ElringKlinger AG (ZIL2) Earnings Call Transcript & Summary

Dear ladies and gentlemen, welcome to the conference call of ElringKlinger Group. At our customer's request, this conference will be recorded. [Operator Instructions] May I now hand you over to Dr. Stefan Wolf, CEO, who will lead you through this conference. Please go ahead.

Well, thank you very much, ladies and gentlemen. A very warm welcome to our analysts' conference on the fiscal year 2020. I'm sitting here with my colleague, Mr. Jessulat, our CFO; and Mr. Winter, who is in charge of Investor Relations. We, of course, would have preferred to have this event in a personal format as we normally have it every year. But due to the current infection situation and the third wave of the pandemic, which we are talking about here in Germany, we have decided for this form in -- as a conference call. All in all, this shows that the coronavirus has still a firm grip on us, unfortunately. I would like to start with some headlines of the fiscal year 2020, and we'll give you briefly some information on the market and Elringklinger's perspective and its strong market position. And after that, Thomas Jessulat, our CFO, my colleague on the Board, will present the final financial figures of the fiscal year 2020, and I will then close with the outlook on the current year 2021. And of course, at the end, as always, there is room for discussion, and we will be ready to answer your questions. Well, the fiscal year 2020 was heavily impacted, of course, by the COVID-19 pandemic on an operational level as well as on a financial level. It was quite challenging and not easy. But with regard to these underlying conditions, we can be satisfied with our results, and of course, we are. First of all, I want to point out some of the highlights of 2020 in very brief, which have already been published in part along with the release of our preliminary figures in February this year. We generated revenues of EUR 1.48 billion, which corresponds to an organic sales decrease of 11.7%. Compared to the global automotive production, which contracted by 16%, it is fair to say we have mitigated the unfavorable effects through -- brought to us by the coronavirus pandemic, and that's quite well. We further managed to keep our EBITDA on previous year's level at EUR 181 million, and we had a positive EBIT of EUR 27.7 million, which results in an EBIT margin of 1.9%. The results have been influenced by various factors, such as the coronavirus impact, of course, that was the most important thing, some impairments and provisions. 2020 also marked second year of our global efficiency program. Our successful execution of the measures resulted in cost reductions, higher efficiencies and last but not least, results in an operating free cash flow in the triple-digit million area for the second year in a row, and that is at approximately EUR 165 million free cash flow. The successful execution also helped us to further decrease our net debt to a level of EUR 459 million, which results in a ratio net debt-to-EBITDA of EUR 2.5. For the COVID-19 year 2020, we decided on the Board to suspend our dividend. So as last year, we're not going to pay dividend this year. Unfortunately, also with regards to the current situation and the pandemic, we will held our Annual General Meeting and the Annual Assembly -- General Assembly, Shareholder Assembly virtually. And it will take place on May 18, 2021. Let me say a couple of things with regard to corona and the pandemic at ElringKlinger. One point is particularly close to my heart, the sense of solidarity at ElringKlinger is second to none as we have witnessed even in the extraordinary situation of this pandemic. Due to the exceptional engagement of all employees, we have been able to diminish the effects of the pandemic on our global production efforts. We have taken rigorous preventive measures at a very early stage such as the implementation of a reporting mechanism, travel and visit bans, coronavirus rules of contact, having more and more staff working from home -- from home office, our tests, such as body temperature measurements and body scanners. Given the current situation, especially in Europe, we will keep our strict and proved measures in place for the foreseeable future in order to contain the pandemic and guarantee our production output. The strong cohesion of the employees in the different locations all of the world has been remarkable, and I would like to take this opportunity here today to thank all our employees for their real big commitment and support. Well, ElringKlinger has started 2 important routes for the future in the last financial year. First, the group entered into a strategic partnership with Airbus to jointly develop and validate aviation-compatible fuel cell stacks over the coming years. ElringKlinger is providing access to key technology for this purpose and in return, received proceeds of EUR 25 million during the fourth quarter of 2020. Following extensive market analysis, Airbus had selected ElringKlinger as its partner, primarily because of the high power density of our fuel cell stacks and our expertise in the field of industrial scale production. The closing of the transaction took place in December 2020. Secondly, ElringKlinger holds a majority interest, that means 60%, in a company by the name of EKPO Fuel Cell Technologies, a joint venture with the French supplier, Plastic Omnium. The aim of both partners is to jointly develop the global market for fuel cell stacks and components. Additionally, we sold our Austrian subsidiary for the -- for integrating hydrogen systems to our new French partner and received an amount of EUR 15 million. The closing of the agreement with Plastic Omnium took place at the beginning of this month of March. Let's go on to the markets. In China, the outbreak of the coronavirus was detected first. But as the year progressed, China recovered quickly from the crisis experienced in the first quarter and showed stable growth throughout the rest of the year. This is kind of ironic that where it started, they got through that pretty fast. And in all the other parts of the world, we are fighting with -- still fighting against that. So in the U.S. and especially Europe, the pattern was totally different. The impact of the lockdown as a countermeasure to contain the pandemic has been much more massive here and all the other parts of the world. It covered the months March and April, and last but not least, May, when the measures were gradually lifted again. Even though the extent of the impact was not as severe in the U.S. as in Europe, it took until September in both regions to return to growth again. We now see on Slide #7 the estimated development of global markets over the next decade. First, let me underline the most important finding. Automotive is a growing market. Even if you do not consider the current drop by COVID-19 starting from the 2019's pre-pandemic level, global lightweight production will grow by 1.3% on average over the upcoming 10 years. The second finding is, all the growth comes from new drive technologies. They will play an increasing role in the future. And the third finding is also important. The combustion technology will still play a role in 2020. While 39% will be driven only by internal combustion engines, it is total 79% of the light vehicles, including hybrid productions in 2020 will still include an internal combustion engine. I will, of course -- it will, of course, vary by region and by application. That brings us to the development of light vehicle production by drivetrain and region, and you see that on Slide #8. Lightweight vehicle production will grow, particularly in China, and the growth will be massively driven by new technology. This is underpinned by strong governmental programs to support the application of new technologies. By the way, China is also one of the strongest supporters of hydrogen-based technology. This is why we see China as one of our target markets for our new fuel cell subsidiary, EKPO Fuel Cell Technologies. According to the 2030 figures, Europe will also be one of the potential key markets for full electric and full cell electric technology. Out of the 21 million light vehicles, more than 80% will contain a new drive technology, be it battery electric or fuel cell electric or a hybrid car. In North America, however, this share will be only around 41% in 2030. Hence, it will remain a key market for the classical pure combustion engine technology. But there are also regions in the West Coast that are the avant-garde for innovative drive systems and new mobility concepts. Well, let's look at the road map for continuing the transformation at ElringKlinger. ElringKlinger is perfectly prepared for such a twofold structure of global markets. We have started to set the course towards new technologies at a very early stage, while not having left the path of being an expert in combustion engine technology. Our strategy is a triad path within the process of change. First, we will continue to use our strong footprint in classical applications around the combustion engine. This enables us to defend and even further expand our market share. Parts like the cylinder gaskets are the perfect example for this. Second, the classical business unit also using the