Donat Müller - Head of Investor Relations Helmut Schmale - Chief Financial Officer Jürg Oleas - Chairman and Chief Executive Officer

Lucie Carrier - Morgan Stanley Klas Bergelind - Citigroup Inc. Max Yates - Credit Suisse AG Sven Weier - UBS Investment Bank Felicitas Bismarck - Deutsche Bank AG Wasi Rizvi - RBC Capital Markets Frederik Bitter - Exane BNP Paribas Peter Reilly - Jefferies LLC Joerg-Andre Finke - HSBC Daniel Gleim - MainFirst Bank AG Jasko Terzic - Metzler Equity Research

Good afternoon, and welcome to GEA Group's Third Quarter 2017 Conference Call. GEA's CFO, Helmut Schmale, will shortly present the numbers before the CEO, Jürg Oleas, will join in us to answer questions.

Without further ado, let me now hand over to Helmut.

Welcome to our call. Let's start with some key messages.

So the order intake for the quarter was organically flat and nominally down by some 2.5% because of FX headwind which we had. There was only one large order worth €35 million, which was awarded to our application center food.

Reported sales were up 4.3% organically and still up 2.7% nominally, with an FX headwind of about 1.6%. The operating EBIT of €135 million excludes the further provision of a €14.5 million for the bottling project discussed in more depth after quarter two.

This represents an increase of some 18% in the profitability over prior year. The operating return on capital employed and cash flow allowance margin slightly improved sequentially, but are still down year-on-year from the adverse development in operating profit during the last four quarters, including €22 million cost for the bottling project and the working capital level, which is still above prior year.

Let me give you a little bit of an update on the share buyback, as published in weekly updates on our website. We have meanwhile spent some 91% of the €450 million set a side for buybacks and have bought back some 11 million shares.

Now let's turn to the key figures of the quarter in more detail. Firstly, order intake.

The business equipment saw moderate growth to which the recovery in dairy farming contributed, particularly in North America. However, weakness in China, coupled with further slack in marine, oil and gas, and biofuels negatively impacted the separation business on the other end.

Within the Business Area Solutions, the APC's food utilities and dairy were slightly up, whereas beverage, chemicals and pharma were down. Altogether, order intake could not match prior year for Business Area Solutions.

I forgot to say both business areas were up year-on-year. The volume for the business equipment developed in line with the current order intake.

The new machine business grew, and service's volume was somewhat weaker compared to prior year. The Business Area Solutions saw particularly strong revenue realization in dairy and food this quarter, whereas Pharma was somewhat weaker.

EBITDA, BAS took a further provision, as I said, on the background of previous page. So BAS has taken a provision of €14.5 million for the five bottling project mentioned previously.

Before these extra charges, the EBITDA rose to €135 million, an increase by over 18%. From this adjustment's perspective, the EBITDA margin rose by some 150 basis points for the group.

Let's turn to the order intake development and sales trends over time. These trailing 12-month curve provides you a better impression on the order intake and sales trends and other in a quarterly view on the trailing 12-month view.

In summary, we can observe dairy farming is recovering. Dairy processing is leveling.

Although sales are increasing, book-to-bill, still below 1. Beverage's moderate decline continuing; food, growing; pharma and chemical, there is an upward trend since a couple of years.

However, showing some sideways volatility and becoming softer lately. Other industries, we find a stable development.

Book-to-bill ratios. This slide differentiates the weighted average book-to-bill ratio of 1.2% for the group by geographies and industries.

The ratios are calculated on a last 12-months basis to smooth out seasonalities and random quarterly fluctuations. To summarize the picture along its two dimensions.

In terms of geographies, the Americas, DACH and Eastern Europe as well as Latin America are the regions solidly above a ratio of 1, while Asia Pacific is moderately above 1, and EMEA and Northern Europe are significantly below 1. In terms of industries, food, pharma and others are comfortably above 1, while dairy farming and chemical are moderately above 1.

Dairy processing and marine are lightly below 1, and beverages, and oil and gas are clearly below 1. All other industries have a book-to-bill ratio comfortably above 1.

And as usual, the lower box gives you the rates of the cost of sections. Order backlog came down in quarter three sequentially as a consequence of sales exceeding order intakes significantly and fell below quarter three of prior year.

Return on capital employed. The recent decline in these curves reflect the decline in EBIT as well as the increase in the annual average of working capital.

Based on the quarter three result, this large fourth quarter trend now managed to turn around. While the blue curve uses operating EBIT as the numerator, the orange curve is unadjusted and shows the impact of the one-off charges mainly related to Fit for 2020 and strategic projects.

Let's turn then to the working capital. As of reporting date, working capital increased sequentially.

The last four quarter average rate came up sequentially as an automatic consequence of the current third quarter average working capital level, exceeding last year's third quarter average. The next table reports a more granular view on the drivers of the working capital.

Key focus was to bring down trade receivables, which has been achieved with some success since December 2016. Also, sequentially, trade receivables continued to come down.

The drivers for a light sequential increase in working capital were: inventories went up this year, partially driven by mainly the increase in inventory to support quarter four sales; and higher cash deposits to our suppliers. Sequentially, POC liabilities came down as a normal consequence of prepaid portion of the order backlog getting completed.

This was offset by an identical decline in POC receivables. Advance payments, other than for project work, also came down.

Similar to return on capital, the cash flow driver margin is a metric which is based on last 12 months. Also, the cash flow driver margin has been impacted by the decline in the rolling EBITDA since quarter 2016 and the increase in the annualized average of working capital.

As visualized, the light blue and gray portions of the stacked bars. Again, the orange curve is unadjusted for restructuring and other one-offs as well as the PPA effects from recent acquisitions.

Let's then take a deeper look into the net liquidity development. The free cash flow from continued operations for the last 12 months, adjusted for expenditures for Fit for 2020, was almost €250 million.

Most of the items in the bridge are self-explaining. The bucket other includes a payout for pensions of about €30 million.

The service sales continued to grow here on a level of 3%. And the share of service sales in total revenue stands at 31%.

However, the service volume fell short of our internal expectations for the quarter and likely will be softer again in the fourth quarter. Then, let's turn to the outlook for the year 2017.

