Dürr Aktiengesellschaft (DUE) Earnings Call Transcript & Summary

Welcome to the Dürr conference call. Dr. Jochen Weyrauch, CEO, and Dietmar Heinrich, CFO of Dürr AG will present the group preliminary figures of 2021 followed by a Q&A session. I will now hand over to Andreas Schaller, Head of Investor Relations of Dürr AG.

Thank you, Martin. Ladies and gentlemen, good afternoon or good morning to those of you in the US. Welcome everybody to our earnings call. Today, we will present to you the preliminary figures for the financial year 2021. The annual report including the information regarding the proposed dividend will be published on the 17th of March. As always, our earnings presentation is available on our Investor Relations web pages, and we assume that you have it in front of you. With me on the call today are Jochen Weyrauch in his new role as CEO of the Dürr Group; and Dietmar Heinrich, our CFO. Please be aware of our disclaimer regarding forward-looking statements on Slide 2. After this short introduction, I directly hand over to our CEO. Jochen, the floor is yours.

Thank you, Andreas, for the short introduction, and a warm welcome also from my side to all participants on this call. Before I start with my comments on '21 earnings and how we see '22, let me say, we're really very much concerned by the actual activities around the Russian attack on the Ukraine, and the harm this might create or already creates for civilians. We really condemn the military action that is actually being executed towards the people of the Ukraine, and really hope that concerned parties will return to tables and discuss solutions, which cannot be military action soon, and hopefully mitigate the situation. So we're not really happy that this call today coincides with the activities. Nevertheless, I think we have pretty good news for you which we want to share. You already know me from past calls, and the analyst and investor events of recent year. So I don't think that I need to introduce myself. I've taken over the role as CEO of the Dürr Group from Ralf Dieter on January 1. As we have developed the strategy of the Group together in the past, you should not expect major changes in the short run. We will continue what has been working well in the past, but, of course, are open to improve or adapt where we see potential. One thing we would like to keep pretty much unchanged, the agenda of our earnings call. I will start with a review of our performance in 2021. After that, I will comment on the performance of our divisions, before Dietmar will go into more detail regarding the financials. At the end, I will present to you the outlook for our markets and the guidance for 2022. On Slide 4, we see the summary of the highlights for 2021. With almost EUR 4.3 billion, we achieved the new record order intake. The main driver was HOMAG, but we also saw increases in all other divisions, and a strong momentum in Automotive in Q4. The order backlog also reached a record level with almost EUR 3.4 billion. This is a very solid base for growing revenues in 2022. Sales revenues improved sequentially and surpassed the EUR 1 billion mark in Q4. This was a great achievement in light of the still existing supply chain constraints, but it was not enough to reach the lower end of our guidance. However, the sales revenues are not lost, but just postponed, and we're working hard to deliver our products to our customers as fast as possible. Despite the shortfall in sales revenues, we recorded very good EBIT margins before and after extraordinary effects. We achieved EUR 62 million from cost cutting measures, and we announced back in 2019 and 2020 -- and thus -- we announced back in 2019 and 2020, and thus well achieved the target of EUR 60 million. In addition, the strong margin development was supported by our efficiency improvement measures, and a very strong service business. Free cash flow generation exceeded expectations, and was driven by the positive profit development and limited increase in net working capital. With the recovery of business activity, we experienced growing inventory and contract asset levels. However, these were compensated by high pre-payments due to the strong rise in order intake. In 2021, we were very active in M&A, and unlocked new business opportunities in the field of Medtech, wooden construction elements and software. We will discuss what that means with respect to our mid-term growth potential going forward, and give you an update during our Capital Market Day in November this year. Finally, we expect to continue our profitable growth in 2022, and target to achieve sales revenues and EBIT margin on or above the pre-crisis levels of 2019. On Slide 5, we see an overview of the key financial indicators for 2021. Order intake increased by 31%. This includes EUR 249 million from companies that we've acquired in the last 18 months. Sales revenues grew by 6% and included EUR 199 million from acquired companies. EBIT before extraordinary effects doubled and the margin reached 5.6%. Net income improved by EUR 100 million after the loss of last year. It includes a non-cash expense of EUR 17 million related to the prolongation of the pooling agreement regarding HOMAG, as already mentioned at our Q3 earnings. Finally, free cash flow even exceeded the 2020 level. However, the drivers in the year-to-year comparison are quite different. In 2021, earnings were the main contributor to free cash flow. The year before, it was a reduction in working capital. Overall, the cash flow development is better than expected. On Slide 6, we compare the figures achieved with our guidance. Order intake, free cash flow and net financial status even exceeded the updated guidance of July 21. On the other hand, sales revenues slightly missed the lower end of the updated guidance, but we made well within the regional guidance range. As mentioned, those revenues are delayed and not lost. All other parameters came in well within the updated guidance range. EBIT margin and ROCE were closer to the upper end. Let's look at the order intake on a quarterly level on Slide 7. We reached more than EUR 1 billion in all of the quarters of 2021. In Q4, HOMAG orders remained below the EUR 400 million mark as we focus more on the order execution than order generation. But this was compensated by strong momentum at Paint and Final Assembly Systems, driven by e-mobility and Teamtechnik. Clean Technology Systems received a second order for its coating technology from another automotive OEM in Q4, similar in size, like the first order we reported in Q3. On Slide 8, we see the geographical distribution of order intake. All geographies contributed to the overall growth, most of them with double-digit growth rates. The Americas and Europe recovered strongly, and China's growth continued at high level. America and China exceeded the EUR 1 billion mark. Looking at the overall picture, we see that our order intake is very well distributed globally. Regarding the M&A activities of the past 24 months on Page 9, you all know that -- you all know those transactions, as there were no new activities or no new acquisitions in Q4. But I think it is important to point out that they have been selected well with growth opportunities going forward. This includes Teamtechnik and Hekuma in the area of high performance, automation and Medtech. In addition, we broadened our product offering for the production of wooden construction elements with the acquisition of System TM and Kallesoe, and we bought the remaining stake in Weinmann. We also strengthened our software capabilities with Techno-Step, Cogiscan and Roomle, and our reach into the Chinese market with the acquisition of HOMAG China Golden Field. All this added to our knowhow, and opens up new business opportunities, and we are excited to realize the relative growth and profit