Welcome to the Dürr Conference Call. Dieter, CEO, and Carlo Crosetto, CFO of Dürr AG, represent the Dürr Group preliminary figures of 2019, followed by a Q&A session. I will now hand over to Mr. Dieter, CEO of Dürr AG.
Yeah, thank you, Aurelia, and ladies and gentlemen, good afternoon or good morning for those of you in the U.S., and welcome everybody. It is a great pleasure to present to you Dürr's preliminary figures for 2019, and I'm joined by my colleague Carlo Crosetto here for the last time. As you know, Carlo has decided to leave us on February 29th, which is, I think, on Saturday.
Amazingly, tomorrow I will be taking over his duties on an interim basis until Mr. Heinrich, our new CFO, is finally on board. He will be assuming his position effective August 1st, 2020, at the latest, so now to our results. Our year-end closing is already stable enough to be able to give you the key figures today, and I start, as always, by summarizing the highlights and providing an overview of our results for 2019. Carlo then will give you more insights into our financials, and I then will present our new midterm strategy, share our division's performance with you, and give you our initial outlook for 2020, and also a first indication of how we see 2021, and let's start on page three. In 2019, we achieved many milestones. Incoming orders and sales reached all-time highs. Q4 was very strong, especially in light of the weak economic environment.
Our results for 2019 are above our revised guidance of November 2019. The operating EBIT margin reached 6.7%, which is only a slight decline over the previous year and only a slight miss of our first guidance from February 2019, and the guidance was 7.0%-7.5%. Cash flow was clearly above our expectations, and service sales exceeded the EUR 1.1 billion mark for the first time in our history and increased 8% year- over- year. At HOMAG, we will be implementing the previously announced measures in 2020. HOMAG's order intake stabilized in the second half of 2019, and the planned measures should unleash their effect in 2021, and last but not least, we are pushing our Industry 4.0 activities strongly throughout the whole group.
Looking at 2020, we expect sales and reported earnings growth and a further cash flow increase, but we also see a more challenging and unsecure business environment ahead of us. For 2021, as a first indication, we expect an EBIT margin before extraordinary effects between 7.0% and 7.5% after an estimate of 6.2%- 6.7% for 2020. Let's turn to page four and have a look at our results here. The incoming orders and sales increased in 2019 by 4%, respectively 1%. EBIT before extraordinary effects declined only by 4%, and operating cash flow was up by 6%. On page five, we provide an overview of our Q4 performance, which was strong. Incoming orders increased by 3%. The operating EBIT margin was up by 0.6 percentage points and operating cash flow by 21%. Net income was impacted by extraordinary costs of EUR 50 million.
Page six compares the Dürr Group's targets for 2019 and the figures actually achieved. We reached our revised targets in 2019 and surpassed our EBIT margin and cash flow goal. Order intake on page seven reached more than EUR 4.0 billion for the first time. Order intake was outstanding in North America, underpinned by several contracts awarded in the EV sector in particular. By contrast, order intake was down in China and Germany. HOMAG's China business improved from a low level, and the emerging markets total contributed 41% of total new orders, down from 46% in 2018. Carlo will now take you through our financials, Carlo.
Yes, thank you, Ralf. Yes, good morning or good afternoon also from my side. Ladies and gentlemen, before I start with the next page, so page eight, I wanted to actually refer to page 31 of this presentation. Here, we give an overview of the impact of IFRS 16, which was obviously applied in the preparation of these financials. So you can see all these effects there. These changes have a greater impact on the comparability of the figures regarding EBITDA, cash flow, and net financial status, but obviously little or no impact on net profit and free cash flow. So if we move now back to page eight, I will then continue with the flow. The cost of sales increased by 2%, while sales rose by just 1%.
It should, however, be kept in mind that it includes higher extraordinary expenses in 2019 that we did not have at the same level, of course, as in 2018. Gross operating profit was down in three out of five divisions, meaning that the gross margin shrank by 0.7 percentage points to 21.4% overall. We also scaled back R&D expenses after the sharp increases in the previous years. However, just to be clear, there was really no cut in spending on important innovations such as digitalization and software applications. Our SG&A cost rose particularly as a result of the higher selling expenses. The 7% increase, what you see here, was due to the full-year consolidation of MEGTEC, as well as higher expenditure on trade fair activities and our open house event, which took place last year and also takes place every two years, so you need to keep that in mind.
Our reported EBIT of EUR 186 million included extraordinary expenses of EUR 67 million compared to last year's figures of EUR 41 million only. I will describe these extraordinary items in detail later further on. The financial result decreased by EUR 7 million, mainly due to IFRS 16 effects of EUR 3 million and due to a one-off expense of EUR 5 million for the purchase of previously leased real estate assets here in Bietigheim-Bissingen. At 26%, our tax rate reached the same low level as in the previous year. With EUR 130 million, our earnings after tax came in at the top end of the guidance range of between EUR 115 and EUR 130 million that we had defined and communicated back last November. So given these financials, earnings per share reached EUR 1.79 compared to EUR 2.27 in 2018.
