Welcome to the Dürr conference call. Dr. Jochen Weyrauch, CEO, and Dietmar Heinrich, CFO of Dürr AG, will present the Dürr Group's figures for the first quarter of 2022, followed by a Q&A session. At our customer's request, this conference will be recorded. I will now hand over to Andreas Schaller, Head of Investor Relations of Dürr AG.
Thank you, Martin. Ladies and gentlemen, good afternoon or good morning to those of you in the US. Welcome everybody to today's First Quarter 2022 Earnings Call, which takes place a bit earlier than expected due to an ad hoc release that we issued yesterday. You will hear more about the background in today's presentation, and we will be happy to answer your questions in the subsequent Q&A session. As always, our earnings presentation is available on our investor relations webpages, and we assume that you have it in front of you. With me on the call today are our CEO, Jochen Weyrauch, and our CFO, Dietmar Heinrich. Please be aware of our disclaimer regarding forward-looking statements on slide two. After this short introduction, I directly hand over to our CEO. Jochen, the floor is yours.
Thank you, Andreas, for the short introduction, and a warm welcome also from my side to all participants on this call. As Andreas said, we are a week earlier with our earnings call than originally planned. The reason is that despite a decent Q1, we had to adjust our earnings guidance for 2022 after having carefully reviewed our latest forecast for the rest of the year. The outcome is as follows. First, we had a very solid start into 2022, and we will go into more details for the performance in Q1 in a minute. Second, demand drivers are intact as you can see from the record order intake we achieved in Q1. We have not seen any relevant order cancellations and are confident that we will achieve our original guidance for order intake and sales revenues. This is also supported by positive exchange rate effects.
Third, looking at earnings, we have to accept that improvements in the supply chain that we had originally expected by mid of the year will probably not come to a large extent before the end of 2022. This is also due to the latest lockdowns in China, and especially in Shanghai, where the Dürr Group operates three plants. One of them continued production under special authorization, but two of them have closed since early April. Together with the indirect impact of the war in Ukraine, this leads to a higher cost inflation than originally planned. We were able to compensate part of this by an outstanding dedication and commitment of our purchasing and product development teams, and by forwarding another part of the cost to our customers.
However, there remains a portion of unplanned costs that we can temporarily not cover, and this led us to adjust the earnings target for 2022. Fourth, as just said, we see this as a temporary effect and remain confident that we will reach our midterm target of at least 8% EBIT margin in 2023 or latest in 2024. One reason for our confidence is that fundamental demand drivers of our business, like the decarbonization of production processes or the transformation towards e-mobility and sustainable construction, are resilient or have maybe even gained momentum through the current crisis. In addition, we have increased prices and introduced price adjustment clauses in our contracts to better compensate the cost inflation going forward. After this short introduction, let me start now with a review of our performance in Q1.
After that, I will briefly comment on the performance of our divisions before Dietmar will go into more details regarding the financials. At the end, I will present to you the updated guidance for 2022, and we will have sufficient time to answer any questions you might have. The highlights of Q1 are on slide four. With EUR 1.4 billion, we have achieved a new quarterly record in the order intake, and this was driven by all divisions. We received large orders for automotive production equipment where e-mobility was once again an important factor. HOMAG recorded a new quarterly record for order intake as well, with orders with more than EUR 570 million. We also see good demand for environmental technology from the chemical industry, specifically also for the production of battery materials.
The order backlog reached a new record level with almost EUR 3.9 billion. This is a very solid base for sales growth in the coming quarters and even years. What I would like to stress is that the margin quality of our backlog is quite satisfying and reflects the margin recovery in order intake that we have seen since 2021. Sales revenues improved by 15% compared to the weak first quarter of 2021, but it could have been higher without the increasing supply chain constraints. Book-to-bill stood at a high level of 1.55. EBIT before and after extraordinary effects improved year-on-year. This was supported by a higher utilization at HOMAG and improved efficiency due to our capacity adjustment and optimization programs in the last years. The service share of sales remained above 3%.
However, when comparing the margins with Q3 and Q4 of 2021, we can see a decline due to the increased material cost. Orders executed in Q1 2022 were accepted at a time when cost inflation was still at lower levels and price adjustment clauses were not a regular part of our contract. Free cash flow generation once again exceeded expectations and was driven by the positive profit development and high prepayments related to the record order intake. Finally, as mentioned before, we adjusted the earnings part of our guidance for 2022, but left the guidance for order intake, sales revenues and free cash flow unchanged. We also confirm our midterm target of at least 8% EBIT margin. On slide five, we see an overview of the key financial indicators for Q1. Order intake increased by 36%. This includes EUR 60 million positive exchange rate effects.
