OC Oerlikon Corporation AG

Ladies and gentlemen, welcome to the EarlyCon Q2 H1 2020 results, conference call and live webcast. I am Alessandro, the course call operator. I would like to remind you that all participants will be in listen-only mode and the conference is being recorded. The presentation will be followed by a Q&A session. You can register for questions at any time by pressing star and 1 on your telephone. For operator assistance, please press star and 0. The conference must not be recorded for publication or broadcast. At this time, it's my pleasure to hand over to Mr. Andreas Schwarzwalde, Head of Corporate Communication and Investor Relations at Erlikon. Please go ahead, sir.

Thank you, Alessandro, and good afternoon, ladies and gentlemen, and welcome to Erligon's conference call on the 2020 second quarter results. Particularly in light of the current circumstances, I do hope you're all well and staying safe. With me today is Dr. Roland Fischer, our group's CEO, and Philip Muller, the group's CFO. As a reminder, all related documents on the second quarter results, including the following presentation, are available for download on our website Today, Roland Fischer will talk about the Ehrlichon's development and response to the COVID-19, how it has affected us during the second quarter, and outlining our decisive actions we have taken, and how we will emerge from the post-COVID-19 world as a stronger business. Philip Mueller then will give you an overview of the financial performance during the second quarter and the first half of 2020. After the presentations, as mentioned, we will host the Q&A session to answer your questions. The conference is being recorded, and the replay is available on our website shortly after the presentation today. And now, having said that, I'll hand over to Roland.

Yeah, thanks a lot, Andreas, and welcome to all of you from my side as well. Before we start, let me say a few words about the challenging times that we are living through. I hope you all and your families are well and you are staying safe. And I'm extremely proud of the way how Erlikon's employees are handling this crisis with respect to the challenges both professionally and personally. And from a business perspective, we cannot avoid the effects of the global crisis also. we have taken strong and decisive actions where we are able to do so, mitigating the impact where possible for our employees, our stakeholders, and shareholders. And I'm very pleased to report that the MainMed fiber segment has delivered the expected strong performance during the second quarter. We achieved year-to-date order intake of over 500 million Swiss francs and have a very strong order pipeline to the year end and beyond. The strong operational performance during the second quarter has enabled sales to increase more than 20% sequentially and gives us confidence that the full year figure will be over a billion in orders and sales for the third year now in a row. We also made progress in further diversifying our main-made fibers product portfolio by accelerating the non-woven business activities. The COVID-19 pandemic increased the demand for our melt-blown technology, and here we are able to sign 15 contracts for the solution, which is required to produce fleeces for facial masks, and additional projects are under negotiation. The service solution segment was impacted across all geographies and all end markets. We have seen some initial encouraging signs of moderate recovery in June and now in July. However, it is by far too early to know for sure the degree and spacing of the recovery, given the significant risks still posed by the COVID-19 pandemic. And during the challenging lockdown period, We continue to deliver in many countries our services and technologies as they are considered critical and system relevant by our global customer base. We continue to invest in innovation to serve customer needs and drive structural growth. We do have the right technologies, the financial strength and the team in place to take advantage of a market recovery. And you might recall last year we announced structural actions to address the softening market conditions. With the onset of the pandemic, we have accelerated and deepened these measures and have taken additional costs and liquidity preservation measures. Through a combination of short-term measures and the early impact of our structural programs, we have shown excellent operational gearing. to be able to reduce operating expenses by 90 million Swiss francs year-on-year in service solutions. And by the end of June and ahead of schedule, we already actioned more than 400 of the planned 800 headcount reductions. Early-turn-end service solution will emerge stronger and more nimble from 2020, and we remain committed to our mid-term profitability targets. One key element to achieve the target is the structural cost base in the service solution business. Our priority is to substantially reduce the cost base, reacting to structural market trends. We are ahead of schedule with our program to reduce the service solution headcount by around 10% or 800 people. At the end of June, I mentioned it already, we are more than 50% complete and anticipate being 85% complete by the end of this year, 2020. The structural program is not limited to headcount, but is also designed to yield long-term benefits through more efficient working practices and technology adaption. Overall, we target an annualized run-rate EBITDA savings of around 60 million