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GEA Group AG
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Ladies and gentlemen, thank you for standing by, and welcome to GEA Group Aktiengesellschaft Third Quarter 2019 Conference Call. [Operator Instructions] I must advise you that this conference is being recorded. [Operator Instructions]I would like to hand the conference over to your speaker today, Mr. Thomas Rosenke. Thank you. Please go ahead, sir.
Good morning, ladies and gentlemen, and welcome to our Q3 2019 conference call. I'm joined this morning by our CEO, Stefan Klebert; and our CFO, Marcus Ketter. Stefan will lead you through the highlights of the quarter, and Marcus Ketter will take you through the financials later on. Afterwards, we are happy to answer your questions you may have. Let me now hand over to Stefan.
Thank you, Thomas. Good morning, ladies and gentlemen. [Technical Difficulty]So I'll start again. First of all, we upgraded our full year 2019 guidance for sales slightly. Until now, we guided for a moderate decline in sales, and as the first 9 months developed better than we initially expected, and we also see a solid order intake, we now expect sales to be, on prior year, stable in full year 2019. So we confirm our guidance for EBITDA and ROCE again. Let's have a look at the quarterly development now. Order intake increased by 5% to EUR 1.25 billion. And in combination with our sales development in the quarter, which I will explain in a minute, this represents a book-to-bill ratio of 1.02. In these more difficult days in the capital goods sector, we consider this as a good result. And in terms of sales, GEA reached again a new record level for Q3 with around EUR 1.23 billion, which is a 4% year-on-year growth. The strong development of the Service Business continued in Q3 with a growth rate of 8% and supported total sales growth and our EBITDA. EBITDA before restructuring was with EUR 143 million, slightly below of prior year's level. But if we exclude special effects in the amount of EUR 3 million, EBITDA would have been even slightly above previous year's Q3. You will get further information in the explanation of the EBITDA bridges in a minute. EBIT before restructuring was moderately higher than last year, which is due to a lower amount of purchase price allocations in the quarter. So it was EUR 8 million versus EUR 11 million last year. PPA was last year higher due to the acquisition of Pavan in 2017. So ROCE declined to 10.5% from 14.6% last year due to a decrease of EBIT and an increase in capital employed resulting from a higher net working capital level. Compared to Q2 2019, ROCE was flat. So to sum it up, very good order intake in the Q3. Order intake grew by 5% year-over-year, and this is a very good result in these days. We see sales grew by 4% year-over-year to a new record level for the group and was fueled once again by a strong Service Business. And EBITDA before restructuring was tough because of special effects in the net amount of EUR 3 million, slightly below the level of Q3 '18. Please follow me now to Slide 5, where I would like to give you a quick update on our strategic initiatives. We are just 1 month after the Capital Market Day. But as we have promised, we are committed to deliver on our announcements, and we do so. At the Capital Market Day, we have spoken about some short-term portfolio measures in our divisions, Farm Technologies and Refrigeration Technologies. On October 15, we initiated the first measure with the announcement of the possible disposal of GEA Bock, our compressor business, which is part of the Refrigeration Technologies division. Bock is a leading supplier of compressors for cooling applications, with sales of around EUR 90 million in 2018. And the main reason for this decision is that synergies that have been envisaged at the time of the acquisition in 2011 in the areas of portfolio, customers and development have not materialized. Therefore, we believe the company has a better future outside the GEA structure, and we are confident to find an attractive new owner for this asset. Let's move now to Slide 6, where I would like to give you a quick update on some very important personnel decisions. First of all, we are very pleased to welcome our new Board member, Johannes Giloth, who will join us on January 20. He will be responsible for procurement, production and logistics and will steer our initiatives on procurement and production footprint optimization we have outlined at the Capital Market Day in September. Johannes is a very experienced manager coming from Nokia, where he worked as Senior Vice President, Operations, responsible for global procurement and supply chain. So I'm convinced that we have a strong leadership team in place now to meet the challenges ahead of us and to deliver on our targets to bring GEA back on track in performance. Furthermore, we have filled all our 15 C-level positions for our 5 new divisions in the meantime, and also all our regional heads position. We also appointed a new Chief Technology Officer to underline the importance of new technologies for GEA, such as new trends in the food industry like plant-based products, meat and dairy alternatives. And last but not least, we have appointed all our divisional representatives in our over 50 countries. They are the backbone of our matrix organization, and they are the interface between division and the respective sales and service country organization. So to sum it up, we are on track with our new organizational setup that started on October 1, and all decisive appointments have been taken. So now I hand over to Marcus to present the financials to you.
