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GEA Group AG
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Good day, and welcome to the GEA Group Second Quarter 2018 Conference Call. Today's conference is being recorded. At this time, I would like to turn the conference over to Donat. Please go ahead.
Good afternoon, and welcome to GEA Group's second quarter conference call. GEA's CFO, Helmut Schmale, will shortly present the numbers before -- together with our CEO, Jürg Oleas. He will then answer questions by the sell-side analysts. Let me hand over to Helmut.
Many thanks, Donat. Welcome to the call this afternoon. I then would like to hand in a little summary on main key figures of the quarter. And then later on, we shall take your questions. Well, let's start with kind of an executive summary on the main key figures for the second quarter. So the order intakes only recovered in June with a couple of large orders from several industries, among them, dairy processing, beverages and pharma, giving us the highest quarterly order intake ever. We have no reason to be concerned about the top line development at the moment, even though only a small share of larger orders will turn into revenues till this year. Sales increased by 7.8%, adjusted for currency and acquisitions still by 6.7%. Headwinds from currency translation were in a similar magnitude as for order intake, as you can find on Pages 28 and 29 in the appendix. The operating EBITDA amounts to EUR 133 million, which is comfortably upon -- up over last year. Let me add already here the following for the sake of clarity. As detailed in our report, we had some tailwind on central level of over EUR 8 million from the reassessment of inflation and discount rates applying to a long-term liability. On EBT level, it is a wash as the compounding effect is offsetting interest expenses in similar magnitude, but on EBITDA level, it added to the result. More details on operational return on capital employed and cash flow driver margin will follow later during my presentation. Let's then turn to a deeper dive into the business areas. The order intake for Business Area Equipment, we reported plus 11%. It grew strongly. Adjusting for foreign currency and Pavan acquisition, the growth was still at 5.2%, which is comfortable. Milk and dairy farming business meanwhile, up against a respectable comparable, only contributed less compared to prior year. The order intake for Business Area Solutions grew by 12.5% or organically by almost 15% even. While it is too early to read a trend into a single quarter, we now feel fairly comfortable that dairy processing, at least, will not drop below prior year. It remains to be seen during the next months then on the project business for that [ capital by ] industry can actually turn the corner. To say the least, we feel encouraged by the development in quarter 2. Reported sales increased by 7.8%, or 6.7% organically. Both business areas contributed positively. The reported sales for Business Area Equipment grew by 11.6%, organically by plus 7.3%. The new machine business outgrew the service business. The latter will follow the growth in the new machines with a growing installed base. The volume increase continued to come, in particular, from the margin-dilutive food process and packaging business and milk and dairy farming business, as well as from the acquisition of Pavan. BA Solutions reported sales were up by 5.3%, organically even by 7.4%. Then let's turn to the EBITDA. Increase in the operating EBITDA by EUR 11 million is, as I already mentioned, supported through the change of an updated assumption on inflation as well as discount rates. This resulted into a reduction of the present value of the maintenance cost for our long-term liability as well as into a compounding effect, which led to an offsetting interest expense. This quarter 2 impact cannot be extrapolated into the remaining quarters of the year. Let's turn then to Business Area Equipment. The order increase, including the acquisition of Pavan, added altogether EUR 10 million to the result of the Business Area Equipment. This includes negative margin mix impacts with more milk and dairy farming FPP business and less service business, and negative impact from material price increases. Negative currency impacts, that means translation/transaction pricing, in particular in North America, were approximately EUR 5 million to EUR 6 million. There's a general increase in the cost base by about EUR 10 million from -- including group travels and somewhat higher personnel expenses in quarter 2. For Business Area Solutions, the volume and margin increase added [ EUR 70 ] million to [ those -- that ] of the business area. Negative impacts from the currency development were about EUR 3 million to EUR 4 million, in particular, translation impacts and foreign currency losses shown in the P&L. The cost base increased about EUR 10 million with similar drivers as for Business Area Equipment. Let's then drill down into the order intake development and sales development by customer industry. These last 12-month curves provide you with a better impression on the order intake and sales trend over time. In summary, we can observe dairy farming order intake growth leveling off recently, while sales still continued to surge overall, catching up to the group curve over the last 4 years. Dairy processing order intake potentially turning the corner, stagnation at best for sales. Beverages new dynamics in quarter 2 orders, as outlined, based on the large order intake. Food grows for quite some time, meanwhile, however, includes also our latest acquisitions. Pharmaceutical and chemical business, there's a general upward trend since a couple of years, however showing some volatility lately. Other industries appear to be overall stable. As usual, this slide, the book-to-bill ratio differentiates the weighted average book-to-bill ratio of 1.03 by geographies and industries. The ratios are calculated on a last 12-month basis to smooth out seasonalities and random quarterly fluctuations. To summarize the picture along its 2 dimensions. In term of geographies, Latin America, Northern Europe and Asia Pacific has the highest book-to-bill ratio. All other regions are moderately above or below 1. Asia Pacific is positively impacted by the strong growth of order intake in China. Businesses like food processing, separation, beverage, chemical and dairy come into play here. In terms of industries, [ the smaller ], for GEA chemical, O&G and marine, are comfortably above 1; dairy farming, food, beverages are somewhat above 1; pharma at 1; and dairy processing is still below 1. As usual, the lower box gives you the weights of the cross-sections.For those of you who are interested in more -- a drill down into the information from the business area perspective, this slide offers a somewhat consolidated view on order intake trends by organizational units. The dots on the left indicate the relative gross margin profitability of these businesses, including service vis-à-vis the group average. Green means above group average and red means below. And more to the right, you'll see the approximated weight. The strong increase in BA Solutions orders reflects in the first column, which shows all application centers up by double-digit over prior year. The order intake increased to EUR 2,554,000,000 based on the strong book-to-bill ratio of 1.03, but also based on the fact that it contains more than EUR 100 million of backlog from Pavan and Vipoll.The recent decline in the return on capital employed in these 12-months average perspective reflects predominantly the decline in EBIT as well as the impact from the purchase price of Pavan, which has driven up the average capital employed since December 2017. The blue curve uses operating EBIT in the numerator. The orange curve is unadjusted and shows the impact of the one-off charges, mainly related to Fit for 2020 and various other OneGEA strategic projects. Working capital development. At the reporting date, the working capital increased sequentially, which is mainly owed to the recent growth. The last 4-quarter average rates have come up slightly as a consequence. Details on the absolute numbers of the elements are to be found in the appendix. Let me take a deeper dive to the details of the working capital now. The next 2 pages, hence, are giving -- or are providing a standardized view on the relative magnitudes of advance payments, inventories and receivables, including POC receivables. While it is natural to see inventories go up in correlation with backlog, we find that the current intensity level is well within the long-term [ benefit ] and not very far above the long-term average, so are the advanced payments and liability. The receivable intensity is seasonally higher, especially in quarter 1, but also in quarter 2 is more markedly above the long-term average and we are working on bringing that down gradually by a common effort of operations, sales and finance department. We decided to add 3 additional employees for cash collections, of which about 20 are meanwhile hired. Cash flow driver margin. The cash flow driver margin, similar to the return on capital employed, is the margin which is based on the last 12-month average. CFD margin has slightly benefited from the improvement in the [indiscernible] operating EBITDA, the slowdown in the LTM working capital build-up and also a slight decline in CapEx. Again, the orange curve is unadjusted for restructuring and other one-offs as well as PPA effects from recent acquisitions. The liquidity bridge. Free cash flow from continued operations over the last 12 months, adjusted for expenditures for strategic projects, is about EUR 148 million, which you'll find on the right-hand side in that little box. Most of the items in this bridge are self-explanatory. The bucket other includes payouts for pensions of about EUR 40 million on a yearly level. Let's then turn into the service business development. The share of service business in total sales for the last 4 quarters remains unchanged at 31% compared with prior year. The adjusted growth rate is 5%, with BAE growing at even -- growing even at 7%. Well, then let's talk about the outlook. Based on the development we now see after the first half year and accounting for the fact that the shortfall in quarter 1 proves to be too massive to catch up in the quarter 2 entirely, we would like to describe our recent outlook assumptions as follows: Revenue growth in full year 2018 is likely going to come out at the upper end of the guided corridor, whereas operating EBITDA margin and consequently, cash flow driver margin are likely to come out farther at the lower end of the corridor. With regard to the strategic projects, we keep the initially given guidance. We will take a deeper dive into that June quarter 3 when we better understand how will be the potential cash out for these strategic projects. Let's conclude my little presentation on the key figures of the quarter 2. And Jürg Oleas and myself, we would like now to take your questions.