know-how for developing innovative solutions for the new drive technologies. The disc carrier, which is in series production for the full electric vehicle of famous German sports car manufacturer can serve as a very good example for this. Last but not least, we have added new ideas and new technologies to the group. Battery, fuel cells and electric drive units supplement the product portfolio to unlock the tremendous potential of new drive technologies. Well, ladies and gentlemen, let me show you the market for combustion engine components on Slide #10. The number of cars that include internal combustion engines is not expected to be significantly reduced over the next decade, if you consider the relevant hybrid cars too. Market experts estimate that light vehicle production will roughly remain on the same level until 2030. Thus, the majority of light vehicles produced in 2030 still include an internal combustion engine. This implies that there still is a quite stable demand for our classical products in our -- that come from our classical business unit. That is lightweighting and elastomer technologies, metal sealing systems and drive components and, of course, the shielding technology. Slide #11 illustrates that all the growth in global auto markets over the next decade comes from new drive technologies. The major share of it is represented by hybrid cars, but the number of full electric or fuel cell electric cars is also expected to increase significantly. With our 4 key strategic areas, which are to be seen now on Slide #12, we are going to unlock the huge market potential of new drive technology. Due to the profound R&D work of our engineers, ElringKlinger has been able to apply its know-how for developing solutions around batteries and fuel cells. These 2 technologies have been supplemented by the acquisition of strategic minority in hofer powertrain a couple of years ago, which means in that -- and that capabilities around the electrical drive unit, the EDU, have been added to the product range of ElringKlinger. Last but not least, due to a unique tooling technology, ElringKlinger is able to provide sophisticated structural lightweight products like our cockpit carrier. One thing is important, we will not leave the road of success with regard to our classical business and all the products. We have a state-of-the-art setup around the world and the latest technology for the manufacturing and decisive components. We will capitalize our strong market position here and be -- even be stronger in the future. On Slide 13, I would like to give you some background on the first key strategic area of ElringKlinger, the fuel cell business. It is one of the differentiating factor for our group. We have achieved strong expertise over the last 2 decades and high-performance product. Hydrogen applications will soon see a breakthrough for the mass market as hydrogen-based technologies like the fuel cell are ready to be industrialized and will become cost competitive to the current technology. All around the world, you see the governments supporting hydrogen technology. In Germany, the federal government has initiated a program of EUR 9 million -- EUR 9 billion, sorry. In France, there's a similar program with EUR 7 billion. Likewise, China is supporting this technology very, very strongly. It's part of the current 5-year plan of the Chinese government. This brings me to the conclusion that hydrogen-based technology like fuel cell, which we have developed and provided via EKPO Fuel Cell Technologies is really needed to achieve a climate-neutral mobility on a global level on this world. Heavy-duty trucks, coaches and buses are the first key market for fuel cell applications. For both downtime and for recharging, it's expensive for the owners and operators. With regard to these applications, fuel cell is superior to battery, assuming that we need decarbonized technologies. With higher numbers of fuel cell systems, we will see economies of scales and thus, decreasing price per unit. For example, EKPO Fuel Cell Technologies, targets for dividing the price by the [indiscernible] until 2030, which -- with a decreasing price per unit, fuel cell technology will become more attractive also for SUVs and long-distance passenger cars, especially big luxury cars. Last but not least, I would like to mention other mobility devices like trains or ferries or agricultural machines that will be ready for the implementation of fuel cell solutions with decreasing costs over the next years or the years to come. As I mentioned on one of our first slides, we have set an important strategic course in the field of fuel cell technologies in 2020. We founded EKPO Fuel Cell Technologies. And together with our partner, Plastic Omnium, we target a sales volume of EUR 700 million to EUR 1 billion with the aim to achieve a market share of 10% to 15% in 2030. At our headquarter here in Dettingen, in Germany, we are already able to produce up to 10,000 fuel cell stacks per year according to automotive industrial standards. The second key strategic area is our battery technology. In the last 3 years, we have established a company -- established our company as an e-mobility supplier through the series production of cell contact systems for lithium-ion batteries. More recently, we have taken another step forward in supplying complete battery systems as well as only the components. To expand capacities and centralized activities in the field of battery technology, we opened a new site in Neuffen, which is pretty close here to our headquarter in Dettingen. And that took place in January 2021, and we see a second step of moving towards that in 2022. In addition, we will need the new site to realize our new large-scale contract for cell contacting systems, which has been published in March 2021. We are very pleased that a global battery manufacturer has decided in favor of our know-how relating to battery components. From 2022 onwards, ElringKlinger will supply the German plant of this global battery manufacturer from China who produces battery systems for the series platform of a German premium carmaker. The contract covers a total volume in the mid-triple-million euro range over contractual term of approximately 9 years in total for this business. The electric drive unit, the EDU, are our third key strategic area. Together with the engineering specialist, hofer, we bundled forces since 2017. While hofer's contribution lies in the wide range know-how in the field of electric drives, we add expertise in the industrialization of series production orders for customers within the high-end sports and luxury car segment. In 2020, we prepared -- in 2020, preparations were made for series production of new orders with the result that production can now start in our U.S. subsidiary. We are ready. We can start to produce. Our fourth key strategic area encompasses the structural lightweighting. With our lightweight solutions, we can reduce fuel and energy consumption and therefore, cut CO2 emissions. Less weight always means less tire operation. Our sophisticated solutions for chassis of a car combines a maximum functionality with a minimum of weight. It is based on our unique tooling technology. We received our first order in lightweight structural engineering in 2014. Others followed, including those for vehicles for the next generation. We also see strong market potential in our latest development, the underbody shield, which has been developed to protect the battery. It is characteristic. It is superior to the existing material solutions. On broad range -- ladies and gentlemen, our broad range of products for new technologies enables us to generate a higher content per car. Let me illustrate an example. Whereas an internal combustion engine car included 1 cylinder head gasket for a price of EUR 3 to EUR 7, cell contacting systems are comparable products for a full electric vehicle. And there are several systems needed for a car. It translates into a content per car of EUR 100 to roughly EUR 240. And there are also products that have not had a comparable predecessor in the internal combustion engine world. Battery systems, for example, our fuel cell stacks represent an ElringKlinger content in revenue of several thousand euros, if they are included in a car. This brings me to the concluding Slide #19. Currently, the split of sales regarding internal combustion engine and noninternal combustion engine technology is roughly 80 to 20. As the product portfolio of ElringKlinger is strongly addressing the new drive technologies, the orders contain an increasing share of non-ICE technology orders. We have listed here the orders from 2019 to February 2021 on an annual turnover basis, which corresponds to a 62 to 38 split. This means that key strategic areas like structural lightweighting, electric drive units, fuel cell technology and battery technology will show an increasing revenue contribution in the upcoming years. Hence, the transformation pathway of ElringKlinger will move forward and reach part of the internal combustion engine and noninternal combustion engine within the next decade. Yes. With having said this, also some strategic remarks, I now would like to hand over to my colleague from the management Board, Mr. Jessulat, who will explain the financial figures.