Thank you, Stefan. Also a warm welcome from my side. Let's continue on Page 8 here with some more details on order intake, sales and book-to-bill ratio. Order intake in the third quarter '19 increased by 5% to EUR 1.25 billion and was also driven by 6 large orders amounting to EUR 122 million in total. Please bear in mind, the quarterly development was also positively impacted by the deferral of orders in the amount of around 60, EUR 6-0 million, which we have explained in the second quarter call. In the Business Area Equipment, especially the product group, separation, homogenization, flow components and compression, reported a significant growth in order intake. Business Area Solutions order intake was very positively driven by our Beverage business. The book-to-bill ratio as Stefan mentioned reached 1.02, which is, in this environment, a really good result. To sum it up, Q3 was, in terms of order intake and sales, a really good quarter. The macroeconomic picture looks challenging for capital goods in general. However, we are cautiously optimistic based on our order pipeline and conversations with our customers. Let's go to Page 9 now with EBITDA, EBIT and ROCE. As you are well aware of, from 2019 onwards, IFRS 16 is in effect and impacting EBITDA and also slightly, in our case, EBIT. EBITDA came to EUR 143 million, up from EUR 128 million last year. There were 2 major effects. First, in third quarter, we had a positive IFRS 16 effect of 18, EUR 1-8 million, which did not exist in Q3 2018, as just mentioned. Second, we have a headwind of special effects amounting to just EUR 3 million net in the last quarter. I will give you further details about the year-over-year change in EBITDA on the next slide. EBIT increased from EUR 91 million to EUR 94 million and was driven by a lower amount of PPA expenses of EUR 3 million and a positive IFRS 16 effect of just EUR 1 million. As in the second quarter of 2019, ROCE was down in the third quarter year-over-year, predominantly due to a higher capital employed, which is driven by 3 factors: first, a decrease in the last 4-quarter EBIT; second, an increased net working capital figure, which I will explain on Slide 13; and third, the phasing in of our IFRS 16 right-of-use assets in the L4Q calculation. Quarter-over-quarter, ROCE was almost unchanged. Q2 and Q3 are rounded at 10.5%, but ROCE is sequentially down by only 7 basis points. This is the result of a quarter-over-quarter [ light ] increase in L4Q EBIT and a capital employed which is a bit above the level of second quarter. The increase in quarter-over-quarter capital employed is almost entirely due to an increase in net working capital. To sum it up, profitability was around prior year's level. ROCE was down compared to prior year's level due to the decline of L4Q EBIT, the IFRS 16 phase-in effect on capital employed and a higher net working capital employed effect. Let's move to Page 10 with the EBITDA bridge. You might still remember last year's operating EBITDA of EUR 138 million, which excluded restructuring as well as strategic project costs. The EUR 128 million on the left is the EBITDA for restructuring, so including EUR 10 million of strategic project costs. To make it comparable with the third quarter of 2019, we added EUR 18 million IFRS 16 effects of the year 2019, which results then in a like-for-like EBITDA of EUR 148 million. When you see EUR 128 million and EUR 18 million, that is rounding that we end up at EUR 145 million. Let us now have a closer look on the elements of the bridge. Volume. Services growth resulted in the contribution to volume of EUR 13 million. The volume contribution from new machine sales was slightly negative with EUR 2 million. Margin, the positive contribution came mostly from new machines in the amount of EUR 12 million in addition to EUR 3 million increase in service margin of Business Area Solutions. In Business Area Equipment, the service margin was down EUR 3 million year-over-year, but this is just for the third quarter. We actually see improving service margin also for Business Area Equipment in the year 2019. The SG&A expense increase was mainly driven by higher personnel costs in the amount of EUR 15 million. This was caused by cost center reallocations within the OneGEA finance project for both business areas. In Business Area Equipment, it was furthermore due to salary increases in solutions predominantly, due to additional FTEs. The category, other, is mostly driven by EUR 4 million of additional costs resulting from the finalization of the asbestos case in the U.S. Lastly, FX had only a slightly negative impact of around EUR 1 million. EBITDA resulted in EUR 143 million for the quarter, including special effect headwinds of only EUR 3 million net. To sum it up, EBITDA, excluding special effects, is slightly above the level of last year's Q3. Please follow me now on Page 11, highlighting the major effects of the EBITDA bridge by segment. Let's start with the pro forma EBITDA of Q3 '18 of, again, EUR 145 million, including the pro forma IFRS 16 effect of Q3 2019. On the very positive side in the Business Area Equipment, volume increased by EUR 11 million, mainly due to the Service Business. However, a negative driver in the amount of EUR 9 million is in other costs. This includes legal expenses of EUR 4 million, as I just explained, for the finalization of our U.S. legal case. SG&A costs increased by EUR 4 million, mainly due to new cost center reallocation, as I also mentioned, within the OneGEA finance project. In Business Area Solutions, we had an improvement in margin by EUR 13 million, including EUR 1 million of provision release. That would still be improvement by EUR 12 million, as the provision release was related to our backlog review which we did at Solutions earlier this year. We were able to release actually EUR 1 million