[Operator Instructions] We will now take our first question from Klas Bergelind of Citi.
It's Klas from Citi. A couple of questions please. I will take them one at a time, if I could. Firstly, on dairy farming, I get this to be down quite a lot in the quarter on orders when I backed out the growth from on the rolling 12 figures. We see momentum now building from a low level in dairy processing, but farming is now down. I appreciate the tougher comp as we go through the year, but it feels a bit like a trend shift. Could you talk through dairy farming and the orders there a bit? Have you lost any share on the back of a stronger euro or is this an underlying weaker trend? I will start there.
Yes. On the dairy farming, we see, just recently, quite a deterioration on the milk prices in the U.S., which has also to do with the export or import barriers imposed by the U.S. to Canada, which makes the U.S. swimming in milk, let's put it that way. So that is certainly putting a certain pressure. So there is a stabilization of this. Let's see how this develops in Q3 and Q4. But I think the very strong growth we have seen over the last past quarters compared to the previous reporting quarters in MDF or in milk and dairy farming has come, for the time being, to a stop. So my expectation is that it will be, for the rest of the year, rather flat, if not even slightly negative.
And it's mainly the U.S., it's not anything on the European side there?
No, it's mainly in the U.S.
All right.
But that's one of the biggest markets for us.
Yes. No, for sure. So then on the dairy processing side. It's obviously, good to see that we're picking up here. If we analyze the current levels, which seems to be 3 orders around 70 million, 80 million in total, that's obviously around 300 million, levels we haven't seen since 2015. It's obviously -- it looks to be a clear bottoming. But if you look at the quotation activity and thinking about the second half, are you -- how do you feel about this trend continuing or was this just a one-off in the quarter?
No. We are cautiously positive. We do see on the quotation, the so-called hot list pipeline we are revising with our people every month, that the number of requests for proposal is increasing. Not so much for the very big [ lots ]. There is [ greater order spend ] for the middle class, typically those which we also have been able to book in Q2. So we are cautiously optimistic looking at the pipeline.
And any certain regions there where you see sort of more momentum then?
It's China and Nordics. Nordics, for us, such as Norway, Holland, U.K., Belgium and Scandinavia.
Okay. My final one is on operational gearing, thinking about the price versus cost and also mix, both in equipment and in solutions. In solutions, you had pressure last quarter from a stronger euro on the cost side on contracts that were signed when the euro was weaker in the middle of last year. And I assume that you have hiked prices on the new orders at the same time as the euro pressure in the second half of this year will level off. So does it mean that better pricing coming through at the same time as we have less pressure from currency, would you say that -- is that an upside risk to operational gearing in the second half in solutions? And then on equipment, when do you expect the price hikes you do today to start to impact the operational gearing positively in equipment and how should we think there about the mix going forward considering dairy farming, in particular, leveling off here?
Yes. That's quite a complex situation. We have initiated different task forces regarding pricing. [indiscernible] mentioned the normal pricing as we have been doing it in the past to adjust for normal material costs increases or inflation. It's, by far, not enough in this situation, which we have since last -- end of last year, in combination of quite high rises in steel prices and the FX, mainly for our business in the U.S., but also for other areas. And then, of course, we are not free of competition. So in some areas, we, in order to fully compensate material price increases and FX, we would have to -- and we're doing this where we are able to do it, by up to 20% or even more to prices, which then the customer sees. But as you can imagine, this has a limit in order not to deteriorate in the pipeline to fill the factories, et cetera, so it's a fine balance between what is possible. But I can assure you that we have, in many areas, placed task forces to focus on this to try to pass to the customer the material price increases and the exchange rate impact as good as we can. In solutions, it's a bit easier because solutions projects are calculated on a project-by-project basis, whereas in equipment, we have price lists, which have certain validity of a couple of months. Those price lists sometimes are even implemented in the ERP systems of our customers, so you cannot just withdraw them overnight and implement a new price list. But also there we have task forces in order to find balance in between what is possible to increase prices. But we are following this for more than 120 sub-product lines in the Business Area Equipment, line-by-line, country-by-country, what is possible. So we will see some impact of price increases, of course, which we have strongly addressed at the beginning of the year. But having said that, I also would like to caution ourselves, it's not an easy thing because we have peers and competitors. And it's not only about competition, it's also about if you have to raise prices for an investment project of the customer in Brazil or so of 20%, he may even decide to postpone the project.
But just to follow up. In terms of the solutions, when you -- well, when we look at sort of ex -- clean of the -- provisionally, [ you tend to ] think about operational gearing. Are we still waiting for the price increase to come through? Or i.e., put differently, what's the improved operational gearing? What's that in effect of that you were utilizing your engineers more given that, effectively, you were delivering more out of the backlog or was it driven by price? I'm just trying to think about if pricing is yet to come through, well, in both divisions, but mainly in solutions.
