Earnings Call: Q1 2018

May 16, 2018

So, wie ein Frauendeckel so. Welcome to the Dürr Conference Call. Ralf Dieter, CEO, and Carlo Corsetto, CFO of Dürr AG, will present the Dürr Group's figures for the first quarter 2018, followed by a Q&A session. I will now hand over to Mr. Dieter, CEO of Dürr AG. Thank you, Ms. Heinrich, and good afternoon, ladies and gentlemen, and welcome, everybody. It is our pleasure to present to you Dürr's figures for the first quarter 2018, and I'm joined by my colleague, Carlo Corsetto. We already sent you an overview of the impact of IFRS 15 and 9 on our figures in a separate email some weeks ago, and you will find a detailed overview of those effects in our Q1 report and on our investor relations website. First-time application of these new standards did not have any material impact on the Dürr Group's net assets, financial condition, and results of operations. Most of the figures for the first quarter 2017 in this presentation are therefore slightly adjusted. Let me summarize the key highlights in the first quarter on page 3. We had a good start regarding incoming orders and sales surpassing last year's level by 5% and 4% on a comparable basis. That means adjusted for currency exchange effects and EcoGlean. Book to bill reached a very strong 1.2 and project pipeline increased by 30% compared to last year. EBIT before extraordinary effects declined by 15%. Adjusted for EcoGlean's EBIT contribution in the first quarter 2017, operating EBIT declined by 8%, and this decline is caused by the margin decrease in paint and final assembly systems. Let's turn to page 4. Incoming orders exceeded the €1 billion mark again and could compensate the EcoGlean order intake of €36 million in the first quarter 2017. Order backlog increased by €69 million to €2.7 billion, ensuring high-capacity utilization in 2018. Incoming orders in Asia were encouraging and made up for the decline in North America. In China, we increased incoming orders by 19%. This was particularly underpinned by the automotive business, and Europe displayed steady business, and the proportion of orders generated in the merchant markets again nearly reached the 50% mark. Let's turn to page 5. Gross profit fell by 9% to €199 million in the first quarter due to the lower sales and the pressure on margins in paint and final assembly systems. At 23.6%, the gross margin was at a good level and above the full year 2017 level, which was 23.1%. The lower gross profit and the absence of the extraordinary income from the sale of EcoGlean caused an EBIT drop by 41% to €51 million. It should also be borne in mind that the first quarter of 2017 had included operating EBIT of €3.5 million from the EcoGlean. Operating EBIT in the group came in at €56 million in the first quarter 2018 with an EBIT margin of 6.6%. Carlo Corsetto will now take you through our financials. Good morning and good evening also from my side. Ladies and gentlemen, let me continue now on page 6. Our operating cash flow came in Q1 at minus €76 million. This decline was mainly due to a further increase of €100 million in working capital, as well as changes in provisions. One of the key factors explaining the higher working capital was the postponement of payments by automotive OEMs into the second and third quarter of this year. At the same time, we have increased inventories to avoid the risk of short-term delivery shortfalls of some key suppliers operating at high-capacity utilization levels. Our liquidity budget assumes substantially higher incoming payments from the automotive industry over the coming quarters. For this reason, we confirm our forecast of substantially higher cash flow in 2018 as a whole compared with the previous year, 2017. On page 7, you can see the individual components of working capital in more detail. As I already mentioned, inventories and prepayments to suppliers rose sharply to safeguard delivery capabilities. Annualized days working capital increased to an unsatisfactory level of 50 days. The overview of our working capital balance on page 8 has changed due to new IFRS 15 rules. Due to these rules, we are no longer showing any prepayments received. Total contract assets stand opposite to total contract liabilities now. Billing in excess of cost on uncompleted contracts or small series production are included in total contract liabilities figure. The balance shows that the payments balance with our customers has shrunk in quarter 1, 2018, to a figure of minus €59 million from minus €232 million one year earlier. We consider a figure of around zero to minus €50 million as a normal level, so we expect no major cash outflow in the next few quarters of this year. We understand that the key factor in their success is its asset-like business model and its focus on generating a significant return on capital employed, and because of this, we have sharpened measures to improve our working capital management. On page 9, we describe a package of measures that has been taken to lower days working capital to a reasonable figure of around 40 days by the end of 2018. In addition to intensified internal communication and specific instruction for our sales team and project managers, we will also be adjusting the incentive system and giving working capital a substantially greater weighting in our group targets. In the last conference call, we have dispensed with the chart on page 10, a factoring and forfeiting operation within a very narrow range. However, we recorded in Q1 a decline of €25 million over the end of 2017. So if factoring and forfeiting volumes had been unchanged, cash flow would have been €25 million higher than we are showing. At 26.7%, our equity ratio increased by roughly 2 percentage points compared to March 2017, so March 31, 2017, meaning that the equity increased by €42 million in this period. We expect a further improvement of our equity ratio during the course of 2018, and our total cash, including the other liquid assets, currently stands at around €700 million. Our return on capital employed reached 42% in Q1, but we are confident that we will reach our guidance range of between 20% to 40% in 2018. I will now hand back to Ralf Dieter, who will highlight the performance of the division and summarize our outlook. Thank you, Carlo, and let's move on to page 12. Paint and final assembly systems