Yes. Dr. Wolf, thank you. Also a warm welcome from my side. Let me start on Slide #21 with our quite solid order book situation, even though COVID-19 had a considerable impact. After a massive decline in new orders during the first half of 2020, orders were down by 40% compared with the first half of 2019. Figures for the second half year pointed to recovery. Order intake was up 14% compared with the second half of 2019. And a total value of orders received by the group in 2020 was EUR 1,483 million, 14.6% down on the previous year's total of EUR 1,737 million and roughly in line with the sales decrease. Exchange rate movements were a headwind to the order figures. The impact of the pandemic can be seen, among other things, in global automobile production, which slumped by 16.2%. And as a result, revenues generated by the group fell by 14.3% to EUR 1,480 million. However, excluding the effects of currencies and acquisitions, the year-on-year decline was only 11.7%. The group, therefore, succeeded in meeting its expectations of performing slightly better than the market as a whole in 2020 based on the direction taken by organic revenue. With regard to our business divisions on Slide #22. Lightweighting/elastomer defended its position as largest business unit with a share of 29%. Metal Sealing Systems & Drivetrain Components is the second largest business unit, generating 28% of group sales. And Shielding Technology now represents 20% of total sales. E-mobility doubled its sales share to now 4%. The pandemic developed along different lines in the Asia-Pacific region over the course of the first quarter of 2020. China saw an extension to its New Year holidays as well as plant closures, recovered quickly from the crisis, while other parts of Asia still felt the repercussions of the pandemic. All in all, group revenues fell by 9.7% to EUR 280 million. The region's share of total revenue increased slightly to 19%, coming from 18% in 2019. It was not until mid-March that Europe saw the introduction of lockdown measures. Hence, economic recovery was more sluggish than China. Overall, the group generated revenue adjusted for currency effects of EUR 700, which corresponds to a decline of 11.7%. The downturn was more pronounced in North America. Here, revenues stood at EUR 385 million, down 14.6% on the prior year figure after adjusting for exchange rate effects. With a share of 25%, North America remains to be group's second largest sales region. Compared to 2019, it is clear to see that the continuous internationalization of the group led to a much stronger increase in sales outside Germany, especially in North America and Asia. I will now turn to Slide #24. Due to the investments in the global footprint, ElringKlinger has strengthened its position as a global player. Today, we operate with the requisite capacity levels in all of the major automotive markets around the world. And therefore, it is clear that our customer base today includes all major automobile manufacturers. And furthermore, there is no concentrated risk exposure to just or only a few customers as we generate around 10% of our sales with our largest customer, who is from Germany. On Slide #25, you see the earnings development. Despite the pandemic-induced downturn in revenue, EBITDA totaling EUR 181.5 million were slightly above the prior year figure of EUR 181 million. This also is reflected in a higher EBITDA margin. The EBIT came in at EUR 27.7 million, which corresponds to a margin of 1.9%. Just in very brief, as I have explained the effects when presenting preliminary figures, comparing the EBIT to last year, we have to consider the proceeds of the real estate sales in 2019 as well as the proceeds attributable to the Airbus partnership in 2020. Operationally, the pandemic resulted in an earnings shortfall and factors and the positive effects of instruments such as short-time work. Earnings improved by around EUR 47 million due to the global efficiency program. And additionally, the group recognized impairment losses relating to noncurrent assets in accordance with IAS 36. In this context, we also had to consider impairment on development costs and other parts of current assets. And last but not least, provisions have been made to cover various business operations in the wake of the COVID-19 pandemic. Unrealized foreign exchange losses, losses from associated companies as well as a share put option valuation prompted an increase in net finance costs. In addition, income taxes decreased by EUR 10.2 million to EUR 26.4 million. As a result, at minus EUR 0.64 earnings per share were below the previous year's level of EUR 0.06 per share. One important pillar of the efficiency program is CapEx spending. The investments in property, plant and equipment and investment property amounted to EUR 57.3 million. This translates into a CapEx ratio of 3.9% in terms of total sales. One year ago, these figures stood at EUR 92.2 million or 5.3%. As we have finished our investment cycle with new plans, larger factories and extension of the global footprint, we were able to introduce a disciplined CapEx approach. Another part of the efficiency program is the optimization of the net working capital position, which has been reduced to 27.2% of sales coming from 33.4% by year-end 2018. The level has been reduced from EUR 568 million by year-end 2018 to now EUR 403 million. And the main impact results from the optimization of inventories, while trade receivables remained at an almost constant level compared with the previous year. Trade payables have been reduced. With the help of the global efficiency program and its elements, we managed to generate operating free cash flow of EUR 164.7 million. In addition with the robust equity ratio of 41.4% after 41.5% in 2019, the group remains within its long-term target range of 40% to 50%. We now come to Slide #27. Due to the efforts in earnings, CapEx and net working capital, net financial liabilities were reduced by a further EUR 136.5 million to EUR 458.8 million in 2020. This translates into a net debt ratio, which is the net debt in relation to EBITDA of 2.5. 12 months earlier, the figure had stood at 3.3. Let me now turn to Slide #28, showing the performance of our segments. As we have already discussed, the main issues of the OE business above, I will now focus on the remaining segments. Despite the effects of the coronavirus pandemic and lockdowns imposed in many countries, the Aftermarket segment again saw an increase in revenue. At EUR 182.5 million in 2020, it was up EUR 9.9 million or 5.7% year-on-year. This segment managed to drive revenue forward in Eastern Europe, in particular, but also in the Middle East, on the Indian subcontinent as well as in North and South America. Revenue was only down slightly in Western Europe and Asia. The group-wide program also proved successful within the Aftermarket segment in addition to lower travel and exhibition costs due to the coronavirus. Against this backdrop, segment EBIT amounted to EUR 39 million, which corresponds to a strong EBIT margin of 21.4%. Against the backdrop of the global economic downturn, the Engineered Plastics segment recorded sales revenue of EUR 107.6 million in 2020 and revenues fell by EUR 9.9 million or 8.5% as a result of the pandemic primarily in Europe and North America, while revenue generated from sales in Asia remained largely unchanged. Despite the decline in demand from numerous sectors in the wake of the pandemic, the segment succeeded in maintaining EBIT at a robust level of EUR 14 million. This was also attributable to savings in non-personnel and travel costs. The segment's EBIT margin was at 13%. In 2020, we completed the second year of our global efficiency program. So far, it has been a great success as it enabled us to significantly reduce our net debt position. In the current fiscal year, we'll complete the global efficiency program. All in all, we have come closer to our net debt-to-EBITDA target of 2, which we still bear in mind with everything we do. At ElringKlinger, we strive for continuous improvement. While the fact that we have done well so far with the global efficiency program as visible in the numbers, we are going to continue the approach by a future performance plan. We'll further work on operational excellence in order to improve capital efficiency. By fulfilling this, we'll also be able to shape the transformation process. This will bring us to an increasing share of noninternal combustion engine business and support us on the way to a double-digit return on capital employed. Now I hand over back to Dr. Wolf.

