Dürr Aktiengesellschaft (DUE) Earnings Call Transcript & Summary

Welcome to the Dürr conference call. Dr. Jochen Weyrauch, CEO; and Dietmar Heinrich, CFO of Dürr [indiscernible] AG Dürr Group's preliminary figures of 2022, followed by a Q&A session. Please note that this call is being recorded today on Thursday, the 23rd of February 2023. I will now hand over to Andreas Schaller, Head of Investor Relations of Dürr AG.

Thank you, Jess. Ladies and gentlemen, good afternoon, and good morning to those you in the U.S. Welcome, everybody, to our earnings conference call. With me on the call today are our CEO, Jochen Weyrauch; and our CFO, Dietmar Heinrich. They will present the preliminary results of the financial year 2022 as well as the outlook for 2023, and we will be happy to answer your questions afterwards. As always, our earnings presentation is available on our Investor Relations page, and we assume that you have this in front of you. Please be aware of our disclaimer regarding forward-looking statements on Slide 2. And now it is my pleasure to hand over to our CEO, Jochen. Please go ahead.

Thank you, Andreas, for the short introduction, and a warm welcome also from my side to our participants on this call. Let me start with some short remarks on the past year. 2022 was more challenging than we thought at the beginning of the year. The attack of Russia against Ukraine and the extended lockdowns in China in the second quarter resulted in severe supply chain constraints and additional material cost inflation. Despite all this, the Dürr top line growth in 2022 was better than expected and the margin development in line with the guidance we gave in early May. This was probably possible because the hold to improve actively book on these challenges and form solutions to reduce the impact. Let me take this opportunity and thank all our employees for their great commitment and the exceptional efforts. Now let's turn to the agenda. As usual, I will start with a review of our performance in 2022. 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, we will have a look at the guidance for 2023, and we will have sufficient time to answer any questions you might have. The highlights of 2022 are on Slide 4. For the first time in our history, we achieved an order intake of above EUR 5 billion. This was driven by several factors. First of all, Dürr reached the record level of the prior year due to a strong first half and despite the somewhat weakening momentum in the second half. Then we have seen a significant increase in demand in the second half of 2022 from automotive customers as established OEMs started large greenfield and refurbishment projects, while there was still solid demand from EV start-ups. In addition, contract awards for battery gigafactory projects in Europe gained momentum, and we received several orders for solvent recovery systems. In total, order intake for battery production equipment exceeded EUR 100 million in 2022. Last but not least, all the intake in the high-performance automation business successfully grown to a new record level. This included a larger order for [indiscernible] machines for the assembly of solar panels, like you can see on the cover of this presentation. Order backlog stood at more than EUR 4 billion at the end of the year. This is an extremely solid base for sales growth in 2023, as you will recognize when we look at our sales guidance later on. Sales revenues also reached a new record level of EUR 4.3 billion. We had a strong finish of the year with a new quarterly sales record in Q4, driven by the recovery in the automotive business and easing supply chain constraints. EBIT before extraordinary effects grew EUR 230 million, 5.4% margin reached the lower half of the base range of 5% to 6.5% as predicted in November when we published for Q3 earnings. A strong finish in Q4 with a margin of 6.8%, helped to recover some of the margin loss incurred are of the year due to the lockdown of the China. All in all, I believe that the managed supply chain constraints, production disruptions and cost increases very well during last year. Free cash flow remained strong in Q4 due to the continued dispute net working capital and CapEx management. Based on the high order backlog, the overall solid demand environment and the margin improvement measures we have implemented, we are confident to take further that store or our midterm targets and grow profitably in 2023. We will look at the details of the guidance at the end of the presentation. On Slide 5, we see the financial indicators for 2022. Order intake increased by 17% to slightly more than EUR 5 billion. This includes the EUR 19 million of positive exchange rate effect. CapEx revenues grew 22% and increasingly positive foreign exchange effect of EUR 136 million. EBIT before actual effects increased 17%. The margin declined slightly to 5.4% due to the early effects from the China lockdown in Q2 and higher material costs. The foreign exchange impact was EUR 11 million. Net income was 58% higher compared to 2021, in addition to the high EBIT, we also recorded the better financial results. Finally, the free cash flow of EUR 170 million, almost by the year's level. This is equal to cash conversion with respect to net income of 85%. On Slide 6, we can see the comparison of the actual results with the original guidance from February and the last guidance provided to [indiscernible]. The intake came in far better than expected at the beginning of the year due to the drivers already mentioned in the other lines. Sales revenues slightly exceeded the guidance that was unchanged during the year despite [indiscernible]. This achieve reflects our success in increasing values and security parts for our products, sometimes by new [indiscernible]. EBIT margins before and after extraordinary effect reached the levels as predicted when we revised our guidance in early May. The revision was done at the beginning of the China lockdowns and people of the companies that did not suspend guidance, but with new guidance based on the confidence in our own capabilities. [indiscernible] after taxes, we even reach the low end of the original guidance and free cash flow exceeded the guidance that was unchanged during the year. Dietmar will talk about the drivers of this in this part of the presentation. Due to the strong cost increases for building materials will delay part of our CapEx [indiscernible]. This is why the CapEx to sales ratio came in lower than plans at 3.2%. Overall, we [indiscernible] it's fair to say that we performed well in a very challenging year. Let's take a look at the order intake on Slide 7. We started with a very high level of orders in the first half year driven by [indiscernible]. In the second half, demand shifted to automotive [indiscernible] starting to normalize from the levels -- for the full year, we reached a book-to-bill ratio of 1.16. In the fourth quarter, however, the book-to-bill ratios were below 1 due to the very strong sales performance. Overall, the high on intake and resulting order backlog at a very solid basis for 2022. On Slide 8, we see the geographical