio reached 1.3x, while the order backlog continued to grow. The EBIT of minus EUR 1 million includes extraordinary expenses of EUR 3 million, which are partially related to the closure of a small production plant in Germany. Before extraordinary effects, EBIT climbed by 48% to EUR 2 million, increasingly reflecting the positive effects arising from efficiency gains and improved processes following the integration of MEGTEC/Universal. Page 15 shows the rather disappointing performance of Measuring and Process Systems. The division remained largely stable with order intake dropping by only 3% and sales only by 4%. But with the book-to-bill ratio coming to 1.2x, the order backlog continued to grow. The unsatisfactory earnings performance with EBIT coming to minus EUR 2 million after EUR 3 million in the first quarter last year, was caused by a strong decrease of the demand for spare parts, a substantial decline in business in China, I have to say temporarily, and a changed sales mix. There was a substantial decline in business in standard machinery with higher margins and an increased order book with complex, highly automated special machines with higher risk in calculation and execution. We are working very focused on changing processes and procedures in the special machinery business area to address this and to avoid margin erosions here in future. Let's have now a look at Woodworking Machinery and Systems on Page 16. Although in order intake and sales in this division dropped in the first quarter by 10% or 9%, these declines were less than expected from us and only partially influenced by the pandemic. In China, both figures were largely unchanged over the previous year and slightly up. And the HOMAG plants in Germany and Poland, which are responsible for the bulk of production, have remained in operation since the outbreak of the pandemic. The book-to-bill ratio came to slightly over 1% in the first quarter. And EBIT before extraordinary effects dropped by 22% to EUR 16 million due to the sales decline, although the gross margin held steady at the previous year's level. Page 17 shows the relative weak performance of our service business in the first quarter. Service revenues declined by 9% and reached EUR 247 million, contributing to 29% of group sales. As many customers temporarily close their plants, we recorded a noticeable decline in spare part business and service work. Modifications were also limited as a result of those plant closures. Ladies and gentlemen, normally, I would present to you our outlook at this point. However, I'm unable to do this given the current low forward visibility. Let me just say that we are financially well positioned to safely overcome the COVID-19 prices and its effects. But our mid- and longer-term optimism is reflected as well in the fact that we were executing appropriate acquisitions even in difficult times like HOMAG China Golden Field, and we are maintaining our dividend policy. I'm convinced that we will come out of the actual prices stronger as we did in 2009 and 2010. Thank you very much for your attention so far. And now I'm happy to answer the questions you may have. And I would like to hand over to Mrs. Pacona.

[Operator]

[Operator Instructions] And the first question we've received is from Ingo Schachel, Commerzbank.

[Ingo-Martin Schachel]

My first question would be on the Measuring and Process Systems segment and profitability there, especially on the processes and special equipment that you talked about. I think we've always perceived MPS as a segment with -- yes, very good quality, high margins, best-in-class. I was just wondering whether you could shed a bit more light on which process exactly as you're looking at. What the root causes are? And why this is suddenly becoming more visible now? Is it just because the segment is smaller and those things become more relevant? Or are those issues that you might have underestimated a few years ago?

[Ralf W. Dieter, Chairman of Management Board & CEO]

Yes. Mr. Schachel, thank you for your question. First of all, we have -- in the automotive part of the -- and it's basically the balancing business you're talking about. I mean today, the MPS is just balancing and the [indiscernible] business. In the balancing side, we have the automotive part, we always had quite a decent amount of so-called standard machines, which have a high-margin and easy to basically kind of repetitive production, installation and so on. And this business has more or less disappeared because the first tier supplier, which are the main customer segment, they are not investing in further machines for production increases. But they do and what the orders we have got in the last 6 months where orders for special applications in the truck area, also in other new EV area and other sites where they have ordered very specialized machines, which are not only balancing, but the whole automation feeding and so on and tooling. And I was quite in detail in that. So things which have not been done before, which were causing technical challenges and to be very clear here, our technical teams in that area underestimated some of the complexities. And so there was a miscalculation already at the order intake and then execution problems to correct mistakes. And that caused -- even the volume of that business was not huge. Some -- they are quite significant margin erosions, which we are suffering from. So the measures we have taken is basically what you do in that case is, we reorganized that area. We have put very strong controls on each proposal we do an order intake and also execution is now managed and overseen by the top management there. I think with that measure, we get this under control, and we will see that not in the future. It's a temporary problem we have to fix, and I think it will take all the further second quarter to get out of that. Otherwise, the business is stable, as you said before. And I think for the year, we will go through that. That's what it is.