potential going forward. On Slide 10, we highlight some of these opportunities. Wood, a sustainable construction material, has been gaining a lot of momentum recently. We expect growth rates of more than 6% per year for machinery and systems for wooden construction elements over the coming years, and I will talk about this in more detail in a minute. The automated production of medical products is another interesting market where we see growth rates in the high single digits. An ageing population, a growing middle-class, and improved access to medical care, are demand drivers for medical support and products. Last but not least, we see strong demand for electric vehicles, and a large variety of models coming to the market in the next years. Especially in Europe, the momentum has been high in recent months. This drives demand for battery capacities, and we see a lot of projects on the starting block. We have 1,2 first small projects with our proprietary 2-sided coating technology, and see further potential. About 800 gigawatt hours of capacities are to be built in Europe by 2030, translating into low double-digit billion market opportunity. We see ourselves well positioned, as Dürr is a renewed company, and European customers' favorite European supply chain. However, I want to stress that we are still at the start of the game, and we still need to establish ourselves on this new pitch. Let's have a closer look on the opportunity from wooden construction. With the acquisition of System TM and Kallesoe, we cover a large part of the value chain, and are thus in the pole position to benefit from the automation of production in this market. Market analysts expect that wood as a climate friendly material, will be used more and more in construction, and that the usage of wood will extend quickly from single family houses to multi-storey buildings. Demand for related machinery is growing quickly, and we are seeing a lot of interest from throughout Europe, with a new focus also on equipping complete factories, which is an opportunity for HOMAG and Dürr as a team. Order intake has almost doubled from 2020 to '21, and we are investing in additional capacity to capitalize on this opportunity. From wooden construction, it is not too far to sustainability. On Slide 12, we highlight the major milestones we reached in 2021. We have really accelerated out activities in this field in the past 12 months. We published our first sustainability reporting according to GRI principles in May, and increase the level of transparency. This is an important prerequisite to further improve our sustainability ratings and attract additional investors. Another important milestone was the publication of our climate strategy in November. We support the 1.5 degrees Celsius goal, and our climate strategy has meanwhile been validated by the science-based target initiative. We believe that our resource efficient products can play an important role in decarbonizing the production of our customers. We already offer a carbon neutral paint shop as of today, by electrifying heating processes and improving energy efficiency. Our own carbon footprint is relatively small, but we nevertheless want to significantly reduce it by 70% until 2030. We follow the principle of investing rather than compensating. We switch over to green electricity for an operations worldwide and, support this with the installation of own photovoltaics at several sites. We introduced a new supplier code of conduct in order not only to increase awareness regarding sustainability in our supply chain, but to make it one of the decision criteria. Finally, sustainability is also part of the renumeration for the Board of Management since the beginning of 2021. Overall, we see ourselves as an enabler of a carbon-free society. Now, let's have a look at the divisional development. We start with Paint and Final Assembly Systems on Slide 14. Order intake in Q4 was very strong, driven by several factors. First, the mid double-digit order that was delayed in Q3, was booked in Q4. In addition, we saw very good demand from EV players in America and China. And last but not least, order intake momentum at Teamtechnik has improved since September. Since revenues in Q4 Clearly recovered, but for the full year, we still saw a decline due to the weak order intake in 2020, and some project delays. EBIT margins recovered despite lower sales revenues. The implemented capacity adjustments and a high service share led to this improvement. For 2022, we expect a strong growth in revenues based on the high order backlog. Let's turn to Application Technology on Slide 15. Order intake and sales revenues in Q4 came in below the very high prior year's numbers. Nevertheless, due to the solid performance in the first 9 months, the full year figures exceeded the prior year. Order intake points had a strong sales growth potential in 2022, and was driven by the Americas, China and Europe. Sales revenues and EBIT margins were supported by a very strong service business. In addition, EBIT margin benefited from the implemented capacity adjustments. All in all, the business is on a very good recovery path. Next is Clean Technology Systems on Slide 16. The high order intake in Q4 includes the second order for battery coating equipment from an OEM, in about the same size of the order that we reported in Q3. Sales revenue development was very strong in Q4, and we could reach a level slightly above the prior year. However, margins declined in 2021. This was due to our higher R&D expenses, as we are investing into our battery coating product offering. In addition, we experienced some margin pressure in Q4 due to our higher material costs. We see a solid growth potential based on the high order backlog, but still need to work on removing capacity bottlenecks. On Slide 17, you can see the summary of developments at the Measuring and Process Systems division. Order intake and sales revenues recovered to a level of more than EUR 200 million in '21. At the same time, we recorded a strong margin improvement that was driven by early capacity adjustments in Germany in 2020, and an overall improved project execution. We saw a solid demand from North America and Europe. We're very happy with the turnaround of the business, and see further growth potential going forward. Finally, let's take a look at HOMAG on Slide 18. '21 was an excellent year for HOMAG. We recorded records levels for order intake, order backlog and sales revenues. The single machine business was a major driver, but also the systems business grew, and we saw a significant increase in orders for wooden construction. Order intake in Q4 might not look so impressive compared with the prior quarters. However, our focus was more getting the product to the customer rather than generating additional order intake. Underlying market demand remains very strong, and we have seen a lot of orders in the first month of '22. The EBIT margin improved significantly, driven by the implemented cost reduction measures, improved efficiencies, and this high sales volume and service share. ROCE even exceeded 20%. In addition to the higher margin, capital employed was positively affected by high prepayments from customers, following the high order intake. All in all, 2021 is a very solid base for continued profitable growth in 2022. Finally, we come to the service business on Slide 19. Services improved even further in Q4, reaching a new record in the full year, and a share of revenues of 32%. The spare part business continued to be strong, both in automotive and woodworking. In the second half of 2021, we also experienced more demand for modifications. Service margins remained at high levels. Going forward, we target to reach a service share of at least 30% of Group sales on a sustainable basis. And now Dietmar, I hand over to you for the financials.