We currently expect to close the year 2017 at the lower end of our operating EBITDA target corridor of €600 million to €640 million. Key factors are sales growth at the lower end of the outlook scenario as at quarter two 2017 and lower service volume in quarter three 2017, with a softer growth outlook for the quarter four 2017, and services, of course, has an above margin impact.

And at that point of time, I then would like to hand over to Jürg to our outline on the next financial event.

Thank you very much, Helmut. Before we come then to the Q&A, we would like to draw your attention to key dates at the beginning of next year 2018 as we will communicate on March 12 the full-year results of 2017.

We also are planning to do a Capital Markets Day around the same day – probably at the same day, March 12. At Capital Market Day, we'll have the following topics, the progress report on the OneGEA implementation.

In many areas, we have finalized. In some areas, we are progressing.

In some areas, we are behind schedule. So we will address those topics.

Then, we will also address the going-forward way that will allow us to take full advantage of the new organization, which is more and more now becoming functional around the globe. We have clearly achieved some important milestones with this major transformation for GEA.

We are a much more customer-oriented organization. We do believe that this will lead in the future to more growth.

You may ask yourself why haven't we grown then in the current year or in the last year. In the Q&A, we will maybe come back to that.

But I can already address that we have one major setback over the last couple of years, which is dairy processing, which has costed us in the last three years about annually 3% growth, as I have already indicated also in the Q2 conference call. Besides that, the new organization will much more focus on service, so we would also like to give you an update on that on the way forward.

Then, we will also have then the numbers available for a long-term outlook for GEA, with the measures to be taken beyond Fit for 2020 and to OneGEA to improve the performance and the operational efficiency of GEA for the next couple of years. Having said that, I would like to come back now to the Q&A and to hand over to the manager here of the conference call, Donat.

Will you introduce to the Q&A please?

We are now happy to take your questions that you have. Take the first question operator, please.

Thank you. Good afternoon, gentlemen.

I will have three questions. The first one is you commented on your expectation regarding the sales growth for this year, but I was wondering if you could give us some color on your progress regarding the cost reduction initiative that you had announced at the first half 2017 for the second half 2017.

That's question number one. Second question is around the operating leverage and the mix.

It seems to me that both on the equipment and the solution, it probably was a little bit less leveraged than expected. So I don't know if it's because of specific adjustment or mix effect, so bit more color on that would be helpful.

That's question number two. And then finally, over the past few quarters, you've had different changes in reporting, different cost optimization, and so on.

I was just wondering if you could please walk us through in terms of the one-off various charges of restructuring and optimization we should expect now for the full-year 2017 and the full-year 2018.

Yes. Let me take the first two questions, and I would like to ask then my colleague to take the last question.

Regarding your question about the progress of the cost reduction of – I believe, you referred to the admin costs that we lined out in Q2 call. They are progressing well, slightly behind what we called at that time the high-end case.

So it is somewhere in between. However, the low-end case, as Helmut just said, [indiscernible] is more probable because of the development of sales.

And having said that, you have addressed right a question with the operational leverage. Structurally, GEA is quite vulnerable to volume.

If we look at the block of personnel costs, which states here will be around €1.295 billion, I would guess, total personnel cost. And the EBITDA of the given items in that relationship is almost €1 billion to €2 billion, which means that the volume drop of €100 million in sales can hit us in the EBITDA with something like €30 million to €40 million or even beyond €40 million impaired.

So the volume is quite decisive. What we did observe in the last two months of this Q3 in September and August is a soft slowdown of the service volume.

Service is still growing. However, service, of course, comes with extraordinary high margin, so that leverage is quite high compared to the new machine business.

In combination with that, we do see currently that we will come out with the EBIT at the lower range of the given guidance. Regarding the reporting of one-offs, Helmut?

Would you like to answer that?

Yes, I can take that. Certainly, at the occasion of the second quarter, we said that we will have some strategic projects, which, at that date we laid out what it is or what these projects are about, which would have a P&L impact in this year of €57 million and the CapEx impact of €55 million.

And for the year 2018 then, €43 million P&L impact on CapEx, €45 million. Now if we focus on the year 2017, I believe that including now the remaining Fit for 2020 expenses, which we still have at the beginning of year of about €12 million, all-in, the P&L charges for strategic projects will be around €60 million, and the CapEx will be about €55 million maybe a little bit less, around €50 million for this year.

So were you saying the total charge between Fit for 2020 and the strategic project will be €60 million in the P&L for this year? Is that correct?

Yes, that's correct.

Okay. Understood.

And just if I could come back to the provisional leverage question and your comment about the services. I understand you had a slowdown.

Can you maybe help us to quantify the impact of the slowdown in services around the margin momentum here for us to extrapolate that maybe into the fourth quarter?

We do not disclose the service gross margin here. So I would like to apologize, but I cannot disclose the leverage for the service.

But to give you a hint, the service gross margin is substantially above the new machine gross margin on both spaces, that is BA Solution or Equipment.

Thank you.

Hi, Jürg and Helmut. It's Klas from Citi.

I got three questions. I will take them one at a time.

The first one is on the overhead savings and the gross margin. You said slightly behind on the overhead.

I think you targeted around €50 million in the second half versus the first. What is slightly behind?

Do you think perhaps €30 million? And where are you slipping?

And then turning to the gross margin, is it sill targeted at 31.8% for the year? It would be a pretty big step up in the fourth quarter, a gross margin here, clean of bottling lines of 32%, 33% to reach the full-year on my numbers.

Is that the way to think about it?

Well, Helmut, here. Maybe I'd take the question on the overhead first.

So what we said that we would like to come down to an overhead level now that meets the bridge between the gross margin and the EBITDA of €410 million for the second half of the year 2017, of which we have now spent in the third quarter €211 million. So there remains about €200 million to come close to our target.

And this is based on the fact that we assume that given a higher load with more volume, and based on the fact that our operational expenditure saving program now really kicks in, that we believe we can still achieve that level of overhead, which we were indicating on the basis of quarter two call, where we said, well, it could be around €410 million for the second half of this year. Now talking about the gross margin level, what you need to understand here is that in principle, we need a gross margin then for the remainder of about 32.7%.