As mentioned before, on page nine, you can find a detailed overview of the extraordinary effects of these last two years. The breakdown will also help you better understand the reported EBIT and operating EBIT guidance we will be giving for this year's financials. For 2020, we estimate total extraordinary effects of EUR 40 million. In this EUR 40 million included our EUR 70 million purchase price allocation effects. We planned in nearly every division certain streamlining or improvement measures. Let's now move on to page 10. Net financial status declined by EUR 25 million on a comparable basis, so from EUR 74 million to EUR 99 million, to be precise. After a very strong fourth quarter, the cash flow from operating activities widened by 6% in the full year. This improvement was stronger than we had been expecting back in November 2019.
As you can also see in the chart, our cash flow was influenced by a full-year basis, an increase of EUR 65 million in net working capital. In the fourth quarter alone, we were able to reduce net working capital by EUR 146 million, and we assume that the net working capital will show a slight increase in 2020, probably. Accordingly, cash flow should continue to improve in the year 2020. Page 11 deals in detail with the comparison of our net working capital. Like for like, net working capital increased at a similar volume as in 2018, and within net working capital, inventories declined by EUR 26 million, as expected. In 2020, we plan to reduce inventories even further. The overview on page 12 of our work in progress in comparison to progress billings shows a reduction in our payment balance by EUR 63 million to EUR 12 million.
In other words, the net prepayment overhang of our customer is nearly gone. We now consider a level between EUR 50 and EUR 50 million, so this range, to be normal in the future. Although the total balance is now close to zero, so slightly negative, as mentioned on many previous occasions, we are not planning to pre-finance our customers' factories. Page 13 shows further key financial items. Equity grew by EUR 51 million to above EUR 1 billion for the first time. The equity ratio shrank to 26.9%, particularly due to the inclusion of leasing activities, which caused our total assets to rise by more than EUR 19 million. The increase in capital employed was also due to the inclusion of leasing activities. Our cash position, including time deposit, increased to EUR 822 million as a result of the Schuldschein bonded loan issued last summer.
Just to remind you, with the sustainability Schuldschein, Dürr was the first company ever to issue a Schuldschein whose coupon is linked to the Dürr Group sustainability rating, a sign that we are taking sustainability quite seriously. Return on capital employed dropped to 17%, down from 24% in the previous year. This was due to both higher capital employed as well as a lower EBIT. However, at 17%, we're still far above our cost of capital and comparable with other peer groups. Page 14 shows CapEx of EUR 103 million, which represents an increase by EUR 20 million, EUR 28 million, excuse me, compared to 2018. The sole reason for the increase was basically the inclusion of leasing activities, and otherwise, it will be probably pretty much the same. A key item of the 2019 CapEx agenda was the modernization of our IT systems with the goal of digitalizing our process even further.
Across the group, we expect CapEx to remain around EUR 95million-EUR 105 million also in the coming years. I will now hand back to Ralf Dieter, who will outline our midterm strategy, the division performance, and, of course, provide you with our outlook for the year 2020.
Yeah, thank you, Carlo. Let's turn to page 15, ladies and gentlemen. Our midterm strategy is the roadmap for profitable growth and for raising earnings to top level in the international mechanical and plant engineering sector. The strategy is linked to four medium-term key figure targets. First, higher profitability. The EBIT margin is to increase step by step to at least 8% by 2023. We consider this level to be adequate in view of the increased weighting of mechanical engineering business in our portfolio. Second, sales growth. Organic sales growth is expected to average 2%-3% per year and thus match the expected growth in production output and demand in our markets and industries. Third, attractive return on capital. We are looking for a return on capital employed of at least 25%, underpinned by high EBIT contributions from mechanical engineering and low capital employed in plant engineering.
Fourth, increase in the proportion of service business. Service business, with its higher margins, is to account for up to 30% of group sales, and we are close to that already. Efficient service business secures the group's earnings and increases customer satisfaction. In order to achieve our goals and expand our leading position in the world market, we are continuing to push ahead with digitalization via Digital at Dürr as a central strategic element. In addition, we are positioning ourselves to optimum effect in four strategic fields: global presence, innovation, efficiency, and lifecycle services. We have also defined four enablers, supporting functions that are particularly important for the successful implementation of our midterm strategy. So sustainability, mergers and acquisitions, finance organization, and people development. On page 16, we describe the four pillars of our strategy in more detail. First, global presence.
Our business is international, and we have a global footprint with 112 locations in 34 countries. Strong localization reduces our risk to trade barriers and gives us better market proximity in addressing our local customers' needs. To mention here is especially the local engineering. This means that we will be adapting products even more closely to meet the specific requirements of the individual regional markets and producing them on a local basis. This is accompanied by a global strategy for R&D and supply chain management. Each location is to contribute its own strengths to the group network in the best possible way. Centers of competence for specific technologies and products have been installed in the U.S., Germany, China, and India and with respect to production, we will be relying on our specialized product hubs that manufacture and assemble our products for the global market on a cost-efficient basis.
Looking ahead over the next few years, Asia offers the greatest growth potential for us. For this reason, we are systematically aligning our organizational structures and product strategy to meet the needs of these markets. Whereas we already have a strong footprint in China and India, we will be additionally expanding our position in the growth markets of Southeast Asia. Innovation is a pillar of our market leadership, and the group's R&D agenda has two drivers. Our innovations aim to enable sustainable production processes and unleash added value by means of production efficiency. In this way, we are addressing our customers' two most important requirements. Our product development activities aim at achieving low energy and resource consumption, reduced emissions, and low unit costs in production. A further aspect is the flexibilization and modularization of factories.