[Ingo-Martin Schachel]

Okay. And then I would also be curious about the statements you made around second quarter profitability. I think in the release, you said a loss is not ruled out. I think in your verbal comments, you even said the loss is likely. Just wanted to understand whether you could shed a bit more light on the scenarios that you're looking at. Is, I don't know, any framework, what do you say. If the revenue decrease is less than 20%, you might be profitable, if it's more than 20%, that would be your breakeven point, and you would be loss making. I know that's probably oversimplifying it a bit, but do have any scenarios with magnitude of revenue decline and corresponding profitability for Q2?

[Ralf W. Dieter, Chairman of Management Board & CEO]

I see that offer. I mean in these times, you can make every day scenarios and the whole broader sort of scenarios. I think for sure, we have made some assumptions, which can be wrong and can be right. But what we expect is for sure that we are suffering in the second quarter, 2 things: first of all, that the order intake will drop more than we have seen in the first quarter due to the plant closures, and customers have other priorities; and as a consequence, also for the service threat but also for installation of machines. And a treatment that we have limited access to some plants and had a limited access. So as I said, we want to be transparent. I think it's very likely that we will have -- see a second quarter, which has a negative EBIT but then we also have a drop, which is about more than 20% in terms of revenue, but for the quarter only. We also see in some areas, it's a very mixed picture. It's very difficult to judge because we see some areas of recovery. To just talk to China this morning, we are overloaded in China in our paint shop business. We are very loaded in HOMAG business. Also, the MPS is picking up there. So it's a mixed picture, but we just wanted to be transparent that this could happen.

[Ingo-Martin Schachel]

Okay. And then just a very quick clarification question on the Golden Field acquisition. I think you mentioned a maximum of EUR 30 million. I guess that also includes all the performance-based payments. And then I find it surprisingly cheap for such, let's say, big and profitable asset. Golden Field, that's still the same asset that it was in 2018, i.e., if markets recover, it could also generate as much profit as in 2018. Are you pretty quick payback? Or is there any reason why that's structurally different now then for us?

[Ralf W. Dieter, Chairman of Management Board & CEO]

I hope that nobody from China Golden Field is on the phone here. To be honest with you, we started 3 years ago, the discussions. And by the way, also the old HOMAG owners did in the years before. But 3 years ago, their idea of the purchase price was just insane. And we had the long, long discussions all over again and again. And I think in that perspective, corona was not that fast because the age structure of the owner is as such that his time is limited to negotiate. And so that was a good timing. And because of the business performance in '19, which was less than in the record years '18 and '17, we could come to an agreement of this price. And yes, this price has also a performance portion of it. And this goes up to the end of '21 or parts of '22 still. So it was an opportunity, and that's why we didn't hesitate to do that acquisition, although we, at the moment, keep our cash together as much as we can.

[Operator]

The next question is from Tim Rokossa of Deutsche Bank.

[Tim Rokossa, Research Analyst]

Before I come to my questions, I would like to take some time to thank you, Mr. Dielmann, especially for me personally, but also, as I know, on behalf of many others on this call. And it's really hard to imagine a time without you as Head of Investor Relations at Dürr. When I started covering the space, it was in 2009, you had already taken over this department. You were always there for questions and discussions that went way beyond the usual quarterly results. You were always very interesting in strategic discussions about where the industry is heading. I remember our trip to Shanghai that turned out to be really only the beginning of a very strong China story for you. I also remember our discussions post the HOMAG acquisitions, where I think not only me initially struggled a bit to see the value, but look how that turned out to be. And you always communicated the equity story and the numbers in a very reliable way. You are a great discussion partner and simply also a very nice colleague to have worked with. And with that, I would like to come to my questions. And that...

