Welcome to the Dürr Conference call. Ralf Dieter, CEO, and Carlo Crosetto, CFO of Dürr AG, will present the Dürr Group's figures for the first nine months of 2018, followed by a Q&A session. I will now hand over to Mr. Dieter, CEO of Dürr AG.
Yeah, thank you, Ms. Pacuna. And good afternoon, ladies and gentlemen, and welcome, everybody. It is our pleasure to present to you those figures for the first nine months of 2018. And as always, I'm joined by my colleague, Carlo Crosetto.
Yes, good afternoon or good morning for those from the U.S.
As previously mentioned, the first-time application of IFRS 15 and 9 did not have any material impact on the Dürr Group's net assets, financial condition, and operational results. Therefore, most of the figures for Q3 and the first nine months of 2017 in this presentation are adjusted only slightly, just for information. We also want to point out that we have adjusted our incoming orders and our order backlog for Q4 2017 to eliminate orders from Iran worth about EUR 86 million. So let me summarize the key highlights of the first nine months. Incoming orders and sales matched our expectations. Incoming orders basically remained at the previous year's level, while sales were up by 6% like for like. That means adjusted for foreign exchange and the Ecoclean sale.
The book-to-bill reached 1.0, and the project pipeline for the paint business increased by 25% compared to a year ago and doubled compared to the first quarter of 2017. EBIT, before extraordinary effects, and adjusted for Ecoclean's operating EBIT contribution, declined by just 8% and was nearly unchanged in the third quarter. However, earnings have been influenced by the expected margin decrease in Paint and Final Assembly Systems. Moreover, HOMAG's performance was affected by temporary supply and production problems in dealing with a significantly high backlog of system orders. On the other hand, our service and the application division performed pretty well. Clean technology improved strongly also in the third quarter as utilization rose. Cash flow and free cash flow were positive in the third quarter and above last year's level. Let's turn now to page four. Order backlog reached EUR 2.5 billion and is at the last year's level.
Order intake in the emerging markets fell by 26% in the first nine months, reaching EUR 1.1 billion and contributing 41% to the total order receipts. Orders from China, which are included in this figure, were EUR 521 million. However, orders from China should increase substantially in the fourth quarter. New orders in the United States rose by 4% to EUR 420 million, with HOMAG accounting for roughly half of this. In Europe, strong business in Germany ensured that order intake reached the previous year's high level. Exchange rate changes had negative effects of 2-3 percentage points on order intake, sales, and EBIT in the first nine months. Let's turn to page five. Gross profit fell by 5% to EUR 602 million in the first nine months. This decline includes extraordinary costs of EUR 13.5 million for the discontinuation of the micro gas turbine business.
Adjusted for this one-off burden, gross profit in Q3 was steady compared to Q3 2017. Personnel costs alone in Q2 and Q3 were EUR 6 million higher than planned due to the strong wage settlement in Germany. Ecoclean had a negative effect of EUR 5 million on EBIT, and the operating EBIT came in at EUR 179 million with an EBIT margin of 6.5%. In Q3, the operating EBIT margin improved to 6.9%, thus exceeding the first and second quarter. Carlo, now we'll take you through our other financials.
Yes, thank you, Ralf. Ladies and gentlemen, let me now continue on page six of the presentation. The operating cash flow came in at EUR 32 million in the first nine months. This figure can mainly be explained by the increase of EUR 134 million in net working capital, as well as higher tax payment made for EUR 63 million. One key factor contributing to the higher net working capital was the increase of our material and supplies to avoid the risk of production shortfall.
As you know, some key suppliers are operating at higher capacity utilization level, and this has created some issues as well. Nevertheless, we were able to reverse the cash flow trend in Q3, indicating that the measures implemented to reduce net working capital are starting to show their impact. Operating cash flow and, of course, free cash flows were positive and higher than in Q3 2017.
We do expect this trend to continue into the fourth quarter of this year. That is why we confirm our forecast of a high cash flow in 2018 as a whole compared with the previous year, provided, of course, that we don't see further delays in customer payments at the end of 2018. On page seven, you can see the individual components of net working capital in more detail. As I have already mentioned, inventories and prepayments to suppliers rose sharply, mainly to safeguard delivery capabilities. We do expect a small decrease during the fourth quarter in inventories and prepayments made, especially HOMAG is expected to reduce its machines on stock. Net working capital stood at 50 days at the end of Q3. This is not satisfactory, of course, but should improve in Q4 as we continue delivering finished machines.
