Dear ladies and gentlemen, welcome to the conference call of WashTec AG. At our customer's request, this conference will be recorded. As a reminder, all participants will be in a listen-only mode. After the presentation, there will be an opportunity to ask questions. If any participant has difficulty hearing the conference, please press star key followed by zero on your telephone for operator assistance. May I now hand you over to Dr. Ralf Köppe, who will lead you through the conference. Please go ahead.
Thank you very much. Ladies and gentlemen, on behalf of the WashTec board, I would like to welcome you to the Q2 and half year presentation of 2022. My colleague, CSO Stephan Weber, and Head of Finance and Controlling, Sebastian Kutz, are attending the call. Dr. Kerstin Reden, CFO, is on vacation. As you know, in Bavaria, the summer school vacation starts tomorrow, and WashTec will also be closing some parts or most parts of the production during the first two weeks in August, as the years before. Next slide, please. Some short news update on WashTec before I will present the financial figures. Slide three. Let me summarize our business model to take everybody on board. WashTec is the leading provider of innovative solutions for car wash worldwide.
Our product range comprises all types of vehicle wash equipment, as well as the associated peripheral devices, wash chemicals and water reclaim systems. As specialists in environmentally friendly vehicle wash systems, we work continuously on innovations that contribute to sustainable mobility for today and tomorrow. WashTec also offers comprehensive servicing packages and digital smart service solutions spanning the entire product life cycle, including equipment, maintenance, chemicals, equipment take back, financing arrangements and operator management. We go to next slide. Furthermore, let me provide you with an update on the impacts of the supply chain situation. The situation remains tense, as already indicated at our last earnings calls, so things are pretty unchanged.
The situation requires constant efforts to secure the supply chain with highest priority, and we process high volumes in the production, and our efficiency is reduced since some machines get the one or other final part just before shipping. The upcoming closing weeks are helping us to increase the efficiency, and of course, we are using this time and continue to complete and ship machines. Our customers have acceptable delivery times for most of the products, but often battle themselves with the difficulty to complete the preparation of the site for the installation. With our supply and demand planning system, we produce the machine only when the installation site is planned to be ready, when we have the information available. In summary, the coordination effort is very high. Slide five. As announced, we have published our sustainability report 2021.
WashTec aims to provide full transparency on its sustainable business activities, contributing towards addressing the challenges facing society today. We have adopted sustainability strategy encompassing eco-economic, environmental and social sustainability, which is presented for the first time in a comprehensive report. Proceeding beyond prior success with environment-friendly car wash equipment, we have now published targets and measures for our sustainable business activities. Furthermore, the report delivers insights into our corporate culture, embracing agility and diversity. As already presented at the last earnings call, our goal is a 30% reduction in CO2 emissions per ton per EUR 1 million turnover in our business activities by 2025 on the basis of year 2019. Our recommendation, please have a look at the report. It provides a lot more non-financial details about our company. We are looking forward to discussing our ESG program with you. Slide six.
We have redesigned our investor relations homepage. Have a look. With the goal to speed up navigation and access to important information about WashTec. We appreciate your feedback and further suggestions. Let me now start with some details on performance in the Q2 before I then turn to the half-year results. We are now at page eight. For the Q2 , group revenue was EUR 119 million, up 8% year-over-year. Especially key account business and double-digit growth on chemical sales contribute to the revenue growth. Direct sales remain on the solid prior year level. As a result of the time lag between the material price rises and our own price increases, Q2 result was significantly impacted by increase of material costs. As mentioned, WashTec made price adjustments already in the last year based on the expected cost increase.
The Ukraine war and lockdowns in China led to further price rises. The company reacted on it with additional price increase for our products, but due to the fact that the revenue recognition from order backlog takes four to six months, the latest price adjustments are still not recognized to the P&L yet. Due to challenges in regard to the availability of materials, we can't perform our production process in a highly efficient way, so this creates additional costs. Furthermore, it has to be considered that the business in the first six months last year were still impacted by COVID-19 restriction. This year, WashTec attended several trade shows and travel activities are also back to a normal level. All those effects lead to a decrease in the Q2 results. Q2 EBIT was at EUR 8.3 million. EBIT margin was 7%.
Considering all the impact, we are at least pleased that the company was able to fulfill all the delivery obligations over the last six months. For the Q2 , free cash flow after lease payments was negative with EUR 1 million. The situation with the material shortage requires higher safety stocks to make sure that we can perform our business also in the next months. This fact and lower result of the quarter impacted our cash flow compared to the last year. Looking now at the development by product category on the next page. This is page nine. Revenue from machines and service was EUR 101.5 million, up 6.4% versus prior year. As already mentioned, mainly business with our key accounts contribute to the revenue growth in this area.
