Dürr Aktiengesellschaft (DUE) Earnings Call Transcript & Summary

Good day, ladies and gentlemen, and welcome to Durr conference call. Dr. Jochen Weyrauch, CEO; and Mr. Dietmar Heinrich, CFO of Durr AG will present the Durr Group figures for the first half of 2022, followed by a Q&A session. I'll now hand the call over to your host today, Mr. Andreas Schaller, Head Investor Relations of Durr AG. Please go ahead, sir.

Thank you, George. Ladies and gentlemen, good afternoon or good morning to those of you in the U.S. Welcome, everybody, to our second quarter 2022 earnings call. With me on the call, as we just heard, are our CEO, Jochen Weyrauch and our CFO, Dietmar Heinrich. They will present the second quarter and half year results and the outlook, and we'll be happy to answer your questions in the subsequent Q&A session. As always, our earnings presentation is available on our Investor Relations web pages, and we assume that you have it in front of you. Please be aware of our disclaimer regarding forward-looking statements on Slide 2. After the short introduction, I directly hand over to our CEO, Jochen, the floor is yours.

Thank you, Andreas, for the short introduction and warm welcome also from my side to all participants on this call. I'm happy to present our half year earnings together with our CFO, Dietmar Heinrich, whose contract was just extended until 2026 yesterday. I'm really happy to continue the great teamwork with you, Dietmar.

Thanks, Jochen.