Sales revenues grew by 15% and included EUR 21 million positive FX effects. EBIT before extraordinary effects increased by 53% and the margin reached 4.9%. The foreign exchange effect was EUR 2 million. Net income more than tripled from a low level. Finally, free cash flow even exceeded the high level of Q1 2021, with a reduction of net working capital being the main driver. Let's look at the order intake on slide six. As mentioned, we achieved a new quarterly record of EUR 1.4 billion. We received large orders for production equipment for EVs from established automotive OEMs and startups and larger systems orders for woodworking machinery in China. Due to, among other things, price increases in the past months and the introduction of price adjustment clauses, we have improved margins of our order backlog and reduced risks going forward.
On slide seven, we see the geographical distribution of order intake. All geographies contributed to the overall growth with double-digit growth rates, with the exception of Germany, where we experienced decline compared with the strong start in Q1 2021. China continued to be strong and the order intake in the Americas almost doubled. With this strong start and looking at the well-filled pipelines, we are on track to reach our order intake guidance for 2022. Now let's have a look at the divisional development. We start with Paint and Final Assembly Systems on slide nine. Order intake in Q1 was very strong and at the highest level since before the Corona pandemic. Demand in China and USA was very good and e-mobility was a key driver. Sales revenues grew year-on-year, but were still on a relatively low level.
We are expecting some larger projects to increasingly contribute over the next quarters. EBIT margins show some improvement, but were impacted by higher material costs and lower margin projects that were acquired at the beginning of the pandemic. Reported EBIT includes a positive extraordinary effect of roughly EUR 5 million related to a legal case at Hekuma that was decided in our favor. We expect revenues to accelerate in the second half of 2022 as project execution ramps up. Let's turn to Application Technology on slide 10. Order intake was high, driven by North America and Europe. Sales revenues grew sequentially, once again supported by a strong service business. Our production plan shows an increasing number of painting robots to be manufactured in the coming quarters. The EBIT margin development was solid despite the supply chain constraints. Prices were raised at the beginning of the year.
All in all, a good performance of our robotics business. Next is Clean Technology Systems on slide 11. High order intake in Q1 was driven by strong demand from the chemical industry, including from orders from producers of battery materials. Sales revenues grew in many regions, but most pronounced in North America. Service growth was particularly high. On the margin side, however, we are experiencing a temporary dip due to the fact that material costs increased quickly and could not be forwarded to customers in a timely manner. However, we have addressed this topic and are expecting an improvement over the next quarters. At the same time, we are spending more for R&D to further develop our battery coating capabilities. In summary, short term, we will still see some pressure on margins due to higher material cost. We see significant growth potential due to the higher order backlog.
On slide 12, we can see the summary of developments at the Measuring and Process Systems division. Please be aware that the numbers for both years now include the tooling business that was transferred from HOMAG at the beginning of the year. 2021 numbers were adjusted with the exception of return on capital employed. For order intake and sales, this resulted in an increase of a low double-digit million euro amount. Order intake was very strong in the first quarter, driven by North America and China. Large orders came from e-mobility, but also aerospace customers. Sales revenues were constrained by missing parts, and this also had a negative impact on margins, which remained at about the prior year's Q1 level. Price increases were implemented in early 2022 to compensate for the cost increase.
All in all, the demand environment has clearly improved and we see a strong recovery potential once the supply chain normalizes. Last but not least, let's take a look at HOMAG on slide 13. Order intake in Q1 achieved a new quarterly record with way above EUR 500 million. This was driven by several large orders in the furniture business. At the same time, the demand from the wooden construction sector remains high. However, you should not expect that the Q1 level is the new normal going forward, as it was partly influenced by investments that our customers shifted from Q4 2021 to Q1 2022. We are clearly on a very good track to reach a strong order intake for the full year. Sales revenues were close to the record level of Q4 2021.
We clearly see that the investment in our service team pays off as the service business continues to grow. The EBIT margin further increased, driven by the efficiency improvements of the past two years and the implemented price increases. All in all, the development at HOMAG was relatively strong, despite the supply chain constraints that we were also experiencing in this business. We have mentioned the service business already several times. Now let's look at some numbers on slide 14. The service share of group sales remained above 30% in line with our target. All divisions grew service revenues year-on-year in Q1. The service margin was stable on a good level sequentially. Compared to the first quarter of last year, we saw only minor changes in the composition of the service share, with modifications gaining slightly compared with spare parts.
Demand for service remains strong, and this business is a clear differentiator for the Dürr Group. Now, Dietmar, I hand over to you for the financials.
Thank you, Jochen, and also welcome to everybody from my side. I start with slide 16. Q1 saw a very solid start into the year despite cost inflation and supply chain constraints. Especially the free cash flow was the highlight and even surpassed the strong level of Q1 2022. Now let's have a look at some financial details on the next slide. On slide 17, we can see that sales revenues grew year-on-year by almost 15%, but declined sequentially by about 10% compared to the fourth quarter of last year. Considering the supply chain constraints that Jochen already mentioned, we believe that this is a decent performance. From a geographic perspective, Europe gained share, mainly driven by the growing business at HOMAG and the buildup of new automotive capacities in Turkey.