recorded a 2% increase in new orders in the first quarter. The division registered substantial growth in order intake from China and Germany, while new business decreased in the United States. The global project pipeline, and in particular, the total volume of projects to be awarded in the next six months by our customers, is larger than in the previous year. As expected, EBIT and margins continue to decline due to the strong competitive pressure, with the EBIT margin coming to 4.6%. We are able to lower functional costs much stronger than the decline in sales. Recently, we have seen signs of an improvement in the gross margin and order intake again. The Focus 2.0 optimization program launched in February addresses the effects of the more difficult competitive environment and pressure on earnings. The Focus 2.0 paint and final assembly systems is to return to an EBIT margin to 6% to 7% in 2020. Moreover, costs are to be reduced by a figure in the mid-double-digit millions by 2020. Focus is giving clear priority to earnings quality over volume growth. As things currently stand, Focus will cause extraordinary expenses of €5 to €10 million in 2018. In the first quarter, consulting costs of €2.3 million were allocated to the corporate center in connection with this Focus program. Let's move to page 13. Application technology continued to perform well in the first quarter, posting a 7% increase in order intake while sales rose by 9%. The division was also able to grow its important service business. Despite the substantial increase in sales, the book to bill ratio came to 1.2. EBIT grew in sync with sales by 9%, resulting in an unchanged high EBIT margin of 10.4%. Page 14 shows the results for clean technology systems. Order intake exceeded the high figure achieved in the first quarter 2017 by 2%. The division registered strong demand for exhaust air purification systems in China in particular. By contrast, sales dropped by 22%, reflecting the fact that order intake in the second half of 2017 was relatively weak. This resulted in a temporary low-capacity utilization in some regions, which fed through earnings. In addition, energy efficiency technology business continued to generate losses, and we have initiated further measures to improve earnings in this area. On page 15, we have additionally set out the Q1 2017 MPS figures adjusted for EcoGlean in the interest of greater comparability. In like-for-like terms, order intake in the first quarter 2018 was down 17% on the previous year's very high figure, which had been fueled by extraordinarily strong demand for balancing and testing equipment in China in some larger orders in particular. Like-for-like sales and EBIT remained steady. The EBIT margin came to 10.5%. Ladies and gentlemen, let me continue on page 16 with the woodworking machinery and system division. The rollout of a new ERP system at Homag's headquarters in Schopfloch required an extended interruption to production at the beginning of the year. This negatively affected sales and earnings generation, with the result that both key figures remained unchanged at the previous year's level. But order intake rose again by 4% above the record level of the first quarter last year. On March 18, Homag received its largest ever order worth over €60 million from furniture producer Forte in Poland. The operating EBIT margin came to 7.4%, down from 7.6% in the first quarter last year. Following the relatively muted start to the year, sales and earnings should pick up in the course of the year. Let's move now to page 17. As you know, our service business is a key driver of both customer satisfaction and value creation. Service sales grew slightly, adjusted for FX and EcoGlean. Margins are unchanged on a high level, and we expect a more positive trend in our service business in the next quarters. Now let's turn to page 18. Despite the somewhat muted start into the year, we are reconfirming our outlook. Our operating EBIT margin target is 7.4% to 7.8%, which indicates a more or less unchanged operating EBIT in 2018. Ladies and gentlemen, before inviting you to ask your questions, I would like to draw a short conclusion on page 19. First, incoming orders and sales were up 5% and 4% on a comparable basis. Operating EBIT was down 15% due to the weaker paint and final assembly systems performance. The Focus optimization program is being executed and will lead paint and final assembly systems back to a margin level of 6% to 7%. Margins on order intake stabilized in the first quarter at paint and final assembly systems, and the project pipeline has increased. Homag's sales and earnings are expected to improve strongly during the next quarters. Cash flow should improve also in the next quarters, and therefore we confirm our 2018 guidance and see no need for any change. Now, ladies and gentlemen, thank you very much for your attention far. We will now be happy to answer your questions, and I will hand back to Mrs. Heinrich. Thank you. Now we will begin our question and answer session. If you have a question for our speakers, please dial 01 on your telephone keypad now to enter the queue. Once your name has been announced, you can ask your question. If you find your question has been answered before it is your turn to speak, you can dial 02 to cancel your question. If you are using speaker equipment today, please lift the handset before making your selection. One moment, please, for the first question. The first question comes from Alexander Holmstein, DZ Bank. Your line is now open. Please go ahead. Thank you. Hello, Alex Holmstein, DZ Bank. I have a few questions. First of all, with regard to the optimization program, Focus 2.0, could you remind us here about the major points of action for your program and its progress on the timeline? When will we see an impact on EBIT? Is it 2018 already, or is it more likely 2019? Maybe a kind of indication how much it could be. The question is, does the competition also adjust capacities here? So do your clients actually feel the impact as capacity is becoming scarce again, and do they already start to sign first contracts with higher margins again? So that would be the first question part. Okay, Mr. Holmstein, Ralf Dieter speaking. First of all, the major points of action, to summarize on a high level, because there are many, many points, but