Now let's begin the presentation of our earnings. I will start with a review of our performance in Q2 and give an update on sustainability. After that, I will briefly comment on the performance of our divisions before Dietmar will go into more details regarding the financials. At the end, I will present to you the guidance for 2022, and we will have sufficient time to answer any questions you might have. The highlights of Q2 on Slide 4. With more than EUR 1.2 billion, which is an increase by 12% year-on-year, we achieved another strong order intake in Q2 driven by all divisions. Growth in half 1, even amounted to 24%, resulting in the highest half year order intake ever. I think we have to digest that for a second. We received large orders for automation and e-mobility production equipment. HOMAG recorded a new half year record order intake with more than EUR 1 billion. We also experienced good demand for environmental technology from the chemical industry. At the moment, we do not see a slowdown of order activity over the next month. And therefore, we decided to raise our guidance for order intake 2022 to between EUR 4.4 billion and EUR 4.7 million -- sorry, EUR 4.7 billion which is up EUR 300 million. This does not mean that we take every order that we can get. On the contrary, we are becoming more selective and focused on a value before volume strategy in order to support the margin improvement towards our midterm goals. The order backlog reached a new record level of EUR 4.1 billion. This is a very solid base for sales growth in the coming quarters and even years. Sales revenues improved by 16% quarter-on-quarter despite the lockdowns in China and the still difficult supply chain environment. Book-to-bill in Q2 remained above 1 with 1.15. Looking on the margins, we saw a dip in Q2, as we indicated already during our Q1 call in May. The EBIT margin before extraordinary effects temporarily declined by 100 basis points to 3.9%. This was mainly driven by the lockdowns in China that impacted the business significantly in April and May. During that time, we could not deliver the normal level of services. Actually, we didn't deliver much at all. In addition, we recorded underutilization in several areas that negatively affected margins. Other factors that put pressure on margins were the increased material costs and the fact that some of the orders that were executed in Q2 at lower margin quality as they were already accepted in the middle of the Corona pandemic. On top of that, we spent more for our OneDürrGroup Group optimization program, which will generate synergies and cost savings in the future. In June, we already saw a strong recovery in China, and our colleagues there are very eager to catch up the delayed business until the end of the year, the latest. Let's move to cash flow. This is an important focus topic for us. Free cash flow remained positive for the first half year but was clearly negative in Q2. The main reason was the buildup of net working capital in light of the growing sales revenues and in order to have some inventory safety buffers as we are still facing supply chain constraints. The situation in supply chain has not become worse in Q2, and we see the silver line at the horizon here and there, but it is still too early to give the or clear. Based on the development in Q2 and the current business outlook, we confirm our earnings outlook for 2022. As already mentioned at the beginning, the only update refers to the order intake targets that we raised by EUR 300 million. On Slide 5, we see the key financial indicators for the first half of 2022. All in all, we regard this as a solid first half year despite the challenging environment. Order intake increased by 24%. This includes EUR 101 million positive exchange rate effects. Sales revenues grew by 20% and included EUR 69 million positive foreign exchange effects. EBIT before extraordinary effects increased by 8% and the margin declined slightly to 4.3%. The foreign exchange effect was EUR 5 million. Net income was 34% higher compared with the prior year. Finally, free cash flow remained positive despite a strong increase in net working capital in the second quarter. Let's look at the order intake on Slide 6. As already mentioned, we stayed at a high level of more than EUR 1.2 billion in Q2 after the record. The momentum in automotive was strong with continued high demand from China. In addition, HOMAG received large orders in the Americas, including production technology for sustainable wooden houses, due to, among other things, price increases in the past month and the introduction of price adjustment clauses, we improved margins of our order backlog and reduced risks going forward. On Slide 7, we see the geographical distribution of order intake. Most of the regions contributed to the growth with the exception of Germany, where we reached a relatively high level of the prior year. China continues to be strong, and the order intake in the Americas shows a high momentum. India is the main driver behind the growth in the region, Asia, Africa, Australia that does not include China. Let's turn to Slide 8 and talk about sustainability, climate change mitigation and adoption are important topics. The forest fires in many places in the world reminded us of that. An important part of driving action is to create transparency about the measures taken. Since 2021, companies in Europe have had to report about how their activities contribute to the environmental objectives of the EU according to the EU taxonomy regulation. Two levels are thereby distinguished. What part is eligible and what part is aligned with the EU taxonomy. Durr is 1 of only 4 companies in the DAX family that reported both, eligible and aligned activities, and we have clearly taken a pioneering role in this respect. Slide 9 shows some more details regarding our activities. As the EU taxonomy regulation is not giving a general guidance for the mechanical engineering industry, we carefully evaluated all our activities with respect to 2 questions. Where do we make our customers' production more sustainable? And where do we enable the manufacturer of sustainable products? We found a number of activities from resource-efficient painting processes to equipment for the production of solar modules, lithium ion batteries and wooden houses. We believe we are well positioned here and that our industry is actually a key enabler of a carbon-neutral future which is not yet fully recognized by the taxonomy. On Slide 10, we can see the expected reduction of our Scope 1 and 2 emissions in 2022. Already today, we are certain that we will achieve a 40% reduction of these emissions compared with the base year 2019. This is driven by the actions we have taken including the investment in 5 photovoltaic systems in Germany and China to switch to green energy purchase for all locations in Germany since January '22 and the complete switch to green electricity in the Americas by the end of this year. In addition, we are currently revising our company car fleet policy to incentivize the timely switch to emission-free vehicles. And in June, we have published a methodology paper for those of you interested in the details of our methodology and emission calculation. Now let's go back to the business figures and have a look at the divisional development. We start with Paint and Final Assembly Systems on Slide 12. We Order intake in Q2 improved year-on-year by 15%. We received several automotive projects, mainly from Asia, and E-mobility continued to drive demand. In addition, we recorded 2 large orders in Europe and the U.S. for our newly established automation activities with the acquired companies, Teamtechnik and Hekuma. This included a large order of stringer machines that are used to electrically connect solar cells for the largest solar park in Europe. Revenue growth was picking up as more and more projects under execution. In addition, the service business shows solid growth. The EBIT margin, however, was impacted by the lockdowns by higher material costs and the fact that we are still working through lower-margin projects acquired during the early corona phase. We continue to actively approach customers with a goal to share the higher-than-expected material costs and include cost escalation clauses in new contracts. For the second half, we expect a further acceleration of revenues. Let's turn to Application Technology on Slide 13. Order intake remained on a high level, driven mainly by China. The order pipeline looks good, and we expect the broader regional spread in order intake in half 2. Sales revenues in Q2 grew by 26% year-on-year despite the lockdowns in China. The robot activities in Germany were not impacted and decent congestion in Shanghai Harbor resolves quickly in June. Some improvements in the supply chain become visible meanwhile. The EBIT margin was very solid in Q2 despite the fact that we could not deliver spare parts during the China lockdowns in April and May. All in all, a positive development of our robotics business in a challenging environment. Next is Clean Technology Systems on Slide 14. The order intake accelerated in Q2 and was driven by strong demand from the chemical industry in Europe. We continue to see good business opportunities with producers of batteries and battery materials. Revenue growth picked up across many regions with the highest contribution from North America. The service was very strong. On the margin side, we have seen some improvement sequentially. However, we are still experiencing pressure from higher material costs that could not be forwarded to customers in a timely manner. We are expecting further margin improvements over the next quarters. Based on the high backlog, we see significant growth potential going forward. On Slide 15, we can see the summary of developments at Measuring and Process Systems division. Order intake was very solid in Q2, mainly driven by North America and Asia and across all product lines. Service business developed very nicely. Sales revenues were constrained by the lockdowns in China and missing parts. The resulting underutilization had a negative impact on margins, which remained positive due to the support of the strong service business. All in all, the demand environment has clearly improved, and we see a strong recovery potential once the supply chain normalizes. Last but not least, let's take a look at HOMAG on Slide 16. The strong development continued in Q2. Order intake remained at a high level with EUR 457 million, and we achieved more than EUR 1 billion in the first half, another record. Demand from North America was the key driver and included projects for production technology for sustainable wooden houses. For the first time, sales revenues exceeded the EUR 400 million mark in Q2. This included a major trade order of about EUR 40 million. We clearly see that the investment in our service team pays off as the service business continues to grow. The EBIT margin improved sequentially despite cost inflation and supply chain constraints due to price increases, high utilization and the strong service business. We're very happy with the development at HOMAG and look forward to develop this business further with our ongoing capacity expansion expansions and process improvements. Now let's look at the service business on Slide 14 (sic) Slide 17. I already mentioned that spare part deliveries in China were impacted by the lockdowns. This is also reflected in the service mix on the right side of the slide. Nevertheless, service sales even increased slightly quarter-on-quarter. The share of service sales, however, declined to 27% as the equipment sales outgrew the service. Service margin remained at a high level and the order pipeline for the second half of the year looks good. Service is a clear differentiator for the Group. And now, Dietmar, hand over to you for the financials.