[Ralf W. Dieter, Chairman of Management Board & CEO]

Well, first of all, thank you, Mr. Rokossa, Mr. Dielmann is very touched by that. You can talk to him?

[Gunter Dielmann]

No. No. Talked already in the morning...

[Ralf W. Dieter, Chairman of Management Board & CEO]

You talked in the morning already? Okay. But it was very kind of you. And you are right. When I started here, in 2005, he was also -- he just started as well, Günter together. And yes, we have to see -- first the successor, it will be not easy to step into those shoes. That's what you say, Mr. Rokossa, right?

[Tim Rokossa, Research Analyst]

It's big shoes definitely. Yes -- and he -- yes. Look, Mr. Dielmann, it's fantastic to have worked with you, I think. And if we do -- absolutely, I truly mean this. If we do come to 2 questions that I have. And the first one is really on the China recovery, and we are seeing this across a lot of industries right now. That's industrial, that's autos, that's also HOMAG, apparently. How much of a recovery do you see on the HOMAG side in your Chinese market at the moment? And also on the auto side in China, do you see this as a small bounce back where you see that initially, there's just some services business coming back? Or also, are they longer-term projects with your customers that have been untouched by this and where you really still sense that your customers are as bullish as they always were on the volumes in the Chinese market? And then secondly, that's the strategic problem that I struggle a bit with in general right now. I think the visibility also for your customer on the automotive OEM side is extremely limited. When I talk to Mr. Dieter or also Oli at Daimler, they don't really know what's going on, because no one really knows how the consumer is coming back. How do you prepare for this volatility ahead? You have always been a very well-managed business that can deal with volatility? Have you done anything different to what you did in the past?

[Ralf W. Dieter, Chairman of Management Board & CEO]

Mr. Rokossa, thank you very much, very good questions. And I don't have corona, just have to flow my nose. But everybody's cabbages will. So China. My personal opinion is that the Chinese are doing, again, something very good, even I'm sure that corona is there not over. They came and try to be back to normal. And I think also the population wants to continue the path of continuous growth and more people getting into decent income. And what you saw, and I think you know better than me in the April numbers. I think the April sales -- auto sales out of 10 new -- out of 10 sales for a new car, 8 new buyers were not possessing a car before. So it seems though that also the pushes here for people maybe also to avoid public transportation to have their own car. I think that's definitely a trend. But the Chinese people will tell me now after corona, it's just safe for them, it's done, even it's still there because it will never go because we will have it all at one day. They say back to normal. And by the way, we had now enough from it, and let's buy new car, let's buy furniture because the Chinese mentality is also a little bit -- after crisis, they want to do things new and fresh and move on. And I think that's a mentality, which we hope -- we don't have in Europe, and I think that's why Europe will take more time to get out of this. And I think even the Americans will take it faster behind them than we will do. But that's a private opinion. China recovery on the furniture market, we see, as I said, a stable order intake. It was a little bit weaker in April now, but it is not much. We talk to our customers there. They had -- some of them are also public noted company. So they had another good first quarter in terms of profit because people didn't buy furniture when they had the lockdown. But they are optimistic. And we see also the discussions about projects is back to normal. But I would say, before they have larger projects, again, to be awarded. They're also waiting how stable to consume, consumers are. And that's a big question for every industry. How stable is the consumer buying behavior or when it's coming back. So I think when the furniture, it's more stable on the automotive side, it's -- I think they continue to buy the cars because they always said it will grow, and I think how fast and how much, this we have to see. But for me, China, it's a really a bank we can count on.By the way, that's also Korea -- Korea is also very stable. We have good business there. They have -- they left this corona crisis mostly behind them with all the precautions they still have in place, but that's also doing fine. That's much more difficult to predict on the other parts of the world. And you said it, the visibility is maybe as bad as never before. But I recall, and you recall the year 2009, there were also a lot of scenarios and unclearness about how things will develop. I think we will not see a trend like we saw in 2010. I remember in June 2010, there was a big pickup of order intake, but this was mainly China because, because China really had a very strong growth from 2010 onwards. This machine, we don't have in place this time. I think it's more stable China. So we have to be prepared for a longer recovery period. And that's what we are, and you are asking how flexible we are on that. I think we are -- we have one big advantage also that we are so in the globally presented in the world that we are not machinery companies like smaller ones who have to send all these Germans to somewhere. We can do our business, like in China, it's all done by the Chinese at the moment. There's no German going there. We have not many Germans there anyway. The same applies for America or Mexico. These guys can do that job alone. And I think that's a big benefit we have. And what we are now doing in the next weeks and months also is to get a better understanding for the midterm development in Europe to also then, let's say, look at our capacities and what has to be done there. But I think most important is that we have enough financial liquidity. I think this was a big task. And spend some hours here with me, who did the transactions with the banks. And with me as interim CFO, which was very interesting and fun, which gives us a lot of freedom to concentrate on the business and not on financials. Does that answer your questions?