Yes. The operational gearing in solutions is not that big because they do not have too many owned assets which have to be loaded as when you talk about equipments. Therefore, that's also the advantage when it goes downside, the volume in solutions, but it's not a big advantage when it goes upside. Yes, we have increased price factors, supply-chain factors and risk factors, as we call it, in solutions. We will see that slowly, slowly coming through also in the second part of the year. We already see that in the past months and some of it has come through to support the margins compared to previous year.
But just to clarify, sort of finally, but on the operational gearing, I know it's bigger in equipment than in solutions. But you had -- last quarter, you were underutilizing your engineers because you were waiting to gain on the larger orders. Is that now sort of fully utilized or...
Yes, if the order intakes continues as it was. It was -- we were very pleased to see the order intake in the last couple of months, of course. Some of that will convert to sales now at the -- in the second part of the year. So thanks to that deleverage or the usage rates, all the engineers will be much better than in the first quarter.
We will now move to our next question from Sven Weier of UBS.
From my side, the first question is on the order intake and especially the structure of the order intake. The first question there is on the base orders, which were unusually down sequentially in the second quarter. I was just wondering what was behind that. And on the other hand, you obviously also had quite a strength in what I would call the midsized, big tickets above EUR 1 million between EUR 5 million. So is it simply that some of the base orders just slip slightly above EUR 1 million threshold and that's why we should see those 2 segments combined? So maybe any additional color you have on that aspect?
Maybe I'll take that. Yes, indeed. Your observation is correct that we, in particular, had a very strong order intake in the bucket of the orders which are between EUR 5 million and EUR 15 million. And if I may add, also, again dairy processing and the food industry came into play. And if we then look into the bucket of the customer industries for orders which are below EUR 5 million, then we saw that actually beverages are substantially up, whereas dairy farming, as we were talking already about, was somewhat down, but also dairy processing for that smaller bucket of order sizes. That was then more than overcompensated by order intake from the bigger bucket.
And you should not forget that this graph which we are showing are not corrected by exchange rate. So if you take the small orders and correct them by the translation impacts of exchange rates, you have to add another 4% or 5% to compare to previous year.
A bit surprised by the sequential decline because, normally, Q2s are rather up sequentially against Q1. And that was a bit unusual thing, I thought.
That is a bit of a coincidence, I would say.
Okay. And then if I look at the comments you made about the pipeline and how active it is, would you think it's fair to take the first half times 2 to get to kind of a full year sensible range? Or would that correspond to what you see in the pipeline?
It will not be impossible on the order intake side. The pipeline is solid, which we see in our review meetings with our managers. Of course, always, things can happen. Let's see what it is. Trade discussions, which is one of the impacts I just mentioned, which are coming out from the U.S. mainly, are affecting this. But currently, the pipeline is a solid one, which will not exclude that we could even double the order intake. But a lot of things still can have an impact to both sides.
But please be reminded that the second quarter, being a record quarter, certainly was outstanding then. So that will be difficult to repeat that in the quarter 3.
Yes. That's why I thought maybe the first half times 2, with Q1 being lower, Q2 higher, so as an average might be a fair approach. And on the dairy side, the project there seemed -- those are rather not so much for export than more for local consumption in those markets, or less on the powder side, as you said?
You mean dairy processing?
The project that you are winning now, that's probably less than for exports, it's more the local dairy consumption?
You mean the powder then?
Yes.
No, it's a mix. It's a mix. I believe that some of our customers are cautiously going to test the market now with dairy powder. But when we say dairy processing, as we have mentioned it in one of the previous calls, we, of course -- powder is only one part of it. Dairy processing includes liquid, yogurt, cheese, et cetera. So it's not only powder, but we currently also do see projects on powder.
The other question I had was on your portfolio review, when we could be expecting an update on that end?
As we said, it will be in the course of this year. I do not want to promise a date. But what we are planning is to finalize that discussion with the Supervisory Board by the end of year.
And the last question was just on, you mentioned the EUR 9 million one-off in the quarter. Are you expecting any other things in the rest of the year?
No. That was a trigger by the fact that, here and there, we are in discussions with the relevant authorities on these legacy sites which we have. And it turned out that we, after this meeting, recently then called for a new expert opinion on how we would like to assess our long-term liability for that particular site, and that triggered then the restatement of the provision which we have made to -- on the quarter 2. So that was a singular event, as I said, and don't expect anything else during the year.
We'll now take our next question from Max Yates, Crédit Suisse.
Just my first question is around working capital, and it seems like some of the build in the first half is in anticipation of H2 deliveries. So would you be able to give any guidance on how you think full year working capital should evolve relative to the sort of minus EUR 206 million that you've done in the first half? Is there any guidance you could give us there?
Yes. It depends a bit on the continued growth in our order intake. As you have seen, we had quite a bit of vibrant development during the first half of the year. And one of the major changes in the year to the amount of working capital was related to our inventory level. What I would say though is we gave a guidance that the working capital should be somewhat in the quarter between 16% and 16.5% LTM through the year. We are still below that. So we are actually, as we speak, at around 15.8% in average. And I would assume that, as usual, for the year-end, we could think about a swing back in the working capital level that would then support us to come down in that absolute level of working capital yet again.
Okay. The second question is just around your services growth. You obviously give the rolling 4-quarter level of service growth, which ticked up, I think, to 5% in Q2 from 3% in Q1. So would you be able to give the absolute service growth and maybe a little bit of detail around what sort of that -- I mean, clearly it's growing sort of somewhere in the region of high single-digit to double-digit. But if you could give a little bit of color just on the quarterly service demand, what actually caused that inflection and how sustainable that is?
We -- in general, our aim is to grow service across the years by a minimum 5% organically. So we're basically in line with this. It's currently growing slower, not in absolute terms, but due to the strong growth in sales. We try to push this service. We have a lot of service initiatives and, as you know, we have these OneGEA service organizations in 43 countries, which are pushing this. We are also step-by-step implementing new tools, which are supporting the further push for sales growth. So I'm confident that from today's point of view that we could continue to grow service by at least 5% organically [ or adjust ]. And it comes, basically -- if you look at over an average of 2 or 3 quarters, it comes basically from all regions and from all product lines.
But if I'm just looking at Q2, what was the service rate -- what was the service sales organic growth just for Q2?
We have never given this information. So we rather are indicating the 4 last quarter's growth rates, which you'll find there. And what I could say is that in average, the service business for the Business Area Solutions and for the Business Area Equipment has certainly grown in the individual quarter on the upper end, what we have there.