Yes. Thank you, Jochen, and welcome to everybody also from my side. I start with Slide 19. All in all, H1 was quite solid despite cost inflation, lockdowns and supply chain constraints. Sales revenues are well on track, and we are focusing on margins and cash flow in the second half of the year. Let's have a look at the financial details on the next slide. On Slide 20, we can see that sales revenues grew year-on-year by 24%, as already mentioned previously by Jochen. We have seen a fast recovery after the lockdowns in China and strong growth in North America and Europe. Consequently, those 2 regions gained share from a geographic perspective. Asia without China lost share as large projects in South Korea were completed in the prior year. Sales revenues are on track to achieve the guidance for 2022. Now let's move to EBIT on Slide 21. As already indicated during our last call, the EBIT margin before extraordinary effects saw a dip by around 100 basis points quarter-on-quarter in Q2. The lockdowns in China led to underutilization and lower spare part shipments. This impacted the gross margin that declined by 300 basis points in Q2. Overhead costs rose year-on-year, mainly pushed by sales commissions due to the record order intake and higher R&D costs. Extraordinary effects were EUR 9 million lower than during the prior year. On Slide 22, we can see the free cash flow development. We recorded actually a negative free cash flow of minus EUR 67 million in Q2. This was mainly driven by the net working capital development and to a lesser extent by the lower earnings levels. In H1, free cash flow remained positive compared to the same period last year, we recorded an increase in net working capital, higher CapEx and the reduction in contract related provisions that are included in the line item other. Higher tax payments were almost compensated by lower interest payments. Continue to focus on free cash flow, and we are on track to reach the guidance of EUR 50 million to EUR 100 million for the full year. Now let's look at net working capital development on Slide 23 to provide you some more insights. As mentioned, net working capital increased by an amount of EUR 50 million quarter-on-quarter. Contract liabilities remained roughly stable at a high level, driven by the continued good order intake. On the other hand, inventories and contract assets increased because of growing sales revenues and higher safety stock levels. Nevertheless, today's working capital stood at 38.4 days which is still better than our targeted range of 40 to 50 days. We expect some further moderate buildup of working capital over the rest of the year, but we'll manage this very carefully and target the lower end of the range. On Slide 24, we can see the impact of the free cash flow and the dividend payments on our net financial status. Net debt increased to EUR 116 million at the end of the second quarter 2022 compared with the very low level at the end of the first quarter. However, we are at about the same level when comparing with the end of last year or the end of the second quarter 2021. And leverage stands at 0.4x net debt to EBITDA. So we are very pleased with our solid balance sheet and keep our guidance of net debt in an area between minus EUR 75 million and minus EUR 125 million at the end of the year unchanged. Finally, let's have a look at our liquidity headroom on Slide 25. For the first time since a couple of quarters, we have an upcoming maturity of EUR 50 million within the next 12 months related to Schuldschein loan maturing April 23. We feel actually very comfortable with the available funds of more than EUR 1.3 billion, which leaves us flexibility to further grow our business. And with this view from the financial side, I hand back to Jochen for the outlook.