[Tim Rokossa, Research Analyst]

That makes sense. Yes, it does. Can I just follow-up with one, and that is specifically because you say -- if I remember this correctly, from 2009, you already told us that there was never any cancellations in any of your orders, but always only postponement. And I think we're seeing the same now, which is obviously quite powerful. When your customers postpone those orders, do they give you a tentative date when they will come back to discussions with you? Or was that left open right now?

[Ralf W. Dieter, Chairman of Management Board & CEO]

They -- so the one order, which I mentioned, which was not bookable in the first quarter, and this has really technical reasons, nothing to do with corona or buying behavior. From the plan we have now, it will be awarded in the fourth quarter. So this will come this year. It will come anyway, but really most likely in the fourth quarter. We had 1 customer in a big paint job project who was thinking about maybe moving to stop the work on-site because of corona for 2 months or 3 months and come back. And then we told him how much it costs, and then he changed his mind in 5 minutes. So -- and the large project, this is unlikely to happen. It's economically nonsense to do this, yes. And even on the HOMAG side, where you see a lot of smaller companies, customers, mom-and-pop shops, we had, let's say, maybe some requests out of thousands of orders we have here where people ask for where we can have the machine later. So it's -- how should I say, it's, for us, very positive to see that cancellations and this kind of stuff is really not taking place. Some of the smaller customers of HOMAG have asked to get the machine 2 months later, just for reasons of COVID then accessible of their facilities, but that's nothing significant.

[Operator]

The next question is of Richard Schramm of HSBC.

[Richard Schramm, Analyst]

Yes. I would like to just follow-up on the remark you made on the capacities here in Europe and especially, and here, again, I think it's mainly affecting Germany. I'm not sure maybe I have missed it, but the amount you have already reserved for this in the current year of about EUR 20 million. Will this be sufficient? Or should we expect that there is a clear upside risk to this if you evaluate the situation now going forward and through this crisis here?

[Ralf W. Dieter, Chairman of Management Board & CEO]

So Schramm, as I said, we have already taken 2 measures in Germany, and there are -- but the smaller production plants and this 1 from HOMAG, we already announced that we are working on. And maybe 1 or 2 smaller measures will come, which will be covered by this amount you just mentioned. So we have, from today's perspective, not to expect here special extraordinary additional restructuring costs. But these kind of adjustments we already planned end of last year because we also anticipated without corona that the demand in Europe will be lower for mid-term and maybe longer term.

[Richard Schramm, Analyst]

Okay. So yes, maybe...