Asia, without China, lost share as large projects in South Korea were completed. China and the Americas were about stable. Now let's move to EBIT on slide 18. The EBIT margin before extraordinary effects improved year-on-year, but remained below the level reached in Q3 and Q4 of 2021. The EBIT bridge shows that a strong gross profit growth was the main driver for the EBIT increase. The gross margin, by the way, reached a high level of 23.6%. Overhead costs rose year-on-year, mainly pushed by sales commissions due to their record order intake and higher research and development efforts. Extraordinary effects were lower than expected as the gain from the legal case at Hekuma almost completely compensated for the negative PPA effect that we have guided for on a quarterly level.
On slide 19, we can see the free cash flow development. We recorded an excellent free cash flow of EUR 75 million in the first quarter. EBIT growth and the improvement in net working capital were the main drivers, partially compensated by higher taxes paid and higher CapEx. The line item, other, includes the effect of a lower build-up of provisions in Q1 2022. With EUR 75 million free cash flow in Q1, we are already in the middle of the guidance range for the full year. We will explain later. However, it should be noted that we expect the net working capital to grow with increasing business activity, and that CapEx spending will be higher over the next quarters, given the capacity enlargement at HOMAG, as previously announced. For more details regarding the net working capital, let's look at the next slide.
Net working capital dropped to EUR 367 million, as we can see on slide 20. This is equivalent to only 36.5 days working capital, which is clearly better than our target range of 40-50 days. Main reason for this reduction was the strong cash inflow from customer payments, which is reflected in the increase of contract liabilities by about EUR 140 million. Inventories and contract assets rose with business activity, but not as fast as contract liabilities. We expect the level of net working capital to normalize over the course of the year. On the next slide, page 21, we can see the impact of the high free cash flow on our net financial status.
Net debt improved to only EUR 11.4 million at the end of the first quarter, which is equivalent to a gearing of only 1%. As EBITDA over the last 12 months increased to about EUR 320 million, the leverage was reduced to almost zero. We keep our guidance of net debt between -EUR 75 million and -EUR 125 million at the end of the year unchanged, which leaves some flexibility for dividend payout, net working capital build-up, as already mentioned, higher CapEx, and potential M&A activities. Let us summarize, or let me summarize. We are very pleased with our solid balance sheet. Finally, let's have a look at our liquidity headroom on slide 22. Actually, nothing new here.
We feel very comfortable with available funds of EUR 1.4 billion, and the next maturity only coming up in April 2023. As such, we can fully focus on developing our business. With this view from the financial side, I hand back to Jochen for the outlook.
Dietmar, thanks. Let's turn to the outlook and start with the market development. On slide 24, we see the March forecast of LMC Automotive for light vehicle production in 2022 and until 2029. As a consequence of the war in Ukraine and its impact on the automotive supply chain, LMC has reduced its growth forecast for light vehicle production in 2022 to only 7%, which is equivalent to about 82 million units. The key question is, when the strains in the automotive supply chain will ease? However, comparing our business with the automotive production levels over the last year, we have seen almost no correlation between production levels and order dynamics. By the way, that was true in the past as well. Mid to long term, LMC continues to see a growth potential to above 100 million vehicles per year.
On slide 25, we see the development of the markets relevant for HOMAG. The view has not changed since February. Going forward, we expect a relatively stable market size of somewhat above EUR 4 billion, which is characterized by the ongoing consolidation among furniture producers. On the right side, you see the addressable market for machinery and systems for wooden construction elements. Here, we continue to expect a compound average growth rate of more than 6%. We are well-positioned to grow the HOMAG business over the next years by expanding our market share and growing our service offering to our customers. With page 26, we have added an additional slide to our deck because we have seen that growth potentials for our business have been cut in some analyst models.
We would like to argue that the demand for our product is driven by long-term fundamental trends that are resilient. We believe that investments into the decarbonization of production remains high on the agenda of our customers, maybe even higher in the light of the war in Ukraine and an accelerated move to become independent from fossil fuels. In the past months, we have experienced high interest from automotive customers to electrify processes that were so far powered by gas. For example, when it comes to the ovens or air purification systems. We provide consulting services to find the right solutions, and we have the right products in our portfolio. We also believe that the transformation towards EVs will come with high speed, and we experience increased demand from the chemical industry for environmental technology for the production of materials needed in lithium-ion batteries.
Demand for affordable housing remains high, and we continue to see a shift to wood as sustainable construction material, also for multi-story buildings. The cover of this presentation shows one of the machines produced by our subsidiary, WEINMANN, that is used by our customers to assemble prefabricated wooden construction elements. Based on these trends, we believe our demand drivers are intact for the next years, and that's what makes us confident regarding our future growth prospects. Now let's take a look at the revised guidance of the Dürr Group for 2022. The guidance assumes that the war in Ukraine does not develop into a worldwide military conflict and that the lockdown in Shanghai will end in the coming weeks.