Thank you very much, Dietmar. Let's turn to the outlook and start with the market development. On Slide 27, we see the July forecast of LMC Automotive for light vehicle production in 2022 and until 2029. After several downward revisions, we have recently seen a stabilization and even slight upgrades in this forecast. For 2022, LMC now expects a 6% growth in light vehicle production. As you can read from our order intake in the last quarter, there's almost no correlation between production levels and order dynamics. Mid- to long-term LMC continues to see a growth potential to above 100 million vehicles per year. Slide 28, we see the development of the markets relevant for HOMAG. The view has not changed since February and is supported by recent trends. On the furniture production technology side, we expect a relatively stable market size of somewhat above EUR 4 billion which is characterized by the ongoing consolidation among furniture producers. As the consolidators in this industry are looking for a high degree of automation, we feel very well positioned to benefit from this trend. On the right side, you see the addressable market for machinery and systems for the production of sustainable wooden houses. 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 offerings to the customers. We have shown Slide 29 already during our Q1 presentation, as we have the feeling that there is a mismatch between the solid demand environment that we experienced and the cautious growth assumption for our business in the capital markets. I would like to reiterate that the demand for our products is driven by long-term fundamental trends that we believe are resilient. Investments into the decarbonization of production remains high on the agenda of our customers, maybe even higher in the light of the war in Ukraine, and an accelerated move to become independent from fossil fuels. We provide consulting services to find the right solutions and we have the right products in our portfolio to electrify processes in the paint shop that used to be run with gas. We also believe that the transformation towards EVs will continue with high speed and we experienced increased demand from the chemical industry for environmental technology for the production of materials needed in lithium iron batteries. Demand for affordable housing continues to grow, and we see a shift to wood as sustainable construction material also for multistory buildings. Based on these trends, we believe our demand drivers are intact for the next years that's what makes us confident regarding our future on prospects. Now let's take a look at the guidance of the Durr Group for 2022. There's no change in earnings expectations compared to the update in May. The lockdowns in China ended in May, and we already saw a strong recovery in June. Supply chain constraints have not become worse in Q2 and there are first signs of improvements here and there. There is only 1 guidance item that we change today, and that is the order intake. Due to the continued high demand and additional foreign exchange tailwind, we now expect an order intake between EUR 4.4 billion and EUR 4.7 billion instead of the range of EUR 4.1 billion to EUR 4.4 billion we expected in February. As we feel comfortable with the revised earnings guidance from May for the group, we are also resuming our guidance for the divisions. The updated numbers are shown on Slide 31. Compared with the expectations in February, we see the following changes. The order intake expectations have increased for all divisions with the exception of Measuring and Process Systems. The sales revenues guidance remains unchanged for Paint and Final Assembly systems and application technology. For Clean Technology Systems, the outlook for sales revenues increased by EUR 30 million on average due to the solid demand situation. At the same time, sales revenues expectation for Measuring and Process Systems declined by EUR 30 million on average, mainly due to the division-specific supply chain constraints. At HOMAG, we increased the upper end of the guidance by EUR 50 million due to the very good business development. The EBIT margins of the divisions now also reflects the revised group guidance from May. Adjustments compared to February were smaller at Application Technology and HOMAG as these machinery businesses have shorter lead times and we're better able to compensate cost inflation. The systems businesses at Paint and Final assembly systems and Clean Technology Systems saw a larger effect from material cost inflation due to the longer lead times. The largest margin impact we see at measuring and process systems as to supply chain constraints due to lower sales revenues. Our strategy and the midterm targets are shown on Slide 32. I would like to point out that we remain confident that we can reach our 8% EBIT margin target in '23 or latest in '24. Let's summarize on Slide 34. The strong order intake continued in Q2, and we have raised our outlook for the full year by EUR 300 million for the midpoint. Revenues showed strong growth and we are well on track to reach our guidance for '22. The EBIT margin in Q2 was impacted by the lockdowns in China as expected. We have seen a strong recovery movement since June, and our colleagues in China are eager to catch up the delayed business until the end of the year. We confirm the revised earnings guidance from May and have resumed our divisional guidance. Thank you very much for your attention. Now we're happy to answer any questions you might have.