Thank you, Jochen, and also welcome to everybody from my side. I start actually with Slide 21. 2021 was a very good year, despite this tough, challenging environment. And as Jochen already mentioned, we achieved a new record order intake, a strong margin improvement, and a high free cash flow. I will get into the details of the financials on the next slides. On Slide 22, we can see the development of some details that could be of interest to you. The extraordinary effects came in lower than expected with only minus EUR 23 million. The reason was an extraordinary gain of about EUR 9 million in the third quarter that mainly relates to the disposal of SBS Ecoclean a couple of years ago. We sold the remaining shares in SBS Ecoclean, and there was a dispute with the buyer. However, the response of the court ruled in our favor. As such, we could recognize a gain finally. The finance result was worse in 2021, despite the fact that we paid back our corporate bond in early April. This can be explained by a non-cash expense of about EUR 17 million that relates to the prolongation of the pooling agreement regarding HOMAG, with the Schuler/Klessmann Group. For 2022, we expect the finance result to improve to between minus EUR 25 million and minus EUR 30 million. The tax rate in 2021 was unusually high at 36%. Main driver behind this is to just mention, valuation effects related to the pooling agreement with the Schuler/Klessmann Group that was not tax deductible. Going forward, we expect a tax rate of around 30%. On Slide 23, we can see that sales revenues grew sequentially by about 11% in Q4 and reached a level of more than EUR 1 billion. As already mentioned by Jochen, availability of components prevented us to execute more orders, and we believe that the constraints will last until mid of 2022 before they ease. From a geographic perspective, Europe gained share in 2021, mainly driven by the improved business at HOMAG, Asia, with our China loss share as large projects in South Korea where we finished, China and America whereabout they are idle. Let's move to EBIT on Slide 24. The EBIT margin before extraordinary effects remained above 6% in Q4, and we achieved 5.6% for the full year. The EBIT bridge shows that the gross profit growth was the main driver for the EBIT improvement. Overhead costs increased year-on-year, but about 54% of the increase was driven by our acquisitions. Extraordinary expenses were significantly lower compared with last year, and a bit lower than expected, as explained a minute ago. Consequently, the reported EBIT margin reached the upper end of the guiding -- our guidance range. On Slide 25, we can see the free cash flow development. We recorded a positive free cash flow in all 4 quarters, and reached finally EUR 121 million for the full year. This is ahead of our guidance and better than 2020. However, in 2021, earnings were the main driver for the free cash flow, whereas in 2020, it was the reduction in net working capital. Cash generation was bolstered by continued strong cash inflows from fee payment, that limited the increase in net working capital. For more details, let's look at the next slide. On Slide 26, we can see that net working capital increased by EUR 45 million compared with the end of 2020. Main driver was the growing business, including the acquisitions that led to an increase in inventories, receivables and contract assets. As already mentioned, the cash inflow from customer payments continued to be strong, and the increase in contract liabilities was limiting the net working capital growth. Days for working capital stood at about 44 days at the end of 2021, which is in the middle of our target range of 40 to 50 days. Let's turn to our net financial status on Slide 27. Net debt increased by only EUR 50 million compared with the end of 2020, despite significant M&A activities with an EV in a low triple-digit million euro range. The strong free cash flow generation was an important source of financing for us in 2021. Leverage even improved from 0.4x to 0.3x, as EBITDA more than doubled compared with the prior year. We continue to carefully manage our net debt levels. Finally, let's have a look at our liquidity headroom on Slide 28. Actually, nothing new here. We feel very comfortable with available funds of EUR 1.3 billion, and the next maturity is only coming up in the year 2023. As such, we can fully focus on developing our business as we exit the pandemic. With this view from the financial side, I hand back to Jochen for the outlook.