And this is not that much different to what we have achieved in prior years. So in prior years, it was some 33%, 35%, then again, 33%.

And if you would adjust the fourth quarter 2016 for the bad projects that would be then also gross margin, which would be falling through the ballpark of the gross margin we need to achieve also for this year. So this is why I am confident that from the gross margin point of view we can achieve the target.

I would like to add, Helmut, it's less a question of the gross margin. I'm also confident, as Helmut just said, it's more a question of the volume.

So volume multiplied by that gross margin that is the effect.

Absolutely. But my point is that if we are back to that level, that is levels we have seen pre the significant profit warning in the third quarter of last year.

So absolutely correct, but does that mean that the execution issues are now fully behind us? That is really the question.

Well, the gross margin development depends, of course, a lot on the product mix of the different APCs or products groups in the two business areas. So it depends on which product group or APC is growing more or less and the other.

So that is not easy to compare. But the pure execution things, which we were explaining in the conference call for Q3 last year, I believe that most of that is behind us.

So we did not have, beside the bottling things, any major surprises as we unfortunately had to report in Q3 last year, with the exception of the ABF bottling lines, which Helmut has lined out in his summary of the Q3 report.

Maybe I can add to that point. You were asking – basically, you also falsely implied volume development.

And Jürg said, well, that is the driver of – or what happens now? Let me give you a reference point here.

The year to grow volume as percentage of total sales was in the prior years always around 29%. So it is also for this year.

So that pretty much the ambition in the volume is in line what we had also in prior years.

Very good. My second one is on financial targets, and I know you will come back here during your Capital Markets Day, but just a couple of things.

When I recently met you, Helmut, you said that it will be difficult for the Solutions Business to get back to double-digit margins as we're faced with the peak in milk powder and maybe soon also in instant coffee. In that light, we can see that the equipment division need to deliver near 20% margin to get to your current targets.

Can we talk about the margin potential for equipment? Your SG&A to sales is already in line with best-in-class players.

We know you have more to do in terms of manufacturing, and there is probably more to do on the service side. But still a major jump here require you – with no major cyclical support that we see at your peers.

Could we comment on a manufacturing service over time, what is the opportunity for equipment?

Yes. As you rightly said, the equipment has improved the margin nicely over the last two or 2.5 years.

Of course, it's always difficult to find a peer because most of the peers which you may have in mind are only comparable to maybe 10% or 15% of total GEAs volume. The margin of solutions depends very much on the product mix and what we do see currently.

And I cannot say what it is, is also valid for the next year or the next two years. But what we are currently see is that the markets are turning, unfortunately, into a buyer's market not in all areas, but in some areas.

So the times which we had in 2014, 2015, where we had clearly a seller market which, of course, had to do then with the price, but also the payment terms, terms and conditions, contractual conditions in some areas have turned, especially in the area dairy. Of course, as you can imagine, of course, it's a massive setback of the available volume in the world market since 2014 and 2015 on dairy.

So that has completely turned into what I would call, unfortunately now, buyer's market with different pressure on the prices, et cetera. As I have said in the Q2 call also we are currently doing the budgets.

We will discuss this with the supervisory board in December. We are finalizing this now with the managers of GEA.

And then we will come out at the beginning of the next year, as I've said, with the outlook and the new guidance, which is then based on our budget for next year. But we do see no – from the market point of view due to this headwind, not a support from the market at this point in time for the near-term future for the margins.

My final one, and I promise to be quick, is on service growth. Now lackluster in the quarter in Americas.

This has been one of the areas where there has been upside potential, and now, growth disappoints. So what exactly happened?

When can growth come back? And can you talk more about the strategic initiatives to increase service growth?

Is it making the business more captive? Is it reach?

Do you need to add more people? More feet in the street?

So why services should increase from here?

Yes. There are couple of initiatives which we have launched already at the end of last year.

First of all, it's people service. In most areas, they did not at all.

But in most areas, it's a people business. And those peoples, when you hire them from the street, they have to be trained.

So many of the service people which we have hired are under training now in the different training centers or the different product groups and application centers in the world. So before they put their feet on the ground in order to create revenues, we have to have some patience.

How many people of service are at the hiring currently? We are talking here of a couple of hundred.

So we're not just hiring 50 or 60 people. We truly believe that there is a huge potential for GEA out there, so we are hiring a couple of hundred service people.

But they first – most of them have to go through trainings, et cetera. So it takes 1/2 year to 3/4 year until they put on their feet on the ground and start to generate sales and gross margins.

When it comes to other service initiatives, we are currently investing and rolling out tools like installed fleet to have a monitoring of all installed fleet, then also our CRM system, which is not only for service, but also for new machines will also help the service people. Then we are standardizing some other tools for our service people on the street in order to have efficiency increases, et cetera.

And best practice gains from good service sales we had in the past, which we are applying now across all of them. So there's a couple of initiatives.

Some of them are also costing us money. And it's not all in the overheard, some is in the operational result.

And I'm very positive this is good investment because service offers us a very high gross margin. And we do see that in many countries in the world, especially in the emerging countries, our penetration factor has been quite low.

And where we have invested in countries like Columbia and some other good examples, service business has grown tremendously.

Thank you.

Hi. Thank you.

Just my first question is around recent raw materials moves. Obviously, we've seen these move up quite substantially through the quarter.

I just wanted to check how you plan to deal with this in terms of your pricing. Have you already started putting up prices in response to this?

Or is that risk that we see sort of a margin squeeze over maybe the next couple of quarters as those start to feed through to your production? That's the first question.

Yes. Usually, we have two different type of businesses.

One is which I call more the catalog business, where we have standard mass product, where prices are adjusted on a very regular basis. And of course, this raw material is factored in there when price adjustments are done.

Then when it comes to the more project or solutions or system-oriented business, we usually don't try to take any risk for the execution of raw material prices. So when we take the contracts, we try to hedge as much as we can from the raw material prices.

However, as I said, the combination is a bit tricky right now also because of the strong euro. As you know, in the last three or four months, the euro has appreciated quite a lot towards some major currencies like the pound, the dollar and some other currencies in China, et cetera.

So that combination leads more to a buyer's market, as I explained some minutes ago. So it will be not easy for our people to put those prices through if you're buying what you just have addressed with raw materials, but also the currency.