[Operator Instructions] Today's first question is going to be coming from Mr. Will Turner, calling from Goldman Sachs.

I've got several. So I'm going to ask them just one by one. And then the first question, I guess, is on the order intake. Out of curiosity, was the -- has the increase in order intake because you sold more units and more volumes than you've expected? And how much of this increase is really down to the price increases that you've put through.

Okay. Thanks, Will, for the question. To answer from your last piece of the question, there is not much of an impact from the price increases because even -- if you look at HOMAG, for example, where we increased prices in a double-digit manner over 18 months. That, of course, has somewhat of an impact, but it's not a main driver, and it's lower in other divisions. The real impact is from a continued high demand of equipment and machines in all our divisions.

Okay. That's clear. And just out of curiosity, you're now including some greater or new price adjustment clauses in your contracts. Can you just elaborate a little bit more on what this includes? I'm just trying to think from a customer's perspective, how willing are they to agree to, obviously, contracts with unknown costs if there are these kind of escalation clauses?

Yes. Yes, thanks for asking that question. I mean the automotive industry now for a couple of decades and I can say also the automotive OEMs have understood that this is a particular and special situation. And consequently, I see much more flexibility with our customers even on fixed price contracts to at least share the pain, if I may say so. And we have a couple of adjustment already achieved, which -- with significant impact. So that's on fixed -- on past orders, if you will. On the ones that we have concluded recently, the same applies where in the past, especially in automotive, customers have been reluctant or even refusing price indices for running contracts. Again, we now have the first contract signed where customers have accepted this as they now, to some extent, they have to protect also their supplier base. So I can really say there has been positive movement, really very positive movement within or even above our expectations.

Okay. And these escalations, are they related to any particular cost items in the procurement. So if your suppliers don't deliver for the price that you've got agreed. You have like a transparent mechanism, which shows your customers or...

There's a few different ways. One would be we are even ready to go open book contracts where customers can clearly follow what cost item has moved in what way during the execution or that, in many cases, is a preferred option. We have a mix of agreed indices like steel price index, labor, et cetera. that we include in a mix as a calculation in the contract, where we -- once we are ordering significant components from our suppliers or execute the contract as such, we tell the customer at a certain date that the index has made this change, and we've spend a lot of time in discussing this with customers and also making sure that the correlation of those indices work very well with the real cost inflation.

Okay. Great. And then just my final question. Obviously, as you're fully aware, energy prices in Germany skyrocketed this year. And I fully kind of understand that this will have a relatively limited effect on your direct operations. And it's great to see that you've reduced your Scope 1 and 2 emissions so significantly, which will be quite helpful in this current year, I can imagine. But I want to know how do you feel about your suppliers? Are you keeping quite close relationships with them? In particular, the suppliers that you have based in Europe that have foundry operations. Are any of them struggling? Do you have any concerns about their ability to supply with these higher energy costs and the disruption that may be associated.

There is just one thing we learned from this crisis is to look a couple more levels down the supply chain than we might have done before. So we believe that we have a relatively good visibility with what's happening. I can confirm that as of today, I'm not aware of any significant supplier running into any sort of troubles. But we're clearly watching the situation. And for most of our components anyways, we have at least a dual supplier strategy. In terms of energy cost, we have, as our own value-adding in average is relatively low. Our energy cost in Europe is also -- is relatively low. I think we spent less than EUR 15 million last year on oil and gas ourselves. So of course, increases also hit us, but to a much lesser extent companies with a different business model would have to absorb.

We'll now go to Sven Weier calling from UBS.