Swiss francs. In total, we expect implementation costs of around 60 million Swiss francs, and here, let me remind you that 25 million have already been booked in 2019, and 21 million will be booked and rebooked in the second quarter of this year. Our global service network, leading technologies and market position will preserve the ability of service solutions to grow structurally once markets recover and return to growth mode. Nevertheless, we are continuing to evaluate actions to further optimize our structures and cost base, considering the current environment. The elements of top line growth in combination with cost discipline and capital efficiency provides the framework to achieve our midterm commitment to group EBITDA margins between 16 and 18%. Over the past quarter, we have seen a continuation of multifaceted economic development of the COVID-19 pandemic, which we experienced already in the previous quarter. The strength of Man-Made Fiber's market position, customer proximity, and order book continue to provide a stable base in this economic environment. Our order book and the filament business remain sticky with no cancellations and continued visibility out to the year of 2023. The special filament business, including industrial and carpet yarns, remain weaker as a result of pre-existing market softness and the geographical profile of our customer base outside of China. The COVID-19 pandemic has, however, generated a strong global demand for early corn's milk-blown non-woven technology, which is used to produce face masks. This demand has grown, driven by government regulations and the need for greater self-sufficiency and reduced reliance on imports of critical medical items. It can be seen on a daily basis across Europe and the rest of the world with government's regulations and guidance for wearing masks in public places. The strength of the underlying market conditions can be seen in the order intake with 366 million Swiss Francs in the second quarter. resulting in 510 million CIS francs for the first half of the year. This underpins our confidence in delivering sales of over a billion CIS francs for 2020. In service solutions, the imposed lockdowns due to the pandemic impacted all of our end markets and provide different recovery pattern. In tooling and general industry, both representing about 17% of our first half year sales each. We are closely correlated to industrial production, which saw a substantial decline in the second quarter. All regions were materially down sequentially in the second quarter. However, we recognized the recovery pattern in China during the second quarter with increased business activities and the rebuild of inventory. following the easing of the strict pandemic measures. Assuming comparable scenarios for Europe and with the time lag in North America, we expect the second quarter to be the trust. The pattern of recovery is more likely to be V-shaped. In the automotive industry, which was substantially down in terms of deliveries and production in the second quarter, with declines of around 30%. The market currently expects a decline over 20% for the full year of 2020. With the easing of restrictions and lockdowns, particularly in Asia and Europe, we recognized some recovery in the latter part of June as key OEMs slowly ramped up production and or restocked for start of production. And therefore we now assume to see a U-shaped recovery. And last but not least, in the aerospace industry, challenges have been compounded by the sudden and substantial reduction of commercial air travel. IATA forecasts a 55 decline of passenger traffic in 2020 and now expects a return to 2019 levels only in the year of 2024. This leads to a deep and extended down cycle and prolonged recovery. However, Given the megatrends in global mobility and global trade, our belief in long-term structural growth trends remains unchanged. We continue to monitor the ongoing impact on the virus, including potential additional waves. Subject to the situation not substantially worsening, we see the second quarter as a draft in most markets. The shape of the recovery has plenty of facets across the different industries and it is very difficult to predict. Early stability and strength as a group and the structural long-term market dynamics combined with the decisive actions we are taking will position us well for the recovery when it comes. And while we are navigating the continued economic impact of the downturn, We also have a keen focus on positioning our company strategically for the future. Service solution remains a strong and leading industrial technology business. The decisive actions we have taken will increase the resilience of the segment. The business will be capable of delivering higher levels of probability. When there is a return to an environment of structural growth, The business is well positioned to ramp up and deliver sustainable and profitable sales. And in our manmade fibers business, which has evolved as a business and is today, again, a strong stabilizing factor for the group during this time. Our efforts to diversify the business are beginning to yield results and it continues to deliver strong returns. And last but not least, our healthy balance sheet positions us, sorry, well for the future, and we will be ready to execute when the right growth and M&A opportunities present themselves. And following the commercial and market overview, let me now hand over to Philipp to present the group's financials. Philipp, it's yours.