there. The increase in SG&A costs came to EUR 11 million, and this is the OneGEA finance project. In the ROCE, personnel expenses increased by EUR 2 million due to FTE as well as salary increases. However, we have a hiring freeze in place, and we also mentioned on the Capital Markets Day that we are bringing more efficiency within our company by saying that our goal is actually to have 800 FTEs leaving the company to increase profitability here. To sum it up, Business Area Equipment EBITDA declined by around EUR 3 million, of which EUR 4 million are related to special effects. Business Area Solutions EBITDA increased by around EUR 4 million, of which only EUR 1 million are related to special effects. I would like to draw your attention now to Slide #12, the development of our Service Business in the third quarter. Service Business developed strongly year-over-year, with sales growing by 8.3%, or by 6.6% excluding FX effects, and came in at EUR 396 million. Both business areas achieved a new record value for service sales for third quarter. The development was again driven by price increases, but also, and this is very important, strong underlying demand. At the Business Area Equipment, the clear majority of service growth came from the product group, separation and homogenizers. At the Business Area Solutions, growth was driven by an increase in service volume as well as better pricing. To sum it up, our Service Business has continued its positive trend in the third quarter, and we see a good environment for further growth, supported by pricing as well as a very promising underlying demand. Let's proceed to Page 13, so the net working capital development. We admit this does not look pretty, but we are working on it. The increase by almost EUR 37 million or 30 basis points year-over-year was mainly a result of the following 2 factors. Trade payables declined by EUR 61 million year-over-year and were only partly compensated by a decline of net trade receivables of EUR 34 million year-over-year. As stated in the second quarter already, the current elevated net working capital level is absolutely unsatisfactory. On our group-wide net working capital project, it was kicked off end of August and is currently analyzing the net working capital-related processes, and we'll make changes while we see them necessary. To sum it up, the reduction in net working capital is one of our top priorities. Coming from net working capital to cash flow on the next slide. Starting from an EBITDA of EUR 143 million, cash-out for net working capital was EUR 28 million in the quarter, mainly resulting from reduction of payables as explained before. Tax payments were EUR 12 million compared to an outflow of approximately EUR 21 million in last year's third quarter. Cash-out restructuring was EUR 6 million. The category, other, was positive by EUR 21 million and included pension-related cash outflows of EUR 10 million and add-backs from provision expenses of EUR 35 million, which is included in the EBITDA, but noncash. CapEx of EUR 29 million is also roughly on prior year's level, leading to a free cash flow in the third quarter of EUR 90 million. Taking into account these payments according to IFRS 16 of EUR 16 million and interest payment of EUR 3 million, our certified net cash flow came to a plus EUR 71 million. As a result of the positive net cash flow development, net financial debt declined from EUR 330 million to EUR 263 million. So summing up, free cash flow came in at EUR 90 million, net debt declined quarter-over-quarter to EUR 263 million due to the net cash generation in the last quarter.Coming now to financing and liquidity on Page 15. Starting on the left side of the slide, GEA continues to be solidly funded on a diversifying financing structure. The numbers shown are almost unchanged compared to the second quarter 2019. The difference is that the utilization of the bilateral credit lines declined from EUR 260 million to now EUR 193 million due to a positive free cash flow. We are showing this credit line, here illustrated in green, with the majority in 2020, although they are predominantly on an uncommitted base until further notice or rollover over on a yearly base. The bright blue bar shows the promotional loan with the European Investment Bank. The total amount is EUR 150 million, of which EUR 50 million are currently drawn. The availability period for this undrawn portion ends in 2020, but could be extended on a mutual agreement. As you can see, GEA has a good mix in different financial instruments. And looking at the details on the bottom-left corner, GEA's financed with a well-balanced financial debt portfolio with 2 credit lines reaching even until the year 2025. If you follow me to the right side of the slide now, GEA's healthy balance sheet with a solid equity position of EUR 2.4 billion has not changed materially since our last reporting. The covenant leverage is with a multiple of 0.6, relatively low, with an adequate headroom to our financial covenant of 3.0 in our facility agreements. The rating leverage stands at 3.1, which is still in line with our current investment-grade rating of Baa2 with Moody's, respectively, BBB with Fitch, as long as other KPIs are not deteriorating. The financial headroom in long-term financing instruments and the moderate net debt position are providing sufficient comfort in terms of liquidity. However, from a rating perspective, there's very little headroom right now if we want to maintain our current investment-grade rating. We are committed to our investment-grade rating, and our clear target is to maintain this going forward. To sum it up, GEA's in a comfortable situation with regards to financing structure and liquidity, is therefore well prepared for the future. I now hand back to Stefan, who will continue with the fiscal year 2019 guidance.