The currency, if it stays as it is currently, the euro, in relationship to those other currencies, will give us some headache not in the translation. That is easy.

But of course, in the transaction because our current production footprint is by – its vast majority coming out from the euro zone.

Okay. Just second question would be around the productivity and procurement program that you talked about at the last Capital Markets Day.

You obviously gave quite a few slides about how you had, I think, it was 65 plants, and an average of 73 people per plant, and too many small plants. And then, also that you had a very fragmented procurement, all sort of list of suppliers.

You had 26,000 suppliers. So I guess, what I wanted to understand was that given everything that went on with the profit warning, a lot of the reorganization that was going on at the time and the time that process took up, did you actually manage to make any progress with this?

Or was it effectively put on hold? I guess trying to understand, is the number of suppliers you have still 26,000?

Or is that something you have actually been working on behind the scenes?

No, we have not put it on hold. On the production manufacturing footprint and on the supply chain, we are continuing.

And we are going to boost that now in next couple of months more as we have many other constructions sites within GEA to solve with this major transformation. And this is actually going to be one of the key topics for that Capital Market Day, which I said for the beginning of next year.

However, you have to see that our people have managed to increase efficiency in many parts. Not everywhere, but in many parts, beyond Fir for 2020 because the average salary increase, which we had, from last year to this year combined with the headcounts is leading to an increase of the personnel costs which, I would guess, at the end of the year compared to 2016 is going to be around maybe €35 million to €40 million.

And that has to be digested with productivity increases, et cetera, which the people is doing. But beyond that, we're working on that.

And we would like to inform market on that Capital Market Day with more precise targets and time lines.

Maybe just to give us a feel, if you did have 65 plants back in 2016, I mean, how many of those have you closed? A couple?

Three, four, five this year? Just to give us a sense that actually something has been done.

Well, as you may, it's not only about closing. If you remember, we said that we are doing most – or we carried out a detailed analysis of make-or-buy decisions.

You may have seen that we sold also. Recently, we announced that to the outer world.

We are currently – but I would not like to disclose the size because it's a bit tricky from a legal point of view. But in one of the major factories which is affected, we are currently starting to do a voluntary leave program, et cetera, in order to massively reduce the capacity of that site and these types of things.

So we have started, but if you ask for real closures, we have only closed one so far. But we are in the progress now to go one by one.

Okay. Just my final question, quick one on that on the Pavan deal.

I think you said quite helpfully with the rest of the acquisitions that you've done since the disposal of Heat Exchanges, you talked about you bought on average at a multiple that was lower than the Heat Exchanges disposal, and on average, the deals had been margin accretive. Obviously, we didn't get a multiple for the Pavan deal.

It was quite sizable. I mean, can you give us any sense of whether that was below where you sold Heat Exchanges for?

Was it broadly in line? Just in the same way that you'd referenced previous deals.

I appreciate it was probably high margin on average than most of the deals that you've done, but just any kind of guidance on multiples relative to the Heat Exchanges disposal.

Yes. We're not likely to disclose the multiple or the price paid for that.

However, I also would like to address that when we sold Heat Exchanges, the multiple at the stock exchange, et cetera, the environment was quite different for those times. I think we achieved very good multiples for selling the Heat Exchanges business, as I shared, EBITDA or EBIT.

However, in this times, the multiples have, of course, dramatically increased following the capital markets, in general. So it is higher than the multiple we sold Heat Exchanges.

But we have other benchmarks, like for example, share buyback. And as we disclosed once in one of the Capital Market Days, our cockpit for acquisitions, it's a combination.

If I would like to repeat that, does it make more sense for the shareholder that we buy back shares or invest the same amount of money in an acquisition? Number one.

Number two, is it going to be accretive within a midterm for the ROCE and the cash flow driver? Number three is, is it of course, when we valuate the cash flows with our backs, is it affordable, the price?

Number four is, is it a strategic add-on for GEA or a regional footprint add-on for GEA or a technology add-on for GEA? And number five, very important, is how reliable are the financials?

Because I do believe that you can pay a price. But then as to financials, if you buy a typical hockey stick into the future, then you might have some disappointments as we had with Food Solutions.

Or are the financials really reliable? And if the planning, which you're buying, reach the target, a hockey stick or not?

So all that combined leads us to a yes or no when we go for acquisitions, and I'm very happy that for Pavan, we had most of those lights in green. And it's very important for GEA because we need to widen our portfolio, as I mentioned, to get a bit more independent of dairy because the future of dairy it's difficult to predict.

The downturn circle, which we had now over the past three, four years, has been in a quantum which we would never have believed three years ago. So we have to broaden our portfolio, and I think this is very interesting element, with the pasta and especially the extrusion technology.

Okay. Thank you.

Just very final one, on working capital. It sounded like when you discussed the inventories, that you made it sound like the increase in inventories was somewhat seasonal.

Would you be able to give any guide on where, on an absolute basis, you would expect working capital to finish for the year?

Yes. That's probably a question I will take then.

I said couple of weeks or months before that my personal target is to bring it down to a level of €650 million at year end. I missed it in September that for some reasons, it went up again.

Though, we achieved a lot in working down the receivables, at least. It is why I would say still I will hold to the ambition.

But maybe it's safe to say that it will be more in the range of €650 million to maybe €670 million, something like that, at year-end date.

Okay. That’s very helpful.

Thank you very much.

Yes. Good afternoon from my side.

A couple of questions, please. The first two questions are follow-up questions.

First of all, have you mentioned why service was so weak in the first place? I haven't really understood that yet, why there is such weakness in service.

Any specific area? Maybe you can take that first.

Thank you.

Yes. Actually, it's not weak.

It's growing, but the path of growth in the past was quite positive. And that path of growth has slowed down a little bit.

From where does it come? I think in one area, it has to do that we did have a very strong growth, we did harvest a lot of low-hanging fruits after the OneGEA establishment into OneGEA service organization.

It will be a bit more difficult now to harvest the slightly higher hanging fruits. That's why we are investing now into the Service Business and into different tools and processes.

Then it come particular from a couple of regions, the slowdown of growth came mainly to an amount of 60% or 70% from the U.S. I think the U.S.

was extremely bullish in the past 1.5 years, and it's slowed down now. And partially, the slowdown came from two other countries like China and India.

