Good day, ladies and gentlemen, and welcome to Dürr conference call. Dr. Jochen Weyrauch, CEO, and Mr. Dietmar Heinrich, CFO of Dürr AG, will present the Dürr Group figures for the first half of 2022, followed by a Q&A session. Now, hand the call over to your host today, Mr. Andreas Schaller, Head of Investor Relations of Dürr AG. Please go ahead, sir.
Thank you, George. Ladies and gentlemen, good afternoon or good morning to those of you in the U.S. Welcome everybody to our second quarter 2022 earnings call. With me on the call, as you just heard, are our CEO, Jochen Weyrauch, and our CFO, Dietmar Heinrich. They will present the second quarter and half year results and the outlook, and will be happy to answer your questions in the subsequent Q&A session. As always, our earnings presentation is available on our investor relations web pages, and we assume that you have it in front of you. 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. I'm happy to present our half year earnings together with our CFO, Dietmar Heinrich, whose contract was just extended until 2026 yesterday. I'm really happy to continue the great teamwork with you, Dietmar.
Thanks, Jochen.
Now let's begin the presentation of our earnings. I will start with a review of our performance in Q2 and give an update on sustainability. 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 guidance for 2022, and we will have sufficient time to answer any questions you might have. The highlights of Q2 on slide four. With more than EUR 1.2 billion, which is an increase by 12% year-on-year, we achieved another strong order intake in Q2, driven by all divisions. Growth in half one even amounted to 24%, resulting in the highest half year order intake ever. I think we have to digest that for a second. We received large orders for automation and e-mobility production equipment.
HOMAG recorded a new half-year record order intake with more than EUR 1 billion. We also experienced good demand for environmental technology from the chemical industry. At the moment, we do not see a slowdown of order activity over the next months, and therefore we decided to raise our guidance for order intake in 2022 to between EUR 4.4 billion and EUR 4.7 billion, which is up EUR 300 million. This does not mean that we take every order that we can get. On the contrary, we are becoming more selective and focused on the value before volume strategy in order to support the margin improvement towards our midterm goals. The order backlog reached a new record level of EUR 4.1 billion.
This is a very solid base for sales growth in the coming quarters and even years. Sales revenues improved by 16% quarter-on-quarter, despite the lockdowns in China and the still difficult supply chain environment. Book-to-bill in Q2 remained above on with 1.15. Looking on the margins, we saw a dip in Q2, as we indicated already during our Q1 call in May. The EBIT margin before extraordinary effects temporarily declined by 100 basis points to 3.9%. This was mainly driven by the lockdowns in China that impacted the business significantly in April and May. During that time, we could not deliver the normal level of services. Actually, we didn't deliver much at all. In addition, we recorded underutilization in several areas that negatively affected margins.
Other factors that put pressure on margins were the increased material costs and the fact that some of the orders that were executed in Q2 had lower margin quality as they were already accepted in the middle of the corona pandemic. On top of that, we spent more for our One Dürr Group optimization program, which will generate synergies and cost savings in the future. In June, we already saw a strong recovery in China, and our colleagues there are very eager to catch up the delayed business until the end of the year, the latest. Let's move to cash flow. This is an important focus topic for us. Free cash flow remained positive for the first half year but was clearly negative in Q2.
The main reason was the buildup of net working capital in light of the growing sales revenues and in order to have some inventory safety buffers as we are still facing supply chain constraints. The situation in supply chain has not become worse in Q2, and we see a silver lining on the horizon here and there, but it is still too early to give the all clear. Based on the development in Q2 and the current business outlook, we confirm our earnings outlook for 2022. As already mentioned at the beginning, the order update refers to the order intake target that we raised by EUR 300 million. On slide five, we see the key financial indicators for the first half of 2022. All in all, we regard this as a solid first half year, despite the challenging environment. Order intake increased by 24%.
This includes EUR 101 million positive exchange rate effects. Sales revenues grew by 20% and included EUR 69 million positive foreign exchange effects. EBIT, before extraordinary effects, increased by 8%, and the margin declined slightly to 4.3%. The foreign exchange effect was EUR 5 million. Net income was 34% higher compared with the prior year. Finally, free cash flow remained positive, despite a strong increase in net working capital in the second quarter. Let's look at the order intake on slide six. As already mentioned, we stayed at a high level of more than EUR 1.2 billion in Q2, after the record in Q1. The momentum in automotive was strong, with continued high demand from China. In addition, HOMAG received large orders in the Americas, including production technology for sustainable wooden houses.
Due to, among other things, price increases in the past months and the introduction of price adjustment clauses, we improved margins of our order backlog and reduced risks going forward. On slide seven, we see the geographical distribution of order intake. Most of the regions contribute to the growth, with the exception of Germany, where we reached the relatively high level of the prior year. China continued to be strong, and the order intake in the Americas shows a high momentum. India is the main driver behind the growth in the region, Asia, Africa, Australia, that does not include China. Let's turn to slide eight and talk about sustainability. Climate change mitigation and adaptation are important topics. The forest fires in many places in the world remind us of that. An important part of driving action is to create transparency about the measures taken.
Since 2021, companies in Europe have had to report about how their activities contribute to the environmental objectives of the EU, according to the EU Taxonomy Regulation. Two levels are thereby distinguished. What part is eligible and what part is aligned with the EU taxonomy. Dürr is one of only four companies in the DAX family that reported both eligible and aligned activities, and we have clearly taken a pioneering role in this respect. Slide nine shows some more details regarding our activities. As the EU Taxonomy Regulation is not giving a general guidance for the mechanical engineering industry, we carefully evaluated all our activities with respect to two questions. Where do we make our customers' production more sustainable? Where do we enable the manufacture of sustainable products?