Thank you, Roland, and good afternoon. Let me start with the group financial review and with a closer look at the second quarter and half-year figures. In the second quarter, Group order intake was 604 million Swiss francs, down 10% year-over-year on a reported basis, and down 4% at constant FX rates. The significant decline in order intake in surface solutions was compensated by a strong performance of the man-made fiber segment. Sales in the quarter were 510 million Swiss francs, down 27% year-over-year. FX contributed negative 4.6% to the decline, as our reporting currency continued to appreciate compared to the same time period last year. Man-made fiber sales were 23% lower year-on-year as some shipments from Europe faced delays and given the very high sales level in the comparable period last year. We're expecting the delayed shipments from Q2 to be largely caught up during the months of July and August. Surface solution sales were down 31% as the various shutdowns related to COVID-19 impacted all of our business lines and geographies. Operational EBITDA was $55 million in the second quarter, or 10.8%. As Roland mentioned, we executed swiftly on our various cost-out actions, and we're expecting continued benefits from the measures in the second half of the year. For the first half, we reported sales of just over 1 billion Swiss francs and group operational EBITDA of 10.9%. As we have previously discussed, we are expensing the majority of the implementation costs for our restructuring program during 2020. In the second quarter, we incurred 26 million of charges for restructuring and impairments of certain intangible assets that are related to these restructuring actions. In order to give you a like-for-like comparison to our prior period results, we have defined operational measures of profitability. As you will have seen in our earnings release and the half-year filing, we are providing reconciliations from these operational measures to our reported figures. In terms of solutions, second quarter sales were 262 million Swiss francs. Sales declined 31% year-over-year on a reported basis and 27% at constant FX rates. We saw declines in orders and sales across all geographies and end markets. During the months of April and May, lockdowns in North America, Europe, and parts of Asia impacted our ability to service our customers significantly. As Roland described earlier, we saw some recovery in June with substantially more service locations open and higher levels of utilization. This positive trend was confirmed during the month of July. Our ability to predict future activity, however, remains extremely low given the rapidly changing environment. Operational EBITDA in the second quarter was 17 million Swiss francs, or 6.5% of sales. We managed costs tightly using short-term measures and saw some of the benefits from our structural cost-out program already in the second quarter. Overall, in the first half of the year, we reduced operating expenses in surface solutions by 90 million Swiss francs compared to the first half of 2019. Next, on man-made fibers. Man-made fibers delivered strong order intake in the second quarter of 366 million Swiss francs, up 23% year-on-year and in line with our expectations. At constant FX rates, orders were up 31%. As we discussed during our Q1 results, the filament market remains robust, and we saw some of the orders that were delayed in Q1 materialize in the second quarter. Year-to-date, Man-Made Fibers has booked orders worth 510 million Swiss francs on track for our full-year expectations. During the first half of the year, we saw particular strength in our nonwoven business, where we signed customer agreements for 15 equipment systems. These systems are used in the production of face masks. We expect to continue to see a positive trend for these solutions as more countries are developing their respective independent supply chains. Sales for man-made fibers in the second quarter were 248 million. As previously stated, we are expecting to be caught up on the majority of the production delays by the end of August. Second quarter operational EBITDA was 38 million Swiss francs, or 15.2%. In the first half of the year, operational EBITDA was at 12.4%. We're expecting margins to continue to improve in the second half of the year. Manmade Fibers is providing a significant degree of stability to us at this point. We expect the stable development to continue for the foreseeable future as our order pipeline sees delivery lead times extending well into 2022 and 2023. We are also in the process of new project discussions with customers for deliveries in 2024. Next, let me go through the balance sheet. Our balance sheet remains strong, and during this challenging period, we have a balance of cash and cash equivalents of 600 million Swiss francs as per the end of June. Net liquidity at the end of June was negative 156 million Swiss francs. Total equity was over 1.3 billion Swiss francs, an equity ratio of 37%. Overall, our financial position remains very strong. We have done a lot of work to make sure this remains true during this crisis. We continue to look for opportunities to deploy our balance sheet and value creative ways, whether that is M&A or organic investing. Next on CapEx, CapEx was 48 million Swiss francs, down 27% from prior year's level, or 16 million. We prioritized organic investments further during the first half of the year as we were focused on cost and cash management. Excluding the amortization of acquired intangible assets of 21.4 million in depreciation charges related to the application of IFRS 16, depreciation was at 63 million Swiss francs. roughly flat to the first half of the year 2019. Next, on cash flow. Cash flow from operating activities before changes in net current assets was 59 million Swiss francs. Change in net current assets was negative 64 million, resulting in cash flow from operating activities of negative 5 million Swiss francs. Cash flow from investing activities was negative 57 million Swiss francs, mainly reflecting CapEx of 48 million. and some smaller bolt-on acquisitions. Cash flow from financing activities was positive 14 million. We paid the dividend, bought back shares in Q1, and drew down on our credit facilities in the first half of the year. All in all, cash and cash equivalents decreased by 57 million Swiss francs to 600 million at the end of June 2020. Now let me conclude with a summary before we start the Q&A session. Man Made Fibers has done an excellent job overcoming the operational challenges caused by the COVID-19 pandemic and delivering 510 million Swiss francs of order intake in the first half. We are confident to achieve our full year sales and orders targets, and we are expecting margins to expand versus 2019. The Surface Solutions team reacted swiftly to the operational challenges presented by the COVID-19 crisis. Towards the end of June and into July, we see the first signs of recovery, but the degree and robustness of this trend are yet to be seen. Our company remains very well capitalized, and we are positioned to not only survive this crisis, but to act quickly should the right M&A opportunities present themselves. We have accelerated the restructuring program, which we announced in 2019, and we're continuing to streamline our operation. With the cost actions we are taking and our leading technology portfolio, we are certain our surface solutions business will emerge even stronger from the crisis. The future remains extremely difficult to predict for us and many others. We continue to focus on what we can control and adjusting our structural cost footprint. As the impact of our cost actions materializes in the P&L, we expect to see margins improve in the second half of the year. We expect group margins in the second half to be 300 to 400 basis points higher than in the first half of 2020. This obviously assumes no additional material events negatively impacting the market recovery. Furthermore, as our structural cost actions are taking effect, we remain confident of our commitment to the midterm margin corridor of 16 to 18% for the group. This closes our prepared remarks. With that, we will open it up for questions. Alessandro, please go ahead.