first of all, the cost reduction, and we call it cost of a project cost down, which means the equipment cost, which requires also work on leaner designs, but also the whole execution cost of a project, from engineering down to the site management. We are looking in all areas where we can improve and take costs out. The second one is that we have some activities in our processes, which will take longer time, because we started now with engineering, where we use different methods of working to become more efficient. Basically, to say, to do the same work with less people or the opposite, with the people we have more work. At the moment, we are looking at the first one. I think that's the major point. Besides, we are changing the sales organization to have more focus and to be more selective on projects. Nevertheless, I said that the project pipeline is pretty full, which is also for me interesting to see again, because it's a kind of repeat of 2005, that the market volume is increasing. Your question, when the competitors, by the way, so far we know the Asian competitor, they are stable in terms of setup, but they reported losses in the first quarter. Our friends around the corner here, we also see that they don't increase, but they also have to keep the people because of some issues. The customers will have to learn in the next months and quarters that there is not enough capacity in the market maybe to do all the projects. This is kind of customer education we had in 2005, but it will take time, because they always think that everything can be done which is out there. But the situation is great for our program because it puts us in a situation where we can be selective and look for the higher margin order and are not forced for utilization reasons to take low margins orders. I think that's the whole name of the game. When is the impact on EBIT? Some of them may be this year, but you have to expect that most of it will be in 2019 and 2020, because they are not measures which have an impact overnight, like re-engineering of products takes some time and process changes take time. So for your guidance, expect the EBIT improvements starting in 2019. Okay? Yes, thank you. That was clear. Another one, please. You spoke about some short-term supplier issues here. Could you please share some more detail? What exactly is the bottleneck here and which parts or divisions are affected, and when do you expect this to be overcome again? Thank you. I think when you follow a little bit the press, the machinery and equipment industry at the moment is quite full-loaded, and you hear all over supply constraints. Mostly affected at the moment is Homag, because they have a huge order increase and backlog, and there are suppliers which are, by the way, famous names, which suddenly say, instead of four weeks delivery, we have now three months delivery, which has forced us also to increase our inventory. So we put on stock what we could get in order to not have too much delay on the lead time of orders. Homag is also the other divisions are affected, but mostly affected is the Homag side. But also a little bit shank on the PFS side, I would not see that as too much a problem. APT also, we increased the stock, because we have here a lot of repetitive parts from key suppliers, the same, by the way, big names. Therefore, that's also part of the reason why we increased our inventory significantly, because we want to be able to deliver also spare parts is important to deliver. I understand you probably have loaded up already, and you don't see the necessity for you to do this again for the next quarters. On the other hand, is it right to assume that the situation is not going to change until year end? As of the first question you asked, we don't assume that we will increase here more. That's not our intention, and from today's perspective, that's our goal. Whether we go through the year, that we can't say today, but I think we are at a stock level now where we can manage. Okay. We would rather see an improvement during the course of the year that we can reduce again a little bit. Got it. Okay, thank you. Pleasure. Thank you. The next question comes from Philippe Laurent Berenberg. Your line is now open. Please go ahead. Good afternoon, gentlemen. Philippe Laurent from Berenberg here. I've got a couple of questions. I mean, the first one is really on, let's say, how the mix of your activity between project business and machinery business can have an influence on your cash flow generation and your working capital. Perhaps we can start with that high-level question, and then I've got a couple of follow-ups on that. To answer that is not so easy, but I can say from a high level, on the Homag side, we have quite a stable prepayment behavior of the customers. Where we have the main pressure is on the automotive side, and this reflects PFS and APT. We see the same also for the shank business. The numbers aren't even so large, but here from the machinery side, the payment terms are even worse. But the impact on our cash side is from PFS and APT. Okay. Is it fair to assume perhaps that in the machinery business, generally speaking, you have a higher working capital as well because of the, let's say, the higher volume of inventory and, generally speaking, as well, probably the balance that you just have in the receivables and payables? That's a correct assumption. I'll give you an example. When we sell a machine from Rotex, our balancing machine, to an automotive customer, the payment terms are there is no prepayment. You get an order, and then when you deliver, you get 80% of the cash of the amount of the order. So we have not to differentiate between machinery and equipment. We have to differentiate between OEMs, automotive, and non-automotive business. Yeah. Okay. Then on your days working capital goal, I mean, I noticed you target for this year something like 40 days. What would be then the target that you would like to stick to in the longer term, especially because you've been increasing inventories this year? So I guess that the 40 days is going to be slightly inflated, and perhaps there's a cash inflow from working capital to expect actually next year. Is that correct? Philip, this is Carlo Conceto. Let me take this question. I mean, you've seen that our days working capital of 50 days has developed