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Yes. Good afternoon, and welcome from GEA's [ part ] to our first quarter 2018 conference call. Let me now hand over to our CFO, Helmut Schmale, for presentation of the numbers, before he will answer your questions together with our CEO, Jürg Oleas.
Thank you, Donat, and welcome to our call. So on the first slide, the executive summary slide, just find the key figures of our today's results presentation. As you may see, the order intake in reported terms fell short of 1 prior year. In the absence of any large orders for our Business Area Solutions, the negative translation impact from the strengthening of the euro was about minus EUR 57 million in the quarter. Sales increased by 3.5% organically even by 4.5%. Headwinds and currencies are about the same magnitude like for the order intake.The operating EBITDA amounts to EUR 67 million, a sharp deduction mainly due to impacts at BA Solutions, which I will then explain in more depth shortly.So let's take a more deep dive into key financials. On the next page, starting with the order intake. When comparing the reduced order intake with the prior year, it is worthwhile to note that we had EUR 50 million of large orders in the quarter 1 last year, but none this year, which impacted mainly the Business Area Solutions. So for the Business Area Solutions, the order intake fell by about minus 18% in the year-on-year comparison or about minus EUR 100 million. In terms of customer industries, the main driver was a year-on-year decline by EUR 65 million in the dairy processing.Business Area Equipment reported a plus of 13%, so there was a strong growth. Headwinds from foreign exchange of about EUR 40 million were compensated by the additional volume from the acquisition of Pavan. It's worthwhile to note that the milk and dairy farming business continues its strong recovery.Reported sales were up by 3.5%. The organic increase was even 4.5%. For BAE, the sales growth was mainly achieved from the new machine business. The new machine volume increase belongs, in particular, to food processing and packaging as well as to milk and dairy farming.Additional volume from our new product with pasta extrusion milling, which is Pavan, was canceled out against negative impact from FX calculations.The volume reduction for BAS of EUR 70 million, by and large, originates from FX headwinds.Operating EBITDA. Out of the decline of the group of minus EUR 29 million was the major part of EUR 24 million being attributable to the Business Area Solutions. For Business Area Solutions, 3 factors are responsible for the reduction in the result. First, on the one hand, we had an adverse impact from product mix in the order of about minus EUR 7 million outside of our North American business. While concrete even at some very profitable dairy and beverage products last year, nothing compared to this year. The gross margin of our North American business solutions declined by about minus EUR 9 million.This was then coupled with some increase in the revenue and cost of sales that has been not charged close to the project, which really is a sign of underutilization by some minus EUR 5 million.And then there were some currency impacts. The swing in direct currency-related gains and losses from hedges and conversion of foreign currency items in the balance sheet of P&L was about EUR 2 million, to the negative. There is still an impact, difficult to measure probably coming from the indirect effect at subsidiaries with a depreciated import currency started to pass on the -- to their customers' increased costs coming from a stronger euro when sourcing from core factors in the eurozone and other products into pricing.Business Area Equipment, while the organic volume increased and the acquisition, Pavan added some EUR 40 million to the result, some negative impacts offset this increase, a negative margin mix resulting from the above-average growth of below-average margin products. Our product groups impacted the results of BA Equipment here for minus of EUR 7 million, and the lower-priced quality in the U.S. market with minus EUR 4 million.The swing in currency-related gains and losses compared to prior year in the P&L is about minus EUR 4 million.On the next slide, we highlight the last 4 quarter order intake development and sales by industries, since quarter 2, 2012. This last 12-month curve provides you with a better impression on the order intake trends over time. For the weights of the exposures, please refer to one of our additional pages in the presentation. It's actually at Page 30, where you would find more details on this.In summary, we can observe that dairy farming continues to grow, meanwhile, above average of GEA. Dairy processing, the negative trend continues, although sales temporarily increased in 2017, due to late execution of some larger orders.Beverages sees a continuous moderate decline. Food, you will see some growth for quite some time, although this also reflects our recent acquisitions, which we acquired in the years 2017 and 2016. Pharma and chemical, there is a general upward trend since the couple of years. However, showing some volatility and becoming softer lately. A bunch of other businesses is overall stable, whilst highlight was delivered almost stable order intake development.Book-to-bill ratios. As usual, this slide differentiates the weighted average book-to-bill ratio of 1.02 by geographies and industries. The ratios are calculated on a last 12-month basis to smooth out seasonalities and random quarterly fluctuations.To summarize this picture, along its 2 dimensions. In terms of geographies, North America and