What the latter means is that we are developing scalable production systems that can be simply adjusted to the market demand. Efficiency is the third pillar of our strategy. We constantly adjust and digitize our processes to boost productivity. One key aspect of this implies harnessing synergies within the group, and this includes uniform processes, shared services, the use of economies of scale, and end-to-end IT applications. Efficiency as a strategic field also includes an ongoing portfolio analysis on the contribution made by our business activities and identify the areas in which adjustments are necessary. We will perform further optimization in the course of 2020. Let's have a look at the fourth strategic pillar. Service business has strategic relevance in two aspects, as it generates higher margins than new business and directly strengthens customer loyalty.
In order to achieve a sustained share of service business of around 30% of group sales, we are increasingly aligning our service activities to the entire lifecycle of the machinery and systems we install. In doing so, we have three main thrusts: installed base, expansion of spare part business, and brownfield modernization and expansion. Page 17 shows how our service business performed in 2019. Service revenues rose by a significant 8% and exceeded the EUR 1.1 billion mark for the first time. Service margins remained at a very satisfactory level, and looking ahead to 2020, service business is expected to grow in a low single-digit volume due to an unexpected weaker utilization at our customers' factories. Let us now move to page 18, which presents an important area of our future business, namely alternative drives. We have brought together a few statements made by some of the OMs.
Their goals for the next few years are very ambitious, and new production facilities must be installed or existing ones must be modernized and rendered more flexible for these goals to be reached. And in 2030, about 6% of all vehicles produced worldwide are to be fitted with alternative drives. And on page 19 sets out the order intake that we have specially generated with EV manufacturers. Order intake rose by 44% to EUR 387 million, accounting for around 10% of group order intake. The traditional OEMs are being joined by new producers in China and the United States that have never built conventional vehicles before but want to gain market share with EVs. Over 20 such EV pioneers, including names such as Byton, Tesla, and Lucid, ordered production technology from Dürr in 2019.
Before providing a brief overview of our specific range for EV production on page 20, I would like to put into proper perspective the so far relatively low order intake for battery production. In this area, we are only offering certain applications like gluing, for which we hold specific expertise. We have several projects in the pipeline as battery production plans are also being planned in the West. On page 20, you can see that in addition to painting systems, we offer further technologies required for the production of electric vehicles such as final vehicle assembly. Assembly can be automated to a greater extent as the drive train fitted to electric vehicles is not as complex compared with their conventional counterparts. So Dürr has already installed automated assembly systems for well-known EV OEMs. Demand is likely to increase as EV production volumes start rising.
One key point in the assembly of electric vehicles is the marriage station. This is when the battery is automatically fitted to the underbody using Dürr technology. Up to 36 screws are perfectly positioned at the screwing point and fully automatically closed. Dürr also offers systems for filling batteries with coolants and gluing and sealing of battery packs and battery systems. Electromobility also poses new challenges for testing technology on finished vehicles, particularly with respect to safety. Using Dürr testing systems, it is possible to make sure that the high-voltage systems in electric vehicles do not cause any risks. And Dürr subsidiary Schenck RoTec provides support for the production of electric motors. One example is a specially developed eTino balancing system that measures and eliminates imbalances in the electric rotors for e-drives. Schenck RoTec also offers the Centrio spin test stand for material testing for electric motors.
In this way, it is possible for OEMs to determine the maximum rotational loads to which their drives may be exposed. The automotive industry requires additional battery production capacity to achieve large volumes in electromobility. Here as well, the Dürr Group offers technologies for different steps along the production chain. Its subsidiary MEGTEC has a system for coating electrodes for lithium-ion batteries. The process is unique in that it simultaneously coats both sides of the base material, a metal foil, with cathode and anode material. So Dürr supports the production of battery modules with high-precision Application Technology. One example is insulation can painting, a coating system for the thermal and electrical insulation of battery cells.
A solution made by Dürr is also available for battery bonding, in which the coated battery cells are arranged contiguous to each other and bonded together in a battery module, after which a thermal paste known as the gap filler is applied to dissipate the heat generated when the battery is charged and discharged, and in the final step, the battery cover is also glued onto the module. Let us now turn to the performance of the individual divisions, and as usual, I will start with Paint and Final Assembly Systems on page 21. This division again achieved a healthy growth in order intake in 2019 of 3% despite the distortion in the automotive industry. With order intake coming to EUR 509 million, Q4 was the strongest quarter for the year. Full year sales rose by 1%. Book- to- bill came in at 1.1.
EBIT improved by 11% to EUR 62 million as expected due to the positive effects of our Focus 2.0 optimization program. At 6.9%, the EBIT margin was particularly strong in Q4. And for 2020, we forecast an ongoing margin increase at the operational level, but as already mentioned, we expect one or the other streamlining measure. Automotive filling and testing system with sales 2019 of EUR 179 million and with EBIT of EUR 16.3 million have been transferred to Paint and Final Assembly Systems as of 1st of January 2020. This was done in order to bundle automotive final assembly-related activities and increase synergies in front of the customer. Turning to page 22, order intake for Application Technology rose another 1% in 2019 and at EUR 641 million reached another record.