distribution of order intake. After several strong years, we have experienced some [indiscernible] of demand in China, but still on a very high level. However, this was overcompensated by strong investment by our customers in North America. Orders in Germany grew driven by the uncalled notice [indiscernible] environmental equipment. In the emerging markets, we experienced increase in order intake, especially in India, but also in South Africa. With our global footprint, we can balance and situations in local market and are able to capture growth on a global level. The transformation of mobility and the related modernization of production plants are key demand drivers for us. On Slide 9, we see the growth [indiscernible] for EV-related order intake. We reached a level of more than EUR 1.1 billion in 2022 and a compound average growth rate of at least stood at more than 20%. We believe that this growth driver will continue to sort core business as well in 2023. Sustainability is another key driver of our business, and we are also taking measures of sales to reduce our carbon foot. On Slide 10, we see the reduction in Scope 1 and 2 emissions compared to the base year of 2019. By switching to green electricity in Germany, the Americas and India already achieved a reduction in emissions of about 50% measured in CO2 treatments. That means well on track to reach our target of a 70% reduction by 2030. In 2023, we plan to switch to green electricity at the remaining per locations, and we will further invest into [indiscernible] on systems. In addition, we have provided our company [indiscernible] policy and incentivize the conversion [indiscernible]. Overall, we continue to follow our strategy to invest into CO2 reduction rather than compensate. Another topic that has been the large important in recent years is the respect for human rights. On Slide 11, we showed some of the targeted actions that we obtained in 2022 to improve governance and prevent human rights regulation in our supply chain. Our corporate due diligence approach is describing the policy statement on the respectful light that you can find on our [indiscernible]. We are conducted with the thorough risk analysis on country level and assess the supplier sustainability performance using standardized [indiscernible]. Our supplier code of conduct is a prerequisite for collaborating with us. In addition, we provide protectional engine suppliers and human rights and our requirements. Now let's have a look at the divisional development. We will start with Finland later Center Systems on Slide 13. One intake reached a record in 2023. And so Q4 a bit solid 2022. And so Q4 was between due to timing effects. We continue to see very strong project pipeline and already a capacity limits -- so we are in a good position to continue with our margin-oriented revenue before volume strategy. Sales revenues increased 32% as the business is recovering from the low order intake during the beginning of the [indiscernible]. The EBIT margin recovers as well due to a better capacity utilization and the bid phase of our lower-margin projects taken during the corona [indiscernible]. Core sales revenues were particularly strong, and the EBIT margin reached a level of 4.46%, also driven by the high service chain. Based on the high quarter-to-date backlog, we expect meaningful growth in 2023. Let's turn to Application Technology on Slide 14 -- also in this division, order intake reached a new record, while sales revenues grew strongly Q2. The margin recovery was oil impacted by higher equipment share in the sales mix, weak service systems during the China lockdowns and increased costs for managing the high inventory levels as we start a [indiscernible] supply chain constraints. Since the beginning of the current year, we have seen a stronger service order pipeline that should support margin development in 2023. Next Technology Systems on Slide 15. Once again, we can report a new record, a new record in order intake there as well. Q4 was particularly strong as we received several orders from better manufacturers, mainly for solid recovery equipment for [indiscernible] factors in Europe. Sales revenues grew across many regions with China and North America contributing strong. The service business continues to grow even faster. On the margin side, we saw some improvement in Q4. However, we are still experiencing pressure from high industrial costs. In 2023, we will accelerate to invest in our [indiscernible] to scale up our proprietary bolting technology to [indiscernible] standards. This will temporarily impact the margin development. Operationally, we will follow a margin recovery and see significant growth potential going forward. On Slide 16, we can see the summary of development at the [indiscernible] Process Systems division. Order intake momentum was strong in 2022, especially in North America and Asia and across all product lines. The service business developed very nice. Sales revenues and margins fluctuated during the year as a chain bottlenecks and lockdowns in China led to underutilization in production. In the second half of 2022, these bottlenecks, we're leasing in both sales revenues and EBIT margins recovered strongly. In Q4, the EBIT margin will reach a level of 10%. For the full year, we achieved 6.2%, which is in the upper half of the guidance range. The business is back on a good track and we expect profitable growth in 2023. Last but not least, let's take a look at HOMAG on Slide 17. Order intake for the full year reached the record level of the prior year. However, we saw a decline in trend, reaching the lowest level in Q4 as customers were hesitant in placing orders due to uncertainties around the potential larger recession in Europe. However, we expect a recovery of order intake in Q1 2023 as these fields have calmed down and the solid pipeline exists in many regions. The demand for equipment for the preproduction of [indiscernible] construction amends remained solid, and we expect further growth in this area. We achieved a new record level of sales revenues despite the supply chain constraints. This was supported by the high order backlog at the beginning of 2022, a good management of parts that were tied in supply and price increases that we started to implement already 18 months ago. This price increases, together with high efficiencies outdoor margins to high compared with the prior year. Even though we foresee a normalization of order intake in 2023, we expect the order backlog to support sales growth in 2022. We will continue to focus on margin improvement as we want to reach our 9% EBIT margin before extraordinary effects in 2023. Now let's move on to the service business on Slide 18. Service sales reached a new record level in Q4, driven by strong demand from automotive. However, due to the strong growth in equipment sales, a certain share of revenues remained below the target level of 30% for Q4 and the full year. We continue to work on increasing our service business. In particular, we see potential at [indiscernible], where we have hired additional personnel. And now [indiscernible] Dietmar.