DACH & Eastern Europe has the highest book-to-bill ratio, while other regions are moderately above 1. The only exceptions since Western Europe, Middle East, Africa, in particular in the beverage industry we invoiced more compared to new orders being awarded.In terms of industries, milk and dairy farming, food, chemical, O&G and others are comfortably above 1. Marine is moderately above 1, beverage and pharma are slightly below 1 and dairy processing is clearly below 1.As usual, the lower box gives you the weights of the cost sections. For those of you who are interested in a more granular view by our product groups and application centers, we added a respective table to Page 20 -- on Page 26.Order backlog. The order backlog increased in the quarter 1 sequentially, and contains more than EUR 100 million of backlog from our most recent acquisitions, Pavan and Vipoll.Return of capital employed. The recent declines in these last 12-month costs reflect predominantly the decline in EBIT as well as some impact on the denominator from the purchase price of Pavan, which increases the average capital employed since December 2017 and to a minor extent, Vipoll since January. The blue curve uses operating EBITDA in 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 to the working capital development. At the reporting date, the working capital increased sequentially. And is again on prior year's level. The last 4 quarter average rate came down sequentially. However, as an alphabetical consequence on the increasing sales level and the slightly lower average working capital compared with quarter 4 2017.More details on the working capital on the next page. This table reports a more granular view on the drivers of the working capital development. The use of seasonal swing in net trade receivables and trade payables are canceling out each other in the sequential development. There is an increase in inventories in both business areas. This is based on the now higher backlog for Business Area Equipment and on timing or anticipation of more orders in quarter 2 for Business Area Solutions.Cash flow driver. Similar to the return on capital employed, also the cash flow driver margin is a metric based on the last 12 months. Also the CFD was negatively impacted by the decline in volume operating EBITDA, but benefits from the reduced swing in the working capital, as visualized in the light blue and gray portion of the slide bars. Again, the orange curve is an unadjusted for restructuring and other one-offs as well as PPA effects from recent acquisitions.Net liquidity. The free cash flow from continued operations over the last 12 months adjusted for expenditure for strategic project is about EUR 186 million. Most of the items in this bridge are self-explanatory. The [bracket] also includes payouts of operations of about EUR 40 million on a yearly level. Currency impacts negatively impacted the net cash position we have said, minus EUR 79 million.Service business. The share of service and towards sales for the last 4 quarters remains unchanged at 31% compared with higher year. Service sales at BA Equipment grew organically by 5% and at BAS by 1%.Then the next page is our outlook, or the guidance for the year 2018. And this is unchanged to what we said at the beginning of the year. And in the lower section, you'll find the reported numbers for the first quarter, which are comparable to the guidance given.That concludes my presentation of the -- our quarter 1 numbers. And Jürg Oleas and myself, we are now happy to take your questions.
[Operator Instructions] We will now take our first question from Max Yates of Crédit Suisse.
Just my first question would be around the large orders for this quarter and the pipeline that you see. So just trying to understand the fact that there were no large orders this quarter. Do you see that as a reflection of the underlying environment, or is it more that a couple of large orders over EUR 15 million may be slipped into the second quarter? So just trying to understand how reflective that is of the underlying environment?
Yes, the underlying environment is not that positive. So it's not a slippage or, of course, there's always a project here and there, and we are also waiting to get final confirmation of 2 larger orders, which are slipping from 1 quarter to the other, but these are exceptional things. But in general terms, I would say that the climate in the areas where we are active with large orders is not the same as in the past. So, however, we do see a couple of them as opportunities also in the rest of the year. But in general, the climate has changed for large orders. When I say large orders, I mean those above EUR 30 million. In below EUR 30 million, we see that the level of activity is normal.
And I mean, just when I look at your competitors, I mean, in Q4, we saw SPX winning a couple of dairy processing orders in Europe. We then saw Alfa Laval winning a very large brewery order in Q1. So I'm just trying to understand, do you think that you've maybe missed out on a couple of projects here, or is that not really a concern at this stage?
No, it's not a concern. I think, if I remember correctly, the numbers, which SPX published for Q1, they also were complaining about missing large orders. And if I remember correctly, it was also written somewhere, it's in the same areas where we are missing them. Coming to the brewery order in -- from Alfa Laval, that -- I mean, this is another dimension. This is not a so-called large order in our sense. It is most likely when we talk about breweries, it's dozens of separation, I would assume, which they got that type of business also for us is normal.