The fact that EBIT dropped by 16% to EUR 57 million was partly due to the lower sales and mainly due to the inclusion of an extraordinary expense of EUR 6 million in connection with the legal dispute. Adjusted for extraordinary expenses, the EBIT margin came to 10.7%, thus reaching the target corridor of 10%-11%. With higher sales in the non-automotive business, we were able to reduce the losses within our industrial painting technology. We expect stable business for the division in 2020, although spare part business is likely to contract slightly due to potentially lower utilization of some of our customer plants. In connection with Clean T echnology Systems on page 23, it is important to bear in mind that the MEGTEC was consolidated for the first full year in 2019. The year before, it was only consolidated from October 5th.
The sharp 74% rise in new orders is primarily due to these effects. But however, Clean Technology Systems on a comparable basis also posted organic growth in order intake in the high single digits. And in fact, like-for-like sales rose at a rate in the low double digits. The division's earnings achieved a clear turnaround. Despite the purchase price allocation expenses, EBIT climbed to EUR 12 million with the EBIT margin widening to 3.1% and an operating EBIT margin of 5.9%. Both figures lived up to our expectations, and by contrast, the restructuring-related loss of EUR 15 million had arisen in the previous year, so in 2018. The integration of MEGTEC has been largely completed and has progressed very well. We expect a further increase in earnings in 2020, although business will temporarily tend to remain flat. Page 24 outlines performance of Measuring and Process Systems.
The division posted a 6% increase in order intake to EUR 426 million in 2019, although performance in the fourth quarter was muted. By contrast, sales dropped by 10%. One reason for this was the moderate order intake in the fourth quarter of 2018 and parallel the extraordinary high sales realization. In tandem with high R&D expenses for digitization, the substantial decline in sales caused EBIT to contract by 35% to EUR 39 million. At 9.4%, the EBIT margin did not quite reach the target corridor of 10%-11%. However, it did reach a very good figure of 12.4% in the fourth quarter. The outlook for the division for 2020 must be seen in the light of the move of automotive filling and testing to the division Paint and Final Assembly Systems.
And looking forward, the division will be composed only of the activities of the Schenck Group, including the Schenck Technology and Industrial Park. Now let's have a look at woodworking machinery and/or HOMAG on page 25. HOMAG noticed a pronounced decline in demand in its business within the furniture industry in 2019. This particularly impacted system business with integrated production lines. The division's order intake dropped by 9% to EUR 1.22 billion but was only slightly down on the previous year's figure in the second half of the year. In China, demand was initially again weak, but however, a large order could be placed in the third quarter and caused full year order intakes to rise. HOMAG was able to keep its sales nearly stable at EUR 1.79 billion. Sorry, EUR 1 billion.
In response to the challenging market environment, structural overcapacities, and process shortcomings, we announced a package of measures in the fourth quarter of 2019 aimed at achieving significant efficiency improvements in this division. The package entails non-recurring expenses of EUR 40 million, of which around EUR 37 million arose in the fourth quarter of 2019. A further EUR 9 million from purchase price allocation effects for the HOMAG Group brings the extraordinary effects for HOMAG to a total of EUR 45 million in 2019. EBIT dropped by 57% to EUR 37 million primarily as a result of the extraordinary effects, translating into an EBIT margin of 2.9% down from 6.6% in the previous year. Operating EBIT fell by 13%. The main reasons for this were lower revenues, a changed sales mix, as well as shortfalls in capacity utilization, higher costs, and partially inefficient processes.
The operating EBIT margin came to 6.5% down from 7.3% in the previous year. Page 26 describes these efficiency measures. Once implemented, they will result in a reduction of about 7% in assembly and lead times per year. The major aspect is a change in our operational approach aimed at overcoming historical silo-like processes with a lot of interfaces and inefficiencies. We will be introducing a seamless ERP process across all functions from order to cash, and the efficiency improvement of our sales and spare part logistics will also generate additional benefits. All in all, we expect optimization effects and cost savings of around EUR 20 million from 2021 onwards.
On page 27, we again set out the reasons why we are convinced that HOMAG will be able to widen its worldwide market share from currently around 30% in several steps to as much as over 40% over the next few years. This will, of course, result in a disproportionate increase in sales. The main drivers here are China, with the expansion of local production, intensified service business, the strengthening of our leadership in digitization, the product standardization that we have initiated, and improvement in production processes. Now coming to our group outlook on page 28. As things currently stand, we expect sales of EUR 3.9 billion-EUR 4.1 billion in 2020. This means that sales will probably be higher than in 2019. Order intake is expected to come to EUR 3.8 billion-EUR 4.1 billion.
Adjusted for extraordinary effects, the group EBIT margin should come to 6.2%-6.7%, which means that we plan a slightly lower operational result. The reported group EBIT margin is expected to reach 5.2%-5.7%, which will represent an increase compared to the previous year, and at this stage, we project extraordinary costs of around EUR 40 million in 2020, of which around EUR 17 million will come from PPA effects. We expect rising cash flows in tandem with a stable capital spending in 2020, and net working capital should increase only slightly. A detailed outlook can be found on pages 45 and 46 of this presentation, and please bear in mind that the EBIT outlook in these divisions will be affected by some streamlining measures.