to a level which we think is not acceptable, and we have set ourselves a goal for this year to bring it down to 40. The question you raise is more beyond 2018. I think it's fair to assume that we would like to stick to that goal also for the following year, so something between 35 to 40 days. We need to make sure that the measures that we have sharpened are actually going to deliver these improvements. I also would like to highlight that we like to measure. I mean, if you just look at the working capital requirements and not at the advanced payment story, that really our focus is to manage the business in terms of days working capital, not an absolute working capital number, because as our business will hopefully continue to grow, we will actually be spinning a bigger wheel. So for us, it's key that days working capital are under control and stay competitive, because, as I mentioned in my initial remarks, our asset-light model is what I think makes us an attractive investment for shareholders. So we need to make sure return on capital applied ultimately stays above 30%, so 30% to 40%. So that's how we measure it. And there are different measures that we have summarized in one of the slides, but there's more than that, of course. Okay. And perhaps the last one, just on your guidance for the cash flow. I mean, you guide for a significant increase in cash flow this year versus last year. How should we think about that in terms of magnitude? Because I was doing some really basic math here. You guide for $180 to $200 million of net results. If CapEx and D&A are roughly the same level of $80 million, that would be quite neutral. We see at the end of this quarter a build-up of working capital of $70 to, let's say, $80 million, something like that. So if I was to take that measure and imply that basically the working capital stays more or less where it is for the coming quarters, I would come to a free cash flow of somewhere close to $100 million. Is that kind of calculation correct? Do you see the things a bit differently? Yeah. I mean, when we give guidance, we give guidance towards year-end, so we don't give guidance by quarters on cash flow. But I think your statement is correct. Look, it's very simple. I mean, if the order intake is stable or increasing ultimately, and we're generating revenues in the same level, then ultimately cash has to come in. We've been arguing in the last conference calls that there has been a delay in payments or reduction in advanced payments. So ultimately, once you build, let's say, let's call it a normal level of working capital, although it's not normal 50 days, I think it's fair to assume that our cash flow at year-end will be higher than what it was in 2017. I mean, our operating cash flow. Of course, if we acquire and pay dividends and stuff like that, that's a different story. But in general, we do expect the business to improve from a cash flow point of view, assuming that we're even able to improve days working capital. So $100 million free cash flow, I think that's the number you said is okay as an assumption to use. Okay. Perfect. Thank you very much. Thank you. The next question comes from Sebastian Grover, Commerzbank. Your line is now open. Please go ahead. Yes. Good afternoon, gentlemen. Thanks for taking my question. The first one is on the woodworking business. Homag obviously has seen very great order intake in the first quarter. As you already said in your prepared remarks, you also benefit from the award of larger projects. Could you just give us a sense on what that means for the margin quality and the backlog? Is there, generally speaking, a differential between, say, the smaller bread-and-butter business and the larger projects? Or how should we simply think about that from a structural point of view? The second one on paint and assembly, in your prepared remarks, you said that you have seen some signs of a gross margin improvement on recent orders. Is there simply a function of the improved cost structure under the focus program, or is it really that the price pressure is easing in that business? And then lastly, on working capital, you stated, I think, on the Q4 conference call that you were expecting a major advanced payment from a Chinese customer. Can you just update us on if there has been any positive development in Q1 or when you would expect this advanced payment to come in? And finally, you also mentioned that working capital is going to play a greater importance in the management incentive structure. So what is the weight now compared to what it was before? That's my question here. Thank you. So where I start, Rafi, speaking with Homag, a $60 million project as I reported, we booked in the first quarter. From 40 is an extraordinary size of a project. It's basically a whole factory with all Homag equipment. Last year, we had also a $30 million large order in the first quarter. So when you compare it, it's not that the order intake was covered by this large project. Your question whether in small projects we have higher margins or in larger ones, this answer is not easy to give because we have also for sure smaller projects where we have maybe higher margins, but also the opposite depends on the competitive situation. But most important is that when we bought Homag in 2014, they made losses on those larger projects. Due to the work we have done over the last years, today we make money. A $60 million project is a good opportunity to make also in absolute terms good margins. What makes me very, very proud is that we were chosen by this customer because of our Industry 4.0 capability, not because of our machines, because we also built the whole infrastructure of an IoT plant for this customer. I think that's a wonderful project for this. You would say that it's overall rather even if you just compare, say, small and mid-size orders compared to also the large orders after the work that you have spent there? As I said, it's going to be difficult to fix on that answer, but let's say from the general trend, larger projects are maybe in percentage terms a little bit lower than smaller ones. But as I said, they contribute with a larger absolute amount, which is helping to cover the cost there. All right. Second question, PFS margin. Yeah, we saw a stabilization, basically a slight improvement compared to the whole