We found a number of activities from resource-efficient painting processes to equipment for the production of solar modules, lithium-ion batteries, and wooden houses. We believe we are well-positioned here, and that our industry is actually a key enabler of a carbon-neutral future, which is not yet fully recognized by the taxonomy. On slide 10, we can see the expected reduction of our Scope one and two emissions in 2022. Already today, we are certain that we will achieve a 40% reduction of these emissions compared with the base year 2019. This is driven by the actions we have taken, including the investment in five photovoltaic systems in Germany and China, to switch to green energy purchase for all locations in Germany since January 2022, and the complete switch to green electricity in the Americas by the end of this year.
In addition, we are currently revising our company car fleet policy to incentivize the timely switch to emission-free vehicles. In June, we have published a methodology paper for those of you interested in the details of our methodology and emission calculation. Now, let's go back to the business figures and have a look at the divisional development. We start with Paint and Final Assembly Systems on slide 12. Order intake in Q2 improved year-on-year by 15%. We received several automotive projects, mainly from Asia, and e-mobility continued to drive demand. In addition, we recorded two large orders in Europe and the U.S. for our newly established automation activities with the acquired companies, teamtechnik and HEKUMA.
This included a large order of stringer machines that are used to electrically connect solar cells for the largest solar park in Europe. Revenue growth was picking up as more and more projects enter execution. In addition, the service business shows solid growth. The EBIT margin, however, was impacted by the lockdowns, by higher material costs, and the fact that we are still working through lower margin projects acquired during the early Corona phase. We continue to actively approach customers with the goal to share the higher-than-expected material costs and include cost ex-escalation clauses in new contracts. For the second half, we expect a further acceleration of revenues. Let's turn to Application Technology on slide 13. Order intake remained on a high level, driven mainly by China. The order pipeline looks good, and we expect a broader regional spread in order intake in half two.
Sales revenues in Q2 grew by 26% year-on-year despite the lockdowns in China. The robot activities in Germany were not impacted, and the congestion in Shanghai Harbor resolved quickly in June. Some improvements in the supply chain become visible, meanwhile. The EBIT margin was very solid in Q2, despite the fact that we could not deliver spare parts during the China lockdowns in April and May. All in all, a positive development of our robotic business in a challenging environment. Next is Clean Technology Systems on slide 14. The order intake accelerated in Q2 and was driven by strong demand from the chemical industry in Europe. We continue to see good business opportunities with producers of batteries and battery materials. Revenue growth picked up across many regions, with the highest contribution from North America. The service was very strong.
On the margin side, we have seen some improvement sequentially. However, we are still experiencing pressure from higher material costs that could not be forwarded to customers in a timely manner. We are expecting further margin improvements over the next quarters. Based on the high backlog, we see significant growth potential going forward. On slide 15, we can see the summary of developments at Measuring and Process Systems division. Order intake was very solid in Q2, mainly driven by North America and Asia, and across all product lines. Service business developed very nicely. Sales revenues were constrained by the lockdowns in China and missing parts. The resulting underutilization had a negative impact on margins, which remained positive due to the support of the strong service business. 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 16. The strong development continued in Q2. Order intake remained at a high level with EUR 457 million, and we achieved more than EUR 1 billion in the first half. Another record. Demand from North America was the key driver and included projects for production technology for sustainable wooden houses. For the first time, sales revenues exceeded the EUR 400 million mark in Q2. This included a major trade order of about EUR 400 million. We clearly see that the investment in our service team pays off as the service business continues to grow. The EBIT margin improved sequentially despite cost inflation and supply chain constraints due to price increases, a high utilization, and a strong service business.
We're very happy with the development at HOMAG and look forward to develop this business further with our ongoing capacity expansion and process improvements. Now let's look at the service business on slide 14. I already mentioned that spare part deliveries in China were impacted by the lockdowns. This is also reflected in the service mix on the right side of the slide. Nevertheless, service sales even increased slightly quarter on quarter. The share of service sales, however, declined to 27% as the equipment sales outgrew the service. Service margin remained at a high level, and the order pipeline for the second half of the year looks good. Service is a clear differentiator for the Dürr Group. Now, Dietmar, hand over to you for the financials.
Yeah, thank you, Jochen, and welcome to everybody also from my side. I start with slide number 19. All in all, H1 was quite solid despite cost inflation, lockdowns, and supply chain constraints. Sales revenues are well on track, and we are focusing on margins and cash flow in the second half of the year. Let's have a look at the financial details on the next slides. On slide 20, we can see that sales revenues grew year-over-year by 24%, as already mentioned previously by Jochen. We have seen a fast recovery after the lockdowns in China and strong growth in North America and Europe. Consequently, those two regions gained share from a geographic perspective. Asia, without China, lost share as large projects in South Korea were completed in the prior year.
Sales revenues are on track to achieve the guidance for 2022. Now let's move to EBIT on slide 21. As already indicated during our last call, the EBIT margin before extraordinary effects saw a dip by around 100 basis points quarter-on-quarter in Q2. The lockdowns in China led to underutilization and lower spare parts shipments. This impacted the gross margin that declined by 300 basis points in Q2. Overhead costs rose year-on-year, mainly pushed by sales commissions due to the record order intake and higher R&D costs. Extraordinary effects were EUR 9 million lower than during the prior year. On slide 22, we can see the free cash flow development. We recorded actually a negative free cash flow of -EUR 67 million in Q2.