Thank you, Marcus. And so finally, a look at our guidance. As you are aware of, the macroeconomic framework has become even more challenging over the past quarter, and the outlook for the capital good industry has further deteriorated. Having this in mind, we are here not only to confirm our guidance for the full year 2019, but even raise our revenue guidance from moderately below to on par with last year's level. For EBITDA before restructuring, we confirm the range between EUR 450 million and EUR 490 million. For ROCE before restructuring, we continue also to expect a level in the range between 8.5% and 10.5%. So to sum it up, we slightly raised our full year 2019 revenue guidance to be on par with last year's level, and we confirm our guidance for EBITDA and ROCE. Please follow me now to the last page of our presentation, Page 19, which shows our road map. With the beginning of the full year 2020, the new organizational setup will be fully operational on March 17, so we will report our full year 2019 earnings and will publish our guidance for the year 2020. On April 30, we will have our Annual General Meeting, and 2 weeks later, the Q1 report is following. In June, we will hold our Divisional Strategy Day, which gives you the opportunity to learn more about the strategies and objectives of our 5 divisions. And on August 12, half year figures will be published. So here, we'll move quickly ahead in the next months, and we will use these events to regularly update you on the strategic initiatives we have presented so far. This will bring GEA back on track and raise further the profitability. So thank you very much for listening, and we are now taking your questions.
[Operator Instructions] Our first question comes from the line of Akash Gupta from JPMorgan.
I have a couple of questions, please. My first question is on order environment in Q4. I mean you had a good quarter in Q3, but you also say that part of that was driven by some order defers from Q2 to Q3. So maybe if you can talk about how do you see environment for orders and quoting activity out there. So that's question number one.Question number one -- question number two is on full year guidance. So if I look at your midpoint of guidance, EUR 470 million, then that implies EUR 141 million in Q4 EBITDA. And if we look at the last few years, then Q4 has been a stronger quarter than Q3. So maybe if you can comment on is it fair to expect that you would likely be ending up in the upper half of the guidance range than lower half.
Yes. So thank you for your questions. I mean so the project pipeline we are seeing at the moment is good for us. So -- but as you know, and as we also saw in between of Q2 and Q3, if it is about these big projects, it is very often the case that a customer is postponing a decision for 2, 3, 4 or 6 weeks. And therefore, it is always, in our business, not so easy to predict the forecast for a quarter which consists only of 12 weeks, actually. So we see a quite good order pipeline, as I said. But at the end, it will be the question, how many projects can we still turn into clear order intake in the Q4. But all in all, we remain quite optimistic. When it comes to the EBITDA guidance, it might look that Q4 is not as stretched as maybe the years before. However, there are still many challenges ahead of us, and therefore, we feel very comfortable with our guidance, which has a midpoint of EUR 470 million, as you know, and that's the reason why we confirm this guidance.
Our next question comes from the line of Sven Weier from UBS.
It's just one, and it's also a follow-up question on the order intake. Because if I remember correctly, in July, you were quite upbeat in terms of the order intake, and you thought you might end up flat after 9 months. So obviously, that has not happened. Are those orders -- and you mentioned the 4 to 6 weeks, right? So is that just that those orders that were missing are simply happening now in October? That's the question, please.
Yes. Thanks for the questions, Sven. I mean as I just described, it's in our business, sometimes, not so easy to really predict when the customers will decide these large projects. You know that we are talking about projects EUR 15 million, EUR 20 million, EUR 30 million order intake. And we see everything. We see that decisions are coming faster than expected. We see that decisions are postponed for 2 weeks or 2 months or 6 months. And we see also, all of a sudden, projects are disappearing. This is all what is happening in our business. And therefore, as I said, the project pipeline is good. We have a lot of interesting opportunities. We have very good negotiations and discussions with our customers. But the order intake is the order intake when it is signed.
I mean is your best guess on the full year kind of a book-to-bill of 1 or slightly above 1? What's your best guess on that end?
Yes. As I said, it's -- it might be around 1.
Our next question comes from the line of Sebastian Growe from Commerzbank.
The first one would also be around orders in the funnel, particularly, I would be interested in the APC Dairy channel, if you could just comment on what you're seeing there. I think there were some reassuring comments from Fonterra earlier this month on strong whole milk powder demand from China, in particular. You yourself have been pointing to some bigger dairy projects in -- with good margins. This is what you said, I think, on the second quarter conference call. And related to the order question, I would also be interested in your thoughts on the mid-sized segment, if I might call it this way. So anything that's between EUR 1 million and EUR 15 million, where it has been apparently a bit low this quarter. Is there anything you would like to highlight how you want to tackle that issue? Is this just unfortunate on the timing side, or whatever comes to your mind? And then I would have one more question on the EBITDA.
Yes. Okay. I mean we can say that when it was about Dairy Processing, we see that, obviously, this industry segment is performing better than the last years, where this business was suffering. So we see that there is a favorable order pipeline, a project pipeline, and that makes us very optimistic. At the same time, we see that all these organizational changes we made at the beginning of the year are turning in the right direction. So we changed a lot of managers in that area that we can have better project execution. And yes, we are quite optimistic that this is -- that this continues this trend. Also having ahead, like you mentioned, the situation that we see in China, increasing demand for milk powder. So all in all, this looks quite favorable, this segment.