India, having its own specifics things, which is currently not only hindering the Service Business, but many other businesses of GEA. You may have heard about these tax issues with the VAT in India.

In all other areas like in Europe, in Western Europe, Middle East, Africa, et cetera, Service developed according to our expectations. So the disappointment came from the U.S., China and India.

Okay. And the second follow-up question is on the topic of wage inflation.

I guess you were already, but negatively surprised this year by the amount of wage inflation. I'm just curious, if you listen to the German trade unions, what kind of demand they're entering into the next round was 6% wage increase and also asking for a lot more flexibility.

Does it concern you, for the wage pull in the next one or two years?

Of course, we will be affected because our biggest workforce is in Germany. However, in the past, we have seen that the unions, when they go into the negotiation, they go with a number and then finally the deal is somewhere else.

Usually, it's on half of that, but I think they are asking currently for 6% to 7% wage increase. So my personal prediction is it's going to end up maybe at 3.5%, in that area.

It was similar last year but the – of course, we'll have to digest that with efficiency improvements. What I also would like to point out is that the total personnel costs, if I go back many years to – let's take 2014, the personnel costs were at about €1.23 billion for all of GEA.

Currently, as we speak here, LTM Q3 2017, we are trading at €1.286 billion. That includes about €40 million increase in personnel costs through the acquisitions.

So if you take the acquisitions that's Hilge, Imaforni, Comas and some other acquisitions we did in the last two, three years out, then you have to take out this additional personnel costs. So we have a very low increase of personnel costs.

Of course, that is due to fit for 2020. The increase on a CAGR basis was below 1%, if we take out the acquired companies, which is a countermeasure to that.

But of course, it would be more helpful if that wage increase would be not 3.5%, but rather at the 1% or 2%. On the other side, not every German employee is affected by that.

As usually about 3/4 or 2/3 of the employees are unionized or affected by those treaty agreements. The other 1/4, 1/3, it's three.

So there, it's like in many other countries, it's really what we decide to do in wage increase.

Understood, just the third question I had was regarding, obviously, since the last quarter, you had a couple of new shareholders. And if you follow some reports on Reuters, it seems that one of them thinks that it's scoped for annual buybacks of up to €500 million, which I guess if you were doing that, there would be not much scope left for M&A.

I was just curious how you think about such demands?

Well, I think we have different type of shareholders and different type of opinions and before we decided to do the last share buyback, which we have just reported at the beginning of this call, we had very controversial discussions with shareholders. Some of them wanted us to invest the money in M&A, some of them wanted – and both can make sense.

The share buyback is of course, the less risky one. The M&A is – if it is not combined with risks because I have always said to M&A that it's one of the most risky business.

To integrate an M&A target, one has to be very careful. The share buyback is, of course, risk less business, so one has to find careful balance.

We of course are aware and I think that this is also strength of GEA. GEA is very strong in generating real operational free cash flow.

When I say real, I mean after dividends and after taxes and interest rates, et cetera. And there's always potential to do M&A even through share buyback or through acquiring new targets, new business.

So that means that you're not generally against this kind of demands?

No, we are not generally against the share buyback, else wise we would not have done the one we did at the beginning of this year. But in general, if all fits together, I think, M&A is the better way, but it has to be well managed and risks have to be well under control.

Okay, understood. Maybe the last question, if I may, is just on the order pipeline.

Q3 was a bit on the weak side again. How do you look into the year end pipeline which is normally or seasonally rather strong one?

Well, we do believe that the Q4 on order intake, what we see in the project pipeline, especially for the month of November and December, were quite positive. We have seen that develop, those in the last years, towards the last two, three months of the year.

Order intake tends to boost for obvious reasons. The hot project list, as we call it, is quite decent.

However, we do see, in this year, and we have seen it in the first nine months, and we do see it also for Q4, not very lively list of large projects. When I say large projects, I mean those above €30 million.

That list has dried out quite a lot. On the other side, when we look into the budget discussions, which we are currently carrying out, we do see a very positive list for the next year.

But let's see. I would guess that the amount of large projects in the last three months is not going to be comparable to last year.

Therefore, we need to invest more in the midsized, smaller projects and into service.

Okay, good. Thank you very much.

Yes. Thank you very much.

A couple of question plus, please. The first one on services again in the U.S., which was lower than you expected.

Was that a temporary effect? What exactly happened there?

Was that more structural? And the second question is on Pharma and chemicals, which has come down quite a bit.

What's going on there? Is that the new dairy or do you expect this to be temporary?

And the last one would be, are you still happy with your bottling guidance, so the cost that you have for your bottlings project for this year? Thank you.

Yes, the service in the U.S, I believe this is a temporary thing, but I don't believe that it goes away in Q4. But I think that will recover again next year.

When it comes to Pharma and chemicals that is a temporary thing between – the different quarters, where one quarter, big orders are in or not in. So we do not see a trend in Pharma, actually, it's vice versa.

We are positive about Pharma, the outlook and chemical, we also don't see a trend neither direction for the mid-term future. So I would not call it a new dairy story or MDF story.

In Pharma, we have to differentiate a little bit between solid and liquids. But in general, the outlooks are positive.

Sorry, you have the bottling question. That is the best to our knowledge.

I mean, as I have also said in the Q2 call, we will only unfortunately know the final number when we have FAC from the customers. We – means final acceptance that – but I do think with this additional provision which we have taken now in Q3, we should be from today's point of view pretty much covered.

Thank you.

Hi, good afternoon. Thanks for the questions.

On the strategic projects, we can see the cost going through the P&L, obviously, so it's about €4 million year to date. But is there a quantifiable amount that we can expect to be generated in savings from these measures.

And I guess that's mainly from – in procurement. I mean, and is there an amount that you can tell us that you've already secured in cost savings or what you would have secured by the end of Q4 or we should expect next year?

That is a different – difficult call to do. We said that we are still in the ramp-up phase now, and the savings will then kick later on, what we do actually on the strategic projects, to take some of those at least, that we are outsourcing our storage systems and network technology into the platform.