Thank you very much. Let's turn to the outlook and start with the market development. On Slide 30, we see the latest forecast of LMC Automotive for light vehicle production in 2022 and until 2028. After a muted development in '21, LMC expects the light vehicle production to recover and increase by more than 11% in 2022, to almost 86 million units. Still open remains the question when the strains on the automotive supply chain will lease. So far, however, we have not seen an effect on the CapEx decisions of our customers. As you know, we are on the CapEx side of the business and not in the direct material. Mid to long term LMC continues to see a growth potential to above 100 million vehicles per year. On Slide 31, we see the development of the markets relevant for HOMAG. The view has not changed since Q3 last year. We saw a fast recovery on the furniture side, almost reaching the pre-crisis level already in 2021. Going forward, we expect a relatively stable market size of somewhat above EUR 4 billion, which is characterized by the ongoing consolidation among furniture producers. On the right side, you see the model for machinery and systems for wooden construction elements. For simplicity reasons, we are only showing the addressable market. Here, we continue to expect a compound average growth rate of more than 6%. We are well positioned to grow the HOMAG business over the next years, by expanding our market share and growing our service offering to our customers. Now let's take a look at the guidance of the Dürr Group for 2022. The guidance assumes that the supply chain constraints don't get worse, but recede by mid of '22, and that we will not experience any further disruption due to COVID or geographical -- geopolitical developments going forward, so which we were talking about a bit earlier during the call. We expect order intake in a range of between EUR 4.1 billion to EUR 4.4 billion. The mid-point is at about the level that we achieved in 2021. After the extraordinary high order intake of EUR 1.7 billion at HOMAG in '21, we expect some normalization to -- between EUR 1.45 billion and EUR 1.6 billion in '22. On the other hand, we believe that order intake at the other divisions will continue to grow. Regarding sales revenues, we target a range of between EUR 3.9 billion and EUR 4.2 billion. Growth will be more second half loaded, as we still feel the impact of the supply chain constraints in the first half of '22. The EBIT margin before extraordinary effects is expected to grow and come in between 6.5% and 7.5%. This translates into a reported EBIT margin of between 5.9% and 6.9%, as we expect extraordinary effects in '22 to amount to roughly EUR 30 million minus, mainly relating to PPA. As with sales revenues, we expect a weaker development in the first half of '22, also due to temporary pressure from material cost inflation. For ROCE, we expect a range of between 17% and 21%, and the net income should turn out between EUR 130 million and EUR 180 million. Free cash flow is expected to reach between EUR 50 million and EUR 100 million, and thus remain close to the level of '21. On the other hand, profitable growth will drive cash flow generation -- On the one hand, profitable growth will drive cash flow generation. On the other hand, we plan to increase CapEx over the next 2 years, to a level of between 4% to 5% of sales. We mainly invest into additional capacities and efficiency improvements at HOMAG. On top of that, we expect an increase of net working capital in line with the revenue growth. Consequently, we expect the net financial status to remain about stable between minus EUR 75 million and minus EUR 125 million. All in all, we target to meet or even exceed the pre-crisis levels of 2019, with respect to sales revenues and EBIT margin. There are still some risks and uncertainties regarding supply chain constraints and cost inflation, that are reflected in the low end of the guidance ranges. Let's look at the divisional breakdown on the next slide. The breakdown by division on Slide 33 covers order intake, sales revenues and EBIT margin before extraordinary effects, one we mark upfront. Going forward, we will include internal order intake and sales revenues between the divisions in our divisional reporting. The reason for this change is that, our subsidiary balance will be reported at Measuring and Process Systems going forward. In 2021, it was reported as part of Woodworking Machinery and Systems. Benz generated about EUR 50 million of sales. About EUR 30 million is internal revenue with Woodworking Machinery and Systems. In order to keep EBIT margins consistent, we decided to include internal order intake and sales revenues in our divisional reporting going forward. This only has a noticeable effect on Measuring in Process Systems. We will bridge both line items to the consolidated Group figures using a consolidation line. But now, let's look at the overall picture. Order intake is expected to increase across all divisions, with the exception of Woodworking Machinery and Systems, as already mentioned. Sales revenues are planned to grow across all divisions, driven by the high order intake in '21. EBIT margins before extraordinary effects should also improve across all divisions, but to different extents. At Paint and Final Assembly Systems, we expect a solid margin improvement, as sales revenues recover strongly. However, we also anticipate some temporary margin pressure due to the combination of long project durations and the price increases for material and components that we are currently experiencing. Application Technology should show stronger improvement, as the business continues to recover. For Clean Technology Systems, we expect an improvement towards the margin level of around 6%. Our R&D -- higher R&D expenses and some supply chain constraints will still be impacting margins in '22. Measuring and Process Systems has already reached a solid margin level in '21, and we expect a moderate further improvement. As in all other divisions, the margins will be impacted in the first half of the year, by supply chain constraints and temporary cost pressure. At HOMAG, continuous process improvements and increasing sales levels are expected to drive a solid margin improvement. On Slide 34, we see our strategy and mid-term targets. Based on the positive business dynamics, we are confident that we will reach our mid-term targets regarding EBIT margin and ROCE in '23 or '24 latest. With respect to revenue growth potential, we are reviewing the target of 2% to 3% organic growth, based on 2019 figures, in light of the new business opportunities that we have opened up with our acquisitions, and the increasing role of sustainability as market demand driver for our products. Let's summarize on Slide 36. We achieved a record order intake and backlog in '21, which is a solid, if not excellent base, for further growth in '22. Revenues are on a recovery path, but have been slowed by the constraints in the supply chain. We assume that this situation will last until the mid of '22, and expect an improvement in the second half. We achieved a strong margin improvement in 2021, based on our successful cost savings, efficiency improvements, and the high service share. Free cash flow development in '21 was better than expected, and our financial situation is comfortable, and allows us to go further with M&A opportunities. Overall, we are very well positioned to grow the business in '22 to our pre-crisis level of 2019 or even above, and we are on track to reach our mid-term targets in '23 or '24, the latest. Thank you very much for your attention. Now we are happy to answer any questions you might have.

[Operator Instructions] We have a first question. It's from Will Turner, Goldman Sachs.

A couple of questions from me. The first one -- because it's quite topical, obviously, at the moment. Could you just outline if you have any -- or what your exposures are to Russia and Ukraine? And then, my second question is on MPS. And I just wanted to know, in terms of -- I was wondering what's the reasoning in your outlook for the order intake to the decline in NPS, but then in the other automotive divisions, you have order intake accelerating? So what's kind of like the dynamics there? And how can move those up relative underperformance? And then the final question is, you mentioned about in the future having higher CapEx. Can you just outline where this CapEx is going to be spent? And what are the areas you're investing in with that?