Revenue from chemicals in Q2 was EUR 15.9 million, up 21.4% year-over-year. We were thus able to achieve clear double-digit growth in this area in the two consecutive quarters. Moving to the performance by region in the Q2 . This is now page 10. In the Q2 , we saw a moderate growth in Europe. Equipment and service revenue was broadly level with the prior year, while chemicals revenue once again saw double-digit growth. EBIT with EUR 9.9 million was below prior year. This was a result of all the effects we already mentioned for the group EBIT development. The region nevertheless showed a double-digit EBIT margin of 10.6% in the Q2 . Let me just have a break until the police has gone by. Okay. Looking at North America.
Revenue in North America was EUR 24.5 million, up 40, 44%. All product and customer segments contributed to the positive trend. In line with the trend across the group as a whole, this region was also negatively impacted by cost increases, especially in the Q2 , because of the significantly larger share relating to key accounts for which a price adjustment could only be implemented starting from June 2022. In conjunction with the high material cost share, it was not fully possible to offset these effects with the increase in revenue. Looking at Asia-Pacific, second quarter revenue development in this region was negatively impacted, in particular by the prolonged lockdowns in China and resulting in a 15% fall in revenue and lower results. Next slide is number 11. You can see the performance of the Q2 over the last years.
Despite all the negative effects I described above, WashTec outperformed the revenue and results of the pre-crisis year, 2019. Coming now to the half-year results. On page 12, you can see the development of revenue, EBIT and free cash flow from 2019 to 2022 for the first six months of the year. For the first half year 2022, group revenue was EUR 220 million, up 12.8% year-on-year. At a constant exchange rate, the revenue growth in the first six months was 10.3%. The growth is mainly attributable to the sharp increase in business with major customers and the extremely positive development of the chemicals business. Direct sales business also developed positively in the first six months.
Looking at EBIT development, EBIT was EUR 12.9 million, down 28.3% compared to last year. As already mentioned for the development in the Q2 , it was mainly caused by the time lag between material price rises and own price increases, as well as by normalization of the business activities like trade fairs and travel after years impacted by COVID-19 pandemic. EBIT margin was 5.9%. Cash flow development was impacted by a significant increase in inventory due to safety stocks in regard to uncertainties on the material markets. Next slide, this is number 13, shows some more details to explain the EBIT development compared to the prior year. As you can see, the main impact is coming from the gap between recognized price increase and rise of the material-related cost.
Selling expenses increase is mainly driven by volume-related increase of freight costs. In addition, there was an increase in trade fairs, which were not incurred in the prior year due to the pandemic situation. To secure the company's long-term growth, WashTec invested, sorry, as planned in expanding capacity in this area during the first half year. I have to say that most of the fairs have been in Q2 and there's only one left, so this will then also show in the next upcoming quarters. Let's have a look at revenue by product category. This is then page 14. Revenue from machines and service reached EUR 185.4 million, up 11.7% year-on-year. The growth in this area was mainly driven by significant increase in the North American region, but also other regions developed positive compared to prior year.
Revenue from chemicals was EUR 31.6 million, up 22.5% versus prior year. Especially the development in Europe was significantly above prior year. Now we are moving on to the performance by region. This will be page 15. Revenue from Europe was EUR 174.8 million, up 7.2% year-on-year, mainly driven by key account business and chemicals growth. EBIT development was impacted by already described effects in regard to material prices and availability, as well as additional costs with regard to normalization of business activities. For the year 2022, we expect a revenue growth of 5%-6% and an EBIT slightly below prior year. Continuing with North America, this is page 16. Revenue was EUR 43.8 million, up 50%. In U.S. dollar terms, revenue increased by 35%.
All product and customer segments contributed to the positive development. Generated loss of EUR 1.3 million is mainly caused by the lag between material price rise and own price increases, especially for key account business. In addition, earnings were negatively affected in the amount of EUR 0.9 million by a significant increase in health insurance premiums. For the year 2022, we expected further growth in this region and EBIT increase compared to the adjusted start from the prior year. You may remember last year, EBIT was positively impacted by non-recurring item in the amount of EUR 2.7 million coming from government subsidies. Asia Pacific, this is now page 17. Revenue was on the prior year level. Positive development in Australian market leads to a slight increase in revenue. Development in China was impacted by the lockdowns in this region.
EBIT is stable mainly due to a solid performance in Australian market. Coming now to our main balance sheet, KPIs. This is page 18. Net working capital went up due to increase in inventory with regard to the safety stocks. Other KPIs like DSO and DPO were improved but not able to compensate the inventory impact. This fact impacts also our cash flow development, and in the consequence, together with the dividend payment, an increase in the net bank liabilities. Equity ratio decreased to a ratio of 24.7% due to dividends payout. Closing with our guidance, this is the next slide. We adjusted our guidance about one week ago. We now expect revenue to increase between 10%-12%, prior 5%-9%, and an EBIT ratio of 8%-9%, prior double digits.
