SAF-Holland SE (SFQ) Earnings Call Transcript & Summary

Good morning, ladies and gentlemen, to the SAF-HOLLAND's Conference Call on Financial Year 2021 Results. Please note that this call is being recorded and streamed on SAF-HOLLAND's website. I now hand over to Petra Muller, Vice President, Investor Relations, Corporate and ESG Communication, for introductory remarks.

Thank you, operator, and welcome, everybody, to our full year 2021 results presentation. This call is being broadcast live over the Internet at safholland.com. A replay of the call will be available on our website shortly following the conclusion of this call. Joining me today are our CEO, Alexander Geis; and the Vice President, Group Accounting, Controlling and Tax, Jörg Wahl. Alexander will start with an overview of the markets in general and the development of our regions. Jörg will provide some more detail on our key financials, followed by Alexander again updating you on our guidance and current developments. After this introduction, we will be happy to take your questions. Please note that management's comments during this call will include forward-looking statements, which involve risks and uncertainties. For discussions of risk factors, I encourage you to review the safe harbor statement contained in today's press release and presentation and in our annual report. All documents relating to our full year 2021 reporting are available on our website. And now without further ado, over to Alexander.

Thank you, Petra. Good morning, everybody, and thanks for joining our call today. Let's start with a short summary of KPIs for last year. 2021 was a turbulent year full of challenges due to the pandemic and inflation. But thanks to the outstanding execution of the entire SAF-HOLLAND team, we mastered it well. We have delivered good profitability and improved our major financial KPIs. Based on strong demand, we achieved sales of EUR 1.247 billion, a plus of 30% versus 2020. Adjusted for FX effects, sales grew by 32%. And our adjusted EBIT margin reached 7.5%, 140 basis points up versus 2020. With these figures, we fully achieved our guidance. CapEx ratio was 2%, slightly lower than forecasted as sales went up significantly. Our net working capital ratio increased to 14.8% due to the strong business leading to higher inventories, higher trade receivables and higher trade payables. And Jörg will show more details later. Now looking at the various markets. Here, we saw a very strong demand across all regions. EMEA showed good growth both for trailers and trucks of 21% and 29%. We were able to increase our sales in the EMEA region by 33%, which means growing stronger than the market. In North America, expectations on market growth were certainly higher. But with 28% growth for trailers and 19% for trucks, growth was remarkable. Trucks were somewhat constrained by the semiconductor shortages, while that is not so much the case for trailers. Brazil and India grew strongly both on the trailer and the truck side. China markets went down quite strongly, but we were able to compensate some of that with a very strong Australia and India performance. Let's talk about EMEA and the business development. Sales here increased by 33% to EUR 734 million. Adjusted for FX, the increase would have been 34%. Business was driven by strong OE and aftermarket business. Our German and Turkish plants were highly utilized during the year 2021. Q4 was very strong with a year-over-year increase in sales of 28% to EUR 189 million. The spike in steel prices, high freight rates and high energy costs caused the headwind on our gross profit. Adjusted selling expenses developed nicely, and the ratio to sales came down to 4.8%. Despite the strong cost headwind, our adjusted EBIT margin of 9.2% for the full year was nearly on the 2020 level. As you can see on the slide, Q4 margin came down by 400 basis points to 7.3% due to the usual time lag in passing on steel price increases to our customers. That led to some margin pressure in the OE business. Worthwhile to mention that we had some positive one-offs in Q4 2020, which led to the high EBIT margin the year before. Now Americas. Sales in our Americas region grew by 21% to EUR 402 million driven by a strong truck OE and aftermarket business. Also, trailer OE business strongly contributed year-over-year. Sales adjusted for FX effects grew by 25% in the region. Q4 sales of EUR 101 million were driven by a very strong trailer OE business as well as a strong aftermarket business. And here, despite the steel price increases, freight rates, energy costs going up significantly, the full year adjusted EBIT margin was up to 6%. Adjusted admin expenses-to-sales ratio improved to 4.6%. In Q4, the margin increase to 7.5% was mainly driven by our FORWARD 2.0 restructuring achievements and our strong aftermarket business. Now speaking about the APAC region. Sales increased significantly by 48% to EUR 110 million. FX had no major impact in '21. Sales growth was driven by strong OE business in India and a favorable growth in Australia. In Q4, sales increased by nearly 49% year-over-year driven by strong trailer OE business. Cost of sales only grew under-proportionally by 38%, and adjusted admin expenses-to-sales ratio improved 290 basis points to 6.6%. While the adjusted EBIT margin was 9.8% negative in 2020, we recorded a positive adjusted EBIT margin of 1.7% in '21. The significant increase in the adjusted EBIT margin is mainly driven by the strong business development both in India and Australia. In Q4, we saw strong adjusted EBIT margin improvement to 1.1% from a negative 9.8% in Q4 2020. Slow China business impacted even better margin development in our APAC region. Now let me hand over to Jörg for a detailed walk-through of our financials on the group level.