The presentation of our working process on page eight has changed due to the new IFRS 15 rules. Due to these rules, we are no longer showing any prepayments received in the numbers separately. Total contract assets stand opposite to total contract liabilities. Therefore, billing in excess of cost on uncompleted contracts for small series production are included in the total contract liability numbers. The balance shows that the payment situation with our customer worsened slightly at the end of Q3 2018 compared to the end of 2017. But at year-end figures, sorry, but at year-end figures tend to look better than during the year. We do consider a figure of around EUR 0 to -EUR 100 million to be a normal level, so we expect no major cash outflow in the next few quarters. A very quick look on page nine at our factoring and forfeiting figures.
These remain in a very narrow range, as always, and we are unchanged over the end of 2017. As you can see, we did not engage in any window dressing to uplift our cash flows. On page 10, you can see that our cash stood at EUR 588 million. The net financial status should move into positive territory by the end of 2018 and reach between EUR 30 million-EUR 80 million, depending on project execution and customer payments in the fourth quarter. This estimate, it's important to know, includes the cash outflow from the MEGTEC Universal acquisition, and you will find a detailed outlook of this on page 36 in our appendix. Our return on capital employed reached 22% in the first three quarters, putting us in the middle of our guidance range between 20%-25% for the year 2018.
I will now hand over back to Ralf Dieter, who will highlight the performance of each division and give an update on the latest product offering, such as electric vehicles and digitalization, and will also summarize the outlook for the group.
Yeah, thank you, Carlo. And let's move on to page 11. Order intake at Paint and Final Assembly Systems dropped by 7% to EUR 765 million in the first nine months. One reason for this is that under the Focus 2.0 efficiency boosting program, we have become more selective in the acceptance of orders and are paying even greater attention to project margins. As a result, the margin quality of the orders received improved compared to last year. Business with new automotive OEMs is also progressing well, with orders received from VinFast in Vietnam and Future Mobility Corporation in China, for example. And those are electric vehicle OEMs. The number and value of customer projects in the pipeline increased noticeably over the previous year. Driven by the high order backlog, sales increased by 8%. At 4.4%, the EBIT margin came within the forecast range of 4%- 5%.
Consulting costs of EUR 3.5 million were allocated to the corporate center in connection with Focus 2.0. In Application Technology, order intake and sales increased more or less in sync in the first nine months, rising by 6%, as you can see now on page 12. In this Paint and Final Assembly Systems, there was a slight improvement in the margin quality of order intake compared to 2017. EBIT rose by 3% to EUR 48 million, with an EBIT margin slightly below previous year's level. One reason for this was a temporary small decline in service business, which, however, still remained at a high level. Clean Technology Systems posted a 24% increase in new orders in the first nine months, underpinned in particular by business in China and the U.S. This is on page 13.
Sales and earnings were not satisfactory in the first half when the division felt the effects of a temporary shortfall in capacity utilization due to new demand in the second half of 2017. However, the situation was reversed in Q3, with sales rising by 21% over the third quarter last year. At EUR 2 million, EBIT before extraordinary effects was positive, substantially exceeding last year's figure. After extraordinary cost of EUR 14 million for the discontinuation of micro gas turbine business, EBIT came to EUR 12 million. Let's move to page 14. We completed the acquisition of MEGTEC and Universal at the beginning of October.
The new companies are expected to contribute around EUR 50 million to Clean Technology Systems sales and order intake in the fourth quarter. In 2019, we are expecting roughly EUR 200 million, and MEGTEC and Universal should contribute about EUR 3 million to operating EBIT in the fourth quarter.
However, the EBIT contribution after purchase price allocation effects is likely to be negative. As things currently stand, the acquisition will have a distinctly positive effect on division earnings in future years, and you can see details for that on page 14. The figures for Measuring and Process Systems on page 15 show declines in order intake of -26%, sales down 15%, and EBIT down 20%. However, this must be seen in the light of the sale of the Dürr Ecoclean business, which contributed sales of EUR 46 million and operating EBIT of EUR 4 million in the first quarter last year. In the third quarter of 2018, order intake dropped by 33% over the same period of the previous year. And in the previous year, we booked big ticket orders, which we could not repeat this year, and this also was accompanied by a 14% decline in sales.