Yes. Thank you, [indiscernible] start with Slide 20. We financed the up in 22 is positive growth, already mentioned order sales which do a record level and free cash flow exceeded guidance range. I have to look at the financial details on the next slide. On Slide 21, we can see that sales revenues in Q4 grew year-on-year by 33% to a new record level of EUR 1.2 billion. This was supported by the supply chain improving and increasing net of automotive projects being executed for the regional perspective China has gained share based on the strong order intake of the prior year in the Americas started to gain traction. The product constraints are largely reduced. However, there are still some electronic components that are tied into [indiscernible]. Let's move to EBIT on Slide 22. EBIT margins continued to recover at 6.8% before extraordinary effect in Q4, turned by the total sales growth -- as a gain and fiber [indiscernible] system business is recovering from the pandemic, we are seeing some mix impact at the margin it is more construction [indiscernible] business, alter machinery business. EBIT growth was driven by higher gross profit. Overhead costs rose year-on-year, mainly pushed by sales commissions due to the record order intake, where R&D costs and negative foreign exchange revenue effect. Extraordinary effects are close to the level of the prior Europe. All in all, a strong finish in Q4, partly compensated the weak second quarter that was impacted by the corona lockdowns in China. On Slide 23, we can see the free cash flow development. We reported another strong quarter in Q4 in fiscal year with EUR 170 million, which is EUR 70 million ahead of the operate of the guidance. Free cash flow in 2022 benefited from high prepayments due to the record order intake. However, this was offset by a large increase in inventories. We manage CapEx and we are a disciplined way and focus on efficiency improvement measures for income taxes were higher, but interest basis were lower than in 2021. Overall, free cash flow reached a similar high level as in the prior year. Jochen already mentioned that this is the third consecutive year with a very good cash operation and conversion. Now [indiscernible] at Network & Capital developed Slide 24 entering capital remained relatively stable and reached EUR 416 million at the end of 2022. Inventory and contract as has increased because of growing sales revenues and still at greater safety stock levels. However, the increase was compensated by higher trade payables and contract liabilities. With sales revenues growing, the base working capital declined from 43.6 in 2021 to 34.7 in 2022, which is actually better than our target range of between 40 and 50 [indiscernible]. Net working capital management will remain high on the agenda in 2023 as we seek to partly compensate a lower level of prepayment with lower inventory levels. On Slide 25, we can see the positive impact of the free cash flow on our financial status. Net debt declined to EUR 46 million at the end of 2022. This includes EUR 95 million of leasing liabilities. Leverage stands at 0.1x net debt to [indiscernible]. As Andreas summarized, we are better pleased with solid balance sheets. Finally, let's have a look at our liquidity handle on Slide 26. Available [indiscernible] or amount to almost EUR 1.4 billion. This compares to maturities of EUR 50 million within the next 12 months related to a [indiscernible] recuring April 2023. We feel very comfortable with our mobility [indiscernible], which leaves us with the ability to further grow our business. [indiscernible] from the financial side, and I hand back to Jochen for the outlook.