Thank you, Alex, and welcome, everybody. As Alex already showed earlier, group sales grew significantly by 30% year-over-year to EUR 1.247 billion. We saw a positive contribution in all 4 quarters in 2021 with the highest growth being recorded in the second quarter. This strong performance was driven by both OE and aftermarket business in all 3 regions. EMEA and Americas account for more than 90% of our sales. EMEA sales share went up by 140 basis points year-over-year, while the share of Americas sales declined by 240 basis points compared to prior year. APAC sales share, on the other hand, went up by 100 basis points. While adjusted gross profit increased by 21%, adjusted gross profit margin came down slightly to 17.4%. Cost of sales were impacted by high cost inflation. Alex already mentioned the spike in steel prices as well as high freight rates and higher energy costs. Price increases, a positive product mix and efficiency improvement could only partially offset the high cost burden. We've implemented price increases at all our customers. But please bear in mind that since those price increases usually are implemented with a time lag, we will only see an effect in 2022. On the other hand, we currently see continuously rising material prices, energy and logistic costs. Despite the cost headwind, our adjusted EBIT margin increased by 58% to EUR 93 million. Operating leverage, cost measures and fixed cost discipline supported the margin increase. Adjusted EBIT margin went up to 7.5% compared with 6.1% in 2020. Our adjusted net profit went up by 78% versus 2020. The financial result improved to minus EUR 9.4 million. One reason is lower interest rates because of better leverage; another one, a positive balance of realized and unrealized FX gains and losses. The undiluted adjusted EPS increased to EUR 1.35. Operational adjustments on EBIT level came down year-over-year from EUR 27.7 million in 2020 to EUR 21 million in 2021. We saw significantly lower restructuring expenses of EUR 4.2 million versus EUR 15.6 million in 2020. In 2021, we booked an impairment for our Chinese operations of EUR 4.7 million as our business in China so far did not develop as expected. Adjusted net profit increased by 79% to EUR 61 million. Reported earnings per share increased from EUR 0.30 in 2020 to EUR 0.81 in 2021. Based on the very good performance in 2021, the Management Board and the Supervisory Board will propose a dividend of EUR 0.35 per share to the AGM in May 2022. This corresponds to a payout ratio of 43% and is in line with our general dividend policy. While net debt was more or less stable year-over-year, leverage improved significantly from 2.4x to 1.58x driven by higher EBITDA. Equity came up to EUR 371 million driven by strong net profit for the period as well as FX differences from the translation of foreign operations and the revaluation of defined benefit pension plans. Equity ratio increased by 400 basis points to 36.6% in 2021. CapEx of EUR 24.7 million was stable compared to prior year. With our disciplined and focused investments, we improved the efficiency of our plants in Germany and added some capacity in Mexico and Turkey. Against the backdrop of the Ukraine conflict, all investments in Russia are currently on hold. The significant sales growth led to a lower-than-guided CapEx ratio of 2% instead of 2.5%. Net working capital went up to EUR 184 million, which corresponds to a net working capital ratio of 14.8%. This was driven by higher inventory to secure our delivery performance as well as higher trade receivables and higher trade payables due to the high demand and high production volumes. ROCE improved by 460 basis points mainly driven by higher adjusted EBIT. The cyclical rebound of net working capital burdened our operating cash flow in 2021. Net operating cash flow was clearly positive at EUR 40 million, and cash flow from investing activities was stable year-over-year. However, the cash conversion rate was impacted by the substantial increase of net working capital due to strong business in 2021 and came down to 48%. And with this said, I would like to hand over to Alex again.