We expect to see an appreciable increase in both figures in the fourth quarter. But despite the low sales, the EBIT margin widened again in the third quarter. At 12.5%, it reached the highest figure in the year to date, after 10.5% in Q1 and 11.8% in Q2, and Q4 is usually the period with the highest margins for Measuring and Process Systems . Ladies and gentlemen, let me continue on page 16 with woodworking machinery systems, which we call, or which is named HOMAG. Following last year's rapid increase, order intake declined by 4% in the first nine months of 2018. However, at clearly above EUR 1 billion, new orders remained on a very strong level. Sales rose by 8% in Q3 and the first nine months by 4%.
This was due to an interruption in production at the beginning of the year in connection with the rollout of an ERP system. Moreover, production problems arose as operations at the Schopfloch plant have not yet been sufficiently modified to cope with the significant growth in the complex system business with complete production lines. Therefore, the EBIT margin contracted from 7.3%- 6.3% in the first nine months. The operating EBIT margin came to 7%, down from 8% in the previous period. HOMAG is responding to these declines by stepping up cost controls. More important, it has initiated an extensive reorganization of its production processes in Schopfloch in particular. This will allow it to handle larger system orders more quickly and more efficiently in future. We expect to see swifter growth in sales and earnings in the fourth quarter as well.
Let's move on to page 17. As you know, our service business is a key driver of both customer satisfaction and value creation. Service revenues grew strongly in the third quarter by 10% year-on-year, after a moderate start in the first half. Margins continue to be high, and we expect an ongoing positive trend in our service business moving forward over the next quarters. Let's move to page 18. Ladies and gentlemen, I would like to give you a brief update of our new products specialized for electric vehicle producers and our progress also in digitization on the following pages. Let's start on page 18 with the new EcoInCure oven concept tailored specially for the production of electric vehicles.
With this innovation, the car body is heated up from the inside out by IR nozzles through the openings for the windshield and for the engine compartment, which is not an engine anymore, the battery or drives. The advantages are uniform heating of the car body despite different materials and also, very important, different thickness of sheet metal in the rocker panel area. Perfect heating of the thicker car body parts, therefore, which are protecting the battery. So in summary, the topcoat quality is strongly improved by this oven concept and also lower investments for the OEM due to lower space requirements as the car bodies are transported through the oven transversely. On page 19, we present our fully automated eTENO balancing system for eDrive components. Cycle times are from 40 to 100 seconds with maximum flexibility for re-equipping to a different rotor.
eTENO is connected with the IIoT platform ADAMOS. And close to 100 balancing systems by Schenck RoTec are currently being used in each line of OEMs and tier one suppliers. And we have a clear market leadership here in that business segment. Let's move to page 20. Two world-first innovations were recently presented to ensure the security of autonomous or semi-autonomous vehicles. As you know, such cars have to cope with traffic scenarios such as overtaking or the need for evasive action with absolute reliability. That's why they are equipped with numerous sensors, radars, and cameras. And Dürr has developed a new generation of test stands to check those components, as you can see on page 20. X-around is the first test stand on the market who allows driving curves for setting and calibrating cameras, radars, lasers, and other sensors.
Typical traffic scenes can be played on monitors in x-around, for example, a pedestrian crossing the street. And the vehicle systems must be able to respond to such scenes, and x-around checks if they do this properly. The multifunction x-road test stand performs classic tasks such as testing brakes, transmissions, and ABS systems. The innovation highlight is we modified the front axle of a classic road test stand and for the first time enabled completely driverless tests. x-road makes sure that the vehicle remains centrally positioned on the test stand even at high speeds without a driver having to correct the steering. In the next phase, x-road curve can be connected to a virtual reality environment.
This subjects the vehicle to a typical traffic scenario requiring steering movements and enables the manufacturer to dynamically test whether the car detects an obstacle or a vehicle in front and reacts appropriately and immediately. On page 21 now, we show you the first smart application of our digital activities for boosting equipment availability, quality, and efficiency. The examples on this page are from our paint shop business. The Paint Shop Analytics application offers real-time tracking, evaluates paint quality information, and identifies problems, hotspots, and the most likely cause. The EcoScreen Equipment Analytics app has various modules for generating data, performing real-time streaming analysis, and visualizing it to make the coating process more transparent, and the Maintenance Assist automatically monitors the maintenance tasks for all areas of the paint shops on the basis of runtimes, counters, and wear and tear data.