We will only give a guidance for the group as a whole at this stage and resume guidance on a divisional level, most likely with the Q2 results, sorry. The table on slide 27 shows the details of the revised guidance. After the strong start and looking at the order pipeline, we keep our guidance for order intake unchanged at between EUR 4.1 billion-EUR 4.4 billion. We also confirm the target range for sales revenues of between EUR 3.9 billion-EUR 4.2 billion. The strong order intake in Q1 makes us confident that there are enough new projects to execute in case of delays. On the other hand, sales revenues are supported by positive exchange rate effects.
For the EBIT margin before extraordinary effects, we lower the target range from between 6.5% and 7.5% to between 5.0% and 6.5%. The reduction is driven by higher cost inflation as a consequence of longer than expected supply chain constraints that are also intensified by the lockdowns in China and increasing indirect costs as a consequence of the war in Ukraine. The widening of the target range reflects the still high uncertainty regarding the further development. Consequently, the target range of the reported EBIT margin is adjusted from between 5.9% and 6.9% to between 4.4% and 5.9%. For return on capital employed, we now expect the range of between 13% and 18% compared with between 17% and 21% before.
The net income should turn out between EUR 100 million and EUR 150 million instead of between EUR 130 million and EUR 180 million as originally planned. The guidance for free cash flow remains unchanged at between EUR 50 million and EUR 100 million. We expect that lower earnings will be compensated by a lower buildup of net working capital due to continued solid prepayments and by reduced CapEx spending levels that will trend more to the lower end of the guidance. Consequently, we also keep the target range for the net financial status unchanged at between EUR -75 million and EUR -125 million. All in all, we see the supply chain induced earnings pressure as a temporary effect with focus on 2022. We've already increased prices and will continue to do so if needed.
In addition, we have included price adjustment clauses in new contracts in order to reduce the risk of future material price hikes. Looking at the strong fundamental demand drivers of our business, we remain confident for the future and keep our midterm targets unchanged. Our strategy and the midterm targets are shown on slide 28. I would like to point out that we remain very confident that we can reach our 8% EBIT margin target in 2023 or latest in 2024. Let's summarize on slide 30. We had a solid start into 2022 with a quarterly record order intake and a high free cash flow. Revenues and EBIT grew year on year but reflect supply chain constraints and cost inflation.
As we believe that the cost inflation will be higher and the supply chain constraints will last longer than expected, we have adjusted the earnings part of the outlook for 2022. Targets for order intake, sales revenues, and free cash flow remain unchanged. We see the margin pressure as a temporary effect from supply chain and cost inflation issues and confirm our midterm targets. Specifically, remain confident to reach our 8% in 2023, latest 2024. Thank you very much for your attention. Now we're happy to answer any questions you might have.
Thank you. We will now begin our question and answer session. If you have a question for our speakers, please dial zero and one on your telephone keypad now to enter the queue. Once your name has been announced, you can ask a question. If you find your question is answered before it's your turn to speak, you can dial zero and two to cancel your question. If you're using speaker equipment today, please lift the handset before making your selection. One moment, please, for the first question. We have a first question. It's from Ingo Schachel of BNP Paribas Exane. The line is now open for you.
Yeah, thanks for taking my question. My first one would be on your order backlog and margin quality. I think you mentioned the introduction of price escalation clauses. Can you give us a bit more detail or anecdotal evidence, for example, in paint systems, what percentage of your procurement volumes or which specific parts of the procurement volume are now under price escalation clauses? Also on your statement that you're happy with the margin quality of your backlog or that the margin quality supports the margin improvement trajectory. Just to clarify that's based on the, let's say, assumption that the supply chain remains constrained and inflation remains high or would you say it only supports the margin improvement trajectory if supply chain normalizes in the second half of the year? That's the first question.
Okay. Ingo, thanks for the question. I'll answer in terms of our price escalation clauses, and I'm sure Dietmar has the equipment, the backlog margins available, where we can talk a little bit about the development. I can tell you that in the last, pretty much since the beginning of the year, we are not taking larger orders in the automotive for Paint and Final Assembly Systems anymore without a form of price indices, be it cost plus, be it escalation clauses, in order to cope with the very much unpredictable material cost changes. That has helped, supported by especially the strong service business that we have.
Maybe Dietmar can comment a little bit on the development of the backlog, margins.
Yeah. Happy to do so. Basically, indeed, as Jochen mentioned, with the incoming orders that we took, we are on a similar level like last year, and also implemented now measures to actually provide a coverage into a margin protection going forward. We do feel actually, Ingo, comfortable with the guidance that we provided in line with this.
If we look at your margins, and I'm conscious that you only provide divisional guidance in August, which is fair, but maybe you can already give us a very broad comment regarding, let's say, HOMAG versus automotive, whether, let's say, one of those two areas, the say, margin pressure or implied cut to your full year expectation is higher or is it, let's say, around 1%-1.5% in both HOMAG and automotive. Maybe you can also comment a bit on how bad the margin in the second quarter might be. I think that's probably true profitability. Just wondering whether we should expect a margin in Q2 which is, let's say, lower than in the year 2020 when it was 3% or whether it's, let's say, closer to the Q1 level than that.