Like many companies, we are currently facing supply chain challenges due to a shortage of raw materials. In addition, the situation in regard with the gas deliveries in the remaining months of the years increases the uncertainty in the general outlook. Our top priorities continues to be to maintain lead times and avoid business interruptions. We have managed this quite well so far. Our guidance assumes that we do not face significant business interruption due to a shortage of materials as well as no material impact from a potential gas restriction. With that, I'd like to open the floor to our Q&A session. Thank you for your attention.
Ladies and gentlemen, if you have a question for our speaker, 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're using speaker equipment today, please lift the handset before making your selection. One moment, please, for the first question. The first question is from Alexander Galitsin, Hauck Aufhäuser Lampe. Your line is now open.
Yes, good afternoon. Thank you for taking the question. I'd like to start with the outlook for 2022. The new outlook, basically the midpoint, suggests that EUR 6 million less EBIT than you previously had expected, even without sort of adding anything from the higher top line you now guide for. I guess what you say, the input cost inflation, mismatch between selling prices and input costs, it all does make sense, but I guess it's not entirely new, is it? Evidently the magnitude of the mismatch, I guess, came as a surprise to you. I would be interested in sort of knowing what came as the biggest surprise to you.
Is it really the magnitude of the input costs, or is it really about your ability to realize higher realization prices, so to speak?
First of all, you know, material shortage and price increases have been also in 2021. Yeah. The price increases due to Ukraine war, which have been also significantly in the market we had not on our risk charge, yeah. That was a surprise to us. We reacted, of course. One topic is of course that we have a huge order backlog from which we work, and this order backlog of course is filled up with direct customers that have a shorter turnover time, where price increases can be realized faster. The tenders with the key account customers of course have to be negotiated and were negotiated step by step, but come in a little bit later. That all together gets this delay and mismatch.
I can hand over to maybe Stephan to give you some ideas, you know, what it means to put the price increases through and how successful we are there.
Yeah, I mean, the one part is definitely the price increases and as Ralf Köeppe outlined very clearly, I mean, the Ukraine crisis was by no means known nor budgeted. Hence, when it came, we had another hike that we didn't see coming. In other words, I mean, really, we had on certain articles a massive explosion again, which we can see now normalizing to a certain extent. However, currently we are really hit by these supply shortages. We also should not forget that something that really, when you say what is the mismatch, the mismatch also is that the inefficiency that the non-availability of these parts create not only in the plant, they also go out in the market. In other words, it becomes very difficult to plan installations these days.
Not only from our side, also from customer side. You know, they cannot get the material, they cannot get the people in place, hence projects are delayed. We have sometimes multiple reasons why we have to visit a site where we usually would go once. Plus also in the factory, we have clear inefficiencies due to the fact that we cannot finish machine in assembly as we plan to. The majority of these, let's say, mismatches came basically with this new impact of the Ukraine crisis, which really created another level of, let's say, inefficiency all around the supply chain until the final customer.
Thank you.
If I...
Yeah.
If I could add one more comment. Immediately after we saw this, we already decided again to have another price increase, and we might have another one in autumn, the way it looks like. I mean, because we are always limping behind, but we have no crystal ball here, you know, that we know where it's headed. Currently we know the negotiations we are having here with the unions and everything that is coming is hinting to us that we cannot avoid another price increase in the autumn to also be prepared then for whatever might come.
Positively saying, adding this as a hint, of course, that the price increase, and we don't want to give details on this because this is of course competitive knowledge, which we do not want to hear put on the table. Our increases and those doing this step by step, we still have a high order intake. From that point of view, we have not destroyed the dynamics in our incoming order. That basically tells us we have to run a high volume with a little bit less efficiency, and that's causing also a contribution to that.
Thank you.
all of
Yeah. Just to confirm on that last point. You're also saying that your price increases, they are in line with what you see across the market from other players or not necessarily?
In general, what we see from other players. I mean, usually we are the ones acting first, but then since we are the biggest, we also monitor closely, so many are following. I would say the chicken and egg question is difficult, but I think we are laying the eggs and then the chickens come. In other words, this is the dynamic of the market. We have not seen anybody, you know, putting harder, let's say, harsher measures than us. In other words, we are riding this really at a level that, like Ralf said, we are, and this is also backed by the huge order backlog that we stay competitive in the market by yet being most of the time anyway, the most expensive in the market.
Trying to measure this and put it in a way that we still, you know, have sufficient order intent, you know. We're sensitive about that.
Okay. This is understood. Thank you. Then maybe another question on the sort of gross margin dynamics. In H1, you mentioned that the mismatch between input costs and prices cost you around EUR 4 million. Now, when one looks into H2, how strongly is the pricing in your backlog detached currently from the prevailing cost environment? What would be your expectation for the second half? And maybe based on that, yeah, in terms of, so what margin would you expect?