First question is on the order intake guidance. And when I look at the increase, in my view, probably largely reflects the outperformance that you had in the first half. But now at the same time, you're talking about what seems like a very good pipeline also for the second half. But if I look at the implications also on the divisional level, it rather shows quite a bit of a slowing in the second half, especially for APT and for the HOMAG business. So is that just you trying to be cautious and -- but the pipeline is actually not so dissimilar than it was in the first half?

Good question, Sven. I would say we are -- as -- we are very positive for the second half. I just was trying to find the right words to not sound too overoptimistic. But the clear message is especially for HOMAG, if you repeat this as 1 example, we said at the beginning of the year, we had a record year last year, and now we created another record half year. We currently -- we see maybe -- do we -- are we sure that we could be as bullish for the second half of the year, as we've seen for the first half but we are probably not. Do we see significant reduction in the pipeline, no, we don't see that. But can we expect same number for the second half, I wouldn't guarantee it. And the same is true also for the other businesses, even though especially on the automotive side, the pipeline remains very strong. But as I was mentioning during my presentation, we become a bit more picky in terms of margin before volume. And this is why we rather want to be a bit more on the conservative side. But is there a risk that we reach more the higher end of the guidance, yes, potentially.

Okay. And can you quantify the -- because I think you had a big ticket in HOMAG in the second quarter in the U.S., how big that order was specifically?

There was 1 order that was between EUR 20 million and EUR 30 million. If I recall, there was probably 2 orders of that magnitude between EUR 20 million and EUR 30 million. One more furniture side of the business and one from what we call the construction element. So that's the wooden houses.

Okay. Understood. And then I had a follow-up question on the price adjustment clauses mean now that the metal prices are coming down quite a bit again. I mean, are you already having the first discussions about downward revisions of the prices or how frequently is this actually updated? Are you striking the contract? And then once it's delivered, you look at how things have developed or how frequently is this actually adjusted?

This is adjusted by, if you will, action. So we -- depending on the customer in a very timely manner, when we execute progress on a project by either our own work or by ordering equipment from suppliers. We fix the date of this and then we combine that with the indices in the contract. So this is not a renegotiation. This is more an issue of documentation to prove to our customers what equipment have we ordered at what date and what impact and reflect that against the public indices. For contracts where we have renegotiated fixed prices, there, the price remains the same, and we believe that we are, hopefully, rather on the safe side than creating additional risk. So the contracts that we have renegotiated, if you will, we've built in some sort of a buffer for us, which hopefully plays well for us.

But if I understand it correctly, I mean, on the price adjustment clauses, it sounds pretty symmetric, meaning that if prices go up further, it's adjusted, but if they go down as well. But it's not like when the prices go further up, it takes longer to pass it through in the adjustment clauses then if prices go down. That's pretty symmetric to me.

No, you are right. Yes, it should work well both directions.

Okay. And then the final question from me would be, again, on the gas exposure, but more on the client side. I mean, we all know that the paint shop is quite a big gas consumer in the production side. And how are you helping the clients to become independent of the gas? Is there any kind of a retooling kit you have? Or how should we think about that?

Yes. That's maybe a very good way to call it. Yes, we make our customers' offers, for example, to convert a gas-fired dryer or an exhaust purification system from really being used with gas into 1 that is electric. So it's an issue of infrastructure of our customers and their willingness to invest. But all of this is available already today. We can build today a CO2-neutral paint shop if a customer is ready to go that route.

And are you seeing more efforts now on the back of what has happened in the last month? Or are the OEMs rather a bit inflexible on that?

No we see movement and for new projects, this kicks in quicker now because there, it's relatively simple for customers to switch. In some cases, that's a bit more CapEx for them. It is, of course, not easy for existing sites where you can imagine that already the infrastructure of electric supply has to be assured. It might be relatively simple to convert a burner from gas into electric, but you have to have the electric power available. So, and the, customers are working on that because electric happening in many more ways. And this will take a little while, but it already now opens new opportunities for us.

We'll now take questions from Mr. Alexander Hauenstein calling from DZ Bank.

I'm wondering with the experience you made since you tapped into the battery business, would you rather see it more or less likely that this business might sooner than later be run as a separate division? And the same question, please, for the MEGTEC Automation business.