Okay. Just the final question is around the solutions business. You quite helpfully show the slide where you show which subsegments or which business areas are accretive and which are dilutive to gross margins. So utilities business, beverages business, obviously, you have the red marker next to them. What I wanted to understand is just a little bit around -- if you did decide that these businesses weren't core in your portfolio review, how easy would it be to either dispose of or sell single units within solutions? And how integrated are each of the sub-businesses within the overall division? So just to understand a little bit about how that division is set up from that perspective.
Yes. First of all, let me make a remark. The more solution-oriented businesses, they have another strength, is in intensity of capital employed in order that they have a complete different profile in CapEx and in working capital. So the margin is one thing, and also if you do this type of chart as we have presented it, there will be -- always half of the businesses will be below average and half will be above average. So whatever you may dispose, half of it will be then below the average. Regarding potential carve-out, for some it's easier, for some it's not that easy. As you know, we've the OneGEA integration we've formed around these businesses, the region/country organization, which is addressing all the relevant issues in their countries. We service new quotations sometimes even pre-engineering and discussions with the customers. But I would not say that these carve-outs are impossible. But the OneGEA organization or the transformation we have done aimed at getting away from 200 or 300 legal entities in -- acting independently and melding them into, as it says, the name, OneGEA organization. But carves-out, of course, are always possible, but the major issue to carve out [indiscernible] [ those spaces ].
Okay. And just very finally, would you be able to give us any update on the ongoing search for the new Chief Executive? Any details around how that's progressing? Whether we think it will be possible maybe to achieve, make an announcement that within -- maybe sooner than the outlined period which was originally given, which was by the end of the year? Do you think the scope for that to -- announcement to come quicker than maybe the end of the year given the process that's ongoing?
That's not for me to comment. I hope you have understanding for this. This is solely the sole discretion and project of the Supervisory Board.
Lucie Carrier of Morgan Stanley.
Actually, they are more follow-up. The first one, I wanted to come back to the equipment division and the deterioration in the margin. I understand there is a mix effect, but when you are looking at your current backlog in equipment and most recent order intake, how should we think about the evolution of this mix for this business? So that's question #1.
Well, the margin deterioration has different sources. Let's go back to what is -- the core of the margin deterioration is the gross margin deterioration or the gross profit margin. That is affected quite substantially by product mix, means that lower-margin product groups are growing faster, some of them much faster, and high-margin products are growing slower. Number two is that new equipment sales is growing much faster or has been growing, so far, much faster than service, whereas service has much higher margin than new equipment sales. And then, especially in the U.S., where our scope is quite big and it's most important market for our equipment products and service, we have, of course, the tremendous headwinds from the currencies since second part of last year. So that has been affecting the margin. On the latter one, we are working with the task force, as I have said. On the product mix, it's difficult to [indiscernible] what that's going to do. I do not believe that we will see a substantial improvement when it comes to the pure product mix in order to help the margin and service in relation to sales. I do believe that the ratio, I mean, it's difficult to forecast it from this point, from this day onwards, but my personal feeling as of today is that the ratio between new equipment sales and service sales is going to be a bit more not in favor of service, but difference will be less than it has been in the first couple of months. Service will continue to grow, as we have discussed. Equipment sales, the strong momentum, the strong [ gradient ] is going to be slowing down a little bit, means that ratio of services is going to have a stronger impact in the gross margin.
Understand. If I just can come back on the product mix. I understand that it's not necessarily easy for you to intervene on that. I mean, you get the orders that are available in the market. But from our standpoint, we don't really have visibility of what is currently in your order backlog for equipment. And so if you think of the product mix currently in the backlog for equipment versus what we've seen over the last, let's say, 6 to 9 months, are we looking at a product mix that is more favorable, less favorable or the same?
Well, if you go to Slide #9, which Helmut presented, there, you see that the less margin-intensive product groups are growing very fast. Food processing, packaging, pasta, extrusion, milling, et cetera, you see that we have these green arrows. And that the high-margin product groups are growing slower in the order intake, be it year-on-year, but also sequential quarter-on-quarter. So that's order intake. So that's a strong indication that for the sales -- composition of the sales, machines is going to be less favorable for the margin.
Okay. That's clear. The second question I had was around dairy processing. I was just wondering if you could give us an indication around the pricing to which these contracts have been taken on, and also pricing dynamic you're seeing in this fixed segment of the market, considering that it looks like demand is slowly starting to come back.
Yes. We stick very rigidly to our pricing politics and our philosophy to add risk provisions and contingencies. We have lost some orders due to this in dairy processing, but also in beverage, but we stick to that. Now the demand has not yet grown that much that we could see that in raising prices, et cetera. It's a very tiny, let's say, light at the end of the tunnel, which for us is not yet the turning point where then we also would feel that it has positive influence on the price.
Okay. And my last question was around tariffs and kind of trade tension. You did mention some impact on your dairy farming business from the situation between the U.S. and Canada. But I was wondering if there was other kind of concern from your standpoint around either on the finished products or in terms of shortages of potential components or ongoing increase in terms of raw materials. And if it is the case, whether you could kind of maybe quantify the impacts you expect, of course, for the rest of '18, but mostly for 2019, of course.
So I'll take that one. Yes, in fact, the actual tariff increases, that is a concern for us not only in the new equipment business, but also in the service business. This, of course, will create some additional cost for us, yet to be very difficult to assess it by now. But what we need to understand is for those products which we are going to import from China, the tariff increase could have potential cost increases, not to speak about also the fuel prices. And then, at the end of the day, also in the business like in the milk and dairy farming, we see there are some issues of the tariff increase, which were increased as an impact on our profitability. What remains to be seen is how that intake will then come into play for the whole year. However, it is an issue which we need to watch out and to react appropriately in order to think about how we can maybe then also reshuffle our procurement to more domestic supply in the U.S. as much as possible, because there are partly, of course, also limitations to that, in particular if you have some specific product regulations on the approvals you need and so on and so forth. Another topic which, of course, is something which we must not forget about is potential Brexit. Here, of course, many different things needs to be considered, for example, about force majeure clauses and oral contracts or what about formalities in our supply-chain and what potential impact that also can have from raising tariffs or special improvements you need for parts of your business like, for example, pharmaceutical industry, yet to be too early to be finally decided how much that potential impact would be from any final [ aspects ]. So as we speak, we have a tense situation in the U.S., which is a major concern, but that is, yes, something on top of the issues which anyhow have. We have the currency exchange rates, the material price increases.
Sorry, I think I was cut off at some point. Were you saying that you were importing product from China to the U.S. or components from the China to the U.S.?
Yes. That is something, which we, of course, [indiscernible] strategic review of our manufacturing footprint have in mind to do this, and then, of course, will be much more difficult in the future if these tariff [ bands ] or tariff situations will stay.