Thank you very much, Dietmar. Let's turn to the outlook. On Slide 28, we can see the fundamental demand drivers for our business that you have already noted from the past presentations. Nevertheless, we show this slide once again, as there are still people out, they are wondering why the order intake has a bit to recipient when everybody is talking about the potential recession. We believe that our business is currently driven by specific long-term trends. This includes the transformation mobility, the decarbonization of production processes in the automotive industry and the transformation in construction to use more and more prefabricated wood and construction elements. On top, we are benefiting from the electrification of processes that were formerly using fossil fuels, [indiscernible], in air purification systems. All these trends should provide the solid support of our business over the next years. This does not mean that our business will not show any demand cycles anymore. This will still be the case and can be seen in 2023, when we expect that our demand from the furniture industry, but the spring in order intake should be less pronounced as the dynamics of different business areas balance each other. Instead of showing LMC light vehicle production for class like in the past, we now focus on the production growth of battery-powered electric cars as this is a better indicator investment dynamics of our customers. On Slide 29, we see the growth trajectory over the next few years. [indiscernible] development for good working with machinery is shown on Slide 30. Separately, for furniture and [indiscernible] construction. What we expect to cycle weakening of furniture sales in 2024, which is reflected in our order intake guidance for 2023. We see a solid growth in the area of food and construction over the next years. Now let's take a look at the guidance for 2023 on Slide 31. The guidance assumes that the war in Ukraine remains limited to the country and that there are a whole new global conflict devising that could significantly back to global ground. After the record year 2022, with $5 billion for quarter in day, we expect a cyclical slowdown for 2023 to a range of EUR 4.4 billion and EUR 4.8 billion. Main driver of this development is a softening in demand for woodworking machinery from the furniture industry. On the automotive side, we already took in a lot of orders in the second half of 2022. The slightly lower on intake and expectations in 2023 reflect the starting effect and the fact that we are approaching capacity lines. For sales revenues, we see a different development. Due to the high order backlog, we expect further growth to range between EUR 4.5 billion and EUR 4.8 billion. Main driver would be the [indiscernible] in Fine Assembly Systems division that continued recovery from the corona pandemic. But out of mark and the other divisions, we see potential for further revenue growth. Looking at the EBIT margin before cash ordinary effects, we target a range of between 6% and 7%, which is a step in the direction of our midterm target of 8% that we want to reach in 2024. The extraordinary effects should decline in 2023 to EUR 20 million due to lower PPA effects from the past for market acquisition. Margin growth should be supported by all divisions as supply chain constraints ease and margin improvement measures like our value before volume strategy and the efficiency improvement that [indiscernible] become effective. This translates into a ROC [indiscernible] between 19% and 23% and net income of between EUR 160 million and EUR 210 million. For free cash flow, we want to again target a range of between EUR 50 million and EUR 100 million. While we expect a higher EBITDA due to the sales growth and improved margins, we also target to spend higher CapEx of between 4% and 5% of sales revenues. On the net working capital side, we target to at least partially balance lower prepayment with lower inventories. In a nutshell, we would like to take a solid step towards our midterm goals. On Page 32, we can see the outlook by division. Our reported out some specific developments when talking about the group guidance and will not go to further detail at this stage. Before this summary, I would like to highlight our strategy for profitable growth on Slide 33 that we presented at our Capital Markets Day in November. We are targeting sales revenues of more than EUR 6 billion by 2030, which is equivalent to a [indiscernible] of 5% to 6% over the next years. For EBIT before extraordinary effects, we target 8% and for ROC 25% in 2024. Now let's summarize on Slide 35. We achieved new records for the intake in sales revenues in 2022. The high order backlog at the beginning of 2023 is a solid base to drive further revenue growth in 2023 to a [indiscernible] between EUR 4.5 billion and EUR 4.8 billion. The EBIT margin in 2022 was impacted by the lockdowns in China, supply chain constraints and material cost inflation. Nevertheless, we achieved the adjusted guidance as [indiscernible] in May. The fundamental demand drivers for our business, vital mobility, decarbonization of production processes and construction with wood remains intact. We help our customers to achieve efficient and sustainable production. We expect to achieve profitable growth in 2023 based on our value before volume strategy, high capacity utilization, price increases and further efficiency improvements. We remain on track to achieve our midterm goals in 2024. Thank you very much for your attention. Now we're happy to answer any questions you might have.