The outlook for 2020 is based on the assumption that the overall economic situation will not deteriorate any further and that political conflicts will not cause any further instabilities. The effects of the corona epidemic have been taken into account in the outlook as far as they can be estimated in the light of the current situation of today. The epidemic looks to impact earnings negatively in the first quarter. However, the board of management currently assumes that the negative earnings effects from corona can be offset for the most part in the further course of the year, provided that the situation largely returns to normal in the second quarter. At this point, we would like to provide an initial indication for 2021, as we believe that the efficiency improvement measures that we have introduced should have a more positive impact from that year onwards.
So accordingly, we project an EBIT margin before extraordinary effects of 7.0-7.5% for 2021, up from an estimated range of 6.2-6.7% for 2020. So ladies and gentlemen, thank you very much for your attention so far. And I would like now to hand over to Aurelia, and we are happy to answer your questions.
Thank you. Ladies and gentlemen, 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 is your turn to speak, you can dial zero and two to cancel your question. If you are using speaker equipment today, please lift a handset before making your selection.
One moment, please, for the first question. And the first question is from Ingo Schachel, Commerzbank. Your line is now open. Please go ahead.
Yes, thanks very much. My first question would be on the, yeah, statements on the coronavirus. And of course, it's very difficult for you to quantify any full year impact or scenario. But can you help us understand what the current situation for you looks like during the first weeks of February by how much your output in your own plants and the auto too and also at HOMAG are down? And yeah, and also how that has really or whether any of your particular plants has been affected more significantly than others during the last weeks.
Yes. Hello Mr. Schachel, thank you for this question.
As you can imagine, we are in daily contact situation as follows: in HOMAG and Schenck and in Dürr, we resumed work and production again. Was it two weeks ago after the 17th of February, exactly? So we had this Chinese New Year and then an additional time of closure. But it's not fully production yet because we have about 40%-50% of the people could come to work, and now it's increasing. The expectation is now that in the first week of March, we will be more fully loaded again also with people, and production should normalize in the course of March. Our customers on the OEM side also started production again. You could see also some press releases like BMW said they are full production and no problems.
But we anticipate today, and it's not easy to calculate, but we have a rough calculation about that. And as I said before, if things go back to normal March, April, then we have good hope that we can recover most of the, let's say, losses in terms of revenue and profit during the course of the year. But from today's perspective, we estimate it's about EUR 50 million-EUR 70 million we are losing in terms of sales and about EUR 10 million EBIT, so in that range, EUR 8 million-EUR 12 million, something like that.
Okay, great. That's very clear.
Yeah. But these numbers you will see in the first quarter. That's what we have left. Okay. It's very precise. I know we tried because we were not surprised that you asked this, and we did our best to calculate.
But the assumption is that if things go back to normal, as Mr. Dieter was saying that we should recover most of these revenues and profit development in the course of the year. And this has already been included, what we know today, in the current guidance. But of course, we don't know what's going to happen tomorrow or after tomorrow.
Can be in one week a totally different situation. Who knows?
Yeah. Okay. Wonderful. Thanks for the detailed, clear answer. On the HOMAG, yeah, restructuring and streamlining, I think you've booked the charges in Q4, which suggests that you've made progress on agreeing with employees and reducing the capacities. Can you also give us, let's say, a slightly softer comment on how satisfied you are with the progress of the other aspects of the streamlining? I think you also wanted to do a lot to change processes and overall efficiency.
Can you just give us an update as to how the HOMAG organization has responded to all the changes, redundancies, and new ways of doing things?
Yeah. I mean, as you know, HOMAG has gone through a lot of changes since we took over. When we took over, it was really a bunch of companies, and then we had this one HOMAG as a first initiative, which was already changing a lot. So people, again, for the new process, we could get now enough support. So the people are now convinced that this would be a better way of work. But they also know that it's a very difficult job to do this besides a normal job. But we have to do it, and they are committed to do so. So I'm quite optimistic on that.
Also, it's very good that even the planned Hemmoor, which we published to be closed, the people there are working. We had not too much friction about that, and we are in good negotiations with the working councils and the unions to find, how do you call it in English, social solutions for the people to have a smooth situation as an outcome. And so that looks quite promising in terms of that we are executing on plan.
Okay. Thank you.
Thank you.
And the next question is from William Turner at Goldman Sachs. Your line is now open. Please go ahead.
Hi, gentlemen. I just have a couple of questions. My first question is on your medium-term guidance of a return on capital employed of 25%.
So if you kind of break down that return and you assume that you guys managed to achieve an 8% margin or even a 9% margin and that your tax rate is similar to what it is now, that guidance of 25% implies that you have to improve the efficiency of your capital base. Can you just talk to us how you expect to be able to do that? Are you assuming in the future that the net working capital turns may return to how it was in the past where customers kind of finance their own projects?
Yes. William, this is Carlo here. I can try to answer. I mean, we don't break down our return on capital employed target for a midterm into division.
But just to give you an indication, I mean, yes, if you look at the Paint and Final Assembly Systems, we have been averaging below 100% but still significant. And the fourth quarter load was 66%. Application Technology was doing also about 25%. And we had this special effect about this legal case that has affected us by roughly EUR 5 million or EUR 6 million. So it should be possible as the business continues to improve as it's been doing in the past to maintain this. Our Clean Technology Systems, when we're doing more than 25% return on capital employed, was having even negative return on capital employed. And now we're showing a positive return on capital employed. And HOMAG's return on capital employed number has been affected by this one-off hit that we've taken in 2019.