I can start with Russia, and then we can cover MPS and CapEx. Yes, thanks for your question, Will. Russia is 1% to 2%, maybe even closer to 1% of our revenue. So in terms of figures, we are not overly concerned. Yes, we've seen actually a lot of potential for the year. Let's see what will happen with that. A couple of projects in solid wood, as Russia wants to increase their own production of wooden elements rather than exporting trees, and also a bit on the automotive side. But it is not looking at the magnitude of our business overall. Actually, I can say it's not overly relevant. Dietmar, you want to talk about MPS?

Yes. Regarding MPS, then we'll -- one reason for the dynamics that we do see there is, as we mentioned, that we allocate a certain part of the HOMAG business. It's a company called Benz Tooling. And then to become a member of the MPS division -- and it's adding then actually sales and order intake. So that's basically the reason why there is a significant uplift in the guidance for 2022.

On the CapEx spending, what we're spending for the additional one?

Yes, CapEx, the plan is to spend, over the next 12 to 18 months, roughly EUR 150 million, if not EUR 200 million, in that range for extension, especially of production capacity in Poland, partially India, but we're also planning somewhat in China. In addition to that, we are planning a new customer center for HOMAG and Schopfloch, which is very relevant to better display our capabilities in HOMAG, and also build additional administrative area, which we also need. So, this is what leads to an increased CapEx for the next roughly 2 years.

The next question is by Philippe Lorrain, Berenberg.

So just want to start with very much housekeeping, just to make sure I understand that. So, the EUR 280 million to EUR 300 million order intake for MPS next year, that includes Benz. So it's not comparable fully to the EUR 209 million that you paid for 2021.

Yes, that's correct. You will see the number with the first quarter figures. We will then provide also a restatement on a quarterly base for 2020. But roughly, Benz is a EUR 50 million business.

Yes. Okay. Understood. But, EUR 1.45 billion to EUR 1.6 billion for woodworking, that would take into account Benz as well? And then in the consolidation, we see that at minus EUR 50 million or --?

The part that was -- or the share that was formerly part of the Benz business is already excluded. But some part of the business -- and this is what we indicated in regard to the consolidation, Benz will still supply then their components to VMS through the woodworking division, and they will sell it either directly to the outside or use it for their own machinery.

Okay. Understood. Perfect. Then the second question was on the contract balance. So that's been basically helping you to offset part of the increase in working capital this year, especially on the inventory side. How should we think about the contract balance in the coming quarters? Because contract liabilities were extremely high as of the end of the year. And would there be a normalization down the way perhaps, as inventories also normalize on the way down?

That's exactly the point that we are expecting when moving forward, the -- let's say, strong development on the contract liability was especially driven by HOMAG, where typically it was a single machine-driven order intake last year, especially, and then the typical payment condition supply that 30% of the whole project volume or auto volume has to be paid at the time when the order is placed. So we expect then, now in the coming months then, a buildup on the inventory and construction contract asset side, sorry, and accordingly, this will balance. But overall, we target to move forward with our 40 to 50 days net working capital.

Okay. So the overall target hasn't changed, and probably, as you have that normalization on the contract balance, still you have headroom as well to compensate for that with reducing the inventory overall.

Yes, correct.

Okay. Perfect. Then the last question is really on the battery coating business. You mentioned that you're investing apparently quite heavily in R&D right now. How should we think about the margin development in that specific business, since you invest like so much in R&D right now.? Mid-term, at some point -- I think, at the Analyst Day last year in November, we were speaking about perhaps 10% EBIT margin. Is that a target that you still have in mind? And also, if that's the case, does it also include the service business for that kind of business, which I assume will be coming also at some point? Or is it just that the new business is that profitable? And perhaps as a related question as well, how scalable is that business?

Thanks, Philippe, for the question. First of all, yes, that the margin target would be including the service business. And the supply chain is yet to be established for the equipment overall in Europe, as there's not been both Giga factories yet. The 2 orders, as we already reported that we have received so far, are for smaller sized facilities, and we will learn more about the competitive situation in that European arena that is just building up. Our assumption still is that, that should offer similar earnings levels, because there will be a significant demand, which also offers enough playground for the supplier base. And yes, we're investing in larger scale equipment now, and we will see in the next, say, 12 to 18 months where the market goes and how this demand -- which is clear that it will be there -- will translate in our customers' ordering equipment.

Yes. Okay. Is it fair to assume that it's going to be probably loss-making at the beginning at EBIT level, before we reach into this kind of margins that you were speaking about at the point of -- at the time of the Capital Markets Day?

Sure, because economy of scale will play a large role here. Yes, that's why your assumption is fair.

Okay. Perfect. I'm back in the queue.

The next question is by Katharina Werner, Deutsche Bank.

My first question would be on the first 2 months of this year. Can you give us a rough indication of how the first 2 months were in terms of order intake, and also in -- how strong you are impacted by raw mat inflation, cost inflation and all the headwinds around?

Yes. Let me answer generic, Katharina. The first 2 months are a very nice continuation from a order inflow compared to the previous year overall. In terms of the headwinds, it is -- as we described, we see the situation still challenging. If you look at the market overall, we have seen the first shortages more in direct material. This is why many of the car producers were short in producing vehicles. But that has also affected the CapEx side of the business, which we are dealing with since third, and even more the fourth quarter of the year. And we assume that this accompanies us in the first and partially second quarter, before it comes a bit better in the second half of the year, but still not easy.

Okay. Great. My second question would be on HOMAG. I see that you're probably reluctant or a little bit more cautious on the order intake, as you've seen a record high order intake last year. But if we look at Page -- I think it was around 30 when you showed the market development, and you were also talking about increasing the market share. And shouldn't it at least stay flat then?

That's a good question. And let me answer in a certain way. Also, the market figures are, of course, qualified guesses, and whether it's EUR 100 million more at the end of the day, during the course of this year, or EUR 100 million less, we don't know. The way we look at our guidance is that, we believe that we will still be above the pre-crisis level, and therefore, consider the current guidance as one we can comfortably defend. Let me put it this way. We would -- at this point, assuming that we can repeat the extraordinary order income of last year, would be a little bit to -- be too ambitious at this point.