You know, the pressure on the cost side is in general, if you look at the equipment business, equally relevant in all the divisions. Because there is, as you know, in general, our business model is not very much based on how high own value adding, maybe a bit more at HOMAG compared to other businesses. There is a large amount of our P&L that we purchase, and that's why you see an impact in all the businesses. We manage it, as we were trying to explain during the presentation, with the price increases on the one hand, with long-term contracts that we have on the supplier base that help.
Consequently, we believe that we can deal within this magnitude that we have shown, which I think would be quite a good outcome, actually.
We have the second quarter margin pressure, I think, was the second question.
Yeah. This is definitely, or is a point that we do see that actually the second quarter will be a bit weaker in regard to the margin. We are not guiding on a quarterly, but you can expect that we should be in a range or we should be lower than the level that we had in the first quarter by around 1-2 percentage points.
Okay. That's very helpful. Thanks very much, and congratulations on a pretty strong order intake this quarter.
Sure.
The next question is by Alexander Virgo by Bank of America. The line is now open for you.
Thanks very much. Good afternoon, gentlemen. Thanks for taking the questions. I guess a couple, if I may. I wondered if you could give us a sort of a hint as to how much of your margin headwind is from logistics and constraints rather than raw material costs. The second question would be, given the length of time in your business cycle, the conversations you're having with customers now and pricing that you're putting through the order backlog now or the order intake now, I should say, how should we think about the trajectory of the margin improvement over the next 12 months, I guess, is the heart of the question.
You must be pushing pricing through now that reflects the current situation in terms of raw materials and components. The last question was just a case of how much of the order intake that you're seeing would you estimate is a function of your customer base nervous about making sure that they have access to delivery slots, if you like, and sort of pre-buying to try and lock in their own pricing with you guys at current levels and try and mitigate some of the inflation that they can see coming down the pipe? Thank you.
Thank you, Alex, for your questions. Let me start from the third one backwards. We don't see, you know, like you see maybe with component suppliers, Siemens or others, that customers would buy from us earlier than originally planned just in order to secure shipments. This we don't see. We see customers ordering despite the fact that delivery times have increased, but we don't see customers in any significant amount ordering ahead of time in order to, you know, to cope with the delivery times. Your question would lead to the fact, would orders this year have an impact, maybe on next year or following quarter? We don't see that.
Second question, in terms of the length of the impact on the margin from orders, a bit different by divisions. At HOMAG, we have started relatively early with price increases as early as first quarter of last year already, and since then have done three price increases and plan for the fourth as we speak. There, some part of the backlog obviously is already sold under higher prices. The picture is a bit different, the longer the lead times are, like for example, in PFS. Typically, lead times for projects are somewhere between 15-24 months, when it comes to larger orders. Also in the past, we have some price escalation clauses.
It's not that in all the cases we have to absorb the full impact of material prices. Plus, as I mentioned, we have with a lot of our suppliers existing agreements that have you know, some sort of a lifespan, which helps us, of course, as we can still in many cases use frame contracts that were made before price escalations. You were asking about the impact of the supply chain constraints on costs. I think we have to differentiate. One is supply chain constraints like you know, it all started with the famous semiconductors, and still that is the case. There it is just a fight in many cases to get the parts on time in order to secure timely shipments of our equipment.
The second is price increases for material. That, of course, has the impact as we were describing. Logistics, yes, logistics have become much more expensive, where, you know, in the past, a standard container from Shanghai to Hamburg was probably EUR 3,000. It is in many cases now EUR 13,000-EUR 14,000 or more. We have reacted to this, and fortunately, we are able to do so with our local for local strategy. Where in the past, for example, we've used maybe China more as a source also for Europe, we're using, for example, Poland at similar cost. There's a couple of issues that we have to manage, but all in all, it comes down to the availability of parts and increases in material costs that we have to manage.
As a consequence of our scenarios, we've adapted the guidance, as we described.
Great. Thank you very much.
Pleasure.
The next question is by Sven Weier of UBS. The line is now open for you.
Yeah, good afternoon, and thanks for taking my questions. The first one is another follow-up on the adjustment clauses on the indexation. Did I understand correctly, you just implemented that for PFS and in the other ones, you're dealing with it differently? I'm asking because, you know, I suppose that also the lead times in the machinery business have become quite long. I was just wondering how reliable the supplier contracts really are, what you have found out about that, because we've seen in situations like here on that they had these supply contracts, but at the end of the day, they were not honored by the suppliers. That's the first one. Thank you.