What if you look related to the next quarters and margin development of which we expect an increase compared to the Q2 , the revenue recognition, especially from the direct sales in combination with, let's say, additional price increases we made in last month, will lead to the situation that we will cover, let's say, price increases ahead in comparison to the prior year situation, except let's say the possibility of further increases, especially in the Q1 , we will be above such increases. That's the plan at the moment. It's what we see in our data and yeah, let's see how it will work, but it's actually the best knowledge we have.
Okay, thank you. Maybe lastly then on the digitalization initiatives. If one looks at in the past maybe almost three years now, 2022 being the third year, you've been consistently investing more into R&D. I think over these three years, you would accumulatively invest EUR 15 million, sort of more than you used to historically, which is basically EUR 5 million less EBIT in the last three years, in other words. You don't really mention much in the report about the digital initiatives, and what it means going forward. Is there anything relevant you could share and provide more color at this stage, any successes, wins, et cetera, you would like to mention?
Yeah. Yeah. Maybe we didn't focus too much on that for the supply chain crisis and so on. Of course, digitalization goes on very well also in how many machines are connected and also we are increasing efficiency in the services. The operator platform now is available for the customer, so we have the premium package. Of course, then there's the question, you know, how do we get the revenue from that? Or what is the strategy on this? We're working on a better, let's say, presentation of benefits of the digitalization. We have not prepared it yet, but I understand your questions.
The positive sense is that with high dynamics, of course, you know, we have increased the R&D budget in terms of pushing the SmartCare, but also pushing digitalization. With those topics, we go on in a nice speed, but still physically in the R&D department, we have a lot of R&D people helping to secure the supply chain and changing in parts, especially on the electrical side. Whereas the digital teams are nicely going forward because they are not in this game. They cannot materialize. We have successfully deployed other service functionalities which drive the efficiency. From that, I'm satisfied. The question of course, Stephan can also tell you a little bit about the competitiveness of our digital solutions. That's the current statement. Yeah. Stephan.
To a certain extent, to answer your question, the way I look at it for the time being, and we have also displayed this on all the shows that we had in Europe this year in Italy, Spain, and particularly also on the UNITI expo in Germany, that digitalization and sustainability is what WashTec has to offer to the operators. I would say the larger order intake that we see, particularly also the larger customers, who are the ones are also benefiting from the current, let's say, energy crisis, also has to do that they see that we have, that we are the partner to deal with for the future, in other words.
All these more business that we are getting also, the larger market share out of this, let's say, part of the wallet, will first of all start with installation and supply, and in the long run, in service contracts where we can play them pretty smartly and with less efforts, once these machines are installed than we used to have in the past. As such also then I would anticipate a significant impact also in the P&L. You know, with onboarding machines, there's always a question in different service contracts, what is the effort that you have to spend for the money you get? With this is the help of digitalization, I think we are far better off now than we were like two, three years ago.
The efforts are less, and we can handle these duties better. I would also expect an impact here in the P&L, whereas I'm seeing it already in the order intake because it makes an impact that we offer something that the market considers as important at this point in time.
Thank you. Maybe just one follow-up. If you would be able to provide sort of a ballpark guidance for R&D expenses going forward, 2023, 2024. Are you expecting them to sort of normalize towards the more historical levels of EUR 8 million, maybe EUR 10 million, or do you expect them to really sustainably stay above EUR 12 million, so EUR 13+ million?
I think first of all, with the innovation ideas to drive the market, we would stay flat in the R&D. Of course, if we have considerable possibilities to activate, we can make use of this. That is of course now a question of how we guide the company into the year 2023. Yeah. As you know, with a good order backlog, 2023 is somehow working, but we have to see how order intake in the next months, Q3 and Q4 is coming up. You know, all the discussions about, you know, inflation and possible recession, which from our perspective is not visible. Will give us a clear indication to the planning of the budget of 2023, which we are currently also, as let's say, working on the framework.
Yeah.
Thank you.
The next question is from Stefan Augustin, Warburg Research. Your line is now open.
Yes. Thank you, Paula. Actually, my first question goes a little bit into the same direction as the predecessor. I'm looking actually at slide 13, and I have opened the same slide from last quarter. My question is, when we go back in on the end of April, the Ukraine crisis was out for two months already, and we had seen steel prices on the spot market jumping up and reaching actually the top somewhere in March. My question is exactly to understand what in that quarter created the delta versus your original budget to adjust the guidance. Because my thinking is like, you would have seen or you could have expected a bit of the price increases by end of April already.
You have the pricing seen as well, and you know, actually what kind of your backlog you were able to negotiate. The question is, what has been the delta versus the original budget in Q2 that made you come up with the profit warning?