Okay. That's good to hear. And then on the EBITDA bridge, I think you didn't comment really on what has been driving particularly the Business Area Equipment, the volume increase of EUR 10 million on the service side of things, at the same time, the margin being down EUR 3 million. Can you just comment on, on what is really worth mentioning around the mix within services at BA-E in particular? And on SG&A, obviously, that's gone up quite sharply in the segment, in particular. I suppose that is related to these very strong efforts you're making and particular strength in the Service Business. Or is there anything else we should have in mind?
[Foreign Language]
[Foreign Language]
Hello. This is Marcus. So when you look at BA-E, we have a volume effect here on EUR 11 million, and that's mainly service. And then we have a slight increase in volume for new machines of EUR 1 million and a margin increase of EUR 2 million. And there is really no pointing to a specific APC, but this is simply the product mix we are looking at. And BA-E service, which I said, it's a negative margin effect of EUR 3 million. That's simply really looking at quarter-on-quarter, with a strong Q3 after last year in service. As I said, overall, we see an improvement actually in service. Then looking at solutions. I think we are through the trough, at least as it looks right now. And we are seeing here improving margins, even though when you look at the BA-S results, they are still on a low level. But however, margins, when you look at quarter-over-quarter on the new machine business, are improving there. And especially a positive is here, that at BA-S, we have a positive service volume effect of EUR 3 million and a positive service margin effect of plus EUR 3 million, which is EUR 6 million. So service is improving, and our margin in our new machine business in BA-S is also improving there. So we see this, really, as I said, through the trough here.
And if I may follow-up on this margin improvement, also commentary on pricing. And it strikes me that, in the report, you are pointing to declining margins in the new machinery business. At the same time, obviously, we are seeing simply the price hikes sticking, it seems, particularly, I guess, for services. So the question ultimately is, to what extent are you optimistic that you will also be able to have the price hikes that you have on mind sticking, especially in the, say, short-cycle equipment business and later on, eventually then also within solutions?
Yes. We don't see that there's a real price pressure actually on the market side. So we are positive actually that the price increases are sticking. And when you have a BA-S here, minus EUR 3 million there, as I said, it's also -- it's a quarterly view here, but we are improving the margins. So price-wise, we are positive actually that we -- are we able to do this. We need to take a look at product mix which we're having. It's a contracting business there. So we don't see this really that we are under pressure there. As I said, we see quite the opposite at BA-S, that we are through the trough here.
Okay. And very last follow-up. Sorry for that. But the pricing in the Dairy aspect, is there any sort of positive readthrough? Because I think, from the past, it was the case that, especially for Dairy Processing, you had some sort of pricing power. Would you at least tentatively agree that we should have a positive tailwind from a better Dairy Processing demand if it is materializing as planned?
So coming back to your question about pricing power in Dairy, we have quite a favorable situation. But of course, when it comes to the big projects, we see also that competitors are getting a bit more aggressive, especially if they need to fill up their production lines. And so I would say we expect not a negative impact, but we also see not very big headroom to improve prices here.
Our next question comes from the line of Lucie Carrier from Morgan Stanley.
I'll have 3, actually. I'll go one at a time. The first one was on orders. I was hoping you could give us an indication around the current margin you see in your order backlog and whether the margin on order taken in the third quarter maybe could have tilted up or could have tilted down versus last year. So that's the first question.
We see no significant change or impact according to last year. We, of course, check our pre-calculations very thoroughly, especially in the solutions area. We also make sure that we have enough contingencies. But if we look at the pure numbers, our margins of order intake, we see no significant deviation to the previous year.
My second question is around the margin uplift in solutions. And the first thing, I was hoping you can maybe comment on the mix and whether this is kind of more mix-driven or whether this is maybe in relation also with your cost-saving initiatives that you have taken at the beginning of the year. So maybe to rephrase, how -- I mean, can you comment on the mix in solution currently? And also, how much benefit have you seen already from the cost-saving?
So if we look at the margin development of solutions, the mix, I would say, is even somehow a headwind at that time. And the increase we have is clearly and definitely coming from better project execution because this is really, like I said before, something where we put a lot of focus on. We changed many responsibilities, and we are looking much more in detail, what's going on.
And any benefit from the cost saves so far or...
From what?
From the cost-savings initiatives that you've taken in the beginning of the year.
No. No, no. That's too early at the moment.
And just maybe, as you said, the mix right now is a bit of a headwind. Can you maybe help us to understand which businesses you are specifically related to in terms of that headwind? Is that from the Beverage, I assume because you seem to say that was maybe a bit stronger?
Yes. We have -- I mean normally, Chemical is helping us to increase margins. Chemical is less turnover at the moment. And we have a little bit more of utilities, which is normally below average. So that is the main driver.
Our next question comes from the line of Nika Zimmermann from Deutsche Bank.
Just 2 really quick and one following up on my colleague from before. The first one is -- so what you just said was that we should see a negative product mix from -- arising from the increase in Beverage order intake and from the increasing in utilities. Is that correct, just to reassure?