Okay, understood. And my last question is on the battery coating. I'll follow-up basically on that. So if I got you're right. So most of the tenders are expected to come in, in the next 12 to 18 months. Is this right? And then the question on that would also be that, do you see yourself well positioned to be invited and also be able to participate in a tender. So is it really that European OEMs are looking for European suppliers? Or are they still, let's say, more comfortable with the suppliers they know from Asia with the known track record?

Yes. Another good question, Katharina. Thank you. There are -- different OEMs look at the situation differently. And I think if -- there was one thing proven over the last 18, 24 months is that, supply chain, geography and logistics matter. And so, we have -- and of course, to answer one of your questions immediately, yes, we're always invited. And in the end, it's a competitive game. And we'll have to see how OEMs rank their decision-making in terms of using an existing supply base in Asia, which also is already well loaded, because not only Europe is -- will be building batteries -- So there will be definitely enough demand also for European players. Nevertheless, in the end, everybody has to be competitive, and this is exactly what we are about to prepare for ourselves and what still needs to be proven. And I can say, the first 2 projects that we won are good entrants, but still -- as I mentioned during my presentation, on a larger scale, we have to prove that this model works as well.

Your next question is by Will Macaulay, Morgan Stanley.

Maybe my first question is a bit broader based, but, how should we think about order intake going forward for your ICE business within the paint shop division, as we make this transition to EV? Is there a kind of minimum maintenance level of CapEx we can expect this business to stay at, as store EV kind of business and orders continue to expand?

Thanks, Will, for the question. Yes, in fact -- I mean, I would almost say, we do use and always differentiating between ICE and e-mobility business. When it comes to the paint shop, there is not really much of a difference on the way this business is set up. We -- there is a market out there for automotive paint shops. If you look back 10 years, of course, it was all for vehicles ICE-based. Now it's either combined production lines or it is purely EV lines. What we currently don't see any more is production lines being built up, maybe with the exception of a few smaller scale car manufacturers, maybe like in India or so who took over from Daimler. So -- but in general, there is no new ICE production lines being built anymore at this point. So nevertheless, if somebody decided still to build a purely ICE line, we would -- as we did in the past -- of course, be happy to supply the paint shop. Because technically, there is not really much of a difference. What we see is supporting our paint shop business is the new capacity overall coming up, which is mainly driven by battery electric vehicles, and the opportunities we have for both greenfield and brownfield from sustainability. And, again, sustainability is much driven by investments into EV vehicles.

Okay. Perfect. That makes sense. And then secondly, still on EV. I think in the release it said, you saw EV orders of EUR 775 million in 2021. I wondered if you could help me split this out between Paint Shop Final Assembly and battery. And maybe kind of later this -- have you seen kind of a pickup in the Final Assembly part of the EV business? Because I think, historically, it's been paint shop that's been very, very strong.

Yes, I could make a qualified guess. The battery and drivetrain testing business in terms of order intake together should be roughly EUR 100 million, as a qualified guess, of the EUR 700 million. Then in purely EV Final Assembly, that should be another -- let me also up 100 -- also roughly EUR 100 million, I would say, and the rest is paint shops.

Okay. Perfect. And I mean I guess that would kind of -- if I'm correct, would imply your final assembly business is flat year-on-year. But my understanding is that we should maybe expect the Final Assembly content to be a bit higher then EV, because the production line is a bit easy to automate. And so, are you starting to get some traction on this side of things?

First of all, our -- we call this next assembly. That includes all our Final Assembly activities, including filling and end-of-line testing of vehicles. It's not necessarily flat. When it comes to the scope for EV versus the -- if you will, the old ICE final assembly, there is elements which are not production steps that you don't need anymore, because the vehicle is less complex in assembly. On the other hand, there is a few elements in Final Assembly which are very interesting for us, which offer us additional opportunities. For example, the traditional marriage in the car is replaced in a way by the battery marriage. And there, we have special solutions to integrate the battery by skewing or gluing into the chassis. So there is pros and cons. Nevertheless, we believe that we have a couple of interesting technologies which help us going forward in the final assembly of electric vehicles.

The next question is by Richard Schramm, HSBC.

Yes. You mentioned in your Q3 call that you saw a better margin development in your order book. Has this prevailed also for the full year in light of the accelerated input costs, especially in Q4? Or would you say that the margin quality might have been even deteriorated a bit due to this? And can you elaborate a bit on your internal efforts of pushing through price increases here? How can you cope, especially with new projects, the uncertainty in current markets here of price developments going forward here, when delivery times are also stretching?

Thank you, Richard, for the question. The picture is a bit different by business. We mentioned that a little bit during the presentation. If you take, as an example, PFS, it was kind of a challenge, and to some extent, still is, with a long lead time of orders, where in many cases, we booked orders even before the strong increase in material cost. We had to deal with them, and also logistic issues during the execution of those orders. And only in a few cases, it is -- was possible in the automotive industry, to renegotiate fixed prices, as you can imagine. So we're working through this. However, new orders we are only taking based on a different level or at least with material price indices, where we have a chance to deal with customers in case there are further effects. The picture in the machine building where lead times are shorter or especially in HOMAG, are different. In HOMAG, we've already increased prices in order to cover the cost increases. They now come into effect step by step. We've also increased across the whole arena prices for spare parts. So this will help. So the picture is a little bit different, and maybe a little bit more challenging on the automotive side, because we have to work through the chain, if you will, once. And that's -- what we are reporting is the result of those activities. And obviously, in the guidance, we have been carefully looking at margin developments and margin projections.