This was mainly driven by the net working capital development and to a lesser extent, by the lower earning levels. In H1, free cash flow remained positive. Compared to the same period last year, we recorded an increase in net working capital, higher CapEx and a reduction in contract-related provisions that are included in the line item, other. Higher tax payments were almost compensated by lower interest payments. Continue to focus on free cash flow, and we are on track to reach the guidance of EUR 50 million-EUR 100 million for the full year. Now let's look at the net working capital development on slide 23 to provide you some more insights. As mentioned, net working capital increased by an amount of EUR 50 million quarter on quarter. Contract liabilities remained roughly stable at a high level, driven by the continued good order intake.
On the other hand, inventories and contract assets increased because of growing sales revenues and higher safety stock levels. Nevertheless, the days working capital stood at 38.4 days, which is still better than our targeted range of 40-50 days. We expect some further moderate buildup of working capital over the rest of the year, but we'll manage this very carefully and target the lower end of the range. On slide 24, we can see the impact of the free cash flow and the dividend payments on our net financial status. Net debt increased to EUR 160 million at the end of the second quarter 2022, compared with the very low level at the end of the first quarter.
However, we are at about the same level when comparing with the end of last year or the end of the second quarter 2021. Leverage stands at 0.4x net debt to EBITDA. We are very pleased with our solid balance sheet and keep our guidance of net debt in an area between -EUR 75 million and -EUR 125 million at the end of the year unchanged. Finally, let's have a look at our liquidity headroom on slide 25. For the first time since a couple of quarters, we have an upcoming maturity of EUR 50 million within the next 12 months related to Schuldschein loan maturing April 2023. We feel actually very comfortable with the available funds of more than EUR 1.3 billion, which leave us flexibility to further grow our business.
With this view from the financial side, I hand back to Jochen for the outlook.
Thank you very much, Dietmar. Let's turn to the outlook and start with the market development. Slide 27, we see the July forecast of LMC Automotive for light vehicle production in 2022 and until 2029. After several downward revisions, we have recently seen a stabilization and even slight upgrades in this forecast. For 2022, LMC now expects a 6% growth in light vehicle production. As you can read from our order intake in the last quarters, there's almost no correlation between production levels and order dynamics. Mid to long term, LMC continues to see a growth potential to above 100 million vehicles per year. Slide 28, we see the development of the markets relevant for HOMAG. The view has not changed since February and is supported by recent trends.
On the furniture production technology side, we expect a relatively stable market size of somewhat above EUR 4 billion, which is characterized by the ongoing consolidation among furniture producers. As the consolidators in this industry are looking for high degree of automation, we feel very well-positioned to benefit from this trend. On the right side, you see the addressable market for machinery and systems for the production of sustainable wooden houses. 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 offerings to the customers.
We have shown slide 29 already during our Q1 presentation, as we had the feeling that there is a mismatch between the solid demand environment that we experience and the cautious growth assumption for our business in the capital market. I would like to reiterate that the demand for our products is driven by long-term fundamental trends that we believe are resilient. 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. We provide consulting services to find the right solutions, and we have the right products in our portfolio to electrify processes in the paint shop that used to be run with gas.
We also believe that the transformation towards EVs will continue 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 continues to grow, and we see a shift to wood as sustainable construction material also for multi-story buildings. 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 guidance of the Dürr Group for 2022. There is no change in earnings expectations compared to the update in May. The lockdowns in China ended in May, and we already saw strong recovery in June. Supply chain constraints have not become worse in Q2, and there are first signs of improvements here and there.
There is only one guidance item that we change today, and that is the order intake. Due to the continued high demand and additional foreign exchange tailwind, we now expect an order intake between EUR 4.4 billion and EUR 4.7 billion instead of the range of EUR 4.1 billion- EUR 4.4 billion euros we expected in February. As we feel comfortable with the revised earnings guidance from May for the group, we are also resuming our guidance for the divisions. The updated numbers are shown on slide 31. Compared with the expectations in February, we see the following changes. The order intake expectations have increased for all divisions with the exception of Measuring and Process Systems. The sales revenues guidance remains unchanged for Paint and Final Assembly Systems and Application Technology.
For Clean Technology Systems, the outlook for sales revenues increased by EUR 30 million on average due to the solid demand situation. At the same time, sales revenues expectations for Measuring and Process Systems declined by EUR 30 million on average, mainly due to the division-specific supply chain constraints. At HOMAG, we increased the upper end of the guidance by EUR 50 million due to the very good business development. The EBIT margins of the divisions now also reflect the revised group guidance from May. Adjustments compared to February were smaller at Application Technology and HOMAG, as these machinery businesses have shorter lead times and were better able to compensate cost inflation. The systems businesses at Paint and Final Assembly Systems and Clean Technology Systems saw larger effects from material cost inflation due to the longer lead times.
The largest margin impact we see at Measuring and Process Systems as the supply chain constraints lead to lower sales revenues. Our strategy and the midterm targets are shown on slide 32. I would like to point out that we remain confident that we can reach our 8% EBIT margin target in 2023 or latest in 2024. Let's summarize on slide 34. The strong order intake continued in Q2, and we have raised our outlook for the full year by EUR 300 million for the midpoint. Revenues show strong growth, and we are well on track to reach our guidance for 2022. The EBIT margin in Q2 was impacted by the lockdowns in China as expected. We have seen a strong recovery movement since June, and our colleagues in China are eager to catch up the delayed business until the end of the year.