Yeah, thanks. Good question, Sven. It's not just PFS, where we're dealing with price escalation, open book or, you know, there's different instruments to be flexible. But not so much in the machine building, because their lead times are shorter and we're having more and longer-lasting sub-supplier agreements. I can really say with very few exceptions our suppliers with which we have long-standing relationships have honored their agreements. I'm personally very much involved in when it really becomes critical in terms of securing supplies. Fortunately, in our case, this works relatively well. Nevertheless, of course, there is some impact, otherwise we would not adjust the guidance.
The more it comes to the construction business there, the more we are exposed, and this is where it is most important that we deal with contracts that give us a chance to adapt our cost in changing also pricing. On the machine building side, shorter lead times, longer-lasting standard agreements with preferred suppliers help us to mitigate the impact.
Understood. Thanks for the additional color. The second question is also on the order intake. Obviously, with the strong number you had in Q1, you have already quite de-risked the full year in a way, and it implies quite a slowing in the remaining quarter. Is that just you being conservative, but you don't really see that for Q2 yet? Or do you already see, you know, slower order intake in Q2 from today's point of view?
We typically obviously look at a full year basis. I can say we're, of course, at the end of Q1, more confident than we were probably at the beginning of the year when it comes to the full year order intake. Maybe that gives a bit of flavor. I can say with the pipeline that we see in all of the businesses, so far we see no clouds. It's really very positive to see at this point that in none of the divisions we see a change of you know any scenario from like before the war in Ukraine or the lockdowns in China. Continue to see in our CRM very healthy pipelines in all of the divisions.
What has happened on the HOMAG side? Because when we started the year in February with the guidance, you were originally expecting a slowdown. Now, I guess, also Q1 has probably surprised you positively. The pipeline still seems good. What's been the swing factor here that has made it so strong?
Yeah. First of all, as we were reporting, some of the projects that could have booked already end of last year were basically rolling into this year. That has some impact. Second is, we have been maybe a bit more on the careful side for this year, as in a few cases it might have been difficult to see in HOMAG how much of the business that we booked last year was a bit driven by incentives in some of especially the European countries. Maybe there was less of this than what we had assumed, which then helped the business to go forward. Nevertheless, we stick with what we said. Last year was an exceptional year, and let's see how much of a very good year we can make this year.
Okay, thank you. If I may, the final question is more a technology question because I've seen other companies involved in Clean Tech starting to go into carbon capture, and I was just wondering if that's also, you know, a possibility for you guys.
How should I best answer that question? Your idea is very well justified. Whenever you are involved in what we do, it is natural to also raise that question. Well, I cannot perfectly give an answer now, but it's a logical way, the way you think.
Yeah. I'll ask again at the next CMD. Thank you.
Please do so, yeah.
Will do. Thanks.
Pleasure.
The next question is by Daniel Gleim of Stifel. The line is now open for you.
Yes. Good afternoon, gentlemen. Thank you very much for taking my questions. The first one would be on the supply chain bottleneck debate. Assuming you're right, and at the end of this year, all of the supply chain bottleneck and should abate, how much savings could this provide in 2023? I'm only talking about the availability of parts, not the cost inflation, please.
Can you just, Daniel, repeat a little bit the end of your question? I did not technically understand it.
I'm wondering if your assumption is right that the supply chain bottlenecks should end at the end of the fiscal year. How much savings that could provide in 2023? I'm thinking about the EBIT bridge from the end of the fiscal to your midterm guidance, 2023, 8%, and how much of the step-up could be due to the supply chain bottlenecks abating.
Yeah. Not easy to calculate because as I was trying to explain, there is a few consequences of what's happening as we speak. Supply chain as such first hinders us in terms of realizing sales because in not all of the cases we have the parts right on time. That is more a top line issue first rather than a bottom line issue. Nevertheless, there is a bottom line element to this as well. As if you would visit some of our facilities today, you would see that we have semi-finished equipment in our production, which of course creates inefficiencies. These inefficiencies obviously cost money, and I would say that is also some sort of a probably single digit number, easily, but very difficult to measure, I must say.
The issue for us in terms of the bottom line is more really the inflation on the material cost side, rather than inefficiencies or under recovery from not timely production.
If I think about the guidance change for 2022 and the EUR 50 million, which this implies in absolute terms, how much of the EUR 50 million very roughly could be cost inflation, and how much the inefficiencies that you just mentioned?
I would say the vast majority is material price increases.
All right, let's talk about that then. I would be quite keen to understand a little bit where we stand on the pricing of the new equipment. If you keep the services on the side, and I appreciate from your comments that might be accretive. If you think about the new equipment only and the orders that you take now in April, how much of the cost inflation do you already cover with price increases or the price escalation clauses that you referred to?
If I just pick one order, that I have in the back of my mind, which is a triple-digit million project we're discussing with the customer. We have made an offer beginning of the year, which we are now revising and the prices or our offer value has gone up significantly more than 10%. This, I would say, is not very unusual for current circumstances.