Yes. But is it then a fair assumption that your order book you take forward to the current year is of better quality than 12 months ago, or because you are able to be a bit selective on orders, or it's not the case, especially in automotive yes?

Yes. In the mix, I would say, very generic, yes. I would say we are in a somewhat better position.

Okay. And then just a follow-up on this battery coating business. You mentioned that you needed to prove that you can scale up this process, and have to spend more in R&D, and also the ramp-up costs you have to bear for this business. So should we expect that the costs here will have a clear dampening effect on the segment profitability, and that this improvement you have outlined for the current year, might then be more at the lower end also going forward? Or is this a very temporary development?

Yes. It is more a temporary development. And the magnitude of the R&D expenses that we foresee, are again taken into consideration when we set up the guidance for the year. Because we also believe as much as -- yes, there will be R&D costs. On the other hand, we see, especially in terms of efficiency and less disruption in the execution of our projects this year compared to last year, also a significant counter effect, a positive one.

Next question is by Daniel Gleim.

I actually got 2 of them, one on the battery coating and the other on woodworking. Starting with the battery coating. Could you give us a little bit of color, now that we are a few months into developing this business, at least as far as we understand it now. Of course, it's been making longer for yourself. But what type line or revenues you have budgeted for the next couple of years? So what is the current status of your budgeting where this business could lead to? That's question number one.

Okay. That's a good one. We are careful in budgeting the business. We now have -- as we said, we've had order intake of roughly EUR 50 million last year. Our assumption is not to double or triple it automatically this year, at least not to triple it. So we are still careful in the projections because, especially the large project that we had announced, they can easily be triple-digit in case you receive the complete order. An order would always consist of the coating, the drying, and the solvent recovery. So there's always 3 elements which -- not in all the cases, we might always win. For example, we had a year ago -- year and a half ago, a larger order, which was then purely solvent recovery. So we are still careful in budgeting it, because budgeting 1 or 2 big orders makes a big difference. And we want to be rather a little bit cautious. If you reflect on the numbers for this year and the guidance, that might give you a little bit of an idea that definitely our assumption is not to triple the volume, also not in order intake. So we'll have to see. If we're successful, there might be an upside, but nobody can really promise at this time as this market is really just developing.

And you mean -- triple, you mean EUR 150 million? What triple digit?

No, I was really -- I have to be fair in saying, yes, triple the EUR 50 million would be a little bit too ambitious.

Now, with regard to the breakeven point, how should we think about this? So EUR 50 million will be breakeven once the one-off R&D has been expensed?

Yes.

The second question would be on the woodworking outlook. If my notes are correct, you mentioned that you could think of around EUR 2 billion in sales in 2025. And if I look at the outlook for the order intake for the coming years, we see a step back with, of course, a reflection of the underlying market. But could you help me a little bit with the top line bridge? How we could achieve this EUR 2 billion starting with the almost EUR 1.5 billion? Is that you project for '22 in terms of order?

Yes. On the EUR 2 billion, as possible -- would really also have as a basis that, on the solid wood side that the business would continue as it does now, and still have a few years to work towards that goal. The last part of your question, honestly, I did not fully get. Could you just repeat the second half of your last sentence?

The order intake is stepping back year-over-year. This is of course, the reflection of the underlying end market. I didn't fully understand that. And I was just wondering about the elements on your top line bridge. If you think about '22 targets in terms of order intake, and then the potential EUR 2 billion in sales in 2025, this is a 1 quarter gap. And I was just wondering whether business growth across all business lines, whether it's specifically solid? I just wanted to get a better understanding of what the current sales of the discussion is. Was the EUR 2 billion may be too far away to be really a more complete target?

I would not rule the EUR 2 billion out. Yes, as I mentioned…

Sorry?

Yes, it's medium term.

2025.

Yes, give or take. But we're well preparing, if you will, at this point especially, with the solid wood business, which will significantly grow, where you're seeing that our target is to have this at least above 20% of our total volume, short to mid-term. That already offers EUR 300 million to EUR 400 million. And if you add -- and if you combine that with our traditional business and the growth that's possible, I wouldn't say it's out of reach.

And the potential teens margin for the business, they are still achievable alongside the EUR 2 billion?

Yes.

All right. Thank you very much.

The next question is by Philippe Lorrain, Berenberg.

Thanks for taking my follow up. I just wanted to get from you perhaps like a little bit of an explanation how you hedge basically the input cost risk in the contract? I think you've got like to some extent -- especially when it comes to components, framework agreements with our suppliers -- but I was really looking for a bit more of an explanation on your side, because you're mentioning the long lead times and the fact that it's not that easy to actually pass through the input cost inflation to your customers right now. However, you mentioned as well that some new orders are only taken with material price indexes. I thought in the past, at least between when you are basically pitching for a project and when you sign, you might adjust the pricing of the project. But yes, I'm trying to understand a little bit better how your hedging strategy actually looks like.

Yes. Sure, Philippe. First of all, the first step actually that we made was to reduce the validity of our proposals, because, what we saw during the crisis is so much movement in terms of cost between the point in time where we made a proposal and the moment where a customer was ordering. So we have significantly reduced validity, in many cases even 4 weeks or below, where, in some cases in the past, we might have had 3 months or so as validity. So first of all, we reduced the risk significantly of cost deteriorating during those 2 points in time. Second, we either calculate more conservative -- the cost, when we still have to do fixed price offerings, or we, in some cases, go, as I explained, with material price indices that we pre-discussed with customers. And something that also happens in a few, not many cases is that, customers in special cases are also ready to go into open book approaches where we define a certain margin based on an open book approach. That's something -- I don't think that will become a significant share of the business, but in some cases, that's for customers and alternatives too, because, obviously, they have to live with some uncertainties as well.