margin average in 2017. Is it due to our cost measures? Partially, but also the fact that we now also have some orders from customers who value our competence, let's say it in that way. It's not just who's the cheapest. It's also who can do it. You know that every customer is the same. In particular, the new EV pioneers, for them, it's most important they get a reliable partner who does a job on time on budget. I think the value of margin decrease we have gone through. But the hill to go up is a little bit ahead of us. We have a slight increase of the value, but not steep upstream now. Okay? Okay. I think you had a question about how do we incentivize improvement in days working capital, how this changed, if I remember correctly. I think just to be clear, days working capital has always been part of our target of our senior management team. But we felt that in order to increase the focus on it, that this percentage of the impact of days working capital in the total bonus compensation should be increased. So we're going to increase the impact that days working capital has on the total target achievement of senior management. But I just want to highlight this is just one of the measures we are looking at or we are going to implement in order to improve days working capital. There are other measures which are also very important that also need to be addressed. As we have shown on page nine, a summary of those, all of them have to work to make sure that we can achieve this goal. For example, we don't, of course, finance the factories of our customers. We always keep saying that. But we want to make sure that every single day of the project, if not every single month, is actually cash flow positive for us, not over the project lifecycle, etc. So it's very important that more strict cash flow management is implemented. But ultimately, as you correctly say, if the manager feels in his pocket, then it's easier to implement these measures. Fair. But would you be willing to give us at least directionally an idea how much working capital now counts for the overall incentive package compared to what it was before? We would not like to disclose that, but it's significant. We basically are talking about doubling the impact, which is not the total bonus, we can be sure, but it's part of it. What Carlo also said, we also made the whole organization worldwide aware of this importance again. This is more impacted up because we had too many years where we had too much cash and people lost a little bit of focus on it. Okay. Understood. Also, our customers are sometimes trying to avoid payments by keeping us on site because they have not enough people to run the plant. So there's a lot of effect. It's quite complex. That's why also the measures are complex. Yeah. Yeah. Okay. And then finally, on the advanced payment from a Chinese customer? Yeah. I don't like to talk about single customer orders, but we expect I do this last time. We expect that in the second quarter, but it could be also the third quarter because particularly this customer is a little bit unreliable in terms of timing when he does what. Okay. Thank you very much. Thank you. You're welcome. Thank you. The next question comes from William Turner, Goldman Sachs. Your line is now open. Please go ahead. Hi. I have a couple of questions. The first one is on cost inflation. What have you agreed for your labor cost increases for 2018? I'm guessing it's around 4%. What was that relative to the year before? Are those increases going to commence from April onwards? Was that impacting the last quarter? And then also. Can we answer that in maybe? Yeah. Sure. Sure. If you have to go one by one, then we do not have to write so much down. For sure, we have to follow the EG Metal salary increase, which has been agreed, and that's for the total year about. 4.2. 4.2%. That also applies to our non-tariff people. But that's only not even 50% of our population. The rest is outside of the world. In China, we had seen in the last year 10%. Now this year less. Overall, but the German increase was higher than we anticipated. In the last years, we always had put in the budget 3% for the year, 2.3%. This has an additional impact on roughly $10 million on our line we have to swallow this year. And then also, I guess, are you seeing any increases? Given that your supply chain is quite constrained, are you seeing any prices from your component suppliers? Are they pushing up prices too? The way I'm going to lean into these questions is, how are you planning to offset it, especially given that pricing environment and PFAS is quite tough at the moment? Will it just be by taking out costs? The component price of, I'm not in detail about every component, what the situation is. But what I know is that we normally talk to our suppliers to decrease prices. But you're right. In some areas where we have huge shortages, I think we will not negotiate that. But in general, yes, there are some increases, but we also on the equipment side, we always try to benefit from our global sourcing network. We are not only reliable. We don't need only to rely on a supplier here in Germany or God knows where. So this impact from the purchasing side, I would not see as a problem overall. Okay. Great. And one final question. I noticed that there was an outflow from utilization of a provision. Could you explain what the provision move was in the cash flow statement? It's quite granular. Sorry. I didn't understand that. There was a $9.2 million cash outflow in the cash flow statement from a provision. Can you explain what that was? Yeah. I don't have it in front of me, but I think it's related to an increase in provisions for potential losses on some of the projects that we booked maybe with a slightly negative price factor. But that's most of it. There are other general provisions. Okay. Great. Thanks, guys. Pleasure. Thank you. The next question comes from Jasko Terić, Metzler. Your line is now open. Please go ahead. Yes. Thanks. My first question is regarding your comments on an improved project pipeline in automotive because it confuses me in that respect that you're also saying that order intake volumes in paint and final assembly could decline. So could you give us here some clarity? What exactly do you mean with improved pipeline and still declining order intake? You're