Although the three apps can be operated independently, they are designed to work with each other. And this interaction helps our customers to significantly increase efficiency. Finally, we'd like to present two new developments on the digital side by HOMAG. Both panel saws on page 22 are equipped with integrated robots. They can be run as autonomous unmanned production cells for batch size one production. And this cell is dedicated for mid-size companies. And IntelliGuide on page 23 is the first intelligent operator assistance system in panel dividing to reduce waste and increase output. Laser and LED operating instructions are directly projected onto the workpiece, telling the operator not only which workpiece needs to be inserted, but also in what way it needs to be inserted. In case something runs out of sequence, the process is automatically adjusted.
Ladies and gentlemen, this was a short view on examples of our latest innovations and developments in the digital area. Let's now turn to page 24. As you know, we have adjusted our full year earnings forecast for 2018 and are now looking for an EBIT margin of 5.8%-6.3%, down from our previous target corridor of 6.8%-7.3%. The EBIT margin before extraordinary effects should now be in a range of 6.8%-7.2% in 2018, down from 7.4%-7.8%. As already published, the reason for the adjustment to our guidance was the decision to continue or discontinue the micro gas turbine business as part of the strategic realignment of the Clean Technology Systems division. This measure will result in extraordinary expense of around EUR 17 million in 2018. A further factor is the earnings contributed by Woodworking Machinery and Systems .
Although the division will increase its EBIT in 2018, it is currently expected to fall short of the original target by more than EUR 10 million out of this effect. Ladies and gentlemen, before inviting you to ask your questions, I would like to draw a short conclusion. First, margins on order intake continue to improve in the third quarter at Paint and Final Assembly Systems , and the volume of projects in the pipeline has increased. Second, due to the high order intake at Clean Technology Systems, we expect a further improvement in sales and operating earnings in Q4. One-offs will be weighed on EBIT in Q4, but more importantly, we have finally solved the energy efficiency issue. HOMAG sales and earnings are expected to improve strongly over the next quarters, and the improvement in cash flow emerging in the third quarter should continue in the fourth quarter.
We will be providing preliminary first guidance for 2019 next February. As we currently stand, we will be able to improve our earnings and cash flow also in 2019. So ladies and gentlemen, thank you very much for your attention so far. We are now happy to answer any questions you wish to raise, and I will hand over to Mrs. Pacuna.
Thank you very much. And we will now begin our question and answer session. If you have a question for our speakers, please dial zero 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 your turn to speak, you can dial zero two to cancel your question. If you're using speaker equipment today, please lift your handset before making your selection. One moment, please, for the first question.
We've received the first question. It comes from Ingo Schachel of Commerzbank. Please go ahead and open up.
Yes, thank you. I would have three questions, and I guess you want to take them one by one. The first one would be on your Q4 order intake guidance, which is obviously a very positive guidance that you're giving for the fourth quarter. Just wanted to understand how we should interpret this very positive view on Q4 order intake. I mean, is it just that after a weak Q3, some orders from Q3 slipped into Q4, or should we be tempted to interpret it as finally the very full pipeline converting into more order intake, i.e., the very stronger conversion than continuing into the first half of next year?
Thank you, Mr. Schachel, for this question. I mean, as you know, this is my favorite subject about quarterly order intakes.
We have a good pipeline. This pipeline is strong, and there's, particularly in China, a lot of projects to be awarded. Our optimism is also supported by we just booked these days a very large order for actually the largest paint shop ever built in China. But also on the other business sides, we are optimistic that because we are basically working on the final stages of those deals, yeah. That's why we have this great team.
Kind of trying to phrase it as a half the order intake question, not as a quarterly question, but I guess that doesn't make a big difference to you. I'll try something else next time.
It's okay because if this order would have been booked, possibly to be booked one or two weeks earlier, then the third quarter would be enormous, and the fourth quarter would be weak.
I don't know.
Yeah, of course, we've understood. The other one would be a bit more structural, where you got to provide a very interesting list of your overview of your e-mobility products. Just to get a better feeling for the economic significance of those e-mobility products in the various segments, can you give us a rough indication as to what next year or in 2020, what percentage of your e-mobility revenues would be in which product area, maybe broken down into MPS, paint systems, final assembly systems?