[Operator Instructions] And the first question comes from the line of Marianne Bulot from Bank of America.

As a first question, I was wondering if you could comment on the reopening of China and what you've seen in the first 2, 3 months of 2023 and what you expect for the rest of the year?

Thank you, Marianne, for the question. We are quite positive about China. I mean, we all have seen the change in policy in China from a 0 covid policy to 100% covid policy, I must almost say. And what we've seen is increasing attitude in China. We see that from our employees. We see that in the market. So we continue to see a strong order pipeline. Actually, that pipeline, even in the second quarter of last year, never went away. But of course, we were concerned. But since, especially now after the Chinese New Year, we see continued and increased momentum in the market, especially on the Chinese OEM side.

And as a second question, looking at the [indiscernible] and final assembly margin and the project execution, do you have a timeline of when you expect to completely phase out the low-margin projects and to now have into the revenues and into the margin, the better selected projects.

Yes, absolutely. As you know, we invoice or we are bookkeeping as a percentage of completion. So those projects actually go out. And I can say there's not much less now in the backlog of those subdued margins from the Covid area. So those projects are mainly completed or at the end of the project phase. So the fact of meanwhile starts to be dominated by much better margin projects. Thank you for the question.

The next question comes from the line of Ingo Schachel from BNP Paribas Exane.

And the first one would be on key Technology Systems, specifically on the battery production equipment, whether you could quantify a bit how much revenues and profit or loss contribution from these activities is included in your guidance for '23? And then maybe also comment a bit on when you expect to be able to win the first coating scope projects on the bigger factories as well? Or if I understood directly that at end of this year, beginning of next year?