Thank you, Jörg. Now let's have a look on our expectations for 2022. According to external market research institutes, truck and trailer markets will grow in 2022. However, these figures were published before the conflict between Russia and Ukraine started. We all do not know what the exact impact will be, but it is likely that these figures will change during the year. We have put our investment in Russia on hold. However, demand from customers in the EMEA region is on a very high level, and we have a strong backlog in our production. Our fabs in Germany and Turkey are currently fully loaded into Q3. In North America, truck production is expected to be further impacted by supply shortages, which could gradually diminish towards the end of 2022 or beginning of 2023. On the trailer side, the challenge for the OEMs is to further ramp up their productions and labor shortages. On the other hand, supply chain issues seemed to improve slightly. In Brazil and in India, we expect large infrastructure programs to be a driver for further growth. China, on the other hand, is expected to be still subdued in 2022. We have talked about the demand side. Now let's have a look at the cost side. Major cost items are material, labor, freight and depreciation. Steel prices are still on a very high level in the U.S. and in EMEA. And prices will most likely go further up due to the conflict in Ukraine and the increasing energy inflation. Supply chain disruptions started to ease slightly. But with the Russian-Ukraine war, we expect that it will get tighter again. Labor costs will be up due to inflation and the increase of minimum wages in Germany. As we increase capacity and build up new lines in Turkey and Mexico, we, of course, need additional staffing. Freight rates remain on a very high level and also most likely will go further up. Energy costs went through the roof since the Russia-Ukraine conflict started, so this will be an additional burden. And up to now, no one knows to what level energy costs might rise during the year. Our depreciation for 2022 will be up slightly, driven by our capacity expansions. And of course, we try to countermeasure cost increases as good as possible. First, we pass on higher steel prices to our customers. We had a price round beginning of January. We'll have another one in April and most probably also in the middle of the year. But as you all know, there is always a certain time lag between us incurring higher steel prices and costs and passing that on to the customers. It means in Q1 2022 will be under pressure from a margin perspective. Second, we invest further in efficiency improvements in our production and will increase recycling further. The supplemental collective agreement in Germany is in place until end of 2024 and will help to somewhat keep labor costs in Germany under control. And let's speak about our guidance for 2022 now. The further impact of the Russia-Ukraine conflict on supply chains, commodities and energy prices, freight rates and inflation as well as on global GDP development is currently not foreseeable. Taking all the aforementioned into account, our guidance for 2022 is as follows. Based on a good order book at the beginning of the year and the very good utilization of our plants, we expect group sales to be between EUR 1.15 billion and EUR 1.3 billion. As pointed out, we informed our customers about additional price increases beginning of the year, and we'll see some more coming towards April. However, given the current raw material situation, the massive inflation and higher pay costs, which puts pressure on our gross profit and EBIT, we expect our adjusted EBIT margin to be significantly below 2021. CapEx ratio should be between 2% and 2.5%. And due to the investments in Russia being on hold, CapEx most probably will be towards the lower end of the range. Now let's also talk about our ESG focus for a moment. ESG is a focus area, and I believe we are all on a journey. We at SAF-HOLLAND continuously work on ESG and are happy that 3 important sustainability rankings show good to very good scores for SAF-HOLLAND. MSCI rated us with AA and puts us in the top 8% of our industry. We are ESG industry top rated by Sustainalytics, which show a low risk for SAF-HOLLAND. Our rating with ISS ESG currently is at C level, and the rating puts us in the top 22% of our industry and confirm that we have a very high transparency level. We intend to keep pushing forward with a continuous improvement in mindset on these important topics. We