We confirm the revised earnings guidance from May and have resumed our divisional guidance. Thank you very much for your attention. Now we're happy to answer any questions you might have.
Thank you very much, Dr. Weyrauch. Ladies and gentlemen, if you wish to ask a question, please press star one on your telephone keypad. Please also ensure any functions are activated, like speakerphone to reach equipment. Once again, please press star one. Today's first question is gonna be coming from Mr. Will Turner calling in from Goldman Sachs. Please go ahead, sir.
Hi, everyone. Thanks for taking my questions. I've got several, so I'm gonna ask them just one by one. The first question, I guess, is on the order intake. Out of curiosity, has the increase in order intake been because you've sold more units and more volumes than you've expected? And how much of this increase is really down to the price increases that you've put through?
Okay. Thanks, Will, for the question. To answer from your last piece of the question, there is not much of an impact from the price increases because even, you know, if you look at HOMAG, for example, where we increased prices in a double-digit manner over 18 months, that of course has somewhat of an impact, but it's not a main driver, and it's lower in other divisions. The real impact is from a continued high demand of equipment and machines in all our divisions.
Okay. Yeah, that's clear. Just out of curiosity, you're now including some greater or new price adjustment clauses in your contracts. Can you just elaborate a little bit more on what this includes? I'm just trying to think from a customer's perspective, how willing are they to agree to, obviously, to contracts with you know unknown costs if there are these kind of escalation clauses?
Yeah. Yeah, thanks for asking that question. I'm in the automotive industry now for a couple decades, and I can say also the automotive OEMs have understood that this is a particular and special situation. Consequently, I see much more flexibility with our customers, even on fixed price contracts, to at least share the pain, if I may say so. We have a couple of adjustments already achieved, which with significant impact. That's on fixed past orders, if you will. On the ones that we have concluded recently, the same applies, where in the past, especially in automotive, customers have been reluctant or even refusing price indices for running contracts.
Again, we now have the first contract signed, where customers have accepted this as they now, to some extent, they have to protect also their supplier base. I can really say there's been positive movement, really very positive movement, within or even above our expectations.
Okay. These escalations, are they related to any particular cost types? Is it the procurement, so if your suppliers don't deliver for the price that you've agreed, you have like a transparent mechanism which shows your customers.
Yeah.
What is it? Yeah.
There's a few different ways. One would be, we are even, ready to go open book, contracts, where customers can clearly follow what cost item has moved in what way, during the execution. That, in many cases, is the preferred option. We have, a mix of agreed indices like, you know, steel price index, labor, et cetera, that we include in a mix as a calculation in the contract where we, once we are ordering significant, components from our suppliers or execute the contract as such, we tell the customer at a certain date that the index has made this change, and we spend a lot of time in discussing this with customers and also making sure that the correlation of those indices work very well with the real cost, inflation.
Okay, great. Thanks for that color. Just my final question. Obviously, as you're fully aware, energy prices in Germany have, you know, skyrocketed in this year. I fully kind of understand that this will have a relatively limited effect on your direct operations, and it's great to see that you've reduced your Scope one and two emissions so significantly, which will be quite helpful in this current year, I can imagine. I want to. How do you feel about your suppliers? Are you keeping quite close relationships with them? In particular, the suppliers that you have based in Europe that have foundry operations. Are any of them struggling? Do you have any concerns about their ability to supply with these higher energy costs and the disruption that may be associated?
If there's one thing we learned from this crisis is to look a couple more levels down the supply chain than we might have done before. We believe that we have a relatively good visibility with what's happening. I can confirm that as of today, I'm not aware of any significant supplier running into any sorts of troubles. We're clearly watching the situation. For most of our components anyways, we have at least a dual supplier strategy. In terms of energy costs, we have as our own value adding in average is relatively low. Our energy cost in Europe is also relatively low. I think we spent less than EUR 15 million last year on oil and gas ourselves.
Of course, increases also hit us, but to a much lesser extent, companies with a different business model would have to absorb.
Great. All right. Thank you.
Mm-hmm.
Thank you very much. Sir. We'll now go to Sven Weier calling from UBS. Please go ahead, sir.
Yeah. Good afternoon from my side. First question is on the order intake guidance. When I look at the increase, in my view, it probably largely reflects, you know, the outperformance that you had in the first half. Now at the same time, you're talking about what seems like a very good pipeline also for the second half. If I look at the implications also on the divisional level, it rather shows quite a bit of a slowing in the second half, especially for APT and for the HOMAG business. Is that just you trying to be, you know, cautious and The pipeline is actually not so dissimilar than it was in the first half?
Good question, Sven. We are very positive for the second half. I just was trying to find the right words to not sound too over-optimistic. But the clear message is, you know, especially for HOMAG, if we pick this as one example, we said at the beginning of the year, we had a record year last year, and now we created another record half year. We see maybe, you know, Are we sure that we could be as bullish for the second half of the year as we've seen for the first half of the year? Probably not. Do we see significant reduction in the pipeline? No, we don't see that. But can we expect same number for the second half? I wouldn't guarantee it.