We will now begin the question and answer session. Anyone who wishes to ask a question may press star and one on their touchtone telephone. You will hear a tone to confirm that you have entered the queue. If you wish to remove yourself from the question queue, you may press star and two. Participants are requested to use only handsets while asking a question. Anyone who has a question may press star and one at this time. The first question is from Christian Obst from Butterbank. Please go ahead.

Yes, hello, and thank you for taking the question. I have four. One is what does it mean right-sizing in additive manufacturing? Can you give us some kind of a framework for that? Second one is the nonwoven odors, of course, positive for the entire group. But are these low to mid single digits per order stakes so that the total is approximately 50 million? Is that the right assumption? Then concerning the free cash flow, free cash flow is negative with approximately 60 million in the first half. Can you give us some kind of a guidance? Do you expect to reach the break-even level until the end of the year? and last but not least it's concerning intangibles they still have a very high degree of approximately 30 percent of total balance sheet of intangibles and this is mainly related to surface solutions where you are currently undergoing a very heavy restructuring and so how is the current status of discussion with the auditors concerning further impairments maybe going forward or how do you see the risk thank you very much then

Okay, Christian, I think I take the first two ones and Philip, you take the second half of your questions. First of all, right-sizing additive manufacturing. And this is actually a very, very simple story. As additive is serving some normal conventional market segments, automotive aerospace, we do see a certain impact here. in terms of reduced volume as well. And on top of sheer volume and market-driven phenomenon, we do see, and this goes more back to the Boeing topic 737 MAX, a certain bigger hesitance to go for application of new technologies here. And this is what we saw, and as a consequence, we took some measures. We reduced people on the operational side, but also in the structure of the additive business. And we also went through our ongoing R&D activities. And here we talk, in some cases, about very long-term projects. And here we applied a simple rule to which extent we believe that there will be, in the middle or in the short term, a few real revenue coming out of it, and here we did some cuts as well. The second question was referring to the non-woven business. This is a business, here we talk about melt blown equipment, what is in the order of magnitude five, six, seven million revenue each system, depending on scope. And normally we did few, very few, units per year, but due to this COVID topic, the demand was increasing. And I think I mentioned, or Philip mentioned it, 15 units have been sold. There is an effect of 35, 40 million in this year, and the same will come next year. That means it's not changing the needle and the entire picture, but it's a nice add-on here.

I would say on free cash flow, I think we're expecting a substantially better second half here. If I go through the components, we will maintain the discipline on the CapEx side. So that's probably going to look similar. But I think from a networking capital standpoint, we're expecting that to be a source of cash in the second half. We had an inventory built related to some specific areas, both in man-made fibers and in surface solutions, which we're expecting to execute through in the second half of the year, equipment deliveries, and so on. And we're expecting receivables to be similar but a better performance on payables. So I would say we're expecting a substantially better cash performance in the second half of the year. And then your last question was on intangibles. You know, I think similar to maybe many others, we're trying to absorb and evaluate the impacts from the COVID-19 crisis. And we're trying to bifurcate between sort of what's the short-term shock impacts and what are the longer-term items that might potentially impair our different business units. I think we've talked about this, the longer term area that we really see or the longest term that we have in the portfolio is certainly the aero market. That's where we're spending a lot of time. We are substantially, you know, we have the same view on the aero market. It's more of a timing question. So we believe in the market and our business in that market and our ability to generate positive returns there. So it's more of a timing question. We'll go through that process as we go through the second half here. and really try to evaluate what it is that we need to look at. But I would say, really, it centers around the aero market at the moment. In the long term, we feel great about that market.

Okay. Thank you so far. Thank you.

The next question comes from Michael Forth from Fontobel. Please go ahead.

Yes, good afternoon, gentlemen. Two questions from my side. The first one also regarding additive manufacturing, just to get a feel for the size of the business and how much drag on profitability this has now. Historically, you had between 200 and 300 basis points, just to see how much it is of a drag this year and maybe also going into next year, what your assumptions are. And then the second question is regarding your liquidity management. First of all, if you could specify how many shares you bought back in the first quarter or for how much, and then the thinking behind basically drawing that liquidity and then buying back shares and paying the special dividend, what the thinking behind that is and how much more of debt facilities you have available at this point. Thank you.

Okay, Michael, I start with the additive part. And I think we indicated already in previous calls that the business, additive business in 19 was in the order of magnitude of 30 million revenue top line. And this is what we are targeting for 2020 as well, but due to the effect of this crisis, we will see a certain impact here, not as strong as in the other business, but nevertheless. And in line with this improvement measures and cost and cost cutting measure, this additive area as well, we have been able to reduce the total, the absolute losses which we generated in the past and now. And we will remain in the region of this 300 basis points impact here. I think because as we believe in the technology and as we believe in the application for this technology, we are not cutting the future. We are just cutting those elements which we feel are not of utmost need right now.

Yeah, and then I would... Your question on the liquidity management, you would have seen in the first half of the year, we purchased about 46 million Swiss francs worth of treasury shares. you would have seen our average price for the total buyback that we've done so far is just over nine Swiss francs. And you can imagine that what we bought back in the first quarter, really at the beginning of the year, was significantly lower just in line with the overall market. So that gets you to the average of just over nine Swiss francs.

And then how much more sort of debt facility or credit lines you have available now?