Yeah. As you know, when we look at April, yes, of course, the Ukraine war was then, but we had secured steel prices until the summer. Of course, the realization and the contracts to negotiate that has been some part in May and so on in June. There are a lot of activities there. China lockdown has been okay with us, but still we see a lot of products on the electrical side. I'm not talking about semiconductors, but on electrical side coming in, and it's still not when you look at the material prices which in steel and aluminum are now going down.
This effect is a raw material market price and is not shown in the products that we use to build the machine. From that, this dynamic increased significantly. Also, the efficiencies, let's say, that we have to complete the machine. This has increased in Q2, and also our customers, yeah, they don't get any people to finish the sites. We see actually a higher dynamic in these problems as the years before, and also as Q1, and that reflects our guidance change. Yeah.
Mm-hmm. If I sum that one up, is it roughly correct to calculate like this? The inefficiencies is something that we would expect to stay roughly in that kind of amount for the next quarters as well, versus your original budget, and then you see it's a little bit of a time lag. There are still some material prices coming through, but that will be, let's say, over by the end of the year, and then we would be back and all the rest is a wash and left and right side and nothing really of importance. That's the two items we could concentrate on.
That's the plan. Given that the markets somehow are intact and still work, but to let's say to make a calculation of these effects, these calculations is quite difficult to make. That's why we took a long time also to get the forecast and see, you know, how if it will then be planned in Q3, Q4, considering that we can deliver and so on. It's not an effect that we can calculate on one piece of paper by some linear combinations of things. There are too many factors playing that in, and we really had to go through all the orders and do the summation of the calculation to come up with a forecast.
Okay.
I mean, from the market point of view, it is. I have honestly not seen this before ever in my career. I mean, that we have here a situation where sometimes we would be able to deliver, but the customer can't receive the machine and vice versa. You know? I mean, this is such a mix up that we are planning more or less. We have not a planning horizon more than a week. In other words, that's why also we have work in progress at a level that we have never had before because things are just not plannable to a certain extent.
Coming back to your initial question, I would say until early part of this year, we always were able to deliver more or less at the time, and the customers were able to receive at the time that we had foreseen in the timeline, in the process, project management. However, in the meantime, the exception has become the rule. You know, at the end of the day, we have to question every order that has to leave the factory here and coordinate with the customer, whether on both ends it's worthwhile to send the machine and to send the staff to
To install it to a magnitude that I personally have never seen in the past. I mean, we of course hope that this will improve. We would say it hasn't got worse since, let's say, March, April, but it is nowhere near to a normal level. We have to be very clear on that.
The idea, just to mention, we are working on the highest volume ever at WashTec. It's not that we have just to do a, say, a meeting volume. We're looking at record highs at every processes and under these circumstances. This creates some challenges, but however, you know, I think compared to other industries, we are doing okay, I would say. I expect that we do this also in Q3 and Q4, but we, you know, it's a week by week thing.
Okay, understood. As the guidance actually has the exemption of gas shortage, and I think it's at least clear that the prices for gas will go up. Could you put, let's say, something like a value at risk for higher gas prices on your business? What do you currently, let's say, calculate on usage? I mean, what we do not know is if something in your supply chain breaks down, that's for sure. Just your own business.
Yeah. First of all, we don't heat with gas here in Germany. In the Czech plant, we have gas, so we're looking currently with the landlord there, how we secure that, but that's only heating. We have one process step that is reflected with gas, affected. This is in the paint shop. We are currently started planning to go alternative on liquid gas. That means every three, four days, a van comes and fills up the tank, but the tank has to be built. In addition, we plan to pre-produce stuff, which is reflected in the net working capital with some stuff. It's a double kind of secure approach on that side. With that, we are okay.
I had discussions also with the Arbeitgeberverband and other company CEOs and so on, with the gas shortage. The impact I would expect would come from the supply chain that other parts have a problem. It's also the plastic industry, the granulates and stuff like that. This is a factor, but I think we cannot solve that in this call. I think we should ask politics and economics and the broad majority of companies ensuring that I have not a special detail for you besides what I just told you on that.
Oh, all right. Understood. To the more positive elements, the green line and the possibility to get equipment under the taxonomy. Can you give us an update and if that is something that would be, let's say, especially interesting for your key accounts?
The EU taxonomy goals one and two have been established, and now goals three and four, which are water and recycling or economics, have been established. What we can show as revenue that falls under the taxonomy we're still working on because also how these things have to be certified and so on is quite difficult. Especially when you look at the big key accounts, and we had contacts with some of the big ones and have talks about this. Our strategy to be able to guarantee a sustainable wash in terms of water volume usage, in terms of that the water reclaim system is working well and properly, is very well appreciated by these, and is also required actually by these key accounts.