The same is true, also for the other businesses, even though, especially on the automotive side, the pipeline remains very strong. As I was mentioning, during my presentation, we become a bit more picky in terms of, margin before volume, and this is why, you know, we rather wanna be a bit more on the conservative side. Is there a risk that we reach more the higher end of the guidance? Yes, potentially.
Okay. Thanks for that additional color. Can you quantify, because I think you had a big ticket in HOMAG in the second quarter in the U.S., how big that order was specifically?
There was one order that was between EUR 20 million and EUR 30 million. There was probably two orders of that magnitude between EUR 20 million and EUR 30 million. One from-
Involving Q2.
A more furniture side of the business, and one from what we call the construction element, so that's the wooden houses.
Okay. Understood. Thanks. I had a follow-up question on the price adjustment clauses. I mean, now that the metal prices are coming down quite a bit again, I mean, are you already having the first discussions about downward revisions of the prices? Or how frequently is this actually updated? Are you know, striking the contract and then once it's delivered, you look at how things have developed? Or how frequently is this actually adjusted?
This is adjusted by, if you will, action. We, depending on the customer, in a very timely manner, when we execute progress on a project by either our own work or by ordering equipment from suppliers, we fix the date of this, and then we combine that with the indices in the contract. This is not a renegotiation, this is more an issue of documentation to prove to our customers what equipment have we ordered at what date and what impact, and reflect that against the public indices. For contracts where we have renegotiated fixed prices, there the price remains the same, and we believe that we are hopefully rather on the safe side than creating additional risk.
The contracts that we have renegotiated, if you will, we've built in some sort of a buffer for us, which hopefully plays well for us.
If I understand correctly, I mean, on a price adjustment clause, it sounds pretty symmetric, meaning that, you know, if prices go up further, it's adjusted, but if they go down as well. It's not like when the prices go further up, it takes longer to pass it through in the adjustment clauses than if prices go down.
No.
Sounds pretty symmetric to me.
You are right. It should. Yeah. It should work well both directions.
Okay. The final question from me would be again on the gas exposure, but more on the client side. I mean, we all know that the paint shop is quite a big gas consumer in the production side. How are you helping the clients to become independent of the gas? Is there any kind of a retooling kit you have, or how should we think about that?
Yeah. That's maybe a very good way to call it. Yes. We make our customers offers, for example, to convert a gas-fired dryer or an exhaust purification system from really being used with gas into one that is electric. It's an issue of infrastructure of our customers and, you know, their willingness to invest. All of this is available already today. We can build today a CO2 neutral paint shop if a customer is ready to go that route.
Are you seeing more efforts now on the back of what has happened in the last month? Or are the OEMs rather a bit inflexible on that?
Now we see movement, and for new projects, this kicks in quicker now because there it's relatively simple for customers to switch. Some cases that's a bit more CapEx for them. It is, of course, not easy for existing sites where you can imagine that already the infrastructure of electric supply has to be assured. It might be relatively simple to convert a burner from gas into electric, but you have to have the electric power available. Customers are working on that because electric is happening in many more ways, and this will take a little while, but it already now opens new opportunities for us.
Okay. Understood. That's it from me. Thank you.
Thanks, Sven.
Thank you much, sir. We'll now take questions from Mr. Alexander Hauenstein, calling from DZ Bank. Please go ahead, sir.
Yes, hello, gentlemen. Thanks for taking my question. I'm wondering, with the experience you made since you tapped into the battery business, would you rather see it more or less likely that this business might sooner than later be run as a separate division? The same question, please, for the MedTech Automation business. Thank you.
Thank you, Alexander. On the battery, you know, we said a while ago, and that still applies, that we're still at the beginning. The capacity or the potential is there. On the other hand, there is an existing supply chain. You might have seen that, Volkswagen is ordering a lot of equipment right now, not all from Europe, if I may say so. Others are also deciding where they buy equipment. We see potential. We have had the two orders we were reporting about, and we continue to be positive, so no change in our view on the business compared to a couple months back. Yet, we have to achieve the first large order, which we don't have on our books yet.
This pretty much then the gradient, if you will, that we can achieve in this business, will then decide whether or sooner or later we make this an own business. So far, we have it, as you know, in our CTS business. Very much the same applies for the automation business. I assume you're referring to our acquisitions of teamtechnik and HEKUMA, where again this. Okay, thanks. The approach remains the same. We are well growing the business. We've had very nice orders for the year, which I was talking about earlier. MedTech in the U.S., a large solar order in Italy. We are also continuing to look at acquisition opportunities, ideally west of the Atlantic.
Once all this happens very well and the business continues to grow significantly, then that might be the right moment to make this an own business. We don't wanna create more complexity for a business that is still relatively small than needed.
Okay. Thanks for that.
Mm-hmm.
Thank you much, sir. We'll now move to Mr. Nicolai Kempf calling from Deutsche Bank. Please go ahead, sir.
Yeah. Thank you for taking my question. It's Nicolai Kempf, calling from Deutsche Bank. My first one will be just a follow-up on the cost sharing with OEMs. Is this true for all OEMs across the regions? Because we've heard some news from German OEMs that they are not willing to share costs.
Look, I can confirm that they do.
Okay.
It's my simple answer to that.
Gotcha. Fair enough.
You know.
That's good. Okay, my second one would be on the free cash flow. After the first half, it's slightly positive, thanks to a very strong first quarter. You target EUR 50 million-EUR 100 million for the full year, but also expect a working capital headwind for the second half of the year. How will you achieve your targets? Just by higher earnings in the second half?