Yes. Thank you very much, Mr. Jessulat. Ladies and gentlemen, let me now draw your attention to the current year. At the beginning, I have already highlighted the impact of the COVID-19 pandemic on ElringKlinger. While we have learned to operate and live with the virus, the dent which the virus brought to the automotive industry will take some time to recover from. And still, given the risks associated with the ongoing coronavirus pandemic and even with vaccination programs in place, the outlook for 2021 remains really uncertain. The upward trend in vehicle markets that was first seen in the second half of 2020 is expected to continue in 2021. Growth rates are likely to vary between regions. In Europe, where many countries remain in lockdown, the light vehicle production recovery is expected to take more time than in North America and especially in China. While North America is expected to reach pre-pandemic production levels in 2022, China will already reach these levels this year, 2021. Europe is currently expected to need until 2028 to reach this level. On a global basis, the pre-pandemic level will be reached by 2023. Although still depending on the development of the pandemic, this year's forecasts are more robust than last year's highly uncertain pandemic development. In 2021, the growth in light vehicle production is expected to be driven by a strong recovery in North America and in Europe. On a global level, the production is expected to grow 13%, which is in line with our market expectations. Due to the ongoing pandemic and many other factors, the current fiscal year is subject to a high degree of uncertainty. In light of these risks and opportunities, the group expects organic growth in revenue over 2021 to be roughly in line with the percentage increase in the global vehicle production. The efficiency enhancement program will continue into the third year in 2021. If global car production develops as projected, the group expects an EBIT margin of around 4% to 5% for the 2021 financial year as a whole year. Further, we will see visible year-on-year improvement in our return on capital employed. A steady annual improvement will lead us to increase ROCE figures in the medium term. The operating free cash flow for 2021 is expected to be in the double-digit-million euro range and remains, of course, positive over the midterm. We will continue our strong net debt/EBITDA reduction in 2021 and have set a net debt/EBITDA ratio of less than 2 as our midterm target. Well, ladies and gentlemen, thank you for your attention. That concludes our presentation, the presentation of Mr. Jessulat and myself. And we are, of course, now happy to take all your questions. Go ahead.