In 2018, which was not necessarily the best year in terms of return on capital employed, they were about 20%. So this should give you an indication that 25% return on capital employed, of course, we can argue about weighting and mixing the different divisions should be achievable in 2023. That's roughly what we say. So I don't think that's unrealistic, let's put it this way.
Okay. So you don't think it's going to return to an environment where in 2014, 2015, especially in paint and final assembly, you were getting paid quite large substantial prepayments from customers?
Yeah. I mean, I did mention before I was going through the balance between cash received and work in progress that we are still having a negative number last year. But it's obviously not in the range of EUR 2 million- EUR 300 million we saw in the past.
Our customers are also fighting hard on cash and investment. But as we keep saying, we're not going to finance the factories of our customers. What is true, however, is that the machinery business is going to get bigger and that our service business is getting bigger. And obviously, that requires different working capital. So that's why we have adjusted the range from -EUR 50 million to +EUR 50 million. But to your specific question, we don't see that the advance is going to go back to EUR 200 million-EUR 300 million like we had in the booming years in China.
Okay. Thank you. And then just my last question was on the R&D. You touched on it at the beginning of the call. If I'm right, it's about EUR 10 million. Can you just discuss what it was that was cut in the R&D plus sign? Yeah.
I mean, the main R&D reductions are around HOMAG. But it was not that we have cut any specific important R&D activities. We have obviously focused on the R&D activities that we believe make more sense. So it's basically we looked at the efficiency within R&D. So that's where the main cut is coming from.
And then to add on that, in HOMAG, we have also too many different machine types, which we are redeveloping in more modular systems. So we don't need so much R&D for all these kinds of different types. So we are focusing more, as Carlo said. So it's not that we don't do something. We just do things more efficient and more clever on that side.
Okay. Great. Thank you.
Pleasure.
And the next question is from Philippe Lorrain, Berenberg. Your line is now open. Please go ahead.
Yeah. Good afternoon, gentlemen.
A couple of questions from my side from the operating cash flow angle. So you guys saw a slight improvement there. Could you remind us when the expenses for restructuring at HOMAG are going to be cash effective? Is it in 2020 and also for 2021? The extraordinary expenses that you are targeting, are they all going to be cash effective that year? Or are we going to see some spillover effects into 2021 in terms of cash flow statements? So it's in order to understand a bit better how the development comes from one year to the other.
Yeah. I mean, the overall restructuring measure that we booked in 2019 has basically had hardly any impact in 2019 in terms of cash flow. So the majority of the cash flow impact will be in year 2020. It is likely that a smaller amount will have a spillover in 2021.
I think at this stage, it's difficult to predict. But the majority of the cash flow impact should be in 2020 for the restructuring.
Okay. Perfect. So I understand that actually then the cash flow generation in 2020 would be much, much better if we had put basically the cash expenses in line with the actual incurred expenses through the P&L in each of the periods.
Yes.
Yeah. Okay. That's the first one. Then the second question that I had was mostly on the one-offs that you expect for 2020. So I don't speak about the EUR 17 million PPA, but rather on the EUR 23 million of non-PPA one-off costs. What are these costs actually that you expect there? And could you break that down roughly by division so we can get a sense of what's the adjusted EBIT margin that you expect there?
Yeah. I mean, as Ralf Dieter and I have mentioned in the call, we will have small adjustments for operation improvement reasons in 2020 that have not been announced, and for this reason, I'm not in a position to actually give you more information than what you already know because it has other implications, so it's just something we have budgeted for and that you should be aware, but we're not in a position at liberty to give you a breakdown for different reasons.
And it's many activities, not one big bunch or one big topic. Yeah. So it's seven, eight, nine topics.
But these extraordinary items will be, let's say, significantly lower than they were in 2019, obviously.
Okay, but it seems in total like APT is going to be impacted by that, I would say, as a first guess.
It looks also like probably HOMAG are going to see some impact as well and CTS. Am I wrong with that kind of assumption or?
As I said, I'm not going to tell you in which division. It's not that I don't want to tell you. I just can't. But it's going to be spread. If these are the divisions you were talking about or others, I cannot comment.
It's part of the guidance. And I think we will talk about this when we have done it and have brought out these results.
Yeah. Okay. Great. And then the final one is just like, do you have any update on the Tesla project in Brandenburg, whether the paint shop has not been awarded? And if you can announce anything.
We are working on that project, but it's not only paint shop. It's also a big final assembly project.
Final decisions have not been made yet because also the Tesla is waiting for the final decision to build this plant or not. Yeah. But before they don't award any order, and then we can't talk about it. But at the same time, we are also working in China on this new paint shop, which looks pretty good for us of Tesla. As you have heard, they also expand in China.
Okay. Perfect. Thank you very much.
All right. Thank you.
The next question is from Richard Schramm, HSBC. Your line is now open. Please go ahead.
Yes. Good afternoon, gentlemen. Two questions from my side. First, on this one-off effect you mentioned in the financial side, I didn't get it so quickly, but I think the amount was about EUR five million burden. Could you explain a bit what was behind this?