Understand. And do you know how much of your sales on the U.S. territory are from products that you are importing from China?
That is something which we are just ramping up. I was telling you that -- well, you know about our manufacturing footprint project, where we said we would like to follow more the competitive cost advantages of production sites. And you may have also heard that we're about to sell one of our European sites. And that particular [indiscernible] will be -- in the future, be executed in China. Of course, that is part of the business where we need this price competitiveness of the Chinese market. So that's something which is a continuous process which we have to relocalize as much as we can to countries with competitive cost advantages, and yes, think about then would like to import in the future into the U.S. That could be an issue. Not yet the case, but that is an issue which certainly can create some concern.
Joerg-Andre Finke, HSBC.
Most of them have been answered. Just 2 follow-ups. First one on the dairy processing. You mentioned in the previous answer that you see some light at the end of the tunnel with regard to pricing. I didn't really understand whether you referred to the 3 orders you won in Q2. So did they come in at a similar margin quality than dairy processing orders in the past?
Yes.
Okay. And then the second question relates to your comments on the portfolio review and also similarly on potential M&As. Given the management's session, which you couldn't comment on obviously, just wondered whether you think it will be sensible to make more meaningful decisions on the portfolio, both in terms of disposal and M&A, before a new management has been announced or involved?
Yes, if we were to [ ask every site ] to make substantial changes in the portfolio, which I do not believe, then of course, that has to be left up to the decision of the new management team. But when we say portfolio discussion -- decisions, as we have been discussing that in the last couple of months, then I think we just have to speed up and to progress and we should not delay that process.
That means the portfolio review still includes a few hundred million euros of revenues, potentially?
Yes.
We will now take our next question from Felicitas von-Bismarck from Deutsche Bank.
Most of my questions have been answered, but one thing on your working capital development, especially on the receivables side now. So I remember correctly, you've outsourced a part of that business. Is that also the reason for the elevated levels, or is there -- generally, is this something more structural or is this something more temporary on the receivables side?
It is certainly something which is more temporarily the case. It has nothing to do -- or little to do with any outsourcers -- outsourcing procedures which we have initiated. No, it has a [ more benefit ] of reasons for, and that is why we [indiscernible] just to go ahead with a lot of staffing [ on cash calls ]. And on the other hand, please be reminded that we also see from all customer sides that many of them improve on their working capital as we speak. And that is, of course, a challenge then also to us to get that into play for all of payment terms, which makes life more difficult. And there are examples where you find customers where you have up to 150 days, 180 days of deferred payment in individual cases and that is just making life more difficult. And if we then turn to all suppliers, which many are mid-size, that is really a difficult thing to deal with. But it has nothing to do with the fact that we have outsourced this. And I think we can [ gain towards the year ] and already in the receivable level. And I was speaking about working capital previously and the focus now of the organization. That's not only finance, it's really to get that level down again.
Okay. And the other question I had, many of our [ cap-goods ] are talking about supplier pressure and that the suppliers are actually asking for higher prices because the demand has been so high over the last couple of years. Do you see anything like that? Or is that just a different kind of division for you, so to say, sector?
We see a lot of that. It's a daily fight. So our supply-chain organization is focusing very much on that. And exactly as you said, the economy in many areas is booming. So the demand is quite strong for half-made products or finished products. And I think with the size of the GEA, which is a good customer for many of our suppliers, we can deal with that. But it is a challenge and it is affecting in a certain way also our gross margin, and our people are working against it.
Have you ever -- have you already had supply bottlenecks yet?
No. We -- that was one reason of increasing working capital and inventory source in the past couple of months, that how cautiously some of our factories increased inventory in order not -- in order to be in a position to deliver it to the customers. For example, also we stepped back in France in order that if there would be a hiccup, that we can continue to deliver our customers.
Okay, cool. And the last question, when you think about the second half of the year, what would you say is your biggest concern?
It's the gross margin, to improve that through pricing. So if you would ask in the organization here at GEA, any of our managers, what is key, critical, most critical things where everybody's working on is pricing, which, of course, it's value pricing. You have to convince customers that due to material price increases or special features of our technologies and products that he's willing to pay. So our biggest concern would be that. And of course, any type of crazy trade wars, which I don't believe is going happen, but that, of course, could immediately slow down the good order intake and the good pipeline we see on the [ offer ] project.
Sure. And on the pricing concern, is that because you've already -- because you've already started it in Q2, is that based on experience? Or is that just because you think it's generally difficult to push through pricing and value pricing and convince the customer?
The problem is the magnitude. We are not talking here about increasing prices of 2%, 3%. So as I just mentioned some minutes ago, in many areas, in order to balance out cost increases, FX impacts, et cetera, we have to increase prices by 10% to 20%, and that order of magnitude are the easy thing. If you just have to increase 3%, that's another issue.
Peter Reilly of Jefferies.
I've got 2 questions, please. Firstly, coming back to equipment, where the margin was down despite strong organic growth and looking at this new Slide 9, you've got quite weak trends in separators and homogenizers that, I guess, has been a big margin driver for that segment in the past. Could you tell us a bit more what's happening with that business with, especially, separators and homogenizers? Because that's obviously been a market where you've been very strong historically for a long period. So is there something -- structural change in there or is it just the temporary issue where demand is slower than other parts of the group? And then secondly, I wanted to ask please about -- in solutions, where you had a pickup in medium-size orders. I'd like a bit more color about why these orders are going to [indiscernible] these projects that were delayed that are now happening. Are they new projects? Because you've been talking for quite some time about customers being reluctant to invest because of their fears about the future. So I'm trying to gauge whether it's just some delayed stuff coming through or whether you're seeing a bit more of a positive medium-term outlook from your customers.
Yes, coming back to your first question, order intake on homogenizers and separators, we're not disclosing for each product group, the numbers. But what I can tell you is that, especially in the area of pharma, we have very -- in the past, very strong order intakes on separation that have slowed down. On homogenizers, that is a coincidence. It's not -- actually, the order intake on homogenizers is doing extremely well. There is once a month where it is lower, next month it's strong. But if you look at the trend for homogenizers, it is very strong. And let me also add, which also applies to flow components, to pumps and valves and also to separation, it has also to do with the U.S. because of the pricing power and transactional impact of the currencies.
So I guess this is one of your businesses where you've got the -- must be one of the higher FX exposures in terms of the margin risk?
Yes, because the market is -- one of the most relevant markets for the separators is the U.S.
Okay. And then on the larger orders coming through?
Sorry, could you please repeat that question, Peter?
Yes. The second question was, you have had a significant pickup in medium-sized orders. You've been talking for a long time about customers being reluctant to invest. So I'm just curious to know whether the pickup in orders is because lots of delayed orders that you hoped to win earlier are coming through and so it's more of a one-off issue, or whether you're seeing customers being more happy to invest than they were 3, 6, 9 months ago.