We see a match on that, and of course, digitalization helps also on that side. There is some on the technology development part, some stuff that we seriously are trying out on real data, on real sites, this year. Strategic-wise, I'm very confident that we are pulling the right trigger. Stephan can also tell you a little bit about maybe the key account view on sustainability and so on the EU taxonomy. Because this would mean, just to summarize, that, let's say, the car wash business, that we can prove that it can be sustainable, and then we could basically give the key account the data that they can put that under EU taxonomy.
You know, that would be then the OpEx and probably the OpEx side of the key account that can be then used for EU taxonomy. Of course, the clear details, I think, are still not known from which I know for now.
I mean, we have. Overall, very good positive reactions on our Green Car Care offerings, you know, which we were the first ones and addressed a very important topic to the key accounts. I can also tell you that two of the midsize key accounts in Germany have decided to go exclusive with us on this range, which will happen the Q2 , and we have more in the pipeline. In other words, more discussions going on with the same intensity. One of the very convincing arguments that it had was the fact that we're getting this audited and certified by Fresenius, an external supplier or provider of these seals, so to say.
That was an important argument for them to deploy this now on all their wash sites because they say, "We need this also for our own declaration of sustainability." So it, in my eyes, clearly hits the nerve, and we have made a good inroad here and have defined basically also a new standard. You know, that's basically why what it shows very clearly.
Cool. Lastly, I have actually another housekeeping question. The adjusted guidance for region at the end of the presentation, I didn't find that one in the Q1 presentation. Could you remind me what had been the original ones?
That would be the guidance in the Q1 presentation? No, but it would be then in the 2021 annual-
All right.
Annual.
That's okay. I'll look it up. Thank you.
Yeah.
We have a follow-up question from Alexander. Your line is now open again.
Yes. Thank you. Just two follow-ups. Maybe firstly on the, I guess if you could share some thoughts around what are you seeing sort of on the ground in terms of customer behavior during this time where inflation is high and rising and also increasingly we have a recession fears in the market. Could you maybe in this context address the major accounts and also direct sales?
Yeah. I mean, we have had so far different, let's say, experiences with, depending on the background of the customers we're talking about. We have so far the key accounts who are, I mean, those key accounts who are also in the energy business, let's put it this way, mineral oil companies. They tend to invest because they see the opportunities also in car wash, and they do have the money and the cash flow to do so. We have had, let's say, so far, no visible impact on the situation in direct business. You mentioned those individual investors, that was pretty neutral. Where we see some hesitance for the time being is on larger projects when it comes to wash tunnels, where there's also a lot of civil engineering involved.
They're becoming a bit more cautious now because, I mean, as you can imagine, it's not the price of the wash tunnel itself, but it's the whole civil engineering, the whole building, the project itself, where all these massive price increases that are on the market will have an impact where they now at the moment say, "Okay, we'll put this on hold. You know, we are looking into these projects, but we are not going to make a purchase decision now because we don't know, you know, how the figures work out." You know, because at the end of the day, the only way to recover is via wash volume and wash prices.
Last but not least, that is my major concern at this point in time, I have to say, really is the drought situation that we are seeing in Italy and Spain, for example, also in France, in larger parts of France, where we now see that quite a number of wash sites are closed by the local governments because they are not allowed to be operated because they have urgency to use their water in other aspects than car wash. Private car wash is not allowed at all. So is in some cases also automatic car wash not allowed. It's not overall, but in some really larger districts, in departments, for example. This on a short term has an impact, of course, on our chemical sales.
That's clear because where there is no car wash, there's also no chemicals to be sold. The question is, you know, what will the mood be in terms of the tipping point for the mood for investing into car wash midterm, which is very difficult to predict, but at least let's put it this way, it's a concern to me. I mean, I'm looking very closely with the respective managers at the markets. We are exchanging this on a weekly basis, whether we can see a tendency also on the investment behavior into car wash. I think that very much depends also for how long the period will last, you know, until they can start operating. You know, I mean, if it's for a rather short period of time, I think this will not have a significant impact.
If this lasts longer, then I can also see that the whole business case is looked at a bit, at least critical for a shorter period of time, I would say. As you can see, there is a range of things. That's also why we see more order intake on key accounts in the past years, where we have a stable order intake on our direct business, but no increase, let's put it this way. On project business that I'm looking at to a certain point also critical. There is no immediate impact because everything we need for project business we own. In terms of revenue, we already have in the books. I mean, it's more a long-term question, you know, where is this heading?
Because we are also very clear that every price increase that we put in, we try to do this as sensitively as we can, has also an impact on the buying behavior. You know, at the end of the day, sooner or later, the machines that you used to buy from us will be more than 10%-15% more expensive than they used to be, you know. From a certain point onwards, private investors will say, "Okay, hold on a minute. We'll see whether this still pays off." This applies to every industry that plays the game of price increases. I mean, this will have an impact.