This is a question I like very much. And the point is that we have roughly at the moment 10%, roughly EUR 300 million in total business with EV OEMs. And this is a very important message that we are really able to capture on this opportunity.
This is not only in paint shops where we are a preferred supplier because these new EV cars are mostly in the more high-price segments and high-quality segments, but also in the example of balancing that we have developed a machine which is particular for the special needs of balancing these e-motors, which is really a growing business. So we have basically on the final assembly side, on the paint side, on the balancing side, also on the filling side, we have made special developments also to fill the battery packs. Each of the divisions, with the exception of HOMAG for sure, are benefiting from this trend. I think that's very good news for me.
Okay, thanks. The last one, I think unfortunately is also one that you may not completely like. Sorry for that. But even though we spoke a lot about margin pressure, I think one segment where I would be interested in your perspective is measuring process systems. And I understood that you said it was maybe due to discount comps, but I think if you look at Q3 of previous years and adjusted for Ecoclean, the margin has been higher in the past. Could you comment a little bit more on the drivers of this underlying margin deterioration? I'd actually be interested in two aspects, whether there's significant R&D step-up in measuring process systems, and also to what extent, let's say, mix has deteriorated, for example, with respect to filling.
Yeah. I think you gave already one-third of the answers. For sure, we have increased our digital investments, but that's maybe a very small million number.
But we also had in the past a huge order, not only backlog, but order volume on filling, which was driven by the change of cooling fluids, which has normalized now. It's still on a good margin, but not anymore on that very eccentric one. And on the end-of-line activities inside MPS, we also see larger bundle projects which have for sure a higher margin pressure because of the size of the business, also particularly from the new EV guys, but not only. And on the RoTec side, on the balancing side, we are pretty stable in terms of margins. Quite healthy, actually.
Okay, very clear. Thank you.
Pleasure.
Thank you. The next question comes from Philippe Lorrain of Berenberg. Please go ahead and give your last opinion.
Yeah, good afternoon, gentlemen. A couple of questions again.
So I would like to bounce back on Ingo's question in MPS and perhaps ask this time around, what kind of long-term margin would you actually envisage for the MPS segment? What's reasonable, bearing in mind the fact that your mix effects can be quite significant, if I did that right?
That's clear. Yeah, of course. We have our target is basically our expectation and what we think we can achieve is about 12% on average.
Okay, so 12% meaning that it can peak at 14% and perhaps drop at 10% or?
It's a good point. To be honest, next year we are planning to increase our investment in the digital products we need. So that could be a little bit lower than 12%, but on the midterm, we expect it to maybe 12% and maybe slightly above. It depends.
It depends also how the digital business is picking up, which will not be picking up before end of next year or 2020 in a significant or more noticeable volume.
Okay, great. And other questions are more around, let's say, PFS and the order pipeline. So I was wondering if you could make a comment on why your intake in PFS has not been that strong, let's say, perhaps in the past quarter where I know the quarterly view is a bit flawed, but even on an accumulated basis, while the pipeline looks very strong. So is it just a timing effect that we see here? And also if you could update us on how the pricing is evolving for the projects.
Don't worry about order intake in PFS. As I said, if we had this big order one week earlier, we could talk about why we had a record order intake in PFS because it's really a substantial order. The pipeline and the projects are out there more than we can do. So we see also that the margin pressure is declining in a way that there's so much work out there that we see also that competition has enough to do and then easily, and basically that leads to the fact that the margin pressure is a little bit lifting, but it's still competitive as always, yeah.
Okay.
So it's a timing issue. The nine months is a timing issue. Look at the full year figure and you will be not unhappy. The quality of the margins of the order coming in in the last quarter is higher than it was before. So clearly we are able to conclude orders that are better margin quality later.
Yeah. Okay. And I guess that's all before even the, let's say, profitability improvement measures or the self-help that you are actually applying in the business is even kicking in in terms of project execution.
You're right. I mean, some of the margin we have worked a lot this year on the Focus 2.0 improvement, which also means cost of materials and project execution. So we see that effect, and I think we also have a positive feeling about the execution of those orders to gain more effect with the margin.