[Operator Instructions]

We don't hear anything. Somebody asking a question?

The first question is from Christoph Laskawi, Deutsche Bank.

The first one will be on the top line guidance and organic growth at production levels essentially. Historically, you've outperformed quite nicely. Now you guide for close to 0 outperformance. Could you elaborate a bit on what is driving limited outperformance? Is it customer mix, something within the product mix? And also since you're in the midterm guide for organic outperformance, how is the phasing of that? Should we expect outperformance to come back in 2022? Or is it more structurally because you shift the revenue streams from the ICE business to non-ICE or powertrain independent? The other questions I would take after that.

Well, that is due to product mix and to projects -- the start of projects. Some of the projects have been postponed. Some of the customers did not spend money on R&D. That's why -- R&D projects are postponed and do not go into series production as planned in 2021. So it's a mix of different things. Some old products are running out. So that -- that is basically a mix, yes. Also, due to, let's say, some pretty tough negotiations with one customer and an important customer, we lost one order in Mexico. But I still think it was right to do it in a way. We did it because you cannot say always yes and reduce prices. So things like that happen, yes. And we see a lot of new projects going into series production in 2022. For example, this big battery component order starts in -- that has triple-digit-million volume for 9 years. That starts in 2022. So -- but we had that in the past. That is nothing really a normal. We had years where we -- many years where we outperformed the market, but we also had years where we underperformed the market or years where we were in line with the market. That is always related to the start-up projects and the product mix.

Okay. So we essentially can work with the assumption that in 2022, you get back to outperforming, and it shouldn't be structural longer outperformance trend do you see until the midterm when the new technologies really contribute bigger volumes to revenues?

Well, the latest '23.

Okay. The second question [indiscernible] will be on EBIT margins. You work with the base assumption of 13% production growth. Many of your peers have been positioning more in the range of 7% to 9%, obviously, factoring some safety cushion for them and also for margins. When concluding on the guidance, you said, assuming your base case is met on production, the margin should be met. Are you confident that if we were to see an environment more towards the 9% or 8% production growth, you can still hold the 4% to 5%, thanks to the cost savings? Or would it be more tricky with that volume assumption?

Yes. The 4% to 5% should apply also in a way that the market would weaken to some extent. We have a pretty solid order situation overall, I would say, but there is some visibility that we have on the impacts customers have on semiconductors and so forth. So for the first half of the year, we are pretty, pretty positive at the end that the guidance here is really confirmed by what we see. And for the second half of the year, there is, of course, a little bit more uncertainty in terms of the behavior of the market, yes. The low end for us, what we need to achieve in our opinion, is 4% EBIT margin. So of course, having said that, with a good start to make a good estimation for the full year remains difficult for now. So the 4% to 5% is something that I mentioned before as demonstrated margin when we look at Q1 2020 and also later Q3, Q4, that we came into that range. And therefore, we are pretty confident that we have that as a minimum level. And we'll continue, of course, with all our efforts here on the cost side, yes. So the 4%, from my perspective, is to be seen as a minimum for the ElringKlinger Group, also a little bit more in adverse conditions.

Last questions will be on the slide that you show with the content per car, which obviously shows impressive numbers in the shift to non-ICE technologies. But having said that, obviously, the market you can tap with those technologies far smaller in terms of volumes compared to the ICE business and with your very solid market shares in the ICE business, you can address quite a lot of the market in that part of the overall production volumes. Is there anything that you would assume as a base case market share and most of the technologies that you need to achieve in order to make the midterm outperformance work? Or should it be just from a couple of project wins actually be possible to reach those targets? And another question would be -- generally, since the amount of parts that you can address, essentially, everyone can address in, say, battery electric cars. The competition is far higher than it is potentially in other markets or in other parts. Do you see yourself well positioned also versus competition? And do you have to make a lot of price concessions currently to enter that market? Or is it actually an okay and sound market environment for those parts as well?

Yes. Of course, the competitive situation is here more diversified. But in our business, that is not different, the traditional business with the new business. It's all decided by technology. You always have to be technological leader. You have to have -- the best is if you have a unique selling point, yes? So if you look at our fuel cell stack, for example, we have the highest power density of all the fuel cell stacks in the world. And that diversifies you, yes? And one thing that, of course, is not happening is that when you ramp up with those products -- I mean, those new products in the market that you start with, I say, dumping prices. That is the worst thing you can do, and we would never do that. And you also have to be willing to say from time to time just no. When you don't achieve sufficient prices, then you just don't do the project. You don't have to get every project. We always try to be a little bit cherry picking and look for projects where we -- the customer just finally says, well, we need them. And of course, it's more diversified. That's pretty clear, yes? But also, if you look at the competitive situation, for example, also with battery components, there are a lot of companies out there that pretend to have products, but they don't have the product at all, not in a way as we do because if you look at cell connector systems, we started 15 years ago with cell connector systems for BMW i3 to develop those systems. And there are some of the competitors that started maybe 2 or 3 years ago with that. So it's always about experience, about technology, about positioning the company in the right way, and that's what we do.

And last question on my end as well is -- so it would be a fair assumption that -- like a hurdle rate on EBIT for the new business over the life cycle, obviously, not in the first couple of years, will be mid-single-digit margin, at least, right?

At least.

At least, more.

The next question is from Akshat Kacker, JPMorgan.

The first one is on the order intake. I see an [indiscernible] number on this slide, where you show that 62% of the order intake over the last 2 years or so is powertrain agnostic or non-ICE. Is it possible to share some more details around that? Is it mostly linked to lightweighting? And the second question on that is the sharp underperformance in 2020 on the shielding business. Can you just discuss what's happening there and how do you expect that to develop forward? I'll follow-up with other questions afterwards.