I think the general climate to invest also for mid- to larger orders has improved in the last couple of months. So the level of quotations has been increasing. And then if we are successful, then you can book your orders. So I think we do not see still no major change in the very large projects. When I say very large, it's $70 million or $80 million or $90 million type of projects. But in the larger midsize, as we have been booking a couple of them, we see a good trend upward. And as I just said, we are also positive for the order intake in July and August for these type of orders because we are basically currently negotiating a couple of them, with positive signs that we will also then get the orders.
I mean, if I may add to that, Jurg, you may remember, Peter, that we said on June -- or quarter 1 earnings call that there were some projects in the pipeline and that we were quite [ trustful ] on a good order intake for the second quarter of the year, which then could make up for what we were missing in first quarter. I mean, that actually then turned out to be reality. So it's not a surprise. But we were expecting that at a certain point in time, we will now have the inflection point for the dairy business.
And is this a global issue? Or is it more some of the big Western food majors just getting a bit less cautious about the future? Obviously, had very weak data coming out of the loss of the big [indiscernible] food companies.
It's global. It's also in China. It's around the world. We have been seeing very positive development from Latin Americas.
Alexander Virgo, Bank of America Merrill Lynch.
I wondered if you could clarify a couple of numbers for me. I think you called out FX impacts in equipment and solutions as $5 million to $6 million and $3 million to $4 million, respectively. And then $10 million was product mix, I think, in equipment, and $10 million cost inflation in solutions. Would you mind just clarifying the sort of the buckets for me?
Yes, I can certainly do this. What I said is that we have about EUR 10 million from additional result from volume mix -- volume and also mix impacts, which is combined into that number. So we have the volume in there, you have the acquisition of Pavan in there, but also the negative relative mix in margins with more milk and dairy farming, food processing business, for example, and also the service business. And then I said that we have an overall currency impact, which is translation and also transaction, as good as we can approximate that, of about EUR 5 million to EUR 6 million combined. And then we have a general cost increase of about EUR 10 million, of which a part is group charges and also part is personnel expenses. That cost relates to BA equipment, [indiscernible].
Sorry, sorry, say that again.
That cost relates to Business Area Equipment, and that was your question about.
Yes. And can you give us the solutions one as well?
Yes. Solutions, I mean, here we have only a marginal increase, which adds about [ EUR 70 million ] to our result. We had here overall currency impacts, positive and negatives, balancing out to an overall negative impact of EUR 3 million to EUR 4 million. And then the cost base increase, similar to Business Area Equipment, of about EUR 10 million.
Okay, cool. And then you mind giving us, even if it's in round numbers, your assumptions for those numbers for the second half so that we can think about that in the context of your guidance just at the group level?
That's a tough call, indeed. That's really on the currency development. As we said, for the whole year, we believe that, for the group, we will grow at the upper end of our volume of what we come from. And every other detail yet needs to be seen, all the development the next 2 quarters. I think Jürg Oleas has said already, one focus point for us will be the pricing situation, also focusing our organization on fast-turning, high-margin business for the remainder of the year. But there is also a certain point in time where you need to assess how much can you really raise prices before the customers start to react negatively. But to give you that level of clarity of the analysis which I've just made is too much for today.
Okay. And then maybe a couple of very small ones. Can you give us the proportion of that EUR 2.5 billion of backlog you've got for delivery for the balance of this year? Is that something you can share?
We've never shared that for quite some time now. It's about EUR 1.6 billion.
Okay, and the last one. I think, in Q1, Pavan had been a little bit weaker than you'd expected performance-wise. I wondered if you can just give us an update on how that acquisition is progressing now.
It's on -- the top line is doing very well, same as many other parts of GEA, means very strong double-digit growth rates in this first 6 months compared to previous years. On the gross margins, they still have some orders in the order backlog, which we were aware when we bought it, with lower margins. They took those projects for strategic reasons. But we have a very strict management for the order intake now since we own it, since January. Our managers, the GEA managers are basically in -- not basically, they are in charge. The current CEO of Pavan is a very experienced GEA Manager, running that now since a couple of months. And he's clearly focusing and he -- because the market is very positive, the demand is strong, to increase further margins on the order intake.
Glen Liddy of JPMorgan.
Could you give us an idea of the impact of raw materials and FX? You said it's a clear headwind and you've took prices up. How much of that headwind have you recovered by price increases in Q1 and Q2? And how much more do you need to do?
Well, that's a very complex question. But if you ask me, from the overall gross margin, we have lost compared to previous year. When you deduct for product mix and the other things, I would say that our teams have been able to compensate up to, maybe, about 100 basis points difference FX and raw material or the steel price increases and [ sub ] supplier price increases. So they have been able to manage that all the way. You know that, for example, steel prices, depending on which type of steel you talk, that they've been going up, up to 40% on a year-on-year basis, which we usually do not buy raw material steel, but we buy semifinished products, which -- and our suppliers are buying the steel, and they of course are trying to increase the prices versus us. So I believe, to a large extent, our teams have been able to manage that away through all kind of activities. And then there is a piece remaining where we still are pushing the pricing and to price [ for ] -- in order to recover that also. And the product mix, as I said, we will focus on accelerating the higher-margin products, but that's something -- we are not going to slow down other products because we want to have the factory filled and we want to have the engineering units filled with work. So we are not going to stop now some product lines, et cetera. We are pushing them. Of course, we are pushing, we're trying to push slightly a bit stronger the ones with the higher margins. And, of course, also, service is key because service comes with a substantial higher margin into the GEA group. And we are, of course, focusing very much on service because that's going to be one of the key success factors at the end of the year.
Okay. And in terms of your inquiries, you say they're at a very high level. Is -- are customers making decisions and commitments faster now than they were in -- at the end of Q1 and the end of last year?
Yes. For the mid- to larger projects, we see that they stick, usually -- more to their plans. They have plans, request for proposal, evaluation, negotiation, placing an order. So we see that their behavior has a bit changed to the positive so that they stick to their plans. And those plans are not being [indiscernible] endlessly, as we have seen in the last year or even in the last 2 years, yes.
Sebastian Growe of Commerzbank.