Okay. I mean, for them it was a EUR 30 million order, but anyway. Just the second question, which would just be around sort of working capital. We have started to see the receivables again, moving in a positive direction to the sequentially and year-over-year. Are we now comfortable with the review of the receivables that has taken place? The fact that those should now start gradually coming down over time. So would you say your sort of comfort in the receivables position has continued to improve and should continue to improve going forward?
We are, of course, constantly monitoring the development of our receivables. And as I said, during the Capital Markets Day already, we also in the management, we're asking to have a special focus, too, on the -- what is closer on the audit procedures as the key audit matter on this level of receivables and the validity of the receivables. So there's no new element in there, which I can report today. What you see here is that is a normal seasonal swing back, that our trade receivables are going down in the first quarter, as customers are not paying us during the last quarter of prior year. And on the other side, that is then canceled out by the fact that we did the same with other supplies and hence, our trade payables are coming down almost the same amount.
Okay. And just one final question around FX. Could you just clarify, I think, you've sort of said it across the divisions, but how much FX impacted in Q1. And also, if you could give based on spot rates today, given that your guidance doesn't include FX, what your best assumption is for the FX impact on EBITDA for the full year, given today's spot rates?
I mean, we have 2, I should say layers with regard to the impact of the FX in our profitability. The 1 element is what holds into the pricing. So obviously, the strengthening of the euro creates a pricing issue for us in delivering our products to countries, which with weaker currencies. That is something, which is difficult to measure. It's more an issue for the full-term service business and the equipment business rather than short term for the solutions business. The -- what you see in the P&L overall is that we had a currency loss and gain, which created a swing of minus EUR 4 million over prior year. And that is the only thing which you can tightly see in the P&L. What is more -- the concern is the pricing power, going forward, the increased prices for components, which are imported in countries with weaker currencies and to find -- and to offer all that into the price levels, which we are asking from our clients. And then...
So just trying to understand that dynamic, because I remember, you've flagged that currency wasn't an increasing concern. You gave the currency flows at the Q4 results and then, in overseas had a sort of fairly significant impact in Q1, which has led to a profit warning. So is it fair to assume that, if you were able to put through prices to offset this, we would have seen it come through in Q1? Or is there any reason to think that the pricing mechanisms may be take a little longer to come through and actually, even though we haven't seen them in Q1, they may subsequently come in Q2 and Q3 if -- why haven't we seen them now?
I have to say that part of our business is more short-term business like the service business, or you may also say the equipment business. And what is more long-term is in the solution business. Actually the concern which we have is that we missed out maybe to increase prices early enough during the year 2017 to see already impacts from price increases, in particular, in the equipment and in the service business, already in the first quarter 2018. What we are now doing is we are, by and large, across-the-board, everywhere aiming to increase the prices in order to mitigate from those reductions of margins, which we have seen.
Is there any confidence or any data points, you can give us that you have seen in the business that give you confidence that these prices are sticking or gaining traction and therefore, they should start to improve margins as we go through the year, or is it too early to say?
Yes, we have aligned all these pricing programs and we will see some of the benefit. However, I have to say that's not easy, because if you take for example, the U.S., which is our biggest region, we also have some of the best margins in the U.S. already. If now, due to the weakening of the U.S. dollar, we have to raise our prices in U.S. dollar even more than what we had already as premium margins, we are doing this. We are setting this up, however, it's not just that simple that you can increase the price list. We have to give the people also the documents, the manuals and the argumentation to be able to sell this, because the U.S. customer that now you should pay whatever 5%, 10% more for the same piece of equipment, which he bought a year before, et cetera. And just to make you aware how this works at GEA, we also have, of course, thousands and thousands of price lists, which have also in many cases been agreed with customers. So they have to be updated. You will see in many areas customers can draw automatically from or pull the equipment automatically using the price list. So we have to correct them in and renew them and bring them up-to-date, et cetera. Usually, we do that once a year. But with this fluctuation in the currencies, which occurred in the second part of last year, we, of course, accelerated this process. We will see an upside in the coming months, I'm sure. But it's not as easy as just changing the price in the list, because you have to also the right argument. And then it depends also, of course, on the competition. If the competition comes from euro in the eurozone, it's, of course, easier. If the competition comes from the dollar zone, we need to ammunition our sales people with much more arguments.
So maybe just to try and put some numbers on this. If you were not to put through any price rises and it was difficult because of all the reasons you've just said. What would the FX impact be just from the currency flows that you see in the business, do you think for the full year? On a bare-case assumption that none of the price rises went through, what would that look like in your view?