Yes. I mean as I said, utilities order intake and margin quality is normally below average. Chemical is above average. That's what I have noticed, yes.
Okay. And then my 2 main questions. The first one. If I also look at the new guidance, I'm not going to focus on the EBITDA now, I'm more looking at sales growth, you would implicitly forecast around negative 6% growth in Q4. I'm just wondering, okay, you are conservative. But what -- isn't that quite a bit conservative?
I mean it's very clear that we not will exactly reach the exact number like last year, and whenever we give a guidance, there is a kind of tolerance, like you know. So we feel, at the moment, quite good with this guidance. It might be conservative, but there are many things in our business always happening. So we feel okay with the guidance.
Okay. So there's nothing in the backlog we should need to worry about?
No.
Okay. And then on the order intake again, given the EUR 60 million of orders you already announced in the Q2 call and which have moved to Q3, taking those out, order intake would have been flat. Is that -- so have you seen kind of a negative trend throughout Q3? Or have there been maybe any cancellations?
I mean, this is a very artificial question or, let's say, artificial calculation if you simply would take out now order intakes. Sometimes, it has to come, and in our business, a quarter is, as I said, it's simply 12 months. So for the capital good business, especially for the huge installments where we are talking about EUR 10 million, EUR 15 million, EUR 20 million, EUR 30 million projects, this is extremely difficult to predict in which week is it coming, and that has a -- as I said also before, always quite an impact. So we see no negative trend, let's say, even we -- as you see, we saw a good quarter. And as I also mentioned, the order pipeline is a -- our project pipeline is very favorable. And it's simply a question when is a customer making a decision, but we see no negative trend. And especially if we look at this environment at the moment in the capital good markets, we feel quite happy with the situation like it is.
Okay. And what about the cancellations? Because it kind of sounded now like the EUR 60 million you already announced in Q2 have not been even realized in Q3.
No. And we had no significant calculation -- cancellations.
Our next question comes from the line of Frederik Bitter from H&A.
So I would basically like to inquire a bit more about your working capital, and we've seen, obviously, the decline in payables. And I'm just wondering, when I hear you also in previous calls talking about obviously your procurement savings and sort of -- and I see that in combination basically, or relative to the decline in payables. Is basically the decline in payables a structural phenomenon? Let's say, you're helping your suppliers with payment terms to realize some procurement savings. Is that the way to look at it? Or how should we think about it?
No. I don't think that's the way how to think about this. I think we have a great opportunity here to really improve our terms and conditions with our vendors, which, in the past, might have not been as tough as we see sometimes from our customers in their terms and conditions to our side. I think what happened is we simply actually paid according to the current terms and conditions, and we are actually in the process of changing the terms and conditions with our vendors. And as Stefan mentioned, we're going to have a new colleague who is responsible for -- also for procurement. It's going to be a major test for him actually to expedite this. So we have really room for improvement on the accounts payable side, also with different tougher terms and conditions.
Our next question comes from the line of Daniel Gleim.
There are actually 2 of them. The first one is for Stefan on Dairy Farming. I've seen in the appendix of your presentation that the current order trend is still firmly negative. Maybe you can elaborate a little bit where this weakness is coming from by products and regions and where you see the trends evolving given that the milk price has ticked up and feed prices are coming down, which should be a positive signal for the market. Is there already positive commentary from your sales force? Where do you see that trending into Q4 and potentially in the first half? That would be the first question on Dairy Farming. Then for Marcus, on net working capital. Of course, the seasonality makes it a little bit hard for us to track what the underlying trends are here. But maybe you could comment a little bit on what the short-term measures are concretely and when you would see them bite, i.e., when are we going to really see an underlying improvement, keeping the seasonality aside? These are the 2 questions from my end.
Okay. Thank you for your question. I'll start with the big farm technology. We are suffering mainly from a weak order intake in the U.S. this year. That's a mixed situation, let's say, a little bit homemade, a little bit coming from the market. We also address some changes here. And we hope and we are optimistic that we can turn around that in due time. That's the answer for the first question.
Okay. Coming to the net working capital. Of course, we're going to have short-term measures now until year-end, as we have in every year. And you saw that actually last year, where we came down from end of Q3 '18, from EUR 904 million net working capital, until the end of the year to EUR 747 million. And of course, we are in the process actually to optimize this again. But this is, of course, the short-term measures there. Now coming to the second part of your net working question, was when do we see a structural underlying improvement of net working capital? And this is something definitely we wanted and we knew we will achieve in the next year. We're really working actually to lower structurally our net working capital level and not just have the seasonality actually going up and down, going down in the fourth quarter, going up in the first quarter. Again, there might be, of course, a seasonal effect of the first quarter. But however, we will be very diligently working next year on structurally lowering our net working capital level.
Our next question comes from the line of Sebastian Ubert from Societe Generale.