And stripping that out, it's done a run rate of about EUR 16 million or so negative we should take forward for the financial results. Is that correct? And second point, looking at your guidance for the adjusted EBIT, or as you call it, operating EBIT, the guidance calls for a certain decline. But if I look at the divisional guidance you give, I have pretty difficulties to see where this decline should come from. So can you shed a bit more light on this? Thanks.
Yes. Richard, that was Richard, correct? Thank you for these two questions. I think the first one, yes, it was EUR 5 million I mentioned. Sorry, maybe I wasn't very clear. Basically, part of the campus here in Bietigheim-Bissingen was leased, and we just decided to basically terminate that lease agreement. And it's basically fully in our balance sheet.
This is the EUR 5 million effect I was referring to. Without this, the financial results should be in the range of EUR 15 million-EUR 16 million going forward. To be honest with you, there was some slight increase this, sorry, 2019, also due to the fact that we have anticipated the financing that was due in 2021 by issuing this Schuldschein. This should then net off the next year. I think your assumption of EUR 15 million-EUR 17 million should be the correct range. Regarding the guidance of the division, there is one significant difference. That is HOMAG. The guidance for HOMAG for next year is slightly lower than what it was in 2019. That's the weighting that is, sorry, compared to 2020. As of 2019, compared to 2020. Yes. 2019 was higher than 2020.
This is the reason why, as a group guidance, we are showing 6.2%-6.7%, basically indicating that it could potentially be slightly lower than 2019 due to the HOMAG expected guidance, which will be lower in 2020 than 2019. Did I confuse you?
Yes, in a way. I mean, if I look at page 46, I found an adjusted EBIT margin for HOMAG for 2019 of 2.9%. And for the current year, your guidance is 4.5%-5.5%, which is a clear improvement.
You were referring to operating EBIT. Sorry, I got confused. The 3% that you're referring to is including the restructuring. The reason why it says adjusted is because part of the measuring and process system business is now part of paint and final assembly. why you see adjusted on the top.
I think the confusion is adjusted is not for operating EBIT. That's a different thing. Adjustment is just about the portfolio change of moving this final assembly business from the MPS division to the paint and final assembly division.
It has nothing to do with HOMAG Group.
Okay. So okay. Then that is the point I missed here. Thanks.
No, it's good that you asked. [audio distortion] Y eah. It's very small letters underneath, but.
Font 3 as a footnote.
Next time we make it clear. Okay. Is now clear for you?
Yes, it's clear.
Perfect. Thank you. And the next question is from Daniel Gleim, MainFirst. Your line is now open. Please go ahead.
Yes. Hello. Good afternoon, gentlemen. Can you hear me well?
V ery well.
Thank you very much for taking my questions. I would start with HOMAG Group in China, if I may.
If you could elaborate a little bit on what you see currently on the ground, what do you learn from customer discussions? What is your sense of the project pipeline for 2020? The reason why I'm asking is that in the third quarter and the fourth quarter, I understand, saw some first green shoots with demand coming back from China. And I'm curious to learn whether, if we look through the dust that is put up at the moment, whether there's a sustained underlying demand pickup. Is that what you're expecting for 2020 once we're out in March and April? If you could comment on the current situation, HOMAG China, please.
I try my best because at the moment, it's not so easy. But to say it clearly, we are discussing with our customers in China also larger projects for 2020.
At the moment, those are. I would not call it delayed or on hold. They just have to wait for a more normalized situation again. The furniture market is still growing in China. Our Chinese colleagues think if the corona epidemic is overcome in China and things are getting back to normal, that this could even increase the demand and give some additional push on that. We see China for 2020 for HOMAG, the minimum on the level as in 2019, under the assumption, as I said before, that in March, things are getting back to normal soon.
Very clear. Thank you very much.
When you speak in your guidance about the coronavirus, can you be very clear on whether this also includes the impact outside of China, or are you only looking at the China impact when you're guiding us to a recovery or a recouping of the revenue and EBIT impact loss in the second half of the year?
I mean, you know, the world is nowadays very, very complex, and everything is connected to each other. So we have looked primarily at our business in China, knowing that some of the parts also needed in Europe or U.S. are produced in China, which we couldn't get into detail, but as we are producing right into local markets, we look primarily on the effect in China, and at the moment, we don't have problems to get parts here. To answer your question, that was our main focus at the moment. Yeah.
Have you learned anything from your discussion with your sales force that there might be an impact from corona also elsewhere? Are customers considering postponing projects? Are you seeing maybe a slowdown on the mechanical equipment, which is faster turning? Is there anything visible at this very moment?
At the very moment in the rest of the world, we don't see that. And also in China, the discussions are going on at the moment on the telephone because people can't meet. And there was no cancellation of any order, if you ask for that. So everybody is in China expecting things getting back to normal pretty soon. Back to normal means we can produce. Suppliers are, by the way, the factories of suppliers are also working.
The biggest problem at the moment in China is, funnily, that there are not enough truck drivers to transport the stuff because they're also in quarantine. Because they're moving in the country, and they have to go into quarantine when they go from one place to the other. So if you know some truck drivers, send them to China, which helps.
Yeah. Yeah. We will think about that. Thank you very much. Last question would be a little bit big picture on your medium-term strategy. Thank you very much for outlining that you look for an EBIT margin larger than 8%. Could you clarify this is an adjusted or a reported guidance? And secondly, when you think about the key absolute drivers on a segment level to achieve the target, where would you pinpoint that?