That's very difficult, but I will try to make an estimate for you. As we have showed, I think in the Q4 call with the results of last year, when we discussed quite a lot about these currencies. We have showed to the capital market at about EUR 800 million to EUR 1 billion as this flow into the so-called weak currencies, which is not only the U.S. dollar, it may [indiscernible] it's about 8 or 9 other currencies, which are important for GEA, which as we compare, of course, the US dollar is the most important one. But our estimate would be that as Jürg has said, the worst case is if we are not able to change anything and we just continue to sell at the same dollar price or renminbi price, et cetera, the difference could be, I would say, 100 to 200 basis points in gross margin for that volume growth. Then, of course, the gross margin is one thing, but then, of course, on the cost side, on the SG&A side, we have, of course, tailwinds. So that we have personnel cost in those areas, the other expenses in those areas are then offset in part of the gross margin but of course, only part. So if we would not have taken any action and we will take even more actions then in the worst case, I think, we could lose on the top line about 200 basis points gross margin. And part of that would be set by the SG&A coming from those countries.
We'll take our next question from Andre Finke of HSBC.
Andre Finke from HSBC. A few questions from my side as well. On your outlook statement, you didn't reiterate some of the comments you released for your preliminary numbers, saying that it depends to a large extent on Q2 order intake, whether to achieve the business outlook. Maybe you could comment on that, whether that statement's still valid and in the same context how order intake in the second quarter has developed so far. And maybe also with regard to the achievement of the full year guidance. What do you think, what kind of Q2 operating EBITDA level would you need to be comfortable to reiterate your guidance with H1 results? And then, I think you have some sort of EUR 15 million tailwind from IFRS 15 application in the first quarter. Could you give an outlook how that might look like for the full year?
Yes, let me take partly the first question. Yes, that statement is valid. It depends on the order intake. And not only on the sheer amount of the order intake, it depends also on the quality. Coming back to the discussion from some minutes ago, it depends, what I mean is quality depends, how are we able to impose in those weak currency regions or pricing what was has just been discussed a minute ago. So it depends on the volume plus quality and the composition of that volume, because very large orders will not help us much anymore with the sales in this year. So we are much keener to get the smaller orders and the midsize orders, because they have a much faster turning time especially in the area of equipment, in the area of service, and the small to midsized orders in the area of solutions. And as I said, in addition, of course, with the quality of the enhanced pricing as we are pushing it now up to see whether -- how we are able to do this and if we do see that this works then we feel confident. So it's not only a question of the total volume, it's also a question on how our pricing initiatives are going to work out.
Let me then maybe something say something on the quarter 2. Please understand that we are now during these days are aiming to develop, in particular, forecast, an internal forecast for the quarter 2. What do we expect there? I have to say that most of the measures, which we are now initiating they, of course, will not kick in during the quarter 2 already, but more back-end loaded in quarter 3 and quarter 4. So this is why, I have to say quarter 2 just gut feeling, there will be not too much difference to what you expect in the year before. And what is then the challenge in total for the 9 months remaining is that we need, of course, to overcome the shortfall of the first quarter, which you would make -- calculating a way that you say maybe, based on the guidance, you should have expected us to deliver slightly more than EUR 100 million. So the shortfall is some EUR 35 million to EUR 40 million. And this is something, which we then need to gain back all the, in particular, all the quarter 3 and quarter 4. And with regard to the question EUR 50 million IFRS revenues. Yes. But please have in mind that exactly I would say, not about the same, but I don't know exactly what it will be. But at the end of the day, of course, revenues and sales in the same metrices we will then miss from the change of the accounting principle because we cannot take them to revenues at the end. So that is the rest the year and a bit of an anticipation into the first quarter, which has by and large to do with our Business Area Equipment.
We'll take our next question from Felicitas Bismarck of Deutsche Bank.
I have one question of understanding. I think you mentioned that the inventories are up in both divisions and solutions in preparation of higher sales, how does that fit with orders being down 20%? So why are the inventories up here? I don't really understand. And the second question would be again on the Q2 order intake. I understand it depends on the pricing and it depends on if it's small orders, does it also depend on which regions these orders kick in in terms of factory utilization, all these kind of things? And the last question would be that you mentioned that the time of large orders is actually maybe a little bit behind us. It seems also that the super cycle and dairy is kind of behind us. So has there ever been discussions within the management to downsize the solutions business either by divestments or by partnerships or anything like that?