You know, we have in the cash and cash equivalents that we have on the balance sheet, the $600 million, that still includes the cash and credit lines. There is some more available, but I think we're looking more at an ability to sequentially repay those revolving credit lines. We, you know, given sort of where we are at the moment, we don't see the need to maintain these on the balance sheet. As we explained last time around, our funding cost for this is very, very limited. But, you know, nonetheless, I think during the third quarter we're looking at, you know, returning some of those funds back. Okay. Thank you very much. Thanks.

The next question comes from Alessandro Foletti from Octavian. Please go ahead.

Yes. Good afternoon, gentlemen. Thank you for taking my questions. Can I ask you a couple, maybe one by one? First, on the order backlog at man-made fibers, can you give an indication how much of this will be delivered in 2020? How much then later on? And maybe if you can give a bit of an indication on how you see the pipeline of order in the different segments, also particularly with the reference on the BCF business. That will be my first question. I have a couple of others.

Yeah, okay. I think let's start with the BCF business, which is down right now. And this was already obvious last year, 2019. And from that perspective, the demand, additional demand in non-woven, in the melt-blown equipment, helps our site in North Germany. And the second question, actually, the filament business, the outlook. You know that here we talk about project business. You know that we have announced, I think it was in March, 600 million new contracts, which are not yet booked as order intake because, and Alessandro, you know it, having a contract is just one precondition. Others are important as well, secured financing, approvals from the local authorities to build the site and stuff like that. And from that perspective, hardly anything, just maybe a minor, a very small, low double-digit million volume will be booked as order intake out of this 600 million in 2020. That means the rest is coming as the delivery slots are reaching into 2023. That means we start delivering end of 21, then 22, and then the later part even reaches 2023. And that gives us the confidence that, and in combination with the statement we made that we don't have cancellation in this business, gives us the confidence that our MainMed business is extremely stable. They are doing well and performing well.

So maybe if I can add my second question here on the capacity utilization, you have committed to remain at 1 billion plus minus. I believe you will stay there. But how is the rest of the industry behaving?

The rest of, you know, we should not talk too much about the others. We should talk about us. And you're absolutely right. We have made a conscious decision years ago. not to substantially increase our capacity. The opposite actually was true. We closed Chemnitz, you might recall. And that's why we are where we are. What we do is we do incremental improvements in terms of efficiency gains. If we need a machine for special drilling or whatever, we do that. But we don't extend the factory. We don't build new factories. And this is our philosophy. And as far as we know, our main competitor, the Japanese family-owned company, is doing similar. They are increasing the capacity within the frame of a given setup. And for the high-end, state-of-the-art, latest technology equipment, these are the two players.

All right. Okay, fine, thank you. Maybe a very small one and then I go back in the pipeline. On the corporate cost line, it was, if I calculated properly, zero or plus one million. Can you explain if there is something special into that one in H1, and can you give an indication for, let's say, the rest of the year, but also afterwards, how high will be that line?

I would say corporate costs are always around that level, Alessandro. You know, there's certain costs that get allocated to the segments and certain that are. There's always a little bit of an over or under, but it should be in that range going forward as well.

So that means that the step down from where it was a couple of maybe one year or one and a half years ago, it has been carried out and you sort of really reduce sustainably the cost there.

Yeah, you know, a lot of this was obviously also done, you know, under the consideration of, you know, the changing portfolio and some of the divestitures that we've made. So I would say that. And, yes, we have reduced the corporate costs and we're continuing to reduce corporate costs.

Okay, thank you.

The next question comes from Fabian Hecchi from UBS. Please go ahead.

Yes, good afternoon, gentlemen. A few questions here. So first, starting with the 90 million OPEX reduction in H1. Can you tell us how much is kind of temporary cost reduction related to or how much of this 90 million is related to short time work? How much is related to, you know, other typical COVID-related savings like much lower travel expenses, and how much is already or is there already substantial part of the structural cost savings of the $60 million you're mentioning? This will be my first question.

I would say, Fabian, you're exactly right with the notion that there's a number of those components in there. There is a You know, we're not probably going to give the exact split, but what I would say is that, you know, short-time work is probably, compared to the $90 million, a relatively minor component. I would also say just with where we are from a timing standpoint within the second quarter, the structural cost-out items have also had a relatively small contribution to that, but will have a much larger contribution to the savings going forward. And then there's obviously a number of other items that react short-term. There's discretionary spend. Those are certain other discretionary spend controls, not just travel and living and so on, where we will continue to control those costs very tightly as we go through this crisis. And where we're also sustainably setting up other business practices that will keep the cost lower. So I would say it's really a mix of all the different cost types that you've described. relatively small on the short-time work, so far relatively small on the structural cost. And that's really the component that also makes us comfortable on the sustainability of the cost savings as the structural cost-out component grows. And we really get the run rate savings from the 400 heads that we've already reduced some of the other things to 85% of the headcount reductions that we're expecting to complete by the end of the year. You know, some other cost items will come back, but we're sure that we're certain that the net of those cost savings will still help us to expand margins in the second half of the year and then also going into 2021.