right. It's a little bit contradictory. What we are facing is a market which is 30% higher in terms of volume. At the same time, we state that we potentially have less order intake in paint. We don't know yet, to be honest with you. If the projects have enough margin or a satisfactory margin, then it could be that we have not a decrease in order intake in paint. What we said is we want to reduce potentially that we are not forced to take orders on every means. So when we look at the market, and this has changed in the last two, three months, two months actually, that is maybe a potential that we have not a decrease in order intake in PFS. Okay. And you were talking about the market pipeline. So it's not about your volumes you have seen last year, and now you expect that volume should be above that level. That was not the meaning. It was a pipeline from the market. It was the projects which we are working on to be awarded the next six months. That's what we are talking here about always. This volume has increased by roughly 30% compared to last year's same time, which is good news. The second one is also on order intake regarding your MPS division. Could you give us a feeling if the comparable base from Q2 onwards is easing? Or in other words, do you expect to get back to like-for-like growth from Q2 onwards? This I can't promise yet. But because in the first quarter '17, we had one customer which gave us a lot of orders on the end-of-line side and also on the balancing side, and we had also strong order intake, particularly in China, on the balancing side. Whether we will manage the same level end of this year, at the moment, we are planning to go to that level or maybe a little bit beyond. But this is too early this year. I can tell you after the second quarter better. Okay. My final one is on your margin prospects. You said that margins should start to increase in '19. I have two questions regarding or one exactly. Does it mean that the level of margins in '19 should be above '18? In other words, will we be bottomed out in '18? Or should we bottom out in '19? We're talking about PFS here. Exactly. Only PFS. In PFS, as I said, I think we have reached the bottom of the value, and I expect that's now improving also then in '19. Is that what you were asking? From today's perspective, it looks like the bottom will be found in 2018. I think we found it already. I think the margins in the first quarter are slightly better than the average of '17. Okay. Thanks. That was helpful. My pleasure. Thank you. The next question comes from Christoph Lascari, Deutsche Bank. Your line is now open. Please go ahead. Hi. Thank you for taking my question. The first one also on PFS, and sorry to pick on that. You commented on the pricing environment, and that actually for orders, the pricing environment is getting better. My question will be, is that just relative to what we've seen in the last couple of quarters where pricing really was tough? Or is it that you already see the project that you can pick on margin levels that we've seen a couple of years back? So basically very healthy, and that the improvement that you guide for in 2019 and 2020 should be quite steep, especially also with your focus program that you reach margins that we've seen before. Can we just answer one after the other? Would be helpful. Yeah. Sure. Sure. Absolutely. Sorry. Great. I know what you are pointing out, but the level of margins we had the years before, and you're talking about 2012, '13, where we had a very special situation where maybe the project and the market were doubled as a capacity of suppliers, this will not come back. That's what we stated several times. That's why we said the PFS goal is 6% to 7% in '20 and not 8% and above like we have seen in the past. So this will not come back. Second, margin improvement doesn't go overnight. It's a process of slightly increases because the customers have to also internally have to swallow that and to argue about it and to justify. This is not a fast process. I don't know how old you are, but I remember 2005 when I had here the crisis. The customer took us from 2005 to 2007 to educate to pay more again, piece by piece. Yeah. So it's a slow process, but a steady one, hopefully. And on the prepayments that you see, especially from OEMs, you have highlighted in the past that when it started basically with one customer that was sort of reluctant to give prepayments. Now it appears that probably other OEMs in the auto industry are sort of showing the same behavior. Do you see it as a structural trend that they are less willing to do the prepayments and that the business should be working with the assumption that you will see less prepayments in general? Or is it just a phase or sort of a fluctuation in the current industry phase? I understand your question. I think what we and Carlo said before. I think we have reached now the level which we have to get used to. They still have prepayments. It's not that they don't pay prepayments, but not like three or four years ago when customers were offering us 50% of the order as a prepayment to get a higher discount. This is not the case anymore. I think for your model, I would assume that we were staying more or less at this level of prepayments. Hopefully, it will change, but I think it's unrealistic to plan anything else at this stage. Okay. And last question will be on Holmek. You basically guide for an improvement over the coming quarters. Will you already see that in Q2 quite notably or rather second half of the year? I think we still have to answer you. I think it will be a slight increase in the second quarter, but it's more in the second half because the effects out of, for example, this SAP implementation where the factory was four weeks down, that we have to catch up there. This will not be overnight. So second half would be more realistic. Okay. Thanks a lot. Pleasure. Thank you. The next question comes from Daniel Klein. Your line is now open. Please go ahead. Yes. Good afternoon, gentlemen. Thank you very much for taking my questions. There are actually two of them. The first one would be a follow-up on the last one. When you're referring to the catch-up in the second half, are you referring to revenues or to margins? To revenues and also increased EBIT margin in percentage, maybe not. You're talking about Holmek