Yes. I think we'll start with the inventories first here. Yes, the increase in inventories, a large angle that is related to the Business Area Equipment. But please have in mind that we have there the increase in order intake and in backlog. So we need to execute that. And on top of that, we have also Pavan, the newly acquired company, which also contributed to the entire inventory level. And then, with regard to the Business Area Solutions, as a matter of fact, it's a bit of a timing for the business area. So they are, of course, now preparing for the revenues in the coming quarters. And so we see a bit of an increase in the inventories there, but if you measure that over the backlog then you would see that we have an increase there in the Business Area Solutions, so inventories of our backlog. But that is then also bit of a timing issue as with new orders coming in next quarter that will then substantially change around. So that is more a timing issue in the Business Area Solutions and for Business Area Equipment, it has to do with high backlog.
Yes, and let me come to your question about the solution potential downside. No, at this point, we don't see any need for that. What we have addressed and the teams have worked out a small saving program to contract. But deteriorations in the gross margin, that is more business as usual. And it's great that our managements are doing this. When -- after the science and solutions business can resist certain volatility because we have a direct part in the previous plans. We have quite a lot of temps there, which we can then, of course, take out from the organization. And the solution business in comparison to the equipment business has much less own added value, meaning less owned factories and assets and capital employed. That means they can react more flexible. And I would not be negative forever on the very large orders or on the day. I'm confident that this will come back. We have to go through a period, which is not easy because also these engineers are very valuable and not easy to find and we cannot just take in and take out engineers with this type of qualification. It helps here that we have the temps. It helps here that the business model is in a way that our own technology factors in that area are only probably maybe about 25% of what is needed and the rest is covered with third-party factors, which gives us much more flexibility for this downturn.
The other question was on the Q2 order intake. So if it's -- also depends on reach applications, do they have to come in dairy? Do they have to come in West Europe or something like that?
Now in the -- for the Business Area Solutions, the regions do not play a major role. When it comes to the applications, of course, we would like to have them in dairy and beverage because those are the areas where we are currently -- have under absorption, where the other 6 application centers, they are decently loaded or even overloaded, if I may say so, say it in a positive way. So it's dairy and beverage, region not so important. When it comes to the equipment, there, the regions play a certain role but not that important.
We'll take our next question from Sebastian Ubert of Soc Gen.
One question from myself also. The confidence you have to achieve at least the lower end of your guidance, that still implies about 10% growth of the EBITDA in the next 3 quarters with a 50 basis points margin improvement. How does the order backlog look like that now gets into execution? Are you really able to manage that or do we see kind of a shortfall like in last year? And you also indicated that it will depend on the second quarter or intake where within the guidance you would end up and then you missed it.
Yes, the -- with regard to the quality of our backlog, I mean, what we see here is that, for the Business Area Solutions, yes, we see that the quality of the backlog has improved. However, we have seen at the same time that we have this element of under-recovery or inefficiency, which we need to manage again. So that is something which we need to address then over the next couple of months. With regard to the backlog of Business Area Equipment and service for both business areas, we said that we had a negative impact here in the first couple of months of this year. And we initiated price increases there. And please have in mind that 3 quarters of the margin of GEA is influenceable more on a short-term track. So whatever is service, which is maybe 50% of our margin, you can influence shortly with price increases. And then the 1 quarter, which is the BA equipment business, also there you could with price increase directly influence the upcoming margin level of the next month to come. Whereas, in the Business Area Solutions, as I said, we have more long-term contracts. And there, we know the price quality which we have. We have here more of the situation and the issues that we need to manage execution and that we need to, yes, manage down our inefficiency or under-recovery.
Okay. One follow-up question, please. On Q2, you indicated that the EBITDA would not be much of a difference compared to last year, assuming a similar development in equipment like we have seen in the first quarter that would imply that you need a steep improvement coming from 0 basically in solutions. Do you really think this is achievable already in that short period?
I mean, if you compare with last year, of course, we have an element in there which contributes as well. This is our acquisitions, Pavan and to a lower degree Vipoll, which will support us there. And yes, as I said, we are doing this forecast on the second quarter. I just wanted to caution everybody that second quarter will not be the big recovery of what we have missed in the first quarter from my point of view.
We'll take our next question from Glen Liddy of JPMorgan.
Just coming back to prices. You've got rising wage costs, you've got rising input costs, and you're endeavoring to raise your selling prices. Have you recovered, currency excluded, all the rise in your input costs and wage costs so far this year?