Okay. That's very interesting. And is it something -- so everything you mentioned, especially when it comes to the material indexes and the open books and so on, is that something that is fairly new? Or is it something that was already existing more or less in your business? And that's just the share of this across the projects which is increasing?

All of this had been performed before. And even on the open book approach we had -- and of course, I'm not going to mention the name, but we had one large customer who was traditionally working with us on this basis. So all of this is known to us. And we just, how should I say, mix the recipe a little bit in a different way. And I would say, until recently, in the automotive world, the fixed price offers had been, if you will, the normal rule of the game. But we are, of course, not -- either we calculate more conservatively and can live with the risk, or we share the risk with the customer.

Okay. But I guess, as long as the raw mats are not fluctuating that much, it's also not like that much of a problem.

Right. The fluctuation was exactly the issue. Even if material prices increase, and everybody lives off the same commodities, then we have to adapt our pricing. The real issue was -- and this is what was impacting us to some extent -- was really the fluctuation of cost during execution.

Okay. Fair enough.

[Operator Instructions] Our next question is by [ Julian Julio, RB Research ].

I have 2 questions. And my first question will be, again, the raw material cost increase. You mentioned how you try to mitigate that. But also talking about the salary increase, you have inflation, salary inflation in Germany, in particular, but in other places of the world. And in form of that, you're expecting the margin improvement. So you have, like you mentioned, also increased the price. What type of pricing increase you have today in orders today compared to it was last year? Is it the magnitude of 5%? Is it 7%, 3%, 10%? Have you an idea about the price increase, everything to be equal, you have implemented today compared to last year? And my second question, what sort of salary increase, or inflation on salaries you're expecting for this year compared to last year? So that's my first question. And my second question would be concerning the woodworking market -- the wood market with the crisis we have in Russia, Russia is a big exporter of wood. Maybe tomorrow, we will not be able to export, we'll have difficulties with that, and that could lead to a strong rise in wood prices. What could be the consequence for your business? If, let's say, prices of wood is increasing very significantly, maybe the demand will reduce because of the pricing. And therefore, the manufacturer of furniture and so on, will need -- will have less volumes, less coming from the customer, and therefore, they may order less machine to work on it. Is it something which is a possibility? Because you talked about effectively how -- your specific impact in Russia, but the indirect impact of the wood market. Have you -- view on that.

Thank you, Julian. On price increases, we have in the higher single-digit area already increased prices at HOMAG. In the machine business, it's easier to track because you can easier compare like-for-like. In the construction business where each paint shop looks a little bit different to another, so to compare price is not always easy. What we track more in this business is obviously the gross margin. And there, our aim is, of course, to defend the gross margin, if not increase it, and this is how we calculate projects. Nevertheless, also there, if I had to make a qualified guess, prices there also increase maybe in the same amount so.

Sorry to interrupt. To answer very quickly. Does it mean that if you raise, let's say, 8%, 9% increase in your pricing, it means that your volumes increase in reality, excluding this inflation of pricing, when you expect some sales revenues to increase by more than a double-digit growth, if I take your guidance for this year? It means that somehow you have, in fact, lower growth in volumes, and a big part of this increase is indirectly due to price?

Yes. We're not a commodity business, so we cannot…

I understand.

Calculation is no easy. So I would say, our sales growth is not purely inflation.

Clearly, it is not. When you mentioned your price increase -- but, just to try to get a sort of mixed or calculation, simple calculation.

Yes. That's maybe -- what I said is what I can deliver, probably. It's -- and nobody knows actually where material prices go from here. They might have peaked out already. In some cases, we've seen that. We've even seen reductions, maybe starting in China, where we've already seen, especially on the typical commodities and steel also, a little bit of a relaxation. So the point is really to adapt to it and to have the right measures in our hands, and to be very sensitive in order to manage the risk of cost fluctuations. And this is where we feel relatively comfortable. On salaries, one of the unions -- so it's hard to say. And Dietmar, you want to add something?

Yes, I can add. What we have in the budget actually is an increase between 4% and 7% across the growth, then depending on the region and prospective country in Germany, which is around half of our workforce. We have a comparable stable situation due to the fact that the labor negotiation last year was done -- concluded until end of September this year. So we need to see what difference we've started to see, how the negotiations finally will be done. But due to the fact that already until end of September is in the books, based on last year's negotiation, then it will only have a limited impact when there is a higher increase for the full year.

Actually, yes. There is no -- I mean, if the question was targeting -- if there is a risk that we see from -- for this year, from a strong wage increase -- and now we don't see that. I mean, the impact that we would have to deal with it than more or less the following year. What the outcome will be in different geographies, hard to say. On woodworking and Russia -- and you've made, how should I say, a chain of events following one another. In the end, customers not ordering so many machines anymore. I don't see that. First of all, we are in a lucky position that we are not the producers of furniture or wooden houses, but we supply the equipment. So we're one step down the food chain, if you will. And why am I not so concerned about this? We've seen a development a bit more than a year ago, where there was trouble between Canada and U.S., and wood prices for at least a period of time had risen significantly. This did not impact the demands of our customers. So, I have at least no evidence at this point that as a consequence of maybe longer-lasting conflict, less wood passing the border, customers paying more for wood, in the end than placing fewer orders. I don't see that chain at the moment.

For the moment, there are no further questions, and finally I'll hand back to Andreas Schaller.

Thank you, Martin. Thanks very much to all of you for your interest, and for attending the call. If you have any further questions, please feel free out to contact myself or the Investor Relations team. And well, then I would like to say goodbye to you all. Stay safe, and thanks once again for your interest.

Ladies and gentlemen, thank you for your attendance. This call has been concluded. You may disconnect.