[Ralf W. Dieter, Chairman of Management Board & CEO]

Corona's just speeding up. That would have happened anyway.

[Richard Schramm, Analyst]

Okay. So it's not adding to the plans you have made because it's sounded to me at first side that you might think there would be some additional reduction necessary going forward, but this is obviously not the case here?

[Ralf W. Dieter, Chairman of Management Board & CEO]

Not from today's perspective. I mean we don't know if the crisis becomes much worse than everybody anticipates then, yes, but then it's for everybody, but from today's not. We are not making big announcement of those measures because we want to keep all the people motivated in Germany, and therefore, we do this just, how should I say, under the grass level, so one after the next, but it's in our -- let's call it, budget for this year.

[Richard Schramm, Analyst]

Yes, fully preempt. Some other companies might take this as an example. One other question concerning the service business, which also suffered in Q1 and you expressed your confidence that it's coming back, however, shouldn't we see the risk that also these activities will suffer from the cost reduction efforts, the massive ones of your OEM customers and that there is clear pressure also on these activities, not only for 1 or 2 quarters, but for a longer term?

[Ralf W. Dieter, Chairman of Management Board & CEO]

Yes. I think when you look at the service business, we have 2, let's say, different or separate buckets here. One is the spare part business. And the spare part business is a must of the installed base, and it's particular in the application technology, but also in HOMAG and also Schenk. It's also driven by how much those machines and equipment is running and utilized. And when plans are coming from 2 shifts to 1 shift, they need less spare parts. And when they are shutdown as many now, then they don't need spare parts any. What we have seen now in China, which was the major hit of spare parts in the first quarter and also in profit loss in that perspective, that now after they came back to production, they ordered more spare parts. So in the China spare part business, April was very strong because they said, okay, now we want to produce. Now we have to keep production going. And now we need more spare parts to be sure that when we have a break that we have the available -- the parts available.The second part of the service business is our modification revamp business. And here, we have not a clear visibility yet because we don't know. Normally, we have 2 main seasons for that, that's a summer shutdown, and that's the winter Christmas shutdown, or in China, the Chinese New Year shutdown. And we have, at the moment, not a clear picture, how much of the summer shutdown business, which is many -- most of that is already -- was in planning, will be executed or not? Will customers shutdown for summer? Or will we continue to produce? This we know better in some weeks. But this could -- some part of the business, which could affect us as well. Yes. So that's what we see. And in the second quarter, numbers we will also see, the spare part business decline out of the shutdowns we have now in North America, Mexico, India, Brazil.

[Operator]

The next question is [indiscernible].

[Unknown Analyst]

I would have a question regarding the acquisition, the planned acquisition of HOMAG China Golden Field. You mentioned that the maximum purchase price is 30 -- so EUR 30 million. Does this cover the 75% share in the sales organization? And also the 18% share in the production company? Or is it only related to the sales organization?

[Ralf W. Dieter, Chairman of Management Board & CEO]

First, you are very good informed about the transaction. I see. Yes. And from whom you are calling, I didn't understand your firm's name?

[Unknown Analyst]

[indiscernible]

[Ralf W. Dieter, Chairman of Management Board & CEO]

[indiscernible] Okay. It covers both.

[Unknown Analyst]

Both. Okay. And another question, last year, according to your press release published 2 weeks ago, how much China Golden Field or HOMAG itself had a turnover in China from around EUR 130 million, EUR 140 million. HOMAG China Golden Field also sold machinery from other suppliers with a turnover volume of around EUR 110 million. Will you keep this cooperation with other suppliers after the full ownership -- after you have gained full ownership of the sales organization? And what's your expectation on this?

[Ralf W. Dieter, Chairman of Management Board & CEO]

The answer is, yes. And therefore, let me say that -- because the closing of that transaction will be in the later part of this year, we have to wait for the China Antitrust Authorities, we expect to be able to close that transaction in September, end of September, maybe October, we don't know yet. And then next year, we have about 20% more revenue and also more margin, because as you know, we sold with the margin to HOMAG China Golden Field, and there is always a margin to the customer, which is now ours as well now.