Thank you, Ingo, for the question. [indiscernible], as you know, we spoke about EUR 100 million of orders in -- during the last year, mainly from solvent recovery, but there was also smaller scale coating projects. And what we're doing right now, we are in the midst of the development phase, and we will, of course, finish that during the year, but much earlier than the end of the year to have our larger scale own coating technology available.

And, if I may add to sentences, -- we work on 2 technologies, one technology in cooperation with Japanese established manufacturer [indiscernible]. That is the [indiscernible] technology where you coat one side after another. That established technology. In parallel, we are finishing the development of our own simultaneous double-sided coating, which happens during the course of this year. We have this technology in the market for smaller scale productions like we have published Salesforce [indiscernible]. So our intent is to sell the first gigafactory when it comes to coding during the course of this year, of course, depends on projects and project decisions. But overall, as we not only do the coating but also the drying and assortment recovery. In any case, this business is planned to be grown this year further up from the EUR 100 million that we had last year.

And in terms of profitability, you were asking, we will still with high R&D efforts during the course of this year, if you isolate that business. That business will still not be positive. That's factored in into the guidance for CTS. But of course, the intention is that next year, latest year after, this will become a profit contributor bottom line to our business.

And maybe on the HOMAG margin guidance and also margin trajectory to the midterm targets. I think when you presented the 10% target at the Capital Markets Day, we were less types in that on an underlying basis, the '22 margin would already have been very strong, is it happening for supply chain and certain other factors. So at least I was thinking that already in '23, the margin could be a bit higher than maybe 24 could even be weaker because that's the year when you expect woodworking machinery markets to be possibly a bit weaker in terms of production volumes. Can you talk a bit about why the margin in '23 would not be better than the sort of underlying level you had in '22? And also whether your view has changed at all on timing, whether you already see a quicker decrease of woodworking machinery volumes in '23 and then maybe an earlier recovery in 24 versus the, say, more 24 loaded decline that you had guided at the Capital Markets Day?

Yes. There's basically no change from what we have guided during the Capital Markets Day. On HOMAG, yes, this is a fair point you're making. We did 7.8% in operational margin last year. If you added everything on top of that result that we had to absorb in terms of supply chain issues, disruptions, material cost increases that we could not automatically factor into the existing order book, et cetera, we would have probably been there already to say, very simple. So let's see how 23 turns out. You know that typically, we are at least at the beginning of the year, a bit more on the conservative side. That would tell the story for '23. For '24, I'm not so much concerned because, of course, we are talking and we're quite open in talking about the cyclicality in the furniture business. But what we see from the pipeline is not like a recession or a cut in the order income coming. So we're not so negative about 24 in the pipeline is still strong. Customers take a bit more time to decide. This is what we were trying to explain in our presentation when we say, look, the market is a bit more uncertain, but we still have a number of projects. So even for '24 from this point of view, we are not concerned on the one hand, when it comes to top line. And in terms of bottom line, we believe that we have a number of measures in place that bring us towards our midterm goal.

Your next question comes from the line of Nicolai Kempf from Deutsche Bank.

My first question is about the margin development throughout the year. Is it fair to assume that we see a similar development as last year with the margin improving throughout the year. We have the phase out of low-margin contracts. And my second question would be on enterprising. Did we reach peak from here? And do you expect like a small headwind from input price this year or even payment.

Thanks, Nicolai. On -- if I got you right on the margin development during the course of the year, -- we typically have kind of the seasonality in our business, wherever it comes from. So that's somehow drives also from a volume perspective, consequently, the margin. Overall, on the PFS side, that was also common in that direction, I can really confirm that we have outgrown the most of the lower margin orders. And all the orders that we have taken last year have much better than average margins, number one. And number two, as a potential in those contracts, we have price escalation clauses, meaning that in cases material costs or overall costs further increase, we -- with an automatic ratio, if you will, we can forward those increases to customers. On the other hand, yes, fair to say if cost decreases, we also will give back some money to customers, which is finally because we stay with them on the cost side anyway. So I think we're -- when it comes to the order book, actually, the I'm talking for all the divisions, we are in a quite comfortable situation much better than the year before or the year there before. Not sure if that answers your question. If it doesn't, please further continue ask.