Okay, that's interesting to hear. So this means, I mean, the $60 million savings, When I think of 800 job sheds, so the 60 million is actually more or less purely related to fixed headcount reduction. And then all other OPEX and SG&A that is in the 90 million, lots of it is probably to stay sticky, right? So is it fair to assume that your structural cost savings will be beyond 60 million?

We're obviously focusing here on a couple of different areas, just like Roland said.

I think you go through a crisis like this and it resets a lot of your cost base. So we're certainly expecting some of the other things that are now more considered a short-term saving that they will be sticky to. So I would agree with you on that. And you're also right that the majority of the $60 million are obviously predominantly headcount-related savings. When you just think about it, we've described obviously a lot of the positions that we're reducing here are structural in nature, so they're a little bit higher in terms of average compensation. So, you know, we try to give you all of that sort of in the margin expansion target for the second half. At the group level, about 300 to 400 basis points higher than in the first half. and certainly surface solutions and the cost out measures that we're taking there play a big role.

In fact, maybe from my side, just one additional comment. Headcount is one topic, but also, you know, offshoring shared service solutions, which are not necessarily showing up in the total number of headcounts, but which contribute out of the different salary levels, right?

Sure, sure. Okay, thank you very much for these explanations. Then my second question is, when I look in Surface Solution, your aviation segment in Q2 had been 15% of sales, and one would have expected that this segment has been suffering the most. Sorry, it was 14% this year, but it was actually in Q2 last year, when I look in your last year's presentation, it was 15%. No, now I say it the wrong way. 15% it was this year, and last year it was 14%. So you actually have increased your relative share in aviation. So this means you have outperformed all the other segments in surface. Can you explain how was this possible?

No, I think there's a couple of effects in there. I think what you obviously have to keep in mind is that some other areas, the very, very short-term areas like auto, some of the tooling areas and so on, were impacted just as much by the COVID-19 crisis. I think what we're trying to say is that we're expecting the path of recovery to be quite a bit different, where we're expecting sort of tooling general industries and with a little bit of delay auto also to come back in a somewhat quicker pattern. We're expecting the aero recovery to take a lot more time. That was sort of the point. But obviously in Q2, you know, all areas were impacted. Yeah.

But, you know, Fabian is right. I think we did have and still have a clear plan to grow our aviation and aerospace business. And I think you all know the famous examples when we have successfully penetrated the aerospace market out of our thin film Balsas business. What was not the case three, four years ago, which we simply didn't have it, right? But this is... The topic of structural growth, what we always told you was one strong element, and that was contributing to the effect you are mentioning.

Okay. Thank you very much for explanations. These were my questions.

The next question comes from Armin Richtberger from ZKB. Please go ahead.

yes hello gentlemen additive manufacturing I understood that most of your restructuring costs go into that and now this point so I wonder these 400 headcount reductions where are they not in additive manufacturing now or What really is the action in additive manufacturing?

Just to maybe clarify the comments, the majority of the restructuring efforts is not in additive. Really, the headcount reductions that we've targeted are really broad-based. They also impact additive and so on. What we've said is that You know, in the current year and with a significant impact on all businesses and so on, additive is also impacted by the deteriorating market environment. So in other words, additive is, you know, the top line is also impacted by everything that's going on around us. And that obviously also has an impact on how that business is able to absorb costs, etc., I think what Roland was also describing is that we're taking a very hard look at some of the different areas that we're working on within Additive and taking a critical view towards do we want to continue those areas or not? And that's sort of the right sizing. This is really at a granular level. We have a really good understanding now of where we think we can generate positive returns and where we can't. And to the extent that we can't, you know, we will discontinue those areas. So I think that's sort of what we were saying so far on what we've done. The restructuring actions haven't been skewed towards additive, and additive has also not been, you know, sort of immune to the impact from COVID-19 and just the drop in demand overall.

Okay. Then... Another question, surface solutions, you say you saw encouraging signs in automotive and in precision components. What precision components? And you mentioned China and Germany, so only China and Germany. The rest of the world still no signs of recovery, I assume, or what's the situation?

No, I mean, I think this has been just examples. what we mean when we talk about encouraging positive signs. I think first of all, you know, the pandemic is a second phenomena. China is back at stage. I don't say back to normal, but they have recovered to a certain extent. And just to give you an additional example, our friction system business is doing extremely well in China, And to a certain extent, it's the volume which goes up, but it's also a question of stocking, because otherwise we would not be able to explain it, right? In Germany, yes, it's coming back. And in Bremen, we have a side for friction system. But U.S. is still, yeah, there is still a long way to go there, actually, right? And from that perspective, there are positive signs. And to be maybe more, not generic, but more precise, but not very specific. When we talk about the monthly service solution revenue, we had the dip in May. And it was coming at the beginning of the year from a normal level and went down, down. And then since May and June, we already... have been back to the April level and in July we expect and we saw also a decent level. Coming back means not being at the old level, but seeing a kind of turnaround, recovery. And we say first cautious science. We don't declare victory.