consider the impact on society as a whole, including suppliers, customers, employees and our shareholders. Sustainability covers more than the green area. Sustainability at SAF-HOLLAND is aligned with the UN Sustainable Development Goals. Safety standards are fundamental for our products. We have a high-quality focus and put an emphasis on safety in our working environment through the safety programs that we use to protect our employees. We are ethical in our business and our supply chain, compliant with our Code of Conduct. And we are a company with skilled, dedicated employees, and we encourage a diverse and inclusive working environment. We, as the management team, decided that we want to focus on 2 major topics to strengthen ESG in the company. The first focus is on the social aspect. We want to position ourselves as a globally attractive employer by promoting a tolerant, fair working environment and lifelong learning. For us, human capital is one of the most valuable assets. And the second focus area is on climate protection. We strongly believe that there are many topics where we at SAF-HOLLAND can work on to make a difference with regards to emissions and the circular economy. Now let's have a short look on the megatrends for our industry and give you an update on our strategy. We believe that despite the terrible war in Ukraine and the immediate effects we currently see, the midterm development for our industry is very good. As you can see on Slide 23, we show a CAGR growth of 8% between 2021 to 2025 for the markets which we are relevant for SAF-HOLLAND. Of course, all calculations were based on external market research institutes' expectations before the Russia-Ukraine conflict. The point is that the 8% CAGR is not the most relevant figure. But what is obvious is that we operate in a growing market, not maybe growing with the same pace every year, sometimes small, sometimes less but steadily growing. Megatrends such as urbanization, higher mobility, digitalization and the focus on sustainability drive industry trends in the trailer and truck market. And these comprise topics like security, electrification, connectivity and automated driving. We at SAF-HOLLAND provide products that can help to increase customer value. On the next slide, you can see some examples how we can help our customers to save costs and to reach their own sustainability targets. Let's talk about innovation for a second. Quality and innovation have been the foundation of our success in the past, and we will build further on this in order to increase market share and drive market outperformance across all regions. We have talked about our e-axle family, the TRAKr and TRAKe, our fully electrified axles before. And we will start serial production for the TRAKr now in March. The push for lower emissions will intensify, and our SAF TRAKr recuperative axle helps customers to reduce fuel consumption and reduce CO2 emissions. With our TRAKr axle, we won the European Transport Award for Sustainability and the Trucks and Fleets Award in 2022. That's a good achievement. Our telematics system, TrailerMaster, on the other hand, plays into the topic of digitalization. It leads components and helps to communicate between trailer, driver and fleet operator. The fleet operator can plan predictive maintenance, lower repair and maintenance costs and extend the utilization of the trailer. Also worthwhile to mention that we won the second place in the German Telematic Award in 2022. Last but not least, let me conclude with the management focus areas for 2022. As you can see, the margin recovery was on track in 2021, and 2022 will be a challenging year again. Apart from the Russia-Ukraine conflict, there is also uncertainty about development of the COVID-19 crisis, but we will monitor all developments very closely. And of course, we'll react as quickly as possible. We continue to strengthen our equity story, and we'll drive the portfolio optimization and growth. I just showed you 2 examples on how we build on our innovative strength. I also talked about our ESG focus a minute ago and how we want to strengthen our contribution to a sustainable economic development. Efficient capital allocation is important to us. And we stick to our M&A strategy focusing on value creation for our shareholders. We continuously watch out for opportunities and review our own businesses to create a maximum value for our shareholders. And with this, we close our presentation. Thank you very much, and we are open for the Q&A session.