So in the cloud solution, so that we are less vulnerable against any IT issues. We are starting to deliver and rollout the first down to migrations with regard to the ERP systems.

Our CRM systems are about to be now implemented globally. And that will then later on trigger additional volume and opportunities for us.

And of course, we have for our manufacturing footprint are playing well that we are looking to future savings, which we have not broken out as a separate part to our guidance because it's embedded there. But we forecast already that we have the first limited savings in this year, and then it will kick in then during the year 2018 in a broader extent.

Okay. I'm sorry, are you able to share that amount that's embedded in the guidance?

Well, I would like to refrain from sharing that because we said that's embedded there. And we will not give it as additional add-on guidance on what we are aiming to achieve as a profitability volume.

Okay, got it. And just on my next question, I was wondering if you could talk a bit more about what you're seeing in terms of your customers' willingness to go ahead with projects, because at the start of the year, it was – that seems you've mentioned those, a hesitance among your customers, and then we've seen the sales number moving up a bit in this quarter.

But have you seen – has there been much of a change in mood among your customers?

Yes. In general, we can say that for midsized to larger projects, which are those projects, let's say, for solutions above €10 million or for equipment above €5 million to €6 million, the speed of action and decision on the customer side has slowed down in general.

Customers have become more contractual, more focused on contractual terms and conditions, et cetera. They, themselves, have issues on their sides to get permits and approvals, et cetera.

So I think we have to accept it. And some of those, as Jürg just said, catch-up in sales we were able to do in Q3 is actually sales which we hoped to have two, three quarters ago.

So there is a general tendency to delay or to slow down in the execution on customer side. So will that stay like that forever?

I fear that this is a general trend in – when it comes to larger projects, permits, execution, et cetera. And then, of course, when it comes to the dairy projects and the milk powder, you have to be aware that the European community, in the meantime, has piled up hundred thousands of tons of milk powder extra compared to previous years.

So the willingness of customers to finalize or to speed up projects to produce milk powder or this type of things, of course, is not as it used to be three, four years ago.

Thank you. And then just finally, I was trying to understand the margin seasonality in solutions, if that's undergone a change because I think even if I add back the bottling charge, the Q3 margin is below the first half and, whereas in prior years, you tended to see a pickup.

Is that just a reflection of the margins in the backlog? And then what does that mean for the kind of step-up we might expect to see in Q4?

I mean I hear it. Also you can observe that the gross margin always has it – and certain seasonality for our Business Area Solutions.

And what we see here that the gross margin we need to deliver for the remainder of this year, 2017, is in the ballpark of what we had also in prior years in order to achieve the overall target for the year. So of course, there is, as usual for GEA, in the last quarter, a certain ambition in there in a way that always the fourth quarter is the most important one with regard to achieving the full year target, in particular, in BA solution, but that is not much different to what we had in prior years.

Okay, thanks very much.

You’re welcome.

Thank you. Good afternoon, gentlemen.

And so I would have a few questions, and will be glad if you could do them one by one. And I guess it's easier for everybody.

And the first one on Pavan Group, when do you expect the deal to close and do you expect first some consolidation as a result?

Yes. The closing of the deal is expected this year, and the first consolidation for 2018, at the beginning of 2018.

Okay, great. Thank you.

And also on Pavan Group, can you share a bit of guidance on transaction integration costs and also expected sales synergies and perhaps also cost synergies you might realize from – like procurement manufacturing. I also noted that there was visibility in your presentation that some of the Pavan Group plants are very close to existing GEA plants in Northeast Italy, particularly.

Anything you could share there in terms of sales and cost synergies will be appreciated.

Yes, the acquisition of Pavan is not typically driven by – it's not a synergy case or a restructuring case. Of course, we will harvest some of those things.

For example, when we acquired Imaforni and Comas, and they required additional people. And we had a slowdown even on our side from Beverage, which are also in the area of Bologna and the other side in the area of Venice and Verona.

So of course we moved workers from Bologna to Verona and Venice in order to help out there. So these are some limited type of synergies.

The Pavan thing, on the sales and service side, we see synergies, especially on the service side because we discuss this quite intensively with the Pavan management and we did see that service was quite weak on them. The global reach for service, the coverage worldwide for service, was weak.

The percentage of sales with service was under peer group comparisons, et cetera. There, we see an upside.

Of course, we introduced there our OneGEA service concept. On the other side, it's a diverse technology, its other product, et cetera.

So we do not see many synergies there. But of course, you are right.

When it comes to administrative work, behind the scene works, et cetera, we have now in the area between let's call Como, Venice, Verona in that area. We have Comas, Imaforni.

We have parts of Procomac. And now we will have Pavan, which is good that we don't have it, let's say in many other parts of the world.

So there is a kind of GEA center in that area around or between Venice and Como, and that certainly is helpful. And as you may have seen in the announcement, we will also support Pavan in the first – as soon as we take it over with managers from GEA.

And of course, they are coming all from the region and from other GEA companies. That is very important that the integration is going to be managed by GEA managers coming from the regions, being Italian, knowing the business of GEA, the tools, the ERP platforms and all those things.

Great, the next one would be on dairy, particularly processing. What is your short to midterm view on this industry?

And then I also note, in light of the Pavan Group acquisition, and we're talking about a step towards more diversified sales footprint, away from dairy. If you could talk a bit about your – the structural view you have on dairy.

That's a question which we have asked ourselves year by year because we always believe it cannot go further down. And then we were negatively surprised again.

Just to give you, once again, a flavor on how harsh this is hitting GEA in the mean time is that the order intake in dairy processing – I'm not talking now about the MDF, the Milk and Dairy Farming business with the farmers, just dairy processing, has come down over the last three or four years from slightly above €1 billion to an order of slightly above €500 million. So that's a massive, massive setback in the top line which then, of course, goes into sales, et cetera, which we had to digest.

This dairy has cost us in the last – dairy processing only has cost us in the last three years organic growth of about 3%. So without dairy processing, organic growth would have been about 3% more.

So what is now the outlook? I really tend to believe, in the meantime, that we are reaching now the bottom.

I know that I may have said a similar – made a similar comment last year, and then again we were negatively surprised. But yes, it's a combination of different things.