[Unknown Analyst]

Yes. Okay. And the cooperation with other machinery suppliers should be continued also in the future. As it has been, for example, in North America after the Stiles Machinery acquisition?

[Ralf W. Dieter, Chairman of Management Board & CEO]

Yes, absolutely. With Stiles, we continued every operation, as far as I know.

[Operator]

The next question is from Daniel Gleim of MainFirst.

[Daniel Gleim, Director]

Yes. Actually, this is Daniel Gleim from MainFirst. The first one would be on pricing trends, what you see in the market, what you see in your orders received, maybe you can comment a little bit on what the auto margins are at the moment that you print, maybe separate between China and what you experienced in Europe and North America? The first part of the question. And secondly, maybe you can give us your opinion. How much this shock on volumes will have an impact on the price in your experience in the weeks and months to come? Maybe share with us what happened in 2009 and for how long maybe the pricing was dented in such an environment? That's my first question, and I take it from the other.

[Ralf W. Dieter, Chairman of Management Board & CEO]

Okay. You mean pricing towards us? So the customer tries to lower the prices?

[Daniel Gleim, Director]

Yes. Are you being willing to lower the prices to get more...

[Ralf W. Dieter, Chairman of Management Board & CEO]

No, we are not willing to lower the prices. And I think the pricing discussions are pretty stable. And also, don't forget that the selection of the customers in the paint shop business has been reduced after our competitor here in Germany has more or less disappeared, yes. So that's not something we are afraid of. And it's not what we see. We have more talks about payment conditions, down payments because that -- on that side, they are concentrating on to delay payments to save their cash. I think that's the main discussion we have at the moment.

[Daniel Gleim, Director]

When you say stable, you mean the bettering prices after you started to become more selective in picking orders for PFS, yes?

[Ralf W. Dieter, Chairman of Management Board & CEO]

Well, we try to get what we can get. If it's a pricing, it's reasonable. I think what we also have done on the paint shop side to reduce our costs quite significantly out of this FOCUS 2.0 program. And here, we are now very competitive. And so I would say from the market here, there's no change, and our cost structure is better. That's what we have always said and always said that we will improve. That's a situation, nothing else. I think the main focus of the customers is now talking about payment conditions.

[Daniel Gleim, Director]

Okay. And that is also what you expect for the months to come. So no change for this more stable-ish environment? So it's more volume not so much...

[Ralf W. Dieter, Chairman of Management Board & CEO]

Yes. We have seen even areas where customer asked us basically were willing to give us a higher price in order to have a delayed payment term.

[Daniel Gleim, Director]

Understood. Very clear. We had a debate entering into the year on the HOMAG optimization program, the rightsizing now that the volumes were a little bit softer. I think that discussion was a little bit less relevant given the COVID development, but maybe you can give us a heads-up where we stand on HOMAG? What the program is for the months to come, so we're still in the loop on what is happening on that side. Leaving the pandemic aside, and maybe if you plan to accelerate the efforts there.

[Ralf W. Dieter, Chairman of Management Board & CEO]

First of all, the efforts are totally unchanged. And also, the good news is that if we have a little bit less loading, then people have more time to concentrate on that. And the plan is in execution. We are working on the process, how we want to have them in future combined and to be then implemented in new SAP infrastructure and that's taking place, and we will go with the new SAP system in the largest plant in Poland, end of the year life for the 1st of January and then following the first quarter in [indiscernible], the second main plant and then the rollout will start. So here, we are fully on track, and people are highly motivated and appreciate that they have a little bit more time at the moment to do this.

[Daniel Gleim, Director]

And do we already see the full impact of these measures in the margins? Or is this something that will...

[Ralf W. Dieter, Chairman of Management Board & CEO]

No, not yet. This not yet. No. That's too early because the process will -- as I said, not before '21, it will start. We see that starting in '21, but also there, I would say, mostly in the second quarter because people have to -- it's the second half, because in the first half, all this many people will have to learn to work in this new way how to work. And the full benefit out of that we will see in '22 onwards.