now, yeah? Yes. The last question. I mean, the midpoint for your guidance is 10% for the year. We're roughly flat at the moment, and I'm just wondering how the sequential evolution will be because at some point you need to overshoot, of course, the guidance midpoint to be in the ballpark. I wanted to try to understand when this will happen. Just to be clear, you're referring to an EBIT margin of 10%? I didn't understand your comment. Sorry. No. The top line growth for '18. The guidance midpoint is 10%. In the first quarter, we've seen flat growth. So at some point, we would expect a re-acceleration potentially to the mid-teens. I was just wondering whether this will already materialize in the second quarter. My understanding from the response was more in the second half, right? That's also our assumption. Yeah. But we're also taking by surprise, hopefully. That's earlier. One more question on the 30% increase in terms of market volumes for PFS. Could you give us a sense on what the utilization rate was last year so we can put this into perspective? Or putting the question differently, will a 30% increase lead to full utilization or above? Above, definitely. We will not be able to do all the projects. At the moment in China, we have a project volume which we are not able, if everything would go to us, we would not be able to handle that. I think the market will also learn in China that there's not enough capacity. But that's a good problem to have. It's needed that we have the chance to increase the margins again. Do you consider this year's level abnormally high, or is this just a return to growth? What is your sense of that? That's higher than a year ago. I think a year ago was on a level than the year before. So it's an extraordinary increase we have not seen before. Also, there are a lot of some of the projects are from this new EV startup, so maybe not each of those will be materializing. So we have to monitor. The good news is that we have more projects than a year ago. 7% is a high number. It's particularly driven out of China. It's particularly driven out of China. Sorry, I wasn't sure. Yes. Yes. Yes. Yes. Okay. All right. Thank you very much. Pleasure. Thank you. As a reminder, if you would like to ask a question, please press 01 on your telephone keypad now. Doesn't seem to be the case, Ms. Heinrich. We receive one more question. The next question comes from Christian Kurse, Weyrauch Research. Your line is now open. Please go ahead. Yes. Thanks for taking my questions. There are actually three. I'll go through them one by one. Firstly, you mentioned this 30% higher project volume available in the market. Can you maybe elaborate what are the key drivers? Are these brownfield projects, greenfield? Are these projects from players rather in the field of e-mobility or traditional players with just combustion engines? That's question number one. Would you be disappointed when I say everything you said is part of the increase? Yes. We have EV factories. We have also larger brownfields. Even though in China, where factories are also aging now, we have very large projects in the US, which are a mix of greenfield, brownfield, and existing factory, and part of the building is new. The other one is a change of equipment. We see that also from the traditional ones. In China, in particular, because of the sales numbers, the capacity needs to be increased. Therefore, everybody's investing, more or less. Okay. That's clear. Second one, you mentioned I think Carlo Cossetto mentioned an unexpected postponement of prepayments in the first quarter. I assume that usually the prepayment patterns are fixed and prescheduled. So does actually the unexpected postponement mean that one of your or maybe even more of your customers face some financial difficulties? Is there any risk of bad debt? No, no. The answer is no. But what you assume would be if we have an order signed, then the prepayment date is fixed, normally, Carlo. But the advance payments, yeah. The advance payments. And on the other side, we have the one we were talking about, and one of your colleagues was asking, was a customer who gave us three paint jobs, but not all three contracts. So on the third one, we are still working, and that's why we had to delay the prepayment. There is the other aspect during the installation of a paint job or the construction of a paint job, for example, you get payments across the project. Sometimes when you reach a certain phase, you have to go through the open point list, and you get a lot of list of things that are going to the customers that needs to be done. This takes negotiations, and this may lead to a delay of a partial payment into the next quarter or to the next month. This is also the case. Some customers play a bit with this in order to delay cash flow payments. Some have issues with us, and we discuss this. But in general, it's a usual process of having to go through these intermediate payments, plus the fact that we're dealing with new customers who are maybe not as used to dealing with payments like maybe the traditional OEM. But as I said, ultimately, it's just a timing issue, and we see this going to improve in the next quarters with regards to advance payments. Okay. So I assume there's no risk of bad debt as you, yeah, heavily confirmed. And then the last. Just to be clear, that's one of the ways we avoid a bad debt situation because we have more cash than work in progress. So it's very unlikely that we have a significant bad debt to write off with regards to these construction projects. Okay. Okay. Understood. Last question is just usually there's a trade-off between the margin potential of a project or of a new order and the generosity with regards to prepayments. And you also stated in your presentation that, yeah, there is a trade-off between discounts and the amount of advance payments. So if you want to become stricter on the prepayment, advance payment side, on your cash management in general, do you expect that there would be some incremental headwind then on the margin side? I mean, you're right that the two things go together. Usually, you win or lose in one way or the other. But to be honest with you, it's also a bit of a mindset question. I mean, in the eyes of our sales team, in the past, maybe EBIT has been more important than getting additional