I do believe that the large spray [dryers] in the world, which we had so many nice orders in the years 2013, 2014, 2015. There will be not much activity, even not in the next year or normal milk powder.

We do see activities – increasing activities in specialized milk, dairy milk, also in powder form, et cetera, special proteins, and special whatever ingredients coming out from milk, but a classic, just bread-and-butter, straight line for normal milk powder, that I would not see an upturn next year. And then, of course, you have a lot of other dairy derivatives which have their own cycles.

Like the butter for example is very positive currently. But there are also many other products which are, for our customers, as we hear, they are not earning money anymore with their dairy product.

So I do believe that the optimism to invest from our customers in general for dairy next year still is going to be on the lower side even so when I look into the current budget discussion which we are having. I'm a bit more optimistic.

The Project list is increasing, but I wouldn't see yet for next year coming back of the large milk powder projects.

Great, thank you very much for the details. So the last one and then I shut up.

On bottling projects, could you give us an update on the progress to conclude the five projects you also mentioned earlier in the call? And what sort of your level of confidence as regards the risk provision is?

You already answered a bit earlier that you still feel comfortable with the Q3 risk provisions now booked. Shall we read from that that sort of – that should be it, and Q4 should not be burdened by risk provisions or what's the current view really?

Yes. As Jürg said, and at the end of the day, it's always the case that you can only finally conclude on these – on some projects once you got an approval and an agreement with your clients.

We are progressing in addressing those topics. We have agreed about solutions with two of our clients.

Additional equipment is in negotiation and we have also proactively contacted our clients in order to rectify that as early as we can do it. And this is an ongoing process.

And as we said before, we believe that with the solution, which we have set by now, we are at the highest levels. And that our people have told us that what we can reasonably assume will be the most likely case.

But as I said, I mean the process account or let's say as well let's see first the signature under the agreed solution and then we take it from there. So but just to answer your question very shortly, that's really best visibility we have with all the in-depth analysis which we have done since the quarter two yet.

Right, thank you very much.

Good afternoon. I've got two questions please, firstly, coming back to working capital.

Your trade receivables are still elevated. Maybe you can give us some more color on what you're doing there in making progress, particularly in transition now, whether the problem is mainly people paying late or whether you have an issue with people contesting your invoices because of technical or other contractual concerns?

And then, secondly just a simple technical question. Can you tell us what the size of the charge was in the fourth quarter last year that you took for the aseptic bottling contracts?

Just so we can get us an idea of the clean year-for-year comparison you're expecting to deliver in the fourth quarter? Thank you.

It’s Helmut. I will take the question.

We're talking about the working capital level I mean I'm happy that we are now coming down with our trade receivables. And if you would compute that in terms of days standing out, that would be now a level of about 65 days in September compared to end of last year of 76 days.

So we are really coming down here in the level. And what we are doing here is we are doing two things in parallel.

At the first place, we are, of course, in yes almost weekly cash cost, we are focusing on the receivables. And on the topics, which we have with the client, which partially are just, I would say, a structural thing that we just need to do the dunning and just do this cash cost.

But on the other hand, we have also issues where we have a lack of documentation or we have account list, which needs to be fixed. So there's a very colorful picture, and you need to take them all individually and this is what we do as we speak.

The other thing is that we have two processes which we are now executing here in order to define them. But one is an audit of cash process as we said, and the key focus is to define the interfaces with shared services in order improving – to improve the dunning and the cash collection procedure.

And on the other hand, to define and harmonize process and this is almost finalized. And we are now in the initial phase of the Fit and have a list of all the 220 components we've shared because it's not that you only identify a future process but you need also to implement that in the daily operation and also ideally in the European environment before you have that then embedded in the day-to-day business.

So this is a kind of two-pronged approach. Fix the obvious things and at the same time develop a structured approach.

And by the way, I would like to add, the thing we are doing on the procurement side, where we have also defined the – as it should be a definition or a future structure for that process in order to also quickly find back to further rebates or cash discounts and reduce also all our cash deposits with the suppliers in order to be just more speeding our execution of that process. So this is ongoing processes, but don't underestimate it.

There is a lot of detailed work you need to do because you need to embed that in – basically in all the 220 components in their daily operations. And with regard to the ABF charge which we had last year, so the ABF charge for the last quarter in the year 2016 was about €8 million to €9 million.

Okay, that’s great. Thank you.

Yes, good afternoon. Thanks for taking my questions.

I have three, please. The first one is just a follow-up on the working capital questions that we had so far.

I haven't seen you confirming cash flow driver guidance. Maybe I have missed it, but maybe you could confirm this or if not, so what probably changed?

Then a question on the number of temps has this gone down further from the second quarter and how's the development here? And the last question on the press reports we have seen last week in Germany on you seeking potential defense measures or working on defense measures.

Can you confirm these reports? And if yes, maybe you could elaborate why you think you should be working on defense measures.

Well, Helmut again. I will start with the first topic, which is the working capital question – the cash flow driver question.

The cash flow driver, where we said is – it's in the range of 8.5% to 9.5%. We have come in contrast to our EBITDA guidance, not excluded in that part of the guidance ABF project.

So if you consider that we have, of course, modeled them would be at and the message is we can still confirm that we will at least reach the 8.5% range. But what must not happen then is that the working capital is going to further increase, so we need to stabilize it on that level of at least €730 million and not go beyond that.

And this is what we of course all are aiming for.

Yes, coming back to the question of temps. We did have by end of June slightly above 2,000 temps, which then slightly decreased in the months of July and August.

And it's increasing now again to similar level as end of June to prepare the year-end racing which usually always needs more temps in the factories, et cetera, to get things pushed through. Regarding your question about defense measures, we did also read that.

We have an investment bank for many, many years, almost now 10 years, supporting us with expertise, et cetera, for different type of Capital Market questions, et cetera. And we still have that bank, which I would not like to name here for obvious reasons.

And we haven't had any other bank for that. So I would not like to comment further those rumors.

Okay, thank you. Then just maybe a very quick follow-up on the temp question.

To what level you think you can sustain and be – lower the number of temps? Then are you planning from those 2,000 or so to turn a certain number into fixed employees or into FTEs?