I mean, we have some estimates on that, but if you could clarify what your view is, what is going to be the key margin driver for the group in the midterm?
Y eah. It's first of all, the EBIT margin is operating EBIT.
No. Reported, sorry.
Yeah. So to be very clear, it's reported, but because we don't expect then high or special effects, the purchase price allocations we always will have, but we don't expect. And this will go down. I think in the next year is quite significantly.
Okay. So I'm just told here that in two, three years, it will be pretty much if you don't buy another big thing, then it will be pretty down and no special restructuring or so. So it's reported EBIT.
The levers for that, I see that we can stabilize on the MPS side, but the biggest increase will come from the HOMAG side. We also said on another, not in this call, but we see that, and we are planning that HOMAG business will be above 9% in 2023. Yeah. And the potential is even higher when we do all the measures we are now undertaking because some of them will take two, three years before they have really an impact, but then the impact will be significant. So in the midterm, HOMAG will be, in terms of growth and margin, the biggest leverage we have in the company.
Very clear. Thank you very much for answering my questions.
So the problem of today will be the opportunity for the future.
Thank you.
Pleasure.
And the next question is from Nicolai Kempf, Deutsche Bank. Your line is now open. Please go ahead.
Yeah. Nicolai Kempf here from Deutsche Bank. Thanks for taking my question. So it's maybe just a follow-up one. Given that there could be some spillover effects in Europe from coronavirus, do you expect that European OEMs could delay their decision to invest? And could they even cancel orders?
As I said, we have no indication at the moment about that under the assumption of today. But if the corona situation becomes worse and then China will not go back in March, but maybe not in the second quarter even, then our European, as all the some American OEMs are heavily affected by the loss of profit. And then maybe they change decisions for sure. But at the moment, that's not the case, and there's no indication for it.
Thanks. Very clear.
And we have a follow-up question from Ingo Schachel from Commerzbank.
Your line is now open. Please go ahead. Hi. Just one follow-up question on this reclassification of the automotive filling and testing systems activities. I think your explanation from the perspective of paint systems made a lot of sense with regard to the synergies. But can you also tell us your thoughts on it from a measuring process systems perspective? I think MPS has always been a segment with very strong people, high organizational pride, strong managers. So it just doesn't look intuitive for this to be a pretty small, tight-knit EUR 200 million segment. And I think in the past, you or one of your predecessors always said EUR 500 million is the right minimum size for a separate segment.
So should we also read into that that you want to increase the pressure on this segment to do M&A or to otherwise curl back into the old size that it previously had?
I would not call it pressure, but we would like to enlarge the MPS division again. But the pressure is not on the management team there. It's the pressure on me and my team to find an opportunity. And we are looking out for that, and maybe we are lucky. Yeah. But you're right. I mean, it's no problem that it's EUR 200 million at the moment because it's nice and has a very good margin. And as we also said in the past, the MPS was always in business, which were four different business inside. And we are not changing the whole organization.
We are just, in front of the customer, have a more clear picture of what we can offer for final assembly, which makes sense. But we're looking out and striving out for opportunities, maybe more to come in the next six, nine months. Yeah.
Okay. Very clear. Thank you.
Thank you.
And the next question is from Peter Rothenaicher, Baader Bank. Your line is now open. Please go ahead.
Yes. Hello, gentlemen. Question on paint and final assembly system. On the one hand, can you comment on the competitive situation now regarding Eisenmann? What is going on there? Do you still benefit here from the unclear situation that customers have less alternatives? The other aspect is, if I look at the segmental or divisional guidance for 2020, your margin projection for paint and final assembly looks relatively conservative.
So is this, on the one hand, due to one-offs which you have calculated in, or what is your view on the operating side here?
Second question, I would answer that it's a little bit conservative, maybe. Yeah. And the competitive situation is as follows: that by the rumors which are out there that there's still no closing on a deal with potential Chinese and the Chinese buyer, which is discussed as a competitor of us for many years. The customers still have enough choice on that side. I don't see the improvement. We had a benefit last year. We got more or less two orders back, if you like, which Eisenmann was taking away for a very low price in the past. But this year, I think it's back to normal, and now the customers wait for what's happening there.
But I think that will be decided in the next weeks, hopefully. But I mean, hopefully, it doesn't matter what is decided. It's what it is, but there's no change here.
Okay. Thank you.
There are currently no further questions, so I'll hand back to the speakers for closing remarks.
Yeah. Thank you very much, Aurelia. And thank you very much, ladies and gentlemen, for your questions. As always, we discuss and enjoy the discussion. Some further information on this side, our annual shareholder meeting will be taking place now on May 8th for those of you who want to join. I'm not sure. And our Q1 figures, which I think will be published on May 14th, as usual. You can participate in our call. And for today, I would say again, thank you very much for your interest and attention. And I have just another information here. What is that?
Oh, yeah. Same information. We will publish our annual report on March 20th, but there will be no press and analyst call when we publish that. But if you have questions, please, you can call our team here, and we will answer your questions if you may have any. Thank you very much for joining us today, and then see you and speak to you soon again. Thank you.
Thank you. Bye-bye.
Ladies and gentlemen, thank you for your attendance. This call has been concluded. You may disconnect.