One question left from my side, it's on the margin. Keeping the EBITDA guidance flat, which implies about 30 basis points on a group level, but even more significant drop of 100 basis points plus on the margin in the fourth quarter, what is going to happen here? What is driving your more, say, yes, lower margin outlook for the fourth quarter in particular?
Okay. There are, of course, 2 things. One is, we are conservative, and this is how we actually derive to our guidance, the first point, and we had got -- we had several questions today in regards to our sales, so forth. As I said, we want to stay conservative here for a while, not be too overly optimistic. This is one part of it. The second part is we are coming actually to year-end close in the fourth quarter, obviously, and we're going to actually look at all of the company and see if there needs to be done something in regards to taking some charges here and there. We stick with our guidance. Our guidance is as it is, EBITDA before restructuring, including all other expenses, except the restructuring expenses to make this very clear. However, as I said, we're looking at the fourth quarter and at year-end close. And therefore, we also stay cautious and see if, there, we need to take some charges here and there or not. And that's why we give a conservative, we think, guidance.
Okay. And then maybe one follow-up question, also related to the cost savings that should come from the, yes, initial cost savings program at solutions. Did I get it right that for this year, you do not expect any significant cost savings yet to drop through, but more in 2020.
Yes, that's basically right. So a little bit of the savings will kick in. So you know that we did reduce personnel with the first activity. So meanwhile, about 100 people already left the organization, but the proportion of what will be kicked in this year is quite limited. So the full effect is expected next year.
Our last question comes from the line of Akash Gupta from JPMorgan.
I have a question on Bock. And maybe if you can indicate or provide some indication on margins and potential proceeds from this divestment, and also whether this would lead to any write-down of intangibles, particularly goodwill.
So we -- so it's -- so first, to the goodwill. There will be no impairment of goodwill because Bock is not a cash-generating unit. So from our first perspective, we will not take a goodwill impairment charge there. But there are significant improvement in margins, where you need to take a look actually at the -- well, you need to take a look at the sales side. So the sales side in comparison to the sales side of the whole group is insignificant. So there will be no significant bump on the margin side when we sell Bock, but it's going to clear up our portfolio. That's the reason why we do this.
We have 2 more questions. And our next question comes from the line of Peter Rothenaicher.
Some technical questions. So your consolidation line has increased in terms of sales order intake as well as EBITDA. Is there some special reasons, structural changes or something like that?
The quick answer is there is no structural change. It's just a quarterly perspective there. So that might change from quarter-to-quarter, but there's no underlying fundamental structural change.
Okay. Then regarding your net financial result, it has become somewhat worse in the third quarter compared to the previous quarter. What is your best guess for full year net financial result now?
Yes. Okay. So let's -- well, it's something that's not going to be really significant here as we looked at it. So we're going to give you actually that off-line later on. You can call Investor Relations, actually. But as I said, it is not going to be a significant expense driver here, anyway.
And my last question is on restructuring charges. So in the third quarter, you booked a relatively low amount. So for the fourth quarter, is it fair to assume that there will be an amount of around EUR 20 million of one-offs, then it's, for the full year, around EUR 55 million?
Yes. There will be further charges. So the number you mentioned could be up to, right? We are still actually in the process of our restructuring there. So the number you just mentioned, up to EUR 20 million, could be right. However, this is, of course, without any impairments we might take, which are below the line of EBITDA.
Our next question comes from the line of Sebastian Growe.
It's actually a follow-up to Peter's questions around the charges. I mean as you make a specific reference in the report and say that you cannot exclude noncash expenses, et cetera, I think you alluded to it at the Capital Market Day. You now said EUR 55 million might be the appropriate number. My question is if there's anything else in the meantime that has happened now where this divisional reorganizational structure is coming closer, which might urge you to, yes, step-up the overall efforts beyond what eventually we have on mind so far. That's the first question. And the other one is related to the cash flows and where you talked about the cash add-backs from provisions of EUR 35 million. Marcus, could you just outline exactly what's behind that? Sorry for not understanding that properly.
Yes, Sebastian. Let's do the first question, the noncash charges. So we don't see, from a restructuring perspective -- the restructuring expenses, as we mentioned, we don't see that there is any step-up we need to do in comparison to what we saw on the Capital Markets Day. What I was referring to in regards to potential impairment, this is, of course, the impairment testing we do at year-end with the new 3-year plan. And this is what I was alluding to, that we're going to, of course, have to check cash-generating units, et cetera, with the reorganization and with the new 3-year plan. And as I said, we did not include this in our guidance for restructuring expenses, but also 2 things: a, that would be noncash; b, that would be below [ EBITDA ]. So that's for the first part of the question. The add-back, well, [ starting first, holding ] free cash flow or operating cash flow [ isn't in there ], right? So we start with EBITDA. And if you have [ an EBITDA charge ] in there, which are noncash [indiscernible] to assume that, that charge for EUR 30 million in the [indiscernible] EUR 35 million [ I mentioned ], which was noncash, and you start having your cash flow from EBITDA. You are now ready to add this back, basically, in the expense with this cash in EBITDA. That's what I was referring to under other with the EUR 35 million add-back. Did I make myself clear?