Yeah. Okay. And I would like to ask also on the pipeline more, perhaps taking a look back at the previous cycles, how did the pipeline actually evolve sequentially, for instance, in the years 2008, 2009? I mean, did you see all of a sudden that some orders were directly pulled out of the pipeline, or is it more than that OEMs are putting some projects on a hold, and if it's the case, or in both cases, actually, what's the kind of visibility that you have, or when do you get the warning sign that actually these projects might be delayed?
As I'm not aware of any project which has delayed because the customer is insecure about investment. It's more about just doing the planning and all the preparation for awarding an order. No, the unpredictable thing is China because in China, it's very, very busy with projects more than we can do, and they come up sometimes on a very short notice. Short notice means three months before they want to give an order, suddenly a new project comes up.
And we have customers. I don't say they, but one of the Chinese ones who basically comes around the corner and says, "I need another paint shop." So it's very active in China, which is positive. And so we see a good pipeline, and I also see that for the next year, actually.
Okay, thank you very much.
Thank you. At the moment, there are no further questions. As a reminder, if you would like to ask a question, please press zero one on your telephone keypad. We've received another question. It comes from Christophe Menard of Deutsche Bank. Please go ahead. Your line is open.
Hi. Thank you for taking my question. Coming back to your offering on e-mobility and future technology, I was just wondering if you could comment on the margin of those offerings. Would you expect in general that those are basically in line with what you see for all the other projects that you have, or are they actually better or weaker as a pricing level in the market has not yet really been found?
Good question. I think, first of all, they must be better because we have spent money for innovating of those or for the innovation of those products. And those I presented to you are quite unique in the market. So they are by nature better margins, yeah. Slightly better margins because we still have competition, but not in those new innovations. And when you look at the x-road machine, we sold 100 of these machines in a very short timeframe, shows that there's not much out there which is competing with it. And in those machines, we have nice margins, definitely.
The testbed for the testing of those cars, this trust has been showed to the public. There is now starting the sales process. Customers have to understand what it means and how they can use so that that's business for next year. Also here, we expect better margin than a normal end-of-line testbed.
Okay. Excellent. Thinking about the e-mobility share of your business, currently EUR 300 million, you said those, again, are also slightly better profitability. Could you give us a rough target where you think it could be in two to three years' time?
That's difficult to say. I mean, look, we have always competition in these cases, and it depends how busy they are. I would say I would not look into we talk about now paint shop business, yeah. I would not look into a totally different scenario like the normal OEM business.
The people who are working there are from other OEMs, so they have an idea of what the margin should be or the price should be. We only see that we have a preferred solution. We are a preferred vendor because we are the leader in this business, and we want high quality, and this gives us an advantage, and that also helps realize maybe better margins, let's say, one or two percentage points than in other projects. Just so you get a rough idea. Not 10% or something.
That is basically the upprice for the innovation that you deliver. Would you expect the pricing to be like that?
For the innovation and our reputation as a very reliable, on-time, turnkey supplier where the customer has no headache because these guys, they want to produce, they want to sell cars. They don't want to spend too much headache on production of them. The regular price downs are then applied as well as for every other project, but just from a higher price also. As I said, maybe we have a premium of 1%-2%, but that's compared to others. That's what I see at the moment.
Okay. Last question will be on China. You said very active market, but again, sometimes very short notice. Now that we see the market weakening in production terms and the government also being worried slightly about overcapacity installed in the market, generally, it is unclear if we will see a stimulus or not. Going into next year, there could be rising uncertainty. Do you approach this very volatile environment with a good degree of caution also in your order intake in the market, or don't you see anything which points to a slight slowdown or a deterioration of the market?
I know I understand your point because although we see the overall data of production volume and growth, but this picture overall does not help. You see OEMs who are, let's say, not so successful, and you see others who are successful and increasing capacity, yeah. Although there is overcapacity, but to develop overcapacity for the China market does not mean anything. So you have some who have too much capacity, who are not investing, and you have others who have the opposite problem.
For example, this huge paint shop project I mentioned, which we will book in the fourth quarter, is from a Joint Venture OEM, which is very successful at the moment. But we also have a lot of these new OEMs from the EV sector. I was just two weeks ago in China to visit a new startup, and he gave us a paint shop order last week. And they are just coming around the corner. Sometimes you even don't keep all the names because there are so many. And this is additional business for us. And that is a stimulus we have at the moment. And then you see the China or Chinese national OEMs, and they are successful. They are growing very much, and they need capacity.