Then another question regarding cash flow from operating activities. It was high because of a big change in contract liabilities. Can you explain what happened there?

Yeah, this is, as you know, the usual cycle in man-made fibers, really related to the large contract there and customer payments and how we're performing work. You know that we had a fairly negative overall result on that in 2019. We've always described that this follows a certain commercial pattern. We've also described that we're expecting a more positive outcome for that in 2020, and that's part of what you're seeing here. So it's really related to the large contracts and down payments and progress payments that our customers make in the filament space.

Okay, thank you.

The next question comes from Marta Brusca from Berenberg. Please go ahead.

Hello. Thank you for taking my questions. I have two. So firstly, I know it may be a little bit far-fetched given that you are so focused on the operational side of it throughout the crisis. But I was just curious if you see any new opportunities emerging for your surface solutions business out of the pandemic and the current situation. And secondly, you mentioned a few times that you are adjusting the additive business to right-sizing it. Actually, I wanted to ask you to right-sizing to what? Who do you want to serve in this segment and how do you think of your end market here? Thank you.

Sorry, on the first question, would you mind repeating that? We're sort of collectively not sure that we understood you the right way. And then the second one I got with additive, but can you just repeat the first one, please?

What new opportunities you start seeing emerging out of the crisis for the surface solutions?

Okay. I'll probably just start with the additive question.

You know, I think that's a good question. What are we right-sizing to? I think the point here, what we've always said is that we're not comfortable and not okay with the level of where the business is performing and the level of dilution that we see from the business. We also always said that this is a function of a couple of different things. One is just to grow the business to an adequate size. This is normal with the new endeavor. And we're continuing to pursue that despite COVID and so on. This is the right strategy. And then the other component that we've described is that as we've gone through the last couple of years and learned more about the applications, our customers, and our own capabilities, we've also learned that certain areas probably don't have the same viability as others. And so we said to the extent that we're evaluating that those areas don't have the right level of viability, We will discontinue them and stop them and really adjust our cost footprint. So that remains the same intention. We want that business to be accretive to the group and accretive to the surface solutions business. And so that's what we're aiming for. It's a function of a couple of different things, but we're on track with that.

And your – Actually, it was the first one. What are the opportunities? And as usual, in each crisis, there are plenty of opportunities. And maybe just to mention a few. And beside of the ones which are coming at stage on the M&A arena, I think we expect that there are opportunities. There are companies, especially in the service solution business, which are increasingly struggling with the economical environment. And we expect to see opportunities there for acquisitions, one element. Another one is the increasing cost pressure in each industry. If, for example, we talk about aerospace, leads to a kind of consolidation of activities. Today, we do have... plenty of cases where coatings is a part of in-source, in-house process. This we expect to change to a certain extent because everybody is forced to focus on the core elements of production and we are offering our capability as a coating company to provide this service to an increasing number of customers. And maybe last but not least, we talk a lot about COVID, but if you talk about automotive, there was a topic before COVID that was the e-mobility topic, right? There is a structural change ahead of us. And these are, let's say that way, this investing R&D money, and here we are spending efforts, resources, and money to... to get a certain share out of it. Just to mention a few opportunities we see out of the topic.

Thank you. That's very helpful.

The next question comes from Uwe Schupp from Deutsche Bank. Please go ahead.

Yeah. Good afternoon, gentlemen. Also two or three questions from my side. Firstly, on the short working hours, can you just remind us in terms of Germany and Switzerland, How long are the programs still lasting? And related to that, if those governments in those countries would be extending their respective programs, would you consider taking part of it or basically have you already more or less decided that should the current speed of the recovery continue to basically abandon the program then? Secondly, on CapEx, Phil, I noticed that obviously you are preserving your cash as much as possible, but how sustainable do you think this currently low level is before it starts impairing your ability to capitalize on the growth once the market comes back. And then lastly, again, following up maybe on M&A, and sorry for that notorious question on these calls. Obviously, many of the potential sellers have, I guess, shuffled off the dust on the back of the COVID-19. And I was just wondering whether basically you liked what you saw, And are you already in the process where you have basically a short list, or are we still in kind of preliminary discussions and M&A is really a topic only for 21? Thank you.

So let's start with the short work topic. And I think this is a regional phenomenon. We have it in certain countries in Europe. And of course, you can be assured we make use of it wherever possible. And the nature of the beast is also clear. It's not going to last forever. And right now in Germany, the discussions are ongoing that the governments and the federal government actually is discussing and planning to extend the normal timeframe to apply because nobody wants to see the short work people, to see them on the unemployment risk. on the unemployment list. And from that perspective, I do expect that the programs are going to be prolonged in Germany and in Switzerland and in other central European countries. And we will make use of it as long as the top line development requires it. But we also have to be crystal clear. Let's assume the market would remain on the level as it is today. Then the short work tool would not be the final one. And then we talk about additional headcount reduction. And from that perspective, we are happy to have it because it enables us to maintain and to keep our workforce to a big extent to be able to ramp up the capacity when the markets are coming back.