Three questions from my side. The first one is on the order intake development in the second quarter. I just would like to get your thinking behind the very, very good growth on one side versus the announced price hikes on the other. So it might be a correlation or consequence, simply, of the announced price hikes during quarter 1. And can you also remind us in that sense regarding the timing from a quotation to order? And the second question is then on the outlook for the full year. And I was just thinking, again, about the trajectory in the second half of 2017, where you alluded to quite a punchy OpEx improvement, if I may say, that you were talking about R&D capitalization of real estate gains, [ provision raises ]. So is there anything in particular that we should be prepared for when it comes to the second half of 2018? And then the third question, last one, on currency hedges. My understanding is that there is a certain time lag in the hedges until they really hit the P&L. So we have seen, obviously, the dollar versus the euro starting to become a pain in the second half of the year 2017. However, it might be that your hedging policy could imply that there's -- although now it seems that the [ payers ] are moving more and more in neutral territory, that there still might be a time lag in the negative hits to the H2 2018 EBITDA from the hedges. Can you just give us your thoughts on this one?
Yes. I'll start with the order intake, and you have to help me whether I got all your questions. On order intake, the time lag between request for proposal and award of contract is, of course, you cannot say that because we have -- in small project that can be within days, in large project that can take 1.5 years. So typically, the larger the order size is, the longer it takes. I would say that, typically, for orders above $10 million or $20 million, this time lag can be a year. For the very large orders, even above that. For the smaller orders, a couple of millions or even below that, it can be a couple of weeks or 2, 3 months. So it is -- depends in which product group and which application we are looking. Very fast that conversion is, of course, for service. In service, we basically see that order intake and sales, they follow themselves very closely with a lag of only a couple of weeks.
Would you [indiscernible]?
Could you help me repeat the other questions you had on order intake?
Part of the question on order intake, if I just may just come back to the point, was really if there is a certain correlation or is it just a coincidence that we see now this very sharp improvement in the order intake growth on the one side, and on the other side you mentioned on the quarter 1 conference call that you are more aggressive now in implementing price hikes. So would you disagree with, eventually, one of the other customer listening carefully to [ tell ] there's something on the way and that are placing order now before taking the order or giving the order in, say, a month or 2 months from here at, then, 10% higher?
No. I don't believe that we have any such impact on the strong order intake. And please keep in mind, the strong order intake, we have seen that in the Business Area Equipment already in the last 3 quarters or 4 quarters, and in the solutions now, a very strong pickup. And the effect you have mentioned, I don't see that.
Okay, fine. And on the guidance, maybe you can [indiscernible]?
Yes. Talking about the guidance. No. I mean, there are no other one-offs to be expected, other than the ones which we listed when we gave our guidance for the so-called strategic projects, like manufacturing, IT and improvement in the [ steering ] systems. So there is no real update to that. I said that we will come back with better insights once we have seen the quarter 3. Some big elements will still materialize. For example, the deal we made around our French site where we disposed a factory to an acquirer, so that impact certainly to hit the P&L. So there's no other news to that [ in this ]. There's no further other thing which you may consider in comparison to year 2017 like any real estate deal, nothing like that to be foreseen. And then to take your last question on the currency gains and losses, that, of course, depends not only on the currency development, but also on exact timing of executed hedges to the order execution. In that very line of the P&L, what you typically find there is if you are having closer hedge with a bank and the order is not yet executed, but once you are executing this, then it will come back over time. So that is something which will stay there for a certain period of time and then fade out again. So -- and with regard to the currency impacts, actually, for the 2 business areas, that was already different in the actual quarter. So, for example, for the Business Area Equipment, there was a currency loss, but less compared to prior year's quarter. And for the Business Area Solutions, it was more pronounced. They had a substantially higher currency loss in this quarter compared to prior year. So it really depends on timing and on the looking-forward contracts which you have closed.
Okay. Structurally speaking and looking at the order backlog, is there anything particular to mention when it comes to currency hedges where you would say there is a spillover of X million euros into the second half of 2018? Is it possible to somehow quantify that impact?
It's too early to quantify. It depends really at the -- on the [indiscernible] reporting date and how it looks like. But I think, at the end, we said, well, our guidance is without any translation impact. But I have to say, what is even more concerning are this type of impact from hedging or from pricing, which are even bigger stakes compared to what you have simply from that translation impact.
Wasi Rizvi, RBC Capital.
Just a couple left for me. Just on orders, and you mentioned you've stuck to your pricing policy a number of times. Could you help us understand what that means in margins? And what is the aim of the pricing policy? Is it simply to offset the headwinds you've talked about in terms of costs? Or are you aiming to get margin on those orders back up to levels, maybe, over time that you were seeing in 2015, 2014? And then the second question was just a detail one on that, on the chart you showed by end-market. I think, if I'm right, that's not organic. Could you give us a trend for food on an organic basis because, obviously, that's been helped by your acquisitions? So if you could help us understand how the organic trend has been for that segment.
Yes. Coming back to -- on the pricing question. In general, of course, underlying, besides this passing through prices from raw material increases and FX, we have our value pricing project, where we do see that in a couple of good product lines where we have a high level of innovation and technology, we are wanting to push the customers also to pay for that, so -- but that has been overtaken by the price increases through the underlying cost increases. But we continue to do that because it's one of the key elements on a long term to increase the margins. So we are aiming to increase prices above levels of the previous years, regardless of the raw material price increases, et cetera, because we do see that we have very good product. The order intake also has to do with a lot of innovations, which are now on the markets. We do see that demand from customers for products of GEA is strong and continues to be strong. And that's something which we will use in the pricing. Then when it comes to the market, could you please repeat your question?
Yes, sure. So if I look at the chart that you've given on Page 7 and then, I guess, also on Page 8 for the food segment, is that an organic development or not? So I see the CAGR in food is 5%, but, obviously, you've also had acquisitions in there. So I'd just be interested to hear what the organic development of that business had looked like if you excluded those acquisitions, what the trend is.
Yes, that's not organic. That's as we reported the numbers or we are reporting the numbers. So of course, it's difficult if you go back to 2013 with the exchange rates. But as you have seen in most of our areas, the impact of -- translation impact of the exchange rate has been, on the top line, in the order of 4% to 5%. So if you look at reported numbers from '17 to '18, you would have to add another 4.5% or 5% in order to come to an organic growth. And then, of course, if you go back to a very long-term period in that food industry, we, of course, had the acquisitions, as you may have mentioned, like Comas, Imaforni, et cetera. I would like to maybe refer you back to our Investor Relations. We could work on that number for you, what the real organic number was. But what I have seen is that the organic development in the industry of food, where we now count also Comas and Imaforni to that, has been quite positively on the top line.
What you find in our additional material for order intake and sales is the structural change is broken down so that you can see what was the combined impact. And basically, the big issues in there are that we acquired Pavan and that we have acquired Vipoll, which now are, yes, supporting our top line development.
Daniel Gleim of MainFirst.