Yes. That is absolutely clear. The question is -- I mean, the magnitude is obviously quite striking and quite a big chunk, I think, when looking at the operating cash flow of [ 110 ]. I think it's first one to that kind and to that extent, and that was the reason for the question. I think there hasn't been any specification in prior quarters. So that was why that catched my attention.
Our last question comes from the line of Lars Brorson from Barclays.
If I can just follow up on the guidance for the year. And sorry to belabor, but a EUR 40 million range for a Q4, that should deliver EUR 140 million, EUR 150 million at the EBITDA level, seems quite wide. I think I heard, when I joined the call, Marcus talking about some charges "here and there." I wonder what specific they are. If I can press the point maybe, Stefan, just on the guidance for the year. I mean you raised your revenue guidance. Your higher-margin short-cycle business is doing well, including services, where you've just lowered the impact from strategic projects from EUR 50 million to EUR 40 million for the year. You're getting a bit of cost savings coming through. Why aren't you quite specifically committing to the higher end of the range, if I can be so clear?
Okay. Good question. Because the year is not finished, and we have still many things to do. You know that the fourth quarter is always proportionately a very high impact on the total result, and that we changed many things in the organization here also in terms of responsibility, that GEA was doing a lot of changes. So we feel comfortable with the guidance as it is right now.
Okay. Coming to your question regards what I mentioned, charges here and there. To be really straight, I mean, we are at year-end. We want to start -- we will start with a solid balance sheet for next year. So we will be -- as every year, we will be scrutinizing everything we have on the balance sheet. And as I said, we are sticking to the guidance, but within our guidance, we might take some charges here and there, if necessary, at year-end.
You can't specify what those would be at this point?
And -- no. Not at this point. As I said, we're going to do -- I mean every company does it, we're going to go through the balance sheet again. We do also quarterly, but scrutinize it. We have a new 3-year plan. We're going to look at the value of all immaterial assets we have on the books, for example, but that would not be EBITDA if something happens there, but we do this with all, with everything, and then we see what we perhaps need to do. But that's part of our year-end closing process. And sometimes, it's below the line, and sometimes, it's above the line and not restructuring. And that's what we want to prepare everyone here, that we might take some charges within our guidance.
Understood, Marcus. And just on the lower guidance for strategic projects for the year. I also see you're notching up your CapEx guidance. So are you capitalizing more of these strategic projects? Or what is driving that number lower in terms of the full year guidance?
Less strategic projects because we don't have any new strategic projects. Because the strategic project is going to go away because this was the old definition and this is not part any longer of our new guidance definition, so we do not add any new strategic projects. And we just single them out right now for like-for-like comparison reasons. If we take any charges, as I mentioned, you will see this mentioned as special effects. But as I just said, we are fully aware that this needs to be within our guidance.
And finally, if I can just ask briefly to inventory levels. I think I heard you talk about structural improvements from your new program coming through really in 2020. But there are also some transitory headwinds as far as inventory levels are concerned. You've had some issues or you've been dual-sourcing on dual inventory levels, I guess, out of Australia. We've had Pavan come in with relatively a high level of inventory levels. Again, there should have been some adjustments come through there. I would have thought already now, we can start to see some improvement around inventories. They're not quite coming through. Can you talk a little bit about some of these transitory headwinds and whether they are still a headwind for you as far as inventory levels are concerned?
Inventory -- from our point of view, inventory right now is now a market -- or no, no, headwinds, really, it's just a question of getting more efficient. And as I mentioned before, when it comes to terms and conditions for all accounts payable, it's here definitely a question of becoming more inventory-efficient, using less inventory, using more just-in-time delivery. And Stefan makes it really a point, actually going to the different production sites and also looking at how much inventory is there and what is really in the pipeline there. And we have now a global production hat here internally and also an Executive Board member who will be responsible for that, and it's now all about getting inventory efficiency up.
Okay. So you can't comment specifically on this [ Australia ] and Pavan, where, again, we've seen some relatively elevated inventory level associated with those.
We are looking at Pavan. We will be looking, of course, also [ early ] because it's our biggest site and see if we can make more inventory efficiency drive there because that's a big lever when you look at the inventory. But this is part actually then of our production inventory efficiency program, which we are setting up.
There are no further questions. I would like to hand the call over to Stefan Klebert.
Thank you. So thank you all for listening and for your helpful questions. I hope that we could answer to your satisfaction. And to sum it up, again, we have a quite optimistic outlook for the next quarter in terms of order intake. We are also very, very optimistic that we can reach our guidance, of course, and that this will be, let's say, a first good year for GEA to see and to start the turnaround to higher profitability. So stay tuned, and yes, see you or talk to you next time. Thanks.
Thank you. That concludes our conference for today. Thank you all for participating. You may all disconnect.