Yeah. This is the absolute increase, but if you think about the cost coverage, how far are we there? Already 50%, 80%? To give us a little bit of flavor, how much further price increases you need.
Yeah. Mm-hmm. Understood. Projects that we price with the current knowledge. Again stressing the example I've given. With this customer, I'm not even ready to give a fixed price. I said, "As we speak, this is a certain amount more, but we have to find either via open book or via price indexing, a way to further escalate pricing when required." Of course, the plan is to forward all cost increases from new projects to customers.
Very well understood. Thank you for that. You mentioned that the backlog margin has improved. Can you maybe quantify that by how much? What I'm really interested in is to understand a little bit better how much the current order intake margin is higher than the current sales margin. Also better understand what could be the margin uplift from the new pricing.
Good question. Dietmar, any comment?
Yeah. Actually, as said, the margin improved and, now I'm not going too much into the details, but it, what we see in the sales level in the first quarter, the order intake is in a range of around 2-3 percentage points higher. The equipment-
Very clear. Thank you for that. Maybe one last one. Ingo previously asked a question, and you mentioned that the Q1 level might be 100-200 basis points lower. Was this a margin comment? My line was really bad.
Yeah.
What's the margin?
The margin in Q2.
Yeah. What's the margin in Q2?
Yeah. Right. Yeah.
Very clear. Thank you all.
Mm-hmm.
The next question is by Nicolai Kempf of Deutsche Bank. The line is now open for you.
Yeah. Thank you for taking my question. It's Nicolai Kempf from Deutsche Bank. Given that we see the price inflation across the sector and that many auto suppliers are a bit struggling currently, is your impression that OEMs are, at the moment, more open to accept higher prices?
The answer is simple. Yes. I'm in the automotive industry for a few decades now, and, as much as I love this industry, as much as I know the pressure that's typically created by OEMs. I'm not saying there is no pressure anymore, but the OEMs have understood that they have to adapt. Discussions like the discussions we have right now on price escalations, et cetera, these discussions I think would not have been possible a year ago or even half a year ago. They know that they have to adapt because otherwise, you know, we are in good company for that part of the business with other automotive suppliers that they cannot continue this way.
Yeah. Understood. My second one, maybe it's a follow-up kind of, but what are the swing factors to achieve an 8% margin next year? By how much need input prices to come down or by how much need auto production to come up in order that you achieve your midterm target?
Yeah. On your last comment first, fortunately, our business is not directly proportional to the automotive production volumes because CapEx and we are CapEx suppliers to the OEMs is planned on a longer term basis. Fortunately, you know, we're not so much bound to the strong fluctuations typically of automotive production like direct material suppliers. When you talk about how do we create an uplift of, in the end, 2.5% in order to achieve the 8%, there will be a little bit of a volume element so that we can materialize on our economies of scale to some extent because we've adjusted with the restructuring to a certain level of production volume.
The second is that we manage the margin in a sense of keeping as much as we can material prices under control, and I'm a bit more optimistic towards the end of the year versus the full effect of price increases. For our business that's more related to machine building like HOMAG, the increases that we've made, just to give you an idea, we have made more than double-digit price increase over the last 12 months. Once that kicks in, this will kick in stronger than potential further material price increases and will help us to stabilize or increase the margin further.
As I mentioned also on the construction type of business, where we are now more aggressively and more successfully managing the prices as we have now more and more time to react versus the cost inflation on the material side.
Okay. Clear. Thank you.
The next question is by Philippe Lorrain of Berenberg. The line is now open for you.
Yeah, thanks. Philippe Lorrain here. Couple of questions. One is on your current guidance or the unchanged order intake and the unchanged sales guidance. To me, it seems like if I consider in the FX gains that you have, on the one hand, and also the price increases that you speak about, perhaps this guidance reflects a slightly more conservative view now on volumes, which I would say in the current environment could be fully justified. Do you agree with me?
That's very well said, Philippe. On the order intake side, I'd immediately sign your comment. On the sales side, we have a mix of, on the one hand, FX gains, on the other hand, supply chain constraints. Let's see how the balance of the two turns out in the end.
Yeah, I agree on your comment with regard to sales and the supply chain constraints. That leads me to the next question. What if the kind of growth that we can assume both for probably order intake and also sales in the coming years, if we take into account the fact that long term your business is not at risk, that the trends are fully intact according to you, that you've increased prices. Yeah, so I guess the question is when could you the EUR 5 billion mark of sales be reached? Is perhaps 2024, 2025 way too early, or how do you see things right now?
If I listen to you, the skies are blue. That's fine. First of all, yes, we believe that the long-term trends are intact. If you look at our sales guidance for the year, which includes some foreign exchange effects, as we said, let's see how they will turn out later this year or maybe next year. You are more experts when it comes to impact of interest rates on foreign exchange, et cetera, than we probably are. Let's see what the realistic baseline sales under normal foreign exchange rates would be. If you then apply the typical growth rate, GDP plus somewhat, you can calculate how long it theoretically takes to talk about the EUR 5 billion mark. I wouldn't want to do that too much today.