Yes. When I answer your questions, second first, shielding, there we will see same as we have seen in the past with cylinder gasket, decreasing share as part of the overall sales portfolio of the group. This is going to be a development that will be continued because the main effort here is on the other areas on the strategic areas, and they will step-by-step decrease the share of the shielding business unit. The order intake, the 62%, we tried to explain that to the best we can because we have, of course, some nondisclosure agreements in place. We got to be careful with that. But let me say something to that, of course. ElringKlinger records order stock as the releases that we have seen from customers. So the businesses that are in the ramp-up phase, for example, the drivetrain business unit that is in preparation for ramp-up now in the first half of 2021. Those releases, we have not seen yet. So we will see in terms of order stock positive development coming from that. And like I say, there is -- we try to detail it as good as we can on the drivetrain systems and also on the cell contacting systems, and there is some contracts that are simply under a nondisclosure clause.

Most of them. You have to see that the customers with regards to those new systems like fuel cell systems and battery technology, they are highly sensitive, highly sensitive because they don't want to disclose anything, which I understand.

Yes. Understandable. Yes. That lead me to the second question on hofer, and you spoke around this growing opportunity in the drivetrain business, obviously, as we look towards more [indiscernible]. I'm sure this is a business that needs upfront investments and the losses widened in 2020. We also know that you did participate in the capital increase for hofer that happened last year. How should we think about future funding of hofer?

Funding for the hofer group is secure. When we look at the financial results as a share of the ElringKlinger share of the business, you can see very clearly that it's not been a good year. It's been characterized also by some deferrals. From an accounting perspective, there is completion IFRS method from an accounting perspective. So that was a pretty tough impact on hofer, but there is no funding need towards hofer. hofer is well funded. When we look at the projects, we are -- the first factory in the U.K. now well underway. We have to say we are in the preproduction phase. We're going into production now in the first half, and we'll see in the second half of the business sales coming in and also next year, a ramp-up towards a mid-double-digit figure. So that is having a good development. And overall, like we mentioned, we have a differentiated approach here to the market. We are not going to be going head-to-head on the large EDU programs. Will be very picky on the smaller series production. And step-by-step, we'll see here some development. But the key -- the chaos, so to say, in this business unit is going to be the series production in our U.K. factory.

The third one on...

And let me say that this was a very profound answer given by the President of the Supervisory Board of hofer AG.

Yes. Third one was on 2021. Mr. Jessulat, can you comment around your free cash flow expectations for 2021? And just in different elements, what do you think about working capital for the year and CapEx as well, please?

When I look into 2021, then I see an increasing level of CapEx. It's going to be high double-digit, in my opinion. When we look at working capital in the first half of the year, we'll see inefficiencies because right now, we have some struggle going on in regard to raw material supplies. So we take material in where we can, I have to say. And towards the second half, we'll try to improve on that again. On a working capital level, therefore, I think we have, from a total amount, some increasing figures towards mid of the year, but they are going to be compensated for also by higher sales levels. So right now, it looks still pretty balanced, and we try to keep it balanced. So if the sales and also taking into consideration the operating leverage, if that is going well, then we are very much in the double-digit free cash flow figures. Based on the uncertainties that we have, it's going to be a mid-double-digit figure to begin with. And then this is something that we need to make more concrete as we head towards the second half. But my expectation is very clear, double-digit, solid free cash flow for 2021.

Which is, by the way, on Slide 23 -- 33 -- no, on Slide 27 -- no, 33, sorry, 33, where we have our outlook for key indicators where it says 2021 and midterm. There is a line, operating free cash flow. It says positive and double-digit million euro range.

Yes. Understood. The last one before I hand it over is on 2020. Can you quantify the short-term benefit that you've seen throughout the year? And where can we see that on the profit bridge shown on Page 25?

The short-term benefit on short work, did I understand that right?

Yes.

Yes. The short term -- yes, [indiscernible] benefit, mainly.

Yes. The benefit, if we look at that from a pure German perspective, then we talk about a 2020 full impact roughly EUR 30 million.

And the next question is from Michael Punzet, DZ Bank.

Yes. Michael Punzet. I have questions. First one is on your business, e-mobility. You mentioned in the annual report that you booked -- received EUR 25 million from Airbus in the revenue slide of the e-mobility. But at the same time, you mentioned that the EBIT was still negative. So my question is, if -- whether EUR 25 million included also in the EBIT line, which would implicate where double-digit minus EBIT margin for the ongoing business. The second one is on the financial result. Maybe you can give us an idea of the running financial results, excluding all the one-offs from currencies and other companies? And the third one is on your JV with Plastic Omnium. Can you give us an idea about the impact in 2021? Because I assume that in the start-up phase, we will see some loss contributions from that.

Yes. Let me start with last question of you. The EKPO impact, EBIT is going to be double-digit negative EBIT start-up period for 2021. On the business performance, of course, we are in a start-up situation. And as part of the transaction which we have closed, we have received EUR 30 million in terms of capital contribution and also double-digit amount for the sale of EKAT, yes. So it's going to be a burden for this year and most likely next year, EBIT -- negative EBIT coming out of that entity. If we look at the financial results, then here we see that we have 3 negative impacts as we have reported. We have, on the one side, hofer share of the financial results. We have also -- and this is known put option regarding shares that another owner of the group companies is having towards ElringKlinger, and this is essentially good for business performance because the expectation is higher here. And therefore, the liability is higher, but this goes negative into the financial result. We have in here an interest result of EUR 15.8 million, I think. In the previous year, we were close to EUR 20 million. So what we see here, we have, is an interest impact. We have already a little bit better situation here in 2020 relative to 2019. And then we have unrealized currency losses of EUR 12 million. And let me say here that we have high single-digit number gains from instruments that we have used on hedging. Now when I look at 2021, my expectation would be that on the EKMA, on the Japanese entity's put option that we won't see further development here. This is my expectation. I think that we have at least breakeven year for hofer, yes -- in the area of breakeven, let's say, and we have an interest result that will be improved relative to 2020. It's going to be a little bit better because based on the better net debt to EBITDA, we have different margins according to [indiscernible]. And then we have residual risk, of course, from our balance sheet exposure, which we try to limit to the best possibility we can. We will eventually increase hedges here for translational exposure based on some higher volatility in the markets. But what we should see here is really the main cost as interest cost for 2021 plus uncertainty coming out of currency exposure. Airbus start-up, the Airbus contribution is positive. We recorded all of that as sales, close to EUR 25 million in 2020. There is no operation. This is a financial interest and quoted as such -- reported as such according to IFRS. And there is -- from an operational perspective, negative. There is not much coming in here because it's financial assets that we have recorded here. And when we look at e-mobility, then we have a lower double-digit figure here negative overall for the e-mobility results here in 2020. So I worked your question backwards. I hope that answers your question.