And then your question on CapEx, I think Naturally, we've reacted with CapEx and just when you think about the overall sales levels and revenue levels, specifically in Surface Solutions, we're obviously well below what we have already executed through with the existing infrastructure. So you can kind of see we have quite a bit of growth pathway with the existing infrastructure. We've still, I would say, prioritized in a very smart way the expansion topics that we had. you know that a lot of this is related for us to regional expansion. And so we've continued to prioritize those investments and made those investments. And I would say that sort of ties into what our overall strategy is. We've mentioned this a couple of times. Our clear strategy, specifically in surface solutions, is to work more capital efficiency with the CapEx that we're spending. I think over the past couple of years, we've made some very good investments into capital growth and modernization areas. But we're expecting the overall CapEx corridor, the reinvestment ratio to come down significantly. And so I would say this crisis is probably a first step to that. In the long term, we're not going to remain at that low of a level, but I would say significantly below the historic levels. And that'll help us to improve capital efficiency. And then I'll just, I'll start with the M&A topic and then Roland, I'll let you obviously comment on it. But the I would describe it as a March, April, and May, you know, many companies go through the immediate shock and the reaction to the COVID-19 pandemic. And then companies are focusing on exactly the process that you're describing and that Roland was talking about as well. Prioritizing core competencies, you know, relooking at the portfolio. And we are very active on the other side of that process. We've made it very clear to a number of different partners that with the strength of our balance sheet and our strategy to grow both organically and inorganically, we want to entertain a lot of these processes. We're looking very, very intensively with our M&A group at different opportunities. I would say when you just go back to that timeline, I think this is still at the beginning stages, but I think we are, we're ready to, you know, move forward if the right opportunity presents, if and when the right opportunity presents itself, so whether that's in 2020 or in 2021.

Yeah, I think it's perfectly described, and just maybe an additional remark, I think we really have a clear position to play an active role here. due to the sheer effect of our balance sheet, our size, and our portfolio. I think we see us as the service solution company, and here size and capabilities out of the size are kicking in what smaller companies do not have. And from that perspective, I'm quite optimistic that at the end of the day, whether it's 2020 or 2021, we will see some results.

Good luck on that, and thank you very much.

Yeah, thanks for that.

The next question comes from Christian Arlund from Main First. Please go ahead.

Yes, good afternoon, gentlemen. Two questions from my side, if I may. On the one side, man-made fiber segment, I mean, the initial guidance in terms of EBITDA margin was that you want to achieve margin level around prior year's level of 13%, and now today you actually increase that guidance saying that you are on track to exceed the 2019 level in 2020. So what has changed to become here more positive? That would be my first question. And the second question on your margin guidance for H2, the 300, 400 basis points higher margins. I believe we are talking about operation on the EBITDA margin. What does it mean in terms of volume? What's the base assumption or rephrasing it? It's probably somewhere between H1 this year and H2 last year. I don't expect that you can achieve the H2 volume of last year. Would that be a fair assumption?

Let's start with the man-made fiber topic first. I think we all have to keep in mind that man-made, of course, also was impacted by this pandemic. Our sites in China have been closed for, I don't know, six weeks or even longer, but we have been extremely not lucky, but doing well. Our German sites provided record volumes and output during these days. That means we see the dip in the first half, and now in the second quarter, and, sorry, the second half of the year we are recovering. That means the factories are working full steam ahead, and here volume and load helps us to show a better performance, and you're right. We indicated the 13%. Now we are quite vocal, actually, to say we will overachieve it. We will be better, and... Despite the fact that we are talking a lot about service solution, it doesn't mean that we don't focus on main-made fiber as well. Whatever can be done in terms of efficiency and cost efficiency on the main-made fiber business, we apply it there as well. That maybe helps you a little bit to understand why we believe you will be better than actually guided.

Then I'll take your second question.

I would say you're right on surface solutions. I think keep in mind that obviously in man-made fibers, that looks quite a bit different. I think in man-made fibers in the second half of last year, Sales were $530 million. I think with the delays that we've described and so on and sort of the overall corridor that we've given you for the full year and our first half achievement, you can see that we're expecting to be quite a bit above that level. And then on surface solutions, I will say this one more time. It's incredibly hard for us to predict what this is going to look like. But with your estimate of what the range is, you're probably accurate somewhere between the first half and the second half of last year. I know that's not overly specific, but obviously right now it is also very, very difficult for us to sort of see further out than one to two months. So that's kind of what I'd say. But don't forget that man-made fibers, obviously, we're expecting the full year deliveries for 2020 to be on track. in line with what we told you at the beginning of the year. And that, at the group level, obviously plays a role as well.

Okay. Thank you. Thank you, everybody. And with respect to time, we would like to close the call now. We appreciate your participation in the call. And if there are further questions, do not hesitate to contact the investor relations team. Next reporting is scheduled for November 3rd, when we disclose the third quarter results, and we'll do look forward to speaking to you at the latest at that point in time. Stay healthy, and goodbye.

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