The -- so for the wage increases, we have been able to manage them on a very moderate level. So we -- of course, we have that in totality. When you will see the P&L, the personnel costs are increasing, but this is mainly attributable to the acquisitions, so the people we have now newly on board. But I think the wage increases, they are tough to manage especially in Germany. But I think we are managing them as well as we can. The rising input cost, that is one of the issues we are now -- or we have decided that we need to increase the prices to pass that through. But especially in those regions when there -- we then have also the weak currency, so it's a combination of those things which makes it then more difficult. You said the currency is equal, yes, I think there it's easier. We don't see a major problem there to pass through the rising input cost, the material cost. But the combination with the low currency regions, which affects about 20% or 25% of the GEA volume there, of course, it's more -- it needs more intelligent work to achieve it there.
Okay. And I appreciate what you said about you're not going to make up in revenue or profit terms everything that you've lost in Q1. But in terms of orders, do you expect to make up for whatever was missed in Q1?
That's pretty much -- I mean, we have 2 -- 2 parts here. The one is Business Area Equipment that we have a very decent development as you have seen. And by the way, that is also 1 element which will support us throughout the year 2018 because what BA Equipment can do more in terms of sales, with the rise in backlog and, of course, supports us in regard to our profitability. The other part is, of course, the miss of the EUR 100 million in the BA Solution product pipeline [Europe] was leveraging already what we have, also some larger projects in the pipeline. We, of course, are then -- even to break or to make it with regard to the half year order intake, still I'm hoping for that if things fall nicely into place that for the Business Area Solutions we could maybe be on the same level like in prior year for the half year order intake.
That would mean that Q2 is a record year -- or record quarter ever for that division?
So let's keep fingers crossed for the large projects. And that is actually more of the lumpiness or it's hard to really predict that precisely which quarter they will kick in. But as I said, we have some larger projects in the pipeline. I have to say I'm always careful. It's not only that they need to be signed, but you need to be sure that financing is in place, in particular, if you are dealing with clients in more remote places. So that could, of course, be something which pulls down a bit in the level of order intake then.
We'll take our next question from Jennifer Latz of CFRA.
I wanted to know what the order intake was at Pavan and Vipoll?
So we have never broken down individual companies in that regard providing these details.
What I can say, they are according to plan, there is a budget for them. And if you divide that by budget by 4, Pavan was fully in line and Vipoll was quite ahead of that budget divided by 4.
Okay. And just one follow up on the IFRS question. You mentioned in the fourth quarter that there may be some negative impacts from IFRS 15. Could you expand on that a little bit, please?
Yes. For us, IFRS 15 mostly has to do with period of recognition, so that we have changed from revenue recognition over a period to a point in time when we are recording the revenues. And that has then led to the fact that we have seen some shift of revenues from last year into this year, where we could then get additional volume from that point of recognition of certain orders with the revenues in the first quarter. However, if the same type of orders will be in our backlog at the end of the year, and we can't take the revenues of those same type of orders as a period of time revenue recognition, but only as a point -- a point in time revenue recognition, they may slip all the time line into the year 2019. So what we are seeing as additional volume in the beginning of this year might be awash with a little bit less volumes at the end of this year. That is the implication of the IFRS 15 for us.
We'll take our next question from Hans Heimbuerger of Kepler.
Can you please remind us where you stand on your portfolio review? In particular, I'm asking about the dairy farming business, which seems to be always a pain for you, either when it goes down or when it goes up through the dilution of the margins. Shall we think that dairy farming is core for GEA going forward?
An update, we are not in a position to give you an update. We explained the process on recent occasions. A bit more specific on dairy farming, that's not at all a pain. You have always -- in any portfolio, you have half of the portfolios below the average of the margin and half is above it. That was the nature of mathematics. And dairy farming is not that much below the average of GEA. And I would like to remind you also that it contributes real EBITDA and real cash flow and a good ROCE. So it's not only about margins what is relevant for the portfolio. For the portfolio discussions, what will be relevant is other questions like opportunities to grow the business, position to defend pricing power, whether we are #1 or #2. Just to remind you also in dairy farming, we are a very strong #2 after DeLaval in the world. I think that's [undebated]. And then, of course, the fit with other businesses, technology-wise, customer-wise, application-wise plays a role. And yes, the margin also plays a role, but it's more than the margin. It's the contribution of real cash flows compared to the needs of assets which you have to invest into the business. And then last but not least, because in the future we will continue to do M&A, it's also important is that's an area for an APC or a product group, where there is still potential to invest, reinvest money, to make the company grow by M&A.