Thank you. Thank you, Alexander. On the battery, we said a while ago, and that still applies that we're still at the beginning. The capacity or the potential is there. On the other hand, there is an existing supply chain. You might have seen that Volkswagen is ordering a lot of equipment right now, not all from Europe, if I may say so. So others are also deciding where they buy equipment. We see potential -- we have had the 2 orders we were reporting about, and we are -- we continue to be positive. So no change in our view on the business compared to a couple of months back. But yet, we have to achieve the first large order, which we don't have on our books yet. And this pretty much then the gradient, if you will, that we can achieve in this business will then decide whether or sooner or later, we made this an own business. So far, we have it, as you know, in our CTS business. And very much the same applies for the automation business. I assume you're referring to our acquisitions of Teamtechnik and Hekuma, where again, okay, thanks -- the approach remains the same. We are well growing the business. So we've had very nice orders for the year, which I was talking about earlier. MEGTEC in the U.S., large solar order in Italy. And we're also continuing to look at acquisition opportunities ideally west of the Atlantic, and once all this happens very well, then the business continues to grow significantly, then there might be the right moment to make this in our business, but we don't want to create more complexity for a business that is still relatively small than needed.

We'll now move to Mr. Nicolai Kempf, calling from Deutsche Bank.

Nicolai Kempf from Deutsche Bank. My first one to be just a follow-up on the cost sharing of OEMs. Is this true for all OEMs across regions because you've heard some news from German OEMs that they are not willing to share costs.

Look, I can confirm that they do. It's my simple answer to that as of now.

Okay, my second one would be on the free cash flow. Post the first half, it's slightly positive. Thanks to a very strong first quarter. You target EUR 50 million, EUR 200 million for the full year, and but also flat working capital headwind for the second half of the year. So how will you achieve your target just by higher earnings in the second half.

Yes. The higher earnings will play a specific role in that regard. That's right. the other contribution is coming nevertheless, from the effect that Jochen already outlined that we expect a good order intake in the second half of the year as well, and we also expect the initial payments coming from our customers.

We'll now move to Mr. Philippe Lorrain College from Berenberg.

Yes. Excuse me, the question has already been asked but I was picking up from your comments in the report, I guess, in the press release that you were incurring expenses related to reorganization one of your group. If I recall that -- could you mention whether these expenses that you had in H1 were really relevant and where they were booked actually back in the P&L?

Yes. Actually, it's not a restructuring, Philippe. It's the -- what we do is harmonization of process and systems that we are doing -- it's a minor -- no, it's an impact. That's why we mentioned it. Actually, it's a low single-digit million euro amount. And it's not recorded as extraordinary effects.

Okay. Perfect. So that means your cost base is further inflated a little bit by these effects that are purely temporary and transitory.

That's correct, yes.

We'll now go to Ingo Schachel calling from BNP Paribas.

The first one would be on the very strong order intake in Paint Systems. I would be curious to understand the psychology from order pipeline to order intake a bit better on your client side? I think you track your order pipeline quite systematically. So just wondering if you could describe whether let's say the last sort of last round of contract negotiations, even more quickly, whether you see stronger time pressure on the side of clients to strike deals, preempt inflation or how you have a conversion rate of pipeline into intake as this maybe changed in the first half of this year?

Thanks, Ingo, for the question. We see in PFS, a very strong order pipeline where I can say for the first time for quite some time, we've also refused in some cases, to quote on customers where we traditionally not been so successful if I simplify this or where we saw a not satisfactory margin potential. Nevertheless, we have good orders, and we continue to see a very strong order pipeline. We see more and more clients trusting us in those days to be a solid partner. And -- but we have become much more selective in an environment where we see a strong -- really a strong pipeline of significant projects globally, not only in China, and more also now in North America. I've talked about India, where we booked a very nice order recently and see the market coming up. Some nice brownfields, but also greenfields in Europe. So a nice mix where we try to select the right ones, but the right ones will even be sufficient to further fill our backlog.

And thinking about the right projects and profitability, would you be willing to share with us when you look at the projects you're executing right now how strongly the, let's say, realized margin differs from the initially calculated margin. I guess, that probably peaked in the second quarter and maybe even how much of the, let's say, margin shortfall [indiscernible] cost effect, do you expect to retained in the second half of the year? So how much shortfall off of realized versus budgets that you still expect in the inflationary environment? Yes, that would be the second question.