Yeah. The higher earnings will play a specific role in that regard. That's right. The other contribution is coming nevertheless from the effect that you can already outline, that we expect a good order intake in the second half of the year as well, and we also expect then the initial payments coming from our customers.
Okay. Sounds good. Thanks.
You're welcome.
Thank you much, sir. So sorry, sir. Thank you, sir. We'll now move to Mr. Philippe Lorrain, calling from Berenberg. Please go ahead.
Yeah, thanks. Good afternoon, everybody. Excuse me if the question has already been asked, but I was picking up from your comments in the report, I guess, and the press release, that you were incurring expenses related to reorganization of One Dürr Group, if I recall that. Could you mention whether these expenses that you had in H1 were really relevant and whether they were booked actually like in the P&L? Thank you.
Yeah. Actually, it's not a restructuring, Philippe. It's what we do is harmonization of process and systems that we are doing. I would note it's an impact, that's why we mentioned it actually. It's a low single-digit million EUR amount, and it's not recorded as extraordinary effects.
Main investment into IT.
Yeah.
Okay, perfect. That means your cost base is further inflated a little bit by these effects that are purely temporary and transitory.
That's correct, yes.
Okay, thank you.
Thanks, Philippe. Good having you.
Thank you, Weyrauch. We'll now go to Ingo Schachel calling from BNP Paribas. Please go ahead.
Yeah, thanks for taking my questions. The first one would be on the very strong order intake and paint systems. I would be curious to understand the psychology from order pipeline to order intake a bit better on the new client side. I think you track your order pipeline quite systematically. I was wondering whether you could describe whether, let's say, the last sort of round of contract negotiations happens more quickly, whether you see stronger time pressure on the side of clients to strike deals to preempt inflation, or how the conversion rate of pipeline into intake has maybe changed in the first half of this year.
Thanks Ingo for the question. We see in PFS a very strong order pipeline where I can say for the first time for quite some time we've also refused in some cases to quote on customers where we've traditionally not been so successful, if I simplify this, or where we saw a not satisfactory margin potential. Nevertheless, we have good orders, and we continue to see a very strong order pipeline. We see more and more clients trusting us in those days to be a solid partner. We have become much more selective in an environment where we see a strong, really a strong pipeline of significant projects globally, not only in China and more also now in North America.
I've talked about India, where we booked a very nice order recently and see the market coming up, some nice brownfields, but also few greenfields in Europe. A nice mix where we try to select the right ones, but the right ones will even be sufficient to further fill our backlog.
Thinking about the right projects and profitability, would you be willing to share with us when you look at the projects you're executing right now, how strongly the, let's say, realized margin differs from the initially calculated, margin? I guess that'll probably peak in the second quarter. Maybe even how much of the, let's say, margin shortfall due to cost inflation, do you expect to retain in the second half of the year? How much shortfall of realized versus budgets that you still expect in a good inflationary environment? Yeah, that would be the second question.
Margins will increase definitely in PFS now in the second half. If you will, in phase one, we were trying to compensate for the cost inflations that we have seen, and I can really say we've been quite successful in that. Now looking forward, that's on existing orders on hand. Now looking forward, we are calculating differently, meaning obviously on a different cost level for new orders, and we're still successful, which gives us confidence that we can further raise the margins for this business going forward.
Okay, great. That's very helpful. On the service business, I think it was an important point you made on the growth potential and also this being a reason for the lower margin for the second quarter. I think when I look at it on a group level, you still seem to have pretty decent growth, double-digit growth in the aftermarket revenues. For the Application Technology in particular, was the aftermarket revenue down in all regions? And can you quantify how much spare parts revenues you've lost in this segment and whether it is already back as we speak in July, or whether that's something you expect to come more back later in the third quarter?
We've already compensated. The impact on APT was basically China, period. Where for two months, interesting enough, we still had the orders, but we could not convert them into sales because we simply couldn't ship. Also on APT, we're just looking the average order intake for spare parts in the first half of the year was really up from last year. That continues to be strong. Overall, I mean, the issue on the service business, if I just look at HOMAG, for example, it's driven by our capability in hiring new service people in order to increase the volume. There's continues to be a strong demand in service.
The service percentage in terms of sales has simply gone down, as we were mentioning earlier, because the equipment sales has gone up even faster.
Okay. Very clear. Thank you.
Thank you.
Thanks. We'll now go to Mr. Michał Małecki, calling for PTE Allianz. Please go ahead.
Yes, good afternoon, gentlemen. My question is with regards to your guidance, especially to the profits, because after first half, you are below the 50% of forecasted net profit. On EBIT margin, you are also below. What is your optimism towards second half based on? Because you mentioned several factors like underutilization, like maybe lower share of services. We have also the seasonality, and do you assume lack of lockdowns? Could you share with us what are your assumptions here?
Yeah, sure. I can do. First of all, we have higher sales in the second half of the year, which automatically significantly contribute to higher margin. You mentioned already underutilization, which we had especially at MPS, but to some extent also in other businesses. Then more and more now, higher margin orders coming into execution. New orders, where we have already adjusted our calculations. We were talking about HOMAG. We have increased prices by 15% in the last 15 months or 16 months. More and more, you know, we had a margin compression because cost increases have kicked in faster than now the price increases come into play. This all together makes us very confident that we can achieve, or that we will achieve the guidance for earnings too
Okay. My second question is with regards to two divisions related to automotive business. PFS and AT have completely different pattern of margins. We have very good margins in AT and low margins in PFS. Could you explain what is the difference?