Well, the ratio of temps is actually not bad for a cyclical business. It's a more simple way to be flexible to – when we have positive times to immediately act in the factories or on the sites, et cetera and if things are done or the boom is over, then to reduce.

So I believe from today's point of view including now the acquisitions, which also did bring some temps on board that currently we'll see a level of temps varying between 1,800 and slightly above 2,000 depending on the seasons and the needs in the different sites. Where we have currently still temps is in some locations with – due to fit for 2020.

We moved, so they had to take over from other close sites, work – in those sites, we still have over and above proportionally money temps. Then also until our OneGEA finance program is fully self atomized, et cetera, we'll also have in that area temps putting together the numbers et cetera, every month.

But I think on a normalized level, temps will vary between 1,700 and slightly above 2,000.

Okay, thank you.

Yes, hello. Thank you very much for taking my question.

Can you hear me?

Yes.

So the first one would be on Slide number 7, I'm a little bit struggling to see the underlying operating EBITDA excluding all the special project cost overruns because you only guide towards the numbers of one particular set of project. So the questions I had is last year, what was the total number of special project cost overruns booked into the third quarter?

Okay. So the bulk of it was the ABF projects, which we have recorded then for – in the last quarter of the year 2016, because there we added something to our P&L and the balance sheet as we saw that things can get more difficult there.

Yes, but you said that it's €8 million to €9 million for the bottling in Q4. You had around €1 million in the third quarter that adds up to €10 million.

And I think the total charge for the full-year was €20 million. So where did you book the remaining €10 million?

This will go on the other projects which we had, that we had also issues with performance and where we fixed that. And that was not related to ABF technology, but to other technologies.

Okay, and which quarter did you book that €10 million?

Mainly Q3, yes.

Q3?

Yes.

Okay, and just for clarification, other than the bottling in this fiscal, you have not any special project cost overruns that we would need to mention?

No. As we said, when you have – we have in Business Area Solutions only about 5,000 projects always under execution.

So you can imagine that a handful of them does not go according to the predicted or pre-calculated or solved gross margin. You will always have a deviation from the positive and the negative side.

But and we usually have said this is in the past. Historically, this was an impact – negative impact of about €12 million per year.

Last year, it was about €20 million more than what you usually have and this year, year-to-date, we don't have besides the bottling projects any other surprise.

Very clear, thank you very much. I would like also to ask a question about Slide 30.

There is the other category within other industries, I mean the other excluding oil and gas and excluding Marine. It's also firmly negative in terms of order intake year-over-year, and I was wondering whether this is just a quarterly fluctuation as you've indicated for Pharma or whether this is more structural.

And if it is the latter, if you could please explain to us, which end markets are involved, what kind of business this is, so we get a better understanding what the fundamental impact likely is going to be?

In the bucket of the other industries, we have some business for example for our visa applications and transport cooling with the acquisition of [indiscernible] which we have made a couple of years before and that is, I would say, a rather cyclicality and not a structural issue which we have there.

And which part of the business was down from the negative. I assume there's one business clearly more down than the 5% that the arrow indicates?

Is this the freezing application or which part of it is it?

No, those are in sort of different industries so that question cannot be answered like that. There are a lot of other industry where we – sometimes, we sell into environmental, into the bus transportation, truck transportation investment, et cetera, so it's difficult to say which part of that because that's really very, very large numbers, variety of small industries.

Okay. Has power anything to do with it or is that not involved?

Well, when it comes to power generating electricity, yes. When it comes to that power, which is oil and gas as you see we – that we have as an industry.

But some parts of power are in there, yes.

But that is a really tiny part.

Yes.

All right, thank you very much.

Yes, most answered so I would go back to Pavan. And can you give me an indication when you want to start to integrate and when we can expect integration is done, so that synergies would bought in?

Well, Pavan, we have a plan ready, the managers as I've said are ready as soon as closing. But I would like to caution that we'll not have a lot of synergies there.

As I just tried to explain, this is not the classical synergy cases. We want to expand the top line of Pavan with our global service footprint and some of our new sales footprint in the country organizations, et cetera, where Pavan did not have, of course due to their size the global reach.

But Pavan is also from the margin way, above the average of GEA, so there's not a synergy case which we can harvest here. We will harvest mainly on the top side to make Pavan a bigger company on the topline for new machines, but also especially on services, et cetera.

Then there will be, but that will take more time. On technology, we do see synergies on technology with Imaforni and Comas, as you can imagine, not only because of the – to be very close geographically but also from the industry, the bakery, the cookies, and this type of things.

And we do believe that in some other areas of GEA where we are already now active, like pet food, et cetera. The extrusion technology, which is a key technology, which GEA did not have so far will help us to expand in other application areas, which we currently have and where we are missing the possibility to do extrusion.

Okay. And then while you prepare all those things, are you capable of doing more M&A because Pavan is more a bigger ticket compared to the past transactions?

As I said M&A is a risky business, I can only emphasize that. So we are very, very careful.

And we do realize that, of course, this is, I would not say, a very large acquisition but compared to the last, it's midsized to large acquisitions. I think it's the largest acquisition since we did food solutions some years ago.

So we are well aware of that that it will keep us busy. We will carefully integrate it.

And maybe even more important than integration is to expand its top line by not giving in the margins they have. And I do see that we will do here and there maybe smaller acquisitions but they are of course all right that two or three Pavans of this size at the same time, I would not like to do for GEA.

Okay. And then a question on your buyback, can you confirm that you plan to cancel those shares when you are – when you conclude the buyback?

Yes, I can confirm that once we are – had fully executed this, then we will cancel the shares.

Okay, thank you. And the final one is on your scheduled Capital Markets Day.

I missed the note that prelims could be released earlier. So is that an indication that we would – that we didn't get any prelims and maybe an indication – in an explanation, why you omit this?

No. Actually, we will disclose the full-year results on the date given in the slides of the presentation.

You're right that in the past years, we had early February, some preliminary numbers, but we would rather like to combine all these things this time.

Okay, that was some nice, thanks. End of Q&A

Yes. Thank you very much for listening to the Q3 presentation of the GEA Group and for your Q&As.

I hope that we could answer the questions you had. And as usual, our Investor Relations team is of course available as of now to answer any further questions you may have to GEA.

Thank you very much, and goodbye.