Two short additional comments. First of all, in Italy and Spain, most of the machines don't have a water reclaim system, and that's why they have to shut down. It's always the same thing. We go into marketing, explain that it's assurance for the time. Of course, with the whole thing coming to a more clear view, the decisions to invest into water reclaim system also is pushed by them. Second, when it comes to civil engineering, of course, the civil engineering prices go up, but in addition, you make good money with the wash tower, you know, that's for sure. The business case excellence.
We know that material is not sometimes available, and from what I heard is that the civil engineering industry counts that this kind of thing eases up into the nine months. That then when you do a project, at least, and when you put the money on the table, that at least you get a completion date and let's say a progress in your civil engineering project. I think this is an addition what I wanted to say.
Thank you. The second question is, could you remind us how this sort of longer-term framework contracts with major customers work and whether there could have been a situation that larger customers kind of could taken advantage of, knowing that you'll be raising prices in order to kind of preemptively place many orders ahead of time to secure beneficial terms? That's prospectively, they'll be ordering less and less.
The question is a good question, and I can tell you they have tried to, but we are also aware of that, so we have avoided that. I mean, they have tried to order bigger. Not only one of them, I mean, many of them have tried, and we said, "Okay, you can place as many orders as you want, for the time being, but we will not accept them because, first of all, we need to have the price increase, otherwise we cannot accept them." With all of them, we have gone to various negotiations. That's, although sometimes very difficult in the contracts that we have with them, and we are not the only ones having these contracts. Also, our competitors sometimes have shares of these contracts.
We have been able to, in all of the cases, you know, on a common understanding, let's put it, in a partnership approach, increase prices. We also have been able to convince them that we cannot accept orders and volumes at old prices. They are also not blind, you know. They see where the market is heading, so that is also why we say in Q2 or Q3, Q4, we'll see some protection in this process. We are also pretty much aware that this is usually this is likely also not the end of the chain yet. We might have to go there again and do the same thing again. There is a certain delay because due to the seasonal size of these organizations.
I mean, we are aware, and I believe also our customers are aware that this is not a sustainable situation at this point in time, and they might not like it. You can be aware that we will not allow customers to outsmart us by just ordering bigger volumes when they know we are threatening with the price increases. This is not part of the game.
Understood. Thank you.
The next question is from Richard Blackburn, HSBC. Your line is now open.
Yes, good afternoon, gentlemen. Two quick ones also concerning the price issue. I would be interested in chemicals because, as that's a fast-turning business here, you should not have big difficulties or time lags in raising prices. This +22% growth we have seen in the first half, how much came from the price side? Could you shed a bit light on this, please?
Sure. Yeah. Half and half.
Okay. There is a part arising for sure from the price increase, but the major part is that there is a real operational growth in this.
I mean, let's say it was also, you know, purposely initiated steps that we decided in the strategy that we want to get greater footprint, particularly in the markets that are just France, Spain, Italy, as we show really good impact of our initiatives also by increasing the number of people selling chemicals in these countries. That was a strategic move that paid off, and that's why we're also seeing growth. On the other hand, we also have to say, and we also have to be fair and always open about that, it is to a certain extent, also better weather related, let's say. The Saharan dust has helped, you know, and certain impacts were simply there. Nice weather helps also.
Too nice weather, as we also see now, if it's only dry, it's also not a help, you know. In other words, it's a mixture of both. It's a targeted initiative, and I also expect this to continue for the time being because the green chemicals campaign works well. We have the right product. Efficiency of our sales force is also continuously increasing, so I just cannot see a stop here. We will continue to grow in accordance to our strategic plans. And of course, price increases do have an impact at the end of the day in terms of top line, but also in terms of bottom line, I would say to a large extent. A mix of all.
Okay. Then to North America. Here also, I think you had a significant currency impact. Stripping that out should leave still a clear volume effect. I was really amazed to see that, obviously there is absolutely nothing as a kind of positive scale effects left for you here. Is it so that your customers there are really so tough that they can refuse price increases so far, and that you have difficulties in pushing this through? What's the picture there for the next quarters here?
I mean, the picture is, it is like this, that the mix of key account business versus direct business in the U.S. is much larger than in Europe. We have to be very clear about that. The multiple site operators' impact is an impact. We had also, let's say, yeah, tough contracts. It was basically not so much willingness on their side to negotiate the contracts because there was no clause in foreseen for that. In the meantime, we have, with all of them, renegotiated the contracts, and that's what we expect to see in the Q3 and Q4 .
That's why we are still, let's say, cautiously positive that we can come to a EBIT level that is, let's say, at a reasonable level where currently we are standing at a minus EBIT, in other words. That has simply and only to do with the fact that we have been able, with the range of the large part of our business, this key account business in the U.S. still, to raise these prices, and we will see this impact then in Q3 and Q4, because the implementation just basically recently happened. With always, like I said, with the delays that we see with key accounts. With private customer, we can change the prices tomorrow.