Let's see how our business develops. If you look at, you know, the about EUR 4 billion of sales, a bit more this year, the EUR 5 billion is 25% more based on organic growth. That's the way to go.
Mm-hmm. Okay, thanks. To me it seems like if I take your guidance as of today for 2022, and bearing in mind the fact that we've got two positive contributors to the order intake, which are the FX and the price increases.
Mm-hmm.
Volume could actually surprise now on the basis of the first statement that you had for the beginning of the year. We could end up with our intake exceeding actually the EUR 4.4 billion mark. That wouldn't be too surprising in my mind. If we bear in mind the fact that we've got supply chain constraints, that's putting a brake perhaps on your sales this year. However, these orders do not disappear. They are just executed and feeding through the P&L a little bit later. We're gonna have a catch-up effect at some point, which is quite probably quite significant with the margin contribution. That's how I was coming to that kind of statement. We should have like a catch-up at some point.
Yeah.
Adding to the structural trend.
Fair enough. I mean, what you probably want to hear from management is when they would then achieve EUR 5 billion on a sustainable basis and not just driven by FX effects where we don't know how they will look like next year. Nevertheless, all your statements made before, we can only underline. We believe that really the drivers continue to be intact. What we also wanted to show is that we and that's really conviction, we believe to sit on the right fundamentals. We've talked about the construction elements business for HOMAG and HOMAG overall. Also on the automotive side, with customers really needing to modernize their production base and do that in a sustainable and follow sustainability.
You've probably read today that BMW has declared that their plant in Hungary will be a carbon neutral facility, and guess who is involved in building this facility. All of this is really driving our business going forward.
Okay. Fair point. Just wanted to come back to your long-term growth guidance, the 2%-3%. Could that be a bit low bearing in mind the fact that you're still like at the very beginning of this battery coating business? Also, because you are exposed to the Medtech vertical now, to some extent, which is growing normally high single digits, plus all the trends that you're speaking about. Should we expect at some point as well a revision to these long-term growth targets?
Let's say, we hope that your statement is true, you know, looking at our growth rates being conservative. However, our focus first is in margin expansion. At this point more than pure sales growth.
Mm-hmm. Okay. Correct. Just like, finally, a couple of questions more regarding the margin. You've shown some confidence in reaching the 8% EBIT margin by 2024 the latest, but you also mentioned next year. I think for next year the big question mark is gonna be as well what's the cost inflation doing in the short term? Do you agree that the time when you reach the 8% EBIT margin right now will probably depend mostly on the cost inflation trends?
I would say that has a very, strong impact. Definitely, yes.
Okay. Is the 8% margin before or after PPA? That's more maintenance.
The 8% is operational EBIT, right?
Basically that's yes, but also the impact already this year coming from PPA is very limited. It's yeah, around half a percentage point.
Okay.
If you're targeting
Perfect.
the need Jochen mentioned and also on a consistent basis.
Okay. Perfect. A final question more regarding price negotiations and so on. I'm not quite sure you've been answering that in most detail. In existing contracts where you had fixed prices, have you tried already to push for escalation clauses being implemented on such contracts? If yes, do you manage to do that successfully?
Yes. The answer is yes and on the first question. The answer on the second question is in a couple of cases. We've not always been successful, but we've been successful in more cases than we had probably or I had initially anticipated. You often also have the chance to improve margins during the course of a project, because in many, many cases, customers change the scope of supply during the lifetime of a project, which often gives us a lever, if you will, to also work on the margin. A combination of the two has helped in many cases already.
Okay. Perfect. Thank you very much for the precision, especially with regard to the scope of supply. That's interesting.
Mm-hmm.
Our next question is by Will Turner of Goldman Sachs. The line is now open for you.
Hi there. You've decided to keep the free cash flow guidance for 2022 unchanged. That's despite obviously lowering expectations for earnings. What would the other variables which have changed that has resulted in you doing that and why?
It's basically on one side, you're right, Will. We will see a drop in the profit, but we will compensate also with lower CapEx, as Jochen already indicated as well briefly.
Okay. It's primarily CapEx, not anything different.
Yeah.
on your working capital expectations.
Yeah, with the working capital, we even expect an increase now in the remainder of the year. Based on the high order intake in the first quarter, we also had a high level of initial payments coming from our customers. As said, then the net working capital for the remainder of the year is expected in a target range of 40-50 days. As said, we are steering then also in regard to the CapEx.
Great. Thanks.
There are no further questions, and so I hand back to you.
Okay. Thank you very much for your questions. Ladies and gentlemen, in case of any further questions, please contact me or my colleagues from investor relations. We are looking forward to staying in contact with you. Stay safe and goodbye to you all.
Thank you very much, also from side of management. Take care.
Bye-bye.
Ladies and gentlemen, thank you for your attendance. This call has been concluded. You may disconnect.