Maybe a follow-up on that. So the question is really, are the EUR 25 million included in the EBIT figure or not of the e-mobility business?

Yes. They are reported in there.

Okay. And maybe a follow-up on the guidance you gave with the 4% to 5% EBIT margin. This also includes the expected payment for hofer of EUR 15 million and as well the start-up losses from JV with Plastic Omnium?

Yes. That includes everything on time from closing the business here with PO as well as all the other factors.

What do you mean by hofer EUR 15 million?

I think as part of JV, you sold the activities in Austria where you...

That's ElringKlinger Austria. That has nothing to do with...

Okay. Okay. Sorry for that. That was my mistake.

[indiscernible] EUR 15 million hofer, this has nothing to do with...

Yes, sorry.

It was a subsidiary [indiscernible] in Austria, which is responsible for systems, fuel cell systems. And Plastic Omnium has also a subsidiary in Switzerland, which is called Swiss Hydrogen. They also work on fuel cell systems, and we put those activities together. Because it doesn't make sense that 2 joint venture partners are working separately on systems. So we do that together.

I think we lost the line, so I will introduce the next questioner. The next question is from Marc Tonn, Warburg Research.

Also a couple of questions from my side, if I may. First one would be on raw materials. You mentioned already a negative impact you're expecting on working capital in terms of volatility. My question would be, do you also expect a negative impact on earnings at least short term and perhaps your expectations on how negotiations may work out with customers when it comes to passing on these effects? That would be my first question, and then I'll come with a second one later on, if I may.

The raw material situation, we see some increases, in particular, when we look at at stainless steel, alloy steels. We have seen some increases here also on the aluminum side. Overall, with today's pricing, I do not see a net negative impact for the group based on our efforts here in our efficiency program. It reduces the improvement that we do in other areas, yes, that is the case. But on a net basis, it's not negative.

Okay. That would directly bring me to the second question. I think on this Page 25, you showed the EUR 47 million positive year-over-year contribution from the efficiency program, which is quite an impressive figure. But if you could give us some insight on what you are expecting for this year, but -- including perhaps this negative impact you see from the raw materials side?

Yes. We have the same program, of course. We have the same focus. If we look at EBIT-relevant parts of the program, we are looking at customer pricing. We are looking at general costs. We are looking at material costs. We are also looking at personnel costs. And here, we are seeing double-digit targets in terms of amounts for the raw materials. We see, relative to last year, a little bit increase in terms of general costs based on higher sales volume and associated costs with that. On the customer side, we are more like in the mid-single-digit figure in terms of targets that we have set here. And in terms of personnel costs, we manage in a way that we will have an improvement in the ratio of personnel cost to sales. In other words, we need to prevent an overproportional buildup of the organization that is in line or maybe more even with the increase what we see in sales. So my expectation is that relative to the previous years on personnel cost ratio to sales between 1% and 2% improvement of that figure. Those targets are set, but part of it is locked in for the year, part of it still needs to be locked in.

Okay. Also on the guidance, I mean, I think in the last call in February, you mentioned when just simply looking at Q4 isolated, and I know that it's not a quarter we could extrapolate to this year that leaving all special items aside, you were -- I think you mentioned [ 9 plus 6% ] in terms of operating margin. Now look at the current year, you're targeting -- let's take the EUR 15 million EKAT contribution out, you're talking about, let's say, basically 3% to 4%, which is quite a difference to the 4%, which give us, let's say -- just as a sum up, I know a lot of volatility, uncertainties, particularly for the second half year, which are around the corner, but you mentioned that you're still expecting positive contribution from the efficiency program. Of course, a lot of the short-term effects may no longer be achievable. Is it basically all or am I missing anything here, which is, let's say, also something we should keep in mind for the current year?

Yes, the figure -- the 4% to 5% is the figure that I gave not to be undercut by the business in also more adverse market conditions. It's -- even though we had a good start, we have some factors that weigh in, in the second half. And so far, it's hard for me really to come closer to the figures that are going to be driving second half results. But this is essentially a big question mark from my side. When we will report first quarter, we'll be a little bit closer to that also in terms of customer releases and also market situation in terms of raw material supplies and also to what extent we can realize or we have realized, in fact, those savings out of the efficiency program. So it's -- take it as not to be below approach also under more adverse conditions for 2021. And of course, we have to report as we go. But we can say, so far, we've had a pretty good start into the year.

Okay. And then the very last question would be on dividends. With these, let's say, great achievements you've achieved on the net indebtedness and the net debt-to-EBITDA ratio, do you already have any kind of, let's say, certain thresholds in mind or milestones in mind when you would, let's say, consider to resuming paying dividends?

Well, we have to see how 2021 -- what is the final result. But if that -- if the year would be a good year, we probably would consider to pay a dividend for 2021.

The next question is a follow-up from Akshat Kacker.