With key accounts, we have a standing contract that needs to be mutually, let's say, agreed upon. That also takes a bit more time because I always say we need to win. We need to try to win this battle, but most importantly also with this larger key account that we have relationship for 10, 20 years, standing relationship, we also need to win the war. At the end of the day, a single-handed approach here, this is what I need and this is what I want, is not really helpful. We have seen this in the past with us, with our competitors. So far so good. We have been able to negotiate price increases, which we will see in Q3, Q4 for sure.
We have been able so far to keep the customers, you know, so it's a small line, you know.
We are running efficiency programs in the U.S.
Yes, at the same time.
Also at the same time to improve that situation, yeah.
Okay. Just if I understood you correctly, this problem of time lag between higher material prices and price increases, especially true for the U.S. because you have so much of key account business there, and here the time lag is of a major concern. We have to wait until Q4 to see really an improvement there, right?
We'll also see in Q3. Q3, we will already see the first, improvements, yeah, for sure. In Q4 as well.
Okay, thanks.
Major impact will already start now from Q3 onwards, because then we are now starting to supply those machines that fall under the price increases that we have been able to negotiate.
Okay. Just in connection with this, are you able, with new contracts, to build in a kind of, yeah, automatic price escalation clause, or is this unusual in your industry?
That's now usual, I would say.
Whether unusual or not, we of course have an understanding, and we did renegotiate one major contract in the recent past, which was due for renewal or let's say for a new tender process. It was a completely new tender process, and this includes this clause. You know, that's for sure, because I mean, we have had a learning now that we haven't had for the history of the company so far. I mean, everything else that we saw before was a 1 or 2% price increase. Then with the volume, that was always justifiable by gaining it through efficiency. But what we are seeing now here cannot be continued going forward. Any contract that is for renewal or new tendering, we need that clause for sure.
We have it so far. One was renewed, and there it is included.
Okay. Going forward, this should become then the standard in future.
Yeah.
for your tender offers here.
Absolutely.
Okay. Thank you very much.
We have another follow-up from Alexander Galitsin. Your line is now open again.
Thank you. Just lastly to address the U.S. business. Can you just confirm again that what you're seeing there is sort of yeah sustainable development, that really you're reaping benefits and fruits of the reorganization, and that it's not just sort of low-hanging fruits being reaped, and then we're likely to hit a standstill in the next years?
If that's so, then in connection to that. Should one look at the second half, 2022, EBIT margin that you will be able to reach in the US, I mean, based off your guidance, it should be upwards of 6% as sort of the benchmark or sort of high watermark for this region, going into 2023, considering that the favorable top-line dynamic is persistent.
I mean, to be very honest, our internal targets are even as a benchmark going forward, more ambitious. To be very honest, I mean, we were, how to say, I would say positive that we can manage it this year when we did the budget. However, we have to realize that the inflation that we are seeing and the price inflation we are seeing in Europe is high, but in the U.S. it's far higher. You know, in other words, so we had the order books full of orders and we're hit by massive price increases, I have to say. Unfortunately, our positive, let's say, expectations were not met. I mean, that is the minimum requirement is anything also 5% EBIT.
Midterm we have to come also the same ambition that we have in Europe, also for the US, sustainably around the two-digit EBIT. That is where we are aiming at.
Yeah. The goal to 2023, it's interesting. As I said, with the price increase and inflation in the US has been tremendous. I think I mentioned this in the calls before, but now it is already in process. We are now supplying steel frames to the US from Augsburg, from our Augsburg steel plant. That leads to, first of all, that we have a material price positive impact on the material price and also on the negotiations with our steel frame users in the US. The question to 2023 is of course, is the inflation going further down in the US? Of course, you know that the US has raised the interest rates earlier than in the EU. This will be interesting part.
That's what I mentioned, that we are also working on cost down projects on the U.S. platform to support that. We're not only waiting for the prices to come down, but we're working actively on this. This just as an additional comment.
Mm-hmm. Thank you.
There are no further questions. I would like to hand back to you, gentlemen, for some closing remarks.
Yeah. Ladies and gentlemen, it was a pleasure. Thank you for attending the call. We are now, at least in Bavaria, entering the vacation area. We're closing down operations for two weeks. This also enables us to increase efficiency. I'm looking forward to hear you and meet you, in the occasions which we indicated on the last slide, where we have presentations of the company at the latest then in the Q3 call. I wish you stay healthy and very well, and if you have vacations, have a good vacation. Thank you very much, and greetings from Augsburg.
Ladies and gentlemen, thank you for your attendance. This conference has been concluded. You may disconnect.