Our next question comes from the line of Felix Warak from Amundi.

I wonder whether you could give us a bit granularity on the key items behind this, in my view, strong growth guidance on the paint shops. Is this rather driven by strong execution or more by aftermarket and energy efficiency demand on the existing fleet?

Thanks, Felix, for asking. It's a mix. Overall, there is not so much greenfield. There is a nice greenfield orders, but most of what we currently see is larger brownfields, where customers either refurbishing paint shops that have become pretty old and or in many cases and also following requirements to fulfill their sustainability [indiscernible]. That drives a lot of brownfield work. And in some cases, yes, there is also smaller service/aftermarket jobs, but the majority of the orders that we see right now, and that's good for us. It's rather complex, big brownfield orders in many cases, of paint shops that we have built a decade or 2 ago.

And I guess this change in the mix with more brownfield is also reflected in the margin, right?

Absolutely. That, of course, offers more margin potential than the more competitive greenfield work. But even on greenfield jobs with our cost measures that we've implemented on our own product, we are quite successful. And customers more and more trust us as the competitive environment, let me say so has worked into our favor.

The next question comes from the line of Sven Via from UBS.

It's regarding the divisional guidance, order intake for Paint and Final Assembly Systems. Because I heard you mentioning there was also timing issue on Q4 orders and the pipeline is above the capacity limit. I mean yet, even if I take the high end of the order intake guidance for the division, it's below what you had in 2022. So does it mean the pipeline that is above the capacity limits is allowing you to be selective? Or is your capacity limits on revenues, EUR 1.75 billion.

That's a good question, Sven. We have become more and more selective. The order intake that you have seen for last year is more or less our capacity limit. It's sometimes hard to say because too smaller jobs for the same value, of course, consume more capacity than one larger job. So it's some -- it's -- you cannot very clearly say that the total of a certain order intake is the capacity limit. But what we have booked last year for pain and financeable systems is about the capacity that we have installed. And that perfectly follows our strategy. When we reduce capacities, and we've been talking about this before, when we were reducing capacities in Europe by about 30% in the business, 2 years, 2 to 3 years back, it was exactly our intention to define a certain capacity that allows us to become selective. If you will, the dilemma from the past was that to feed the beast, if I may say so. And the beast has become much smaller now. And this beast now gets the right food in order to be healthy. And that's exactly what we do right now. The pipeline remains extremely strong, and I can only encourage you to watch Q1 numbers in the business. And then that will answer the question in terms of the market. The pipeline remains extremely good and allows us to become more big.

And so you have no intention also to raise that capacity limit anytime soon. You want to keep it at that level also the coming years or...

Yes, If I look in very simple terms, if I look at the business and we talk about our midterm target of 8%, that midterm target of 8%, of course, comes as a mix from our businesses. And the more I would go PFS at a certain level of margin, the more it might distort the overall profitability in very simple terms. That's why we keep the business where it is become more selective and carefully grow but grow some of the other businesses much faster.

the next question comes from the line of Marianne Bulot from Bank of America.

I was just wondering on the [indiscernible] margin guidance. You're guiding a bit below what you did in Q4. I was wondering if you could give a little bit of color on this and what are maybe the building blocks of the guidance?

Thanks, Marianne. Yes. I mean, the Q4, I was talking a bit earlier today when we were talking to the press, but the 10% is something we want to get used to. And of course, we want to get used to the 10% of [indiscernible], but maybe not as an average for this year. [indiscernible], with a little bit different mix in the business a couple of years ago was continuously above 10%. So we're working to reach those 10% again. But the mix of business that we had in Q4 was a bit favorable for margin. And so we do not anticipate this to be repeated every quarter during this year. But in average, of course, our intention is to further build the profitability. Yes, that has a comment on this one.

The next question comes from the line of Ingo Schachel from BNP Paribas Exane.

I just wanted to ask for a quick update on your M&A pipeline. I think you identified areas where you wanted to grow through acquisitions. Has anything happened in this regard in terms of progress or maybe also opportunities that you saw in the past not saving that you realized?