Yeah.
In these two business lines?
Sure. Happy to do that, Michal. APT is a machine building life cycle business as a business model. We make, in very simple terms, we sell a robot twice over the lifetime. We first sell it as one piece, typically with relatively low margins in order to create an installed base. We leverage the installed base by selling spare parts. By the end of the life cycle, as I mentioned, we have sold the same amount of money, typically, in spare parts than we did on the initial robot, with a big difference that with the spare parts, we're making a lot of money. That's the business model of APT, constant selling of spare parts.
PFS is more a construction type business, where we install large facilities with a relatively high share of purchased e-elements, steel, steelwork, other components. This is really the following a business model of the construction business. Of course, also there, more and more we try to leverage our potential over the life cycle of the equipment. Nevertheless, there is not so many spare parts by nature in this type of business. That's why the margin in this business is lower. Nevertheless, I must say, PFS, as this is the real paint shops, is an enabler for our APT business, because typically we sell our robots with our paint shops. That's why to some extent this business is to be seen together, still following totally different business models.
Okay. The PFS is more sensitive to material price increase, for example, yeah?
Absolutely.
Like construction business. Okay, I see. Thank you very much.
Absolutely. Yeah, thanks for asking.
Thank you much, sir. We'll now go to Mr. Peter Rothenaicher, calling for Baader Bank. Please go ahead.
Yes. Hello, gentlemen. Firstly, I think it's really remarkable that you confirm your mid-term guidance of more than 8% margin and do not change the timing. With that, do you also stick to your division margin guidance, which you have given on a medium-term?
Yeah. Thanks, Peter. Yes and yes. You know, yes, we stick to the target. I mean, we have the fallback year of 2024, so, but nevertheless, yes, we are because we believe that what we said and what we planned despite current headwinds is intact. I think, by the end of the year, we can give further, how should I say, substance because what we do right now, if you just look at PFS in order to increase the margin quality is independent of the current situation. To give you an example, a real example, of course, I'm in discussion with board members of German OEMs who then say, "Yeah, you know, do, would you behave?" Because there I'm saying, "Look, we're not playing the volume strategy anymore.
We wanna earn money or we forget it. They say, "Yeah, but you know, you behave in a certain way because your competitive environment has changed." Yes, it has changed, but for us, that doesn't make a difference. Even if there was still the same amount of competitors, we would still say there's a certain limit of margins that we accept because we wanna earn money. If we don't earn money, we don't have to play the game. That's why we're confident for all the businesses together that we're working in the right direction. This is why, there's still work to do, to be done, we're keeping our targets up.
How are you able to cope, for example, with the expected high wage increases? We were aware some months ago that wage increases in Germany this year would be perhaps in the magnitude of 5%. Now it looks like, due to the high inflation, this might even be considerably higher. Energy costs is the other thing. How are you really able to compensate for this?
Yeah. I must admit we were also surprised by the strong, how should I say, request from the unions. Let's see how it's gonna end up in the end because there's no agreement yet for the metal workers. Of course, that has an impact we will have to compensate. Nevertheless, the impact for us is maybe more limited than it is for other companies as we have a pretty good global footprint, number one. Number two, again, our own value adding the, you know, compensation that we have as a ratio on our total manufacturing cost is definitely lower than the average of the players in our industry. This together, yes, there's still an impact, and we have to react, and we will.
The impact is not so dramatic, and the same applies to energy costs. We're less concerned about this than, you know, how our customers deal with it. Of course, there will be more pressure on them than there is on us.
With regard to sales, I think the point is twofold. On the one hand, which sales volume do you expect would be necessary to achieve the 8% margin? On the other hand, you're talking about a still very strong project pipeline, and you have already a record high order backlog. When do you think will you be able to reduce the order backlog to normal levels? How strongly can you expand sales?
I mean, we have shown if we start with HOMAG, there we are maybe most driven by defined capacities as we have more of an in-house production. We have proven in the last quarter with sales of EUR 400+ million that we have the capacity to work on our backlog. Plus, as we speak, we're building up to some extent capacities. There I'm confident. In the other businesses we are, you know, our own value adding doesn't include the machining of components. It is more a project type of business where you can ramp up or down much easier.
If we look at what we had achieved in the past already in some of the businesses, you know, take APT, we've had volumes of around EUR 600 million before, so this is nothing new to us. I'm confident that we can catch up. It's just, you know, currently our customers have to deal with longer lead times, and we have already declined projects where customers were not willing to compromise and would have brought us into problems in executing a project timely. Having said this, I'm confident when it comes to the volume that we have to generate.
The 8%, we don't want to make us, in order to achieve the 8%, we don't wanna just play the volume game or not really the volume play because that would make us, you know, that would create risk for a downturn if it ever came, because then we could not protect our target margin. We really wanna work on the P&L, the lower side of the P&L than on volume in order to get to the famous 8%. That's what we do today as
Yeah. Lastly, a technical question. In the second quarter, you had a relatively high tax ratio. Were there any special effects, and what is your expectation for the full year?
Yeah, there have been special impacts, Peter, in that regard. The expectation is that we will finally stay in the range of around 30%.
30. Okay. In the third quarter, special effects? In the second quarter, sorry.
Second quarter has been related to an acquisition on one side, a special impact, so that was, I think, the major impact right now.