Okay. And for the small EV businesses that have just come around the corner, I guess your prepayment demands are much higher than versus established OEMs, or how do you manage? Prepayment demands, not. But let's say we are taking care of them and kind of confirm that we're taking a lot of attention on those, that the cash flow is always positive during the process.
Right. There's only really one way to protect yourself, is to make sure that you have enough advance payment to protect the work in progress so that you stay cash flow positive. And that's really the only way you can control your potential default risk, that not everybody's going to be successful, but. And they pay cash and not bankrupt. We have usually in the bank. BADs comes mainly for more established, bigger Chinese players than the young EV players that are coming. Yeah. So that's really the main way of protecting ourselves from potential not getting paid.
Excellent. Thanks a lot for the elaborations. Thanks.
Thank you.
Thank you. We have a next question that comes from Daniel Gleim of MainFirst. Please go ahead and allow him to speak.
Good afternoon. Thank you very much for taking my questions. The first one would actually be on PFS. You mentioned throughout the year that you're seeing a good pipeline of potential orders coming up. Could you please comment how this has evolved sequentially throughout the year? Is it now better or slightly worse than in the first quarter? I think you mentioned a 40% increase when we spoke the first time. Is it still the same ballpark? If you could provide a little bit more color on that, that would be rather helpful.
Sure. I mean, after the first quarter, up to, let's say, April, we thought that the pipeline would be not strong at all, and then it changed during the course of summer very much, and more and more projects came up. The particular dynamic was in China, but we're also working on large re-ramp jobs, also here in Germany or in Europe. The pipeline evolves to be better and better during the summer to the extent that we are now.
I understand historically we already had a strong patch in the years of 2014 around that. If you compare the upswing in demand in this year with that time, is it bigger or the same or less? How would you put this into perspective for us?
Without committing me on a percentage, I would say it's more or less the same level. It's very active at the moment.
So when I understand your margin guidance for the segment correctly, it assumes a flat volume, not an upshot in demand. I mean, this external effect is an additional. Does this mean that you might temporarily overshoot the margin in the orders that you're taking in at the moment, or am I going too far here at this?
You mean overshoot? You mean that we have better margins than we think so far?
Yeah. I mean, the 6.5%-7% is on a scenario that we don't see volumes going up, because it's at least my understanding. So now the volumes seem to be comparable to the levels at around 2014, where your margin clearly went up above the normal level. So I'm just wondering whether if we see the pattern of volume repeat, whether we see the pattern also on the margin side.
Not maybe the same way as those days, but I think that's our opportunity for 2019 in terms of sales realization, yeah. And I understand your question. I understand your background, but that gives us a chance to work on these orders, and then we have a better picture. But potentially, it could be better, yeah.
Would you mind sharing the size of the order that you alluded to several times?
Yeah. Why not? Because I talked too much about it. It's about EUR 170 million. 170.
On the call we had recently, you spoke about the hallmark optimization and that it is ongoing, and we will see also this to continue throughout the next fiscal year. Maybe to ask the question a little bit differently, I understand you put a ceiling on the orders at the moment because you've reached capacity. When are you going to release that ceiling, i.e., when are we going to see an increase in orders for automotive year over year again?
We don't have a ceiling in terms of that we don't take orders. So at the moment, we are working on quite a big amount of system orders again to be closed year end or first quarter next year, and we will take them. All that we need to do is discuss with the customers the delivery times, which are longer than before because we have so much backlog and so much and a limited capacity there to produce them. But we would not decline orders because of capacity utilization. And therefore, we expect more business from automotive in the fourth quarter and the first quarter.
Very clear. Thank you very much.
Pleasure.
Thank you. And we have no further questions. I will hand back to you.
Yeah. Thank you very much. Today was short, but I think that's our last call. When was it? Two weeks ago. We have explained a lot. And therefore, thank you very much, ladies and gentlemen, for your questions today. As always, we enjoyed the discussion. I think now we have a little bit of a break for February, Carlo, because that's the next time when we talk to you.
Merry Christmas, everybody.
Yeah. But you're right. It comes faster than we all want and expected. So for today, thanks again. And we would like to say goodbye now and wish you a pleasant afternoon, morning, or wherever you are, and speak to you then latest in February.
Yeah. Thank you, everybody.
Ladies and gentlemen, thank you for your attendance. This call has been concluded. You may disconnect.