[Daniel Gleim, Director]

Yes. So this is on the savings side and the costs, or let's say -- you spoke about the savings just now, I understand, but what about the costs and the potential dilutive effect in the short term? Is there already full impact now in the current quarter? Or is this going to intensify in the coming quarters? I recall last year, we had this discussion, how much of the underlying margin would be dented by implementing these measures in 2020. And I was wondering whether we already see the full impact of that in the current quarter?

[Ralf W. Dieter, Chairman of Management Board & CEO]

If I understand your question correctly, I would say, the margins are not affected by -- I mean you talked about the gross margin or the EBIT margin?

[Daniel Gleim, Director]

EBIT.

[Ralf W. Dieter, Chairman of Management Board & CEO]

EBIT, I think we see -- in the first quarter, we have full action plan -- executing this program. So I think what is in value, that's what you see in the -- but the main effect out of these measures we are -- and what I just described, will be in the cost of sales going forward. And we had, in the first quarter, I think, which was EUR 1.2 million or so also in restructuring, which is out of the measures because we have capacity measures in HOMAG, which has nothing to do with process. And that we are on track. We had announced that we have about 300-plus people to reduce, the first 100 we have done. And this goes on and that's now in the numbers, mostly covered -- or it's covered in the numbers now. And so for that, you will not see worsening of this.

[Daniel Gleim, Director]

Very clear. The last question is on your indications with regards to the margin development in the coming weeks. Did I understand you correctly that you said EBIT loss for the second quarter is likely?

[Ralf W. Dieter, Chairman of Management Board & CEO]

Yes, that's -- we try to avoid it, but we can't exclude it. It's very much depending on how much the sales is dropping because we can do this cost as much as we want, but it's possible that the sales decline is as such. And then we talk about 200% plus that we will not be able to keep a positive EBIT.

[Daniel Gleim, Director]

Yes. And with the order intake guidance you gave for the second quarter, that will then have an impact on the following quarters, is it also fair to assume that the third quarter will be more similar to the second quarter than, let's say, the first quarter? Or are there very different drivers at play that you would highlight in this discussion?

[Ralf W. Dieter, Chairman of Management Board & CEO]

No. I think -- just to share with you all, I think the models we are following at the moment, the thinking we have and the judgment we have is that the second quarter will be the worst one. We will see, hopefully -- and that's what we anticipate in recovery in the third quarter. And in terms of then reaching numbers basically EBIT. And then the rest, we will see in highly back-end loaded fourth quarter. That's how we see it at the moment. We will -- as I -- as we said, we can't give the guidance now. We'll try to give one, and I think we can when we publish the second quarter numbers in August -- early August. I think then we have a better visibility, how bad or not so bad the second quarter was running.

[Operator]

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

[Ralf W. Dieter, Chairman of Management Board & CEO]

Mrs. Pacona. Thank you very much. Yes. If there are no further questions, then I can only say thank you very much, ladies and gentlemen, for joining us today. And I also would like to mention that we have our Annual General Meeting, our shareholder meeting will take place on May 28. It starts at 2:00 p.m. the Central European Time. It's an -- like everything or most of the things nowadays, it's a, how you call it, digital -- virtual shareholder meeting, but we try to present a format, which gives the feeling that it's a real one. And you can connect to that if you're interested, you can do this besides your e-mails or whatever you have to do at that time. And -- but we are happy if you are joining us, and we'll get a feeling for that because normally, it's not easy for you to come to be here. And the language will be German. I have to warn you, though. For those not being German, it would be a waste of time. Thank you very much, and goodbye for you -- bye for today and speak to you then early August again. And then together with Mr. Heinrich and Mr. Schaller from the Investor Relation side. Bye-bye. And Mrs. Pacona, we are done here.

[Operator]

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