[Operator Instructions] We will take our first question today from Jorge González of Hauck Aufhäuser.

Alexander and André (sic) [ Jörg ], I would like to ask you regarding the outlook. My first question would be if you are taking into consideration some cancellations in this range that you are giving for yourselves in 2022. It's surprising a little bit to me that with the price increases that we'll sort of be seeing this year, you are expecting volumes to go down. So it will be interesting to know if you are already experiencing some cancellations or it's just that you are expecting a worsening of this conflict in Ukraine and Russia. And apart from that, I don't know if you can give us -- if you can be a little bit more specific in the exposure that you have to Russia in terms of sales and the impact you are expecting in EBIT. I don't know if we should be expecting something close to 5 or something closer to 2. It will be interesting if you can elaborate a little bit on this.

Of course. Let me take the first question in terms of our outlook and cancellations. Yes, we already put in, in our outlook some cancellations. We can see, first of all -- or firstly, this is, of course, the Russian market, and Jörg will speak about that a little bit later on, how big the exposure for us is in the worst-case scenario. We are also a dominant player when it comes to axles -- trailer axles for the Russian market. We sell to all major trailer manufacturers there. And of course, we can see now with the conflict starting some -- nearly 4 weeks now or 3 weeks ago that we paused our supplies into the Russian market. So this will be a burden and this is already considered in our outlook. And secondly, we also have some Western and Eastern European trailer manufacturers and also truck manufacturers who do export into Russia. And with those, because they're also very uncertain specifically when it comes to the payments, we can see already some cancellations, not many but there are already some coming in. And this is also incorporated in our outlook already.

With regard to the sales impact from Russia, we expect a single-digit percentage with regard to our group sales as an exposure that might hit us from the loss of the OEM sales business directly linked to our Russian subsidiary.

Okay. Only one follow-up, please. So which are for you the -- what we need to see for seeing the high end of your guidance? So how the scenario from this point needs to change for us to see the most optimistic part of your guidance, please?

Well, as I mentioned before, our guidance is between EUR 1.15 billion to EUR 1.3 billion. As you might know, we are rather conservative than really bullish. We took already cancellations and the missing sales of Russia into consideration. On the other hand, we have really, meanwhile, good sales in the APAC regions, specifically in India and in Far East Asia and Australia. And also the North American market, all 3, Canada, U.S. and Mexico, is developing quite nicely in terms of sales. Demand is there. People are investing. So from that perspective, all the, let's say, missing sales -- or the missing sales, we expect to see coming from the conflict we considered already in our guidance. We're not giving you any -- where we're going to end, our guidance is EUR 1.15 billion to EUR 1.3 billion at this stage.

Okay. I understand. But then basically, you are reducing your expectations for EMEA only. Maybe my final question, can you share with us the direct exposure of your clients in EMEA to Russia and Ukraine?

The exposure of our clients to Russia and Ukraine?

Yes, more or less, if you have that -- I don't know, if you have any reference of how much could be there.

Well, how much time do you have? We have about 150 to 200 trailer manufacturers across Europe, both Eastern and European. If you speak about Spanish, Portuguese, if you speak about Italian, so Southern European trailer manufacturers, there is only very, very little exposure to Russia. When it comes to, for instance, some East European trailer manufacturers, there is a higher percentage of exposure, but it's not breaking their neck, okay? So we are talking -- Russia is not the hugest trailer and truck market in Europe, by far not. But of course, there will be some exposure. And since we have acquired a high market share in Europe, there is some exposure. But we already considered all that in a very conservative way in our guidance.

[Operator Instructions] We will take our next question from Philippe Lorrain of Berenberg.

Philippe Lorrain from Berenberg. A couple of questions as well to follow up a little bit on your sales outlook. You've mentioned in the press release at some point as well that the product mix was supposed to be a little bit more, let's say, of a headwind for you this year. Would that explain as well why it seems like your price/mix assumption for this year is going to be negative assuming that FX is stable, as you say in your guidance, and the rest like basically reflected in your numbers? So that's the first question.

All right. I'm going to take this, Philippe. This is Alex speaking. Well, the product mix is not going to change that much year-over-year, okay? So basically, we talk about trailer products. Here, also, we have a mass product, but also we have some niche products which are also running. On the other hand, we have the truck market for us, which is mainly truck suspensions. It's the fifth wheels on both European but also U.S. side. And of course, we have our highly profitable aftermarket, which is really good and strong. It's -- well, our sales guidance is more based on the conservative approach when it comes now to the conflict. So the Russian market is going very much down. You cannot, let's say, send to the trailer manufacturers without getting your money. And we are very cautious on getting our money, okay? If there is a risk, we are not going to sell. That's the first thing. Secondly, as I mentioned before, you have some trailer manufacturers with, let's say, a double-digit percentage or low double-digit percentage exposure to the Russian and Ukrainian market when it comes to sales. But what really makes our head ache is the increasing -- heavily increasing inflation in all areas. When it comes to foundries, metals, we have standing parts. Everybody uses energy, and energy is exploding. Both normal energy but also gasoline and oil, it's going up. And this will be a big burden specifically, my assumption, in the first half year of this year. And since we have a time lag to pass that on, not everything, not every single detail is written in a contract, so it's not automatically going up. So for instance, inflationary freight rates, you have to agree with your customers. And they then also have to agree with the ultimate customer, which is the fleet owner. And then this is a circle because the fleet owner is increasing the freight rates, which is an impact for us as a company but also as the normal people when you go to the supermarket, and this circle, in my point of view, at the moment gives us a bit of a headache.