Okay, thank you.
Provision that we released. That was not tax effect.
Thank you for your question, sir. Ladies and gentlemen, once again, if you have any questions or follow questions, please press star one on your telephone at this time. We'll now go to Philippe Lorrain from Berenberg, who's coming in with a follow question. Please go ahead, sir.
Yeah, thanks for taking my follow-up. The first one is, again, on the small restructuring that you were mentioning. I was just wondering if you could give us some information on the total cost for that restructuring and also when that's gonna be over.
Philippe, if you are referring to the expenses we had so far this year, this has not been restructuring. This was investments mainly on IT systems in our so-called One program. Currently, we run the largest initiative we ever had in order to make our internal processes more efficient. This is what we call One project. This One project has a number of sub-projects. For example, we are preparing for the introduction of the new S/4HANA as our new ERP backbone. In parallel, we're introducing a new CRM, customer relationship management system. In parallel, and this is all phased, a new SRM, supplier relationship management system. In parallel, One HR, so completely new approach to HR, a modern approach to HR.
This is creating costs, and this is what you have seen in our P&L, but it's not restructuring.
Mm-hmm.
You know, of course, in the end, we want to grow the company then with relatively less overhead, but the plan is not to launch a restructuring program where we lay off people at this point.
Mm-hmm.
Philippe, just to add, Jochen indicated this with these phases of the project, started already back in 2020. Some of them are just kicking in. As for implementation, the first go live with one legal entity will be next year. It's not that we're doing all at the same time and are getting either very unstable or overloaded with the activity. It's a well-planned procedure actually. The costs that are currently occurring is the preparation, it's the implementation. We're preparing the databases and so on.
Oh, okay. I guess it's very difficult then to quantify and also then to say when that's completely fading away, no? Mm-hmm.
Yeah, because I think the major part will be the S/4 implementation finally that will take a prep time of, I guess, when we started the first implementation of around five to seven years for the whole group. There we are right now in the preparation of the first pilot, and we are gaining then experience of how fast can we then do the rollout afterward. For the other projects that Jochen mentioned, typically the timeline for implementation is a range of around three years.
Mm-hmm. Okay. I guess for when you are targeting the 8% margin, most of the cost should be behind us, though, no?
Not yet. S/4 will be later on as well, but we basically included this when we told regarding the 8% and when we want to achieve the 8%.
Exactly. This is part of our day-to-day business. Our idea is not to come out next year and say, "And by the way, we launched a EUR 100 million program that we now build in our P&L." No.
Yeah.
We just wanted to clarify, this is our running business, and we consider this also the cost of that being part of, you know. Also we are not showing this, as Dietmar said, as special effects or non-operational. We just absorb that in our running activities.
Yeah. No, no, sure. I appreciate that point as well. I mean, it's day-to-day business. However, it's just like, you know, when the costs are, like, big enough to exert a sizable influence on the margin and the profitability generally.
Mm-hmm. Yeah
We are quite interested to know that and follow that up.
Yeah, sure.
Okay.
Definitely. If there's anything extraordinary, we will talk about it.
Yeah. Okay. The second question would be, it's a bit of a mathematical question. I was wondering whether, you know, the backlog numbers that you provide, whether they already reflect the repricing that you had on certain contracts to the pass-through of the cost inflation?
No, there is nothing significant yet that you can see at this point. The contracts that we have renegotiated, there will be some impact further in the year because we will receive from some customers, if you will, cost notes that will enter the P&L. So, you know, price adjustments, which have a positive effect then in our P&L. As explained earlier for the newer contracts with price escalation or indices embedded in the contracts. Also this will happen going further, but ideally without a strong impact as it should follow the cost curve more or less. What this is more protection of the orders on hand that we don't have material cost impact.
Yeah. No, no. For the new contracts I was definitely like thinking the same. It was more like for the ones that you actually have repriced, but I guess it depends as well when it becomes really effective and starts going through P&L.
Absolutely true. So far, nothing of any significance in the P&L. Looking forward, yes.
Okay. The last question still on the order backlog. I know that the order backlog can be influenced as well by FX. I was just wondering whether there had been like cancellations also in the automotive business. Just like anything of interest on your side or whether things were all right.
No, nothing of any significance. There's been an order change with one customer, but independent of current issues, where the customer has just decided to go a different route. There we have, let me call it an order change. We have no cancellations, as a consequence of, you know, current constraints or things like that.
If I understand that correctly, if we take the backlog of the Q1, we add the order intake, and we subtract the sales that we've done in Q2, basically the difference between EUR 40 million and EUR 50 million, that's FX going.
That- Yeah. That would be the logic, yes. The whole FX impact for the full year, Philippe, will be in the lower triple-digit EUR million range.
Yes. Okay.
Compared to the order intake.
Okay, perfect.
Thank you.
Thank you, mister.
Ladies and gentlemen, as we have no further questions at this time, I'll turn the call back over to Mr. Jochen Weyrauch for any additional or closing remarks. Thank you.
Okay. Thank you very much, ladies and gentlemen, for your questions and your interest. In case you have any further questions, please contact me or my colleagues from Investor Relations. At this stage, I wish everybody a nice summer holiday and hope to see you then at the conferences in September. Thank you very much and bye-bye.
Thank you very much, sir. Ladies and gentlemen, that will conclude today's conference. Thank you for your attendance. You may now disconnect. Have a good day and goodbye.