Ingo. Yes, we are constantly watching -- looking at potential acquisitions. And by accident, we were not doing any acquisition last year. As you know, it's always is of, as you just mentioned, opportunity and then also executing the opportunity Yes, we continue to watch in the fields that we had mentioned before. We said that in the high-performance automation, which today is our Team [indiscernible] business that has developed extremely well in 2022 compared to 21. We are constantly looking at acquisitions as we speak. That's what we said from the beginning, and this is what we're doing. We continue to look at acquisitions in the area of digitization. All this remains impactful. It really depends on the opportunity, but we constantly have something on our desk if am I say so.

Your next question comes from the line of Peter Rothenaicher Baader Bank AG.

So you've given a relatively cautious guidance for free cash flow, clearly understandable due to -- given the higher order intake you had in 2022 and perhaps here some weaker view. But what I do not understand is that you are sort of cautious in terms of your net financial position. What is the reason for that?

Yes, Peter. Sorry, I hope you can hear me. Yes. First of all, as you said, cautious in regard to free cash flow guidance due to the impact that we will see in line with a lower level of order intake and also a reduction of the initial payments from our customers. And we need to balance this on the other side then in conjunction with -- sorry, with the inventory development, and that's what we're focusing on. But there remain some uncertainty because not all of the supply chain issues disappear situation improve, but we need to manage and to maintain also reasonable safety stock levels to make sure that we can execute our projects in line with this. And with the contact impact on the net financial status, we are also a bit cautious in that conjunction, you know that actually one of the maturities is coming up in the coming months, and we are currently looking and how to deal with this. So we are also a bit cautious.

I do not understand what it has anything to do with net financial status?

In regard to the refinancing?

Yes.

Because it's also -- it's on one side, our net finite is the comparison or it's reflecting both on one side, what we're having as cash on hand. So this is influenced, of course, by the cash flow generation. On the other side is the, let's say, loans outstanding that we are having...

Then another question on HOMAG. I think clearly, prospects regarding sales and profitability for 2023 look favorable. You have in your presentation, then the market overview for furniture sales -- furniture equipment sales. And here, you have a significant dip in in 2024. Though on the other hand, on your presentation, you did sound not that pessimistic for 2024 and also given you guidance in terms of order intake and sales for HOMAG in 2023. I think you still have a strong order backlog for 2024. So is it fair to assume that for HOMAG, we should not see a significant decline in sales for 2024.

Thanks, Peter. That is a very fair statement. And those market projections are always very difficult, already very difficult sometimes to distinguish between order income and sales. And the data we rely on, in many cases, is more or less driven by us because we are a strong player, but in essence, long story short, we start the year with a strong backlog in HOMAG. We have a good pipeline. We have seen in Q4 a bit uncertainty in the market. We are a bit more cautious, of course, as you can see in our guidance, but we are overall not pessimistic. We are very confident when it comes to construction elements, which is becoming more and more relevant. And also on the Furniture side, -- we are, of course, a bit cautious, but we are not pessimistic. -- that's what we are not.

Is there a differentiation in the market demand, a hallmark in particular for the Furniture segment is perhaps China, does it look better and then Europe and North America more solid? Or what is the situation?

Yes. If we look at last year, we had seen more in the second half of last year, slowing down in Europe being well compensated by still good orders from China and North America picking up extremely well. What we are seeing is a bit of a -- a bit more sunshine in Europe starting of the year. We are -- we continue to be comfortable for North America, which has been very positive last year. China, we will have to see. We've been very strong in China. China, our business sometimes depends on a few larger orders as we are more in the top segment in China. So overall, in the mix, again, I can confirm, we're not so pessimistic. We hope that Europe stabilizes, that's our assumption at the moment at some level, and we continue to be positive for North America and a few other regions. Thank you.

We have no further questions in the queue. I will now turn the call back over to your host for some closing remarks.

Okay. Thank you very much, everybody, for your interest and for attending the call and asking the questions. If you have any further follow-up questions, please contact out to the Investor Relations department and colleagues, and we will be happy to help you further. And then thank you very much. Have a nice afternoon and hope to talk to you soon.

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