advance payment because the perception is Dürr has a lot of cash anyway. This is a bit of a mindset internally. It's not just a question of the customer negotiating harder. With the Focus 2.0 program, where we're trying to be a bit more selective in terms of which projects to take on board and by trying to say we want to be as profitable or 20% less orders in 2020, that gives us the ability to be also more aggressive in terms of requesting better payment terms than maybe we can afford today or in the last year. I think that goes a bit together. But you're right. You've got to always negotiate, and sometimes you win and sometimes you lose. Procurement has become, as I said, a bit more focused on cash flow than it was maybe years ago. That's true. Okay. Thank you very much. You're welcome. Thank you. We receive a follow-up question by Alexander Halmstein, DZ Bank. Your line is now open. Please go ahead. Yes, hello. Thanks again. A follow-up on orders on page four. You mentioned that you expect a normalization in America's orders. I understand that you probably mean a lower year over year. But how is it going to be the case for the next coming quarter sequentially? I mean, in the America's orders overall, is it going to rise in Q2, for example, compared to Q1 2018? So Q2 2018 versus Q1 2018. Is it mainly paint-related? Maybe you can share a bit your view here for the next one or two quarters here, what you expect in terms of the momentum in the States or, let's say, North America overall. Thanks. Mr. Halmstein, thank you. But I said earlier, I don't like to be in the sales meeting. We give order intake outlooks, but not on quarterly level, because it's totally impossible. Give an example. We have two large projects in the US to be awarded. Whether we get them or not, I hope we do, maybe one of them, maybe two. The difference between those numbers is so huge that I can give you now any outlook, which would be wrong. We expected that America has a lower level. Also, during the Q1 of the year, we expected to keep the level from last year. It could be much higher than last year. It could be less from today's perspective because the orders have a volume which is so significant that the numbers would change totally to one or the other side. Okay. Okay. Understood. So taking these two out, the trend would be slightly upwards or could you comment on that? The interesting thing on my job site is that this order intake is so unpredictable. Otherwise, life would be too easy. No, no. Just joking. I'm just joking. I think America's business overall on the whole market machinery side has a bit of a slower start. Better with, I think it's also in the US, there's a lot of uncertainty at the moment about the politics. So we have to see how things are moving on. Let's talk in this after the second quarter, then we have a better picture on that. Okay. Great. Thank you. Thank you. Thank you. We receive one more follow-up question by Philippe Laurent Berenberg. Your line is now open. Please go ahead. Thank you for taking my follow-up question. I wanted to go back to your comment on the order pipeline that is 30% higher than one year ago in automotive. You mentioned as well that there seems to be a disequilibrium between supply and demand, more in favor actually to the supply. So is it fair to assume that perhaps that could lead to, let's say, an earlier pricing recovery within automotive that would support the measures that you are implementing in the Focus 2.0 program? It's definitely supporting it, but we will not stop in taking measures of cost reduction. That's for sure. As I said before, it will take some time before customers are realizing that the market could change to a supplier market instead of a buyer market. Today, they still think it's a buying market. It's really just rather a perception problem than a reality problem. Yeah. Because when you talk to one OEM, he has no visibility of what the other OEMs in the world are doing. Yeah. Yeah. Is the disequilibrium more related, let's say, to certain regions, or is it at global level that you observe that kind of thing? I think one of the hotspots is China at the moment because there are so many out there. Also the brownfield side in Europe, there's a lot of projects which are sitting there, which maybe have not enough suppliers. But it's from the greenfield and larger orders, it's mainly China. Okay. And if I remember correctly, a few years back, around 2012, 2013, the market share you control in China in paint shop was about 60%, 70%. What's the kind of market position that you have right now compared to the past? This fluctuates. The question is, when you take order intake by year, then it's a fluctuation. But I still see us between 45%, 55% market share. Okay. So more in line with what you have globally? Because the '70s was a little bit of an exception because we built up capacity the competitors didn't have, and so we could consume more orders than the others. We have now also Chinese competitors who have built up capacity. So that's, I think, on a still, I think, on a fantastic level when you compare to the others who are participating here. In this market, our, let's say, more European competitor has much, much less here. Much, much less. Just the last one. I mean, you were mentioning that basically there was a problem of perception between what your clients are seeing as being so far still a buyer's market. You tell us that we are going to turn probably more into a supplier's market in the coming years. Should that be seen as well as a positive on the way you will be able to actually negotiate prepayment terms? I hope so. And I think so, yes. Okay. Great. That was the last question. Thank you. Sales meeting over. Thank you. There are currently no further questions. I hand back over to Ralph Deter for the closing remarks. Thank you, Mr. Heinrich. Thank you very much, you all, for your questions. As always, Carlo, I enjoyed the discussion. We would like to say goodbye for today. Wish you a pleasant afternoon or morning or afternoon, more afternoon, and evening. Thank you very much for joining us again. When is our second quarter call, Günther? In August. In August. We talk again in August. All right. Bye-bye. Bye-bye. Ladies and gentlemen, thank you for your attendance. This conference has been concluded. You may now disconnect.