Akshat from JPMorgan. A couple of follow-ups, please. I think one topic that was not touched is the battery parts order that you disclosed in early March with the cell supplier. Can you discuss if this present a bigger opportunity on a global scale for you for further contract wins with that cell supplier? And I'm interested to understand who does this business for them in Asia? Or basically, who are you competing with there?

Well, this is, of course, a start, and we are happy that we got this business here in Europe. They have a supplier, but I can't tell you -- really tell you who that is in Asia. I don't know. But of course, this is a real big order for our cell connector systems. And of course, that is a reference project for us. And based on that, of course, we're going to acquire additional projects.

Understood. And in terms of battery technology, we have obviously moved from cell to module to discussing now cell to pack. And in the future, we will see direct integration into the vehicle. Interested in understanding your thoughts on how does your product offering, especially on cell contacting systems, change when we move from cell to pack to direct integration?

Well, the approach that we have is a differentiated one. We are talking about individual components and modules and also systems. But we're also, as Dr. Wolf has pointed out, under party protection that is typically not part of the integrated solution here. So you're right, there is going to be more integration going on, but the ElringKlinger exposure also to more integrated systems is also that we will have products also for that case, so that we will have an exposure in regard to that. The -- there is some dynamics involved in the battery system development, of course, and there is different pathways. And so far, what we have seen, it does not change the strategic outset in terms of the products that we offer. There is some certain developments going on, but there is no strategic impact for ElringKlinger as per today.

So if I understood that correctly, it does not really change your product offering, especially when it comes to cell contacting systems?

No. It doesn't. What I'm saying is a more integrated solution may have an impact on some products at ElringKlinger, but it opens up still business opportunities in other areas. So key is for us to have a differentiated approach, so that we are in a position always to benefit no matter what differentiated solution that is. So it may be the case in single projects, but it is not something that we see [indiscernible] that changes our attitude towards cell contacting systems.

Understood. The last question for me. You said that you're off to a good start to the year, and you're going to close the first quarter tomorrow. Is there a chance for more specific details on the quarter in terms of revenues? Or if you are already above your margin guidance for the full year?

Sorry, but no.

No, not yet. We will have to report here officially.

The next question is from Frank Biller, LBBW.

Biller?

Hello. Hello?

Yes, Biller.

Can you hear me now?

Yes [indiscernible].

Yes. Okay. Sorry about that. It's technical problem. So I don't know what happened. So a question about the whole market assumption on electric vehicles you gave us on Page 7 and 8. So I assume this is IHS prognosis, and it's not your prognosis here because in March '21, so here, this ratio is well below the 50% what Volkswagen gave for a worldwide estimate on the battery electric vehicle side. And also Daimler is assuming ex EVs more than 50% in 2030 and also BMW, Daimler, Volkswagen, all full electric vehicles. So my question here would be if electric vehicles are coming in faster, would that be a positive thing in the short to midterm for you or is it more on the burden side?

That's a pretty difficult question, to be honest. If you say if electrical cars come faster than expected, do you mean battery electrical cars or do you mean...

Yes, full battery electric cars without combustion engines.

[indiscernible] because fuel cell cars are also electrical cars.

Okay. Including the...

Most of the people, they always -- they -- a lot of people say electrical cars or fuel cell cars. Both cars are electrical cars. One is a battery electrical car. The other one is fuel cell electrical car. Both are electrical cars. So you mean -- I assume, as you mentioned, Volkswagen, you mean battery electrical cars. I doubt that the numbers that are published by Volkswagen, they will come like that. That is more or less, I think, a wish of Mr. Diess that things are going to develop like that. We don't have the infrastructure. We don't really have the customer acceptance. We don't have the range. I think that this -- what we show here, and those are the HIS (sic) [ IHS ] figures, that those are the right estimations. It's very profound. It's, I think, a very good research what they do, and we looked at it very, very closely. And of course, we could -- if that comes faster, we could benefit from that. We do already. If you would have asked me 10 years ago, I would have never thought that it goes so fast that we get revenues and earnings from battery -- our battery business and our fuel cell business. So things are pretty volatile. Things are changing. And it depends on the -- if we get projects or we don't get projects. You only benefit if you get project. And we are working on that. We are in a lot of projects. And the question is, what numbers do we see in those projects. If I look at the cell connector system that we supply to this battery manufacturer, and they sell those batteries to a premium OEM here in Germany. If the cars that they produce, the electric cars, if they sell much better than what we expect today, of course, we benefit from that. But that is all a guess. This is future. That's a guess.

So the shrinking market of ICEs then wouldn't be a big burden for you. It is well compensated by the speeding up of electric cars then?

To be honest, in our classical business, I see a consolidation in the years to come, especially in the gasketing business. Who invests in hard production for the internal combustion engine? We do. We invest in that, not that much, underproportional just to keep us on a very, very high technical level. But our dear 2 bigger American competitors on a worldwide basis, they basically drop out of that business. We will see -- from my estimation, we will see in our classical business a shortage of capacities worldwide. So that the OEs are going to ask us and beg us for parts because they need those parts because they still sell the internal combustion engine, be it in a hybrid version or in a complete just a plain ICE version, they will sell that much longer than we all think today.

And pricing is pretty good then, is it?

We were able to increase prices over the last, let's say, 18 months. We've been quite successful in some -- not in all of the parts, but some of the parts we have been successful in increasing prices. If we look at our screen here, we don't see anybody else there on the list anymore. Are there any more questions?

There are no further questions. I would like to hand back to you, Mr. Stefan Wolf, for some closing remarks.

Okay. Thank you very much. Thank you for joining us today. Wish you all the best. Stay healthy. And I'm absolutely positive about the fact that we see each other in person next year for this analysts' conference when we present our results for 2021. So all the best, and thank you for listening to us, and we hear it when we present the quarterly figures for the first quarter 2021. Thank you. Bye-bye.

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