Next question from Arash Roshan Zamir of Warburg Research.
Just one question on your net cash bridge for the remainder of the year or, let's say, net debt bridge. You've moved into a net debt position now in Q1, quite a sizable one. And I was wondering if you could elaborate a little bit on major cash in and outflows which we need to consider for the remainder of the year. I think you've already guided for a cash out of roughly EUR 40 million for strategic projects. But is there anything else we need to consider? And also what do you roughly estimate, where will you end by the end of the year in terms of net cash?
Yes, with regard to the development of the net cash towards the end of the period. If you go back over time, then you would see that from normal operations we are able to deliver some EUR 250 million maybe to the max EUR 300 million of cash in the course of the year. But you rightfully said that we have against this, of course, the cash outflow of the strategic projects. And here, I would like to refer to the additional page which we added on 18 where you'll find the CapEx and the OpEx impact for the strategic projects as we estimate them for the year 2018. With regard to the FX position, we all don't know where this will go. So that is an item which can develop a bit randomly. And I think the other issues are pretty much fixed like the dividend which we are paying out. There is not much coming from additional acquisitions which we are doing. As you said, we are more or less ruling that out that we don't see any further major impact from there. So these are the elements which I would then take into consideration.
We take our next question from Daniel Gleim of MainFirst.
Actually 2 of them. The first one would be on the current trading of dairy farming in April. If you could please give us a little bit of color how that went relative to the first quarter.
Well, I would like to ask for understanding that I haven't seen yet any numbers from April. We don't have that. And even if we have them, we would not disclose them on a monthly basis. But we have commented in the last couple of months and quarters, dairy farming has been very strong. I don't see any signs why that should be lower. From number of working days, April is a better month than March. March has more weekends and Easter. April had less weekends and no bank holidays. So I would expect that April could be a good month.
Very clear. I wanted to follow up on the quality in terms of operating EBITDA in solutions in the second quarter. Did I understand correctly, this should be the same year-over-year?
As I said, we are in the details now of preparing for the second quarter outlook. Internally, for me, too early to comment on a particular quarter and a particular result of a business area. The only thing I wanted to do is just to caution everybody, all the measures, the action items which we have taken, they are more end loaded for the second half of the year than for the next quarter to come.
Could you please split the EUR 35 million to EUR 40 million shortfall that you intend to catch up in the second half of the year, how they come together? Is this then from the first half of '18, is this the correct way to think about it?
So that is what we are missing in the first quarter -- in the first quarter '18. So if you'll see, for example, that we have developed action items for the Business Area Solutions in order to mitigate what we are missing there in terms of result. But at the same time, we are also looking to improve the potentials for the Business Area Equipment. There's a very detailed plan of actions product group by product group that all together is then supporting us to mitigate the miss which we had in the first quarter.
We'll take our next question from Wasi Rizvi of RBC Capital Markets.
Just one last for me. Just talking about the mismatch in the currencies that you're talking about. Does your footprint rationalization plan address that and to what degree? Or will there always be some kind of inherent level of mismatch because you need to keep large facilities for economies of scale?
Mismatch, you mean in terms of geographies?
Yes, so you're going to talk about the margin impact and the pricing issues you'll be facing in the U.S. relative to your euro cost base?
I mean, if you do the math, you would find that clearly more than a billion of trade flows is leaving the Eurozone into noneuro currency regions. And this is something where we need then to consider that the pricing of, let's say, I do, just as an example now, the pricing of an individual separator of us in euro that is produced is the same like -- regardless of what the dollar rate is. And then if you would like to earn the same money in euro then you need to sell the same separator at a higher price in the United States in order to still get the same margin. And that is the difficulty which we have. So it has nothing to do with hedging or so. It's just the transactional point of view where we are hit by the weak currency regions.
Right. And sorry, but the -- some of the manufacturing footprint measures you've outlined, would they seek to rebalance that or is that likely to stay even after you've done that?
Well, that's not our main aim in the global manufacturing footprint because, as you know, currencies can change in 2 months again into the other direction. We have seen all kind of variation every year. So the aim of the global manufacturing footprint is to have a more geographic balance to be closer to the customers, but not much driven by currencies because we don't know what the ratio of the U.S. dollar or Renminbi will be to the euro in 1 year's time. So the rationale for the global manufacturing footprint is level of cost of infrastructure and workers and to be close or more balanced to our main markets, customers, which is, of course, we are talking to you mainly about Asia and Latin America.