It's actually on the sequential turnaround in the solutions business. In the first quarter, you mentioned 3 profit headwinds. And given that the solution projects are longer-term in nature, I struggle to see how these headwinds appear and vanish in one single quarter. So could you please walk us through how these drivers have developed sequentially and what potential countermeasures that you were aiming for need to materialize in the second half of this year, potentially, could have already offset those? As a reminder, you mentioned last quarter that you, one, had unfavorable mix outside of the U.S.; secondly, a softer gross margin in North America; and finally, underutilization of overheads. If you could briefly comment on how these have developed sequentially and, if anything, how you were able to offset them already in the second quarter of this year.
Yes, we had, in Q2, good development on the gross margin compared to Q1. In Q1, there were some special effects. But in addition to that, it was an organic issue at the higher- and better-margin application or sub-applications. They have grown stronger. And we did see that in most of the application centers. I'm talking about new projects. The sales evolution was positive, and they came in with good margins. There was only one application center which was below expectations. The others came in above expectations and overcompensated that one. In solutions, also, we continue to see a strong development on service, which also there comes with an overproportion of higher margin, so that contributed to a solid gross margin in solutions in Q2.
Utilization of overheads?
That also played a role. The total overhead in the last couple of months or, let's say, Q2, when I say the overall overhead, it's the difference between the EBITDA and the gross margin, which includes everything, not only the SG&As, but R&D and other income and expenses, has also developed favorably. That of course is impacted to a certain extent by charging here from the group, which we do a couple of times at the year to charge to the 2 business areas the costs of the global corporate center and service centers and such things. But if you take that out, because that's a wash for the GEA Group, if you to take that out, development of the overhead was positive, which has to do, of course, with the volume and over-absorption or better absorption of the [ structure ].
And to speak about special effects, you mean the special effects were in the first quarter, not in the second quarter?
Well. You have always special effects. When I say special effects, there is 1 or 2 projects drifting south where you have to make a provision, et cetera. But in Q2, we had less of that.
Which begs the question, are you certain that we won't see any of those special effects in Q3 and Q4?
Well, you are never sure for that. But from today's point of view, we don't see that. We see that the organization is executing projects, not everywhere at every site, of course, and for every application and sub-applications you always have some hiccups in some sub-applications, et cetera. But when we look at the sum of all the applications, they are executing them according to plan. And we also did see that their own forecast, which they made for Q2, they could hold it. And that was a very positive sign for us that the project managers could stick to the forecast they made for the June numbers.
And it would happen, of course, quarter-on-quarter that you then get a very favorable composition of executed orders, which also may be supportive, above average, what you would expect in a certain quarter, so you cannot exclude that [indiscernible] in particular. So it really depends on the good execution of executed orders as well.
Maybe 2 follow-up questions on that. First, 1, 2 projects, which went adrift, how big was the negative impact in the first quarter?
It was not a substantial one. And I would not like to disclose now the results of individual projects. As you know, we are running 5,000 projects, more or less, a number like that, at the same time. So sometimes you have a hiccup where you have a delay or something like that. But I will not say that this was major issue, not even in the -- in Q1. And in Q2, we are quite satisfied with the execution capabilities of our people, and the absorption of the organization was also good.
Was there a really material difference in the amount you charge to the solutions segment Q1 compared to Q2 this year?
Yes, that's the case. I mean, what we do every year is a true-up of the charges to the business areas from central services like the global corporate center, but also shared services, and at the same time, also for the so-called trademark fee. Both -- or all of these 3 topics you need and have to do at arm's length based on the floor space for our techs, reasons as simple as that. And that is an individual impact, which is single-digit million each for every business area.
And how big was the change, Q2 over Q1?
About EUR 3 million to EUR 4 million for solutions.
We will now take our next question from Jennifer Latz of CFRA.
I wanted to know about the impact from IFRS 15 in the quarter and then what your guidance would be on how that would impact revenues for the rest of the year.
Thank you. So the overall impact of IFRS 15, there was little change to what we had already in the first quarter. So the combined impact of IFRS 17 (sic) [ IFRS 15 ] for the year-to-date is about EUR 17 million in sales and about EUR 2 million in margins, something like that.
And going forward, are you expecting...
I just was told by my IR colleague that I said IFRS 17. I meant, of course, IFRS 15. Sorry for my misspelling. You had an additional question. Please, go ahead.
Yes. So just to come [ around ], that was $2 million on the margin, and then also I wanted to ask about going forward in the rest of the year, what you expect the impact to be, both on the revenue and margin side.
I mean, at the end of the year, we will then miss some orders, which we had now as an add-on to our top line in the first half of the year. Of course, it is difficult to assess how much the impact that could be at year-end. But it could well happen that all of the positive impact which we have seen in the first half will be evaporated then at the end of the year.
[Operator Instructions] We will now take our follow-up question from Felicitas von-Bismarck of Deutsche Bank.
And just for my understanding, because I am a little confused right now. Does any of the orders you collected and locked in, in Q2 reflect already one of the 10% to 20% price increases? Or is that just the general price increases for the material cost?
That is not yet reflected in there. So even if we raise the prices in a short-term business, like in the equipment business, there are some binding price proposals with our clients which first need to expire before then really the price increases will kick in. And that is what I said also earlier in the quarter 1 call, that I expect these price increases to materialize into our P&L in the quarter 3 and quarter 4. And with regard to Business Area Solutions, it's anyhow an individual pre-calculation of all of the orders, and we had some general price increases, which we reconfirmed yet again with our sales organization that this needs to be in place, these additional supply-chain saving and risk rate factors, which then will transpire into additional profitability over the time. They are when you calculate the order, in first place, a risk rate or an additional cost item and only through then your execution, you will find that you are not using these additional add-ons, then you will get the additional margin later on. That's the way the mechanism works.
Yes. But how can you be so sure that this is not a pre-buy quarter then?
Could you explain that? I...
Is it my colleague who has asked. In the sense, if you were announcing high price increases, if I was the customer, I would make my order now and not next quarter.
Okay. No. I mean, you cannot be 100% sure, but we don't believe that this is the reason for the strong order intake, especially when we look at the hot lists for the next 3 to 4 quarters. We do see that the requests for our products and quotations is on a very high level. And this effect, which you and your colleagues have been asking, will not be an effect which increases the demand for our projects in our pipeline for the next 3 or 4 quarters.
And there are no further questions in the queue. With this, I would like to turn the call back to our speakers for any additional or closing remarks.
Yes. Thank you very much for the questions. I do hope that we could put -- give you some light for your questions and to a better understanding for the mechanisms in Q2. And if you would have any further questions, you know how to reach us. Donat will be pleased to answer your questions which you may have beyond this conference call. Thank you very much.
Many thanks. Bye-bye.
Thank you. That will conclude today's GEA Group Second Quarter 2018 Conference Call. Thank you for your participation, ladies and gentlemen. You may now disconnect.