[Operator Instructions] We'll take our next question from Lars Brorson of Barclays.
I think a lot of shareholders probably would have liked to hear from the Chairman, given both of you have announced your retirement, since we met at the CMD in March. I mean, one thing that's a bit unclear to me at least is what mandate you have to conduct a strategic review at this point and to execute M&A. But maybe in his absence on this call, can I ask to capital allocation in this transition period and maybe you could help us understand a little bit better how you and possibly the supervisory board think about capital allocation, i.e. the split between M&A, buyback and return on investment for the remainder of '18?
Yes, we talked also about that at our AGM some weeks ago here in Germany. Our strategy here is, first of all, we want to focus on the cash flow so that we have something to distribute. On mid- and long-term, our preferred option is M&A to reinvest the money because we do see a lot of potential consolidation and growth with all of the risks and all the things we have been always talking, the checkpoints that we have as and when we do it. On whether further share buyback or via special dividend whatever, that is second priority. However, we also have clearly said at the AGM that as we have now made these 2 acquisitions end of last year and beginning of this year, we will not make any relevant acquisition anymore this year. We will see that the net financial position is going to increase and then we will have to discuss together with the supervisory board what is the best use for this money. But there is no decision taken and the priorities are clear. On the long-term it is M&A. Even before that, priority number one is to generate the cash, to focus on that. And if there is no suitable M&A or in short-term, we have to see what other options we can trigger for the use of this capital. [indiscernible] communication, and we are focusing on generating the cash. We are focusing now in integrating the recent acquisitions and we will not make any relevant acquisition this year.
So okay. I understand that larger M&A is unlikely for the remainder of the year. But it sounds like the buyback is -- or a potential buyback is very much second or third priority. Can I just be clear at the AGM that the AGM renewed your authorization to buy back an additional 10% of shares. I appreciate you bought back 6% last year. But my understanding is that, that program now has been scrapped and renewed with an additional 10% buyback mandate. Is that a correct understanding?
Yes, we have been doing this, if I remember correctly, almost every year at the AGM or every second year because the mandate sometimes is for more than a year. But this is just to be able to react in an emergency case. So if we have asked for that renewal now -- last month at the AGM, it doesn't mean that now we are going to do a share buyback. This is just to be in the position to do that if needed and decided in a secured way.
We will now take our final question from of Felicitas Bismarck of Deutsche Bank.
I wasn't there in the beginning of the queue. Have you commented on why, actually, the sharp decline in order intake in the solutions business happened? So on areas and applications is now -- is only large orders or is there something else?
By and large, this was the dairy business. So of the EUR 100 million miss, about EUR 65 million is related to the dairy business -- dairy processing -- sorry.
But do you expect those orders to come back in dairy processing or do you think this is a down market for a longer time now?
The large orders, I don't expect them to come back in this year. There is always 1 or the other of these large orders, but they have become very rare at this moment. However, as we also are not alone in the world, we have competitors -- if 1 of those orders pops up in the markets, they are being then heavily fought for, and we also have our limits to take orders to protect our gross margins. So we will see in the next 24 months, I believe, 1 or 2 of these large dairy processing orders. But whether then that's going to go to GEA or not depends, of course, on the quality.
Okay, but just for my understanding, you surely weren't expecting to miss those orders, right? It was not in the expectation that you were missing EUR 100 million of orders in that sense or EUR 65 million. Was that a surprise to you or did you expect it already?
Well we have in other areas, we have, let's say, letter of intent or agreements for potential orders that we did not book them in Q1 because as Helmut has just said, we need to see that the cash, everything, downpayments are there and all the commitments are in line before we book an order and then start to work on it. So we're going to be a bit more optimistic towards the end of the year or at the beginning of the year that 1 of these 2 big orders could be booked already in Q1. And it's not dairy processing, it's in other areas.
As there are no further questions at this time. I'd like to turn the conference over to Jürg Oleas for any additional or closing remarks.
Yes, thank you very much to join the GEA conference call. I got some funny comments that why are we doing it exactly at the same timing as [indiscernible] I can assure you this is not on purpose. Maybe next time a bit more careful in watching the timing. So I feel -- sorry, for those of you who have to decide either to be on the other call or this call. And we talk to each other either in different roadshows in the next coming weeks or later, when we come to the Q2 numbers. Thank you.