Fair point on the cost base. Is there as well like any in particular plans within the cost budget when it comes to the Russian investments that you have put on hold now? So is there like any kind of impairment that you've reflected in your guidance so far?

No, we did not reflect any impairment in the guidance so far. First of all, this is not a fully blown production for us like we have it in Turkey or in Germany, okay? We speak about 3,000 to 4,000 square meters only. The total capacity we would have had is 20,000 to 25,000 axles on a yearly output. And basically, we already have for many, many years a central warehouse, an aftermarket warehouse and a storage area in the area of Moscow. And we just rent the warehouse next door. Basically, you can drive from one warehouse to the other one now. And the second one, we installed our machinery. And the total investment is in the ballpark of EUR 4 million to EUR 5 million. So this is not like the massive investments we did in Germany or in U.S. or in China and in Turkey.

Okay. That's good. And what's your expectation for aftermarket in this year versus the new business overall? It's again to try to understand a little bit better your top line guidance, which I understand from your point of view, of course, that you want to be quite conservative especially since you see potential cancellations, plus the dependence on all these OEMs to the Ukraine and Russia. But it's just to really understand like what are the different moving parts.

Well, you know that we are not guiding any aftermarket sales. But what I can tell you, I don't think that the aftermarket will dramatically go down in 2022. This is more driven on the availability of new vehicles and the fleet you have in driving in Europe but also in North America. North America is very strong. I'm happy with the development. We did a good work so check mark on the U.S. So far, Europe is more. Can all the fleets for all the goods to be transported across Europe get new vehicles to keep up with the freight demand? Or if not, what they're going to do? So most likely, they're going to keep older vehicles, so the average of trailers in Western Europe to be hold is about 4 to 5 years. They're going to hold that 6, 7 years or what they have to do. Of course, they have to overhaul the running parts, both truck and the axle. And if they have to overhaul the axle, then of course, they need spare parts. And the spare parts are mainly coming from us. But we are not guiding the aftermarket for this year. Aftermarket is also impacted by price increases because a lot of parts also we take from the same suppliers, of course, who supply us into the OE production facilities. And also here, we have to deal with energy costs. But also here, we are doing new price rounds and have to increase the prices.

Yes, yes, yes. No, I understand the delay, of course, in passing through all the cost increases that you have. Look, another question that I've got is because you mentioned that higher wages in Germany. I've got like a few companies who mentioned that actually that's a hit for probably later this year. How do you feel about that? Because I had the impression negotiations with the work councils and the unions as well were leading to a potential upwards revision to salaries more, let's say, closer to the end of the year during Q4 or so.

Well, the minimum wages will -- at the final stage by end of this year, I think it is October, will be reaching EUR 12. It has nothing to do with our salaries for our people here, okay? Because we are a member, of course, of the IG Metall, which is the metal union. And we pay higher salaries, of course. And -- but this is if you see the whole economy in all areas or specifically Germany, if any company who is involved in supplying, I don't know, might be freight, in loading, in logistics, in whatever you think, if they're going to increase the prices from EUR 9.50 to EUR 12, that's a heavy increase. And what they're going to do? They're really going to pass that on and implement it in their costs? And this cost then later on will increase all companies' costs at the end of the day. But the next thing when it comes to salary increases, we are not there yet. But what we're going to do with all the units in Europe, okay? All the normal people working every single day, they face a tremendous increase in inflation, meat, oil, gas. If you go to a gas station, that's horrible for all the people. And at the end of the day, they have to pay for this. And at the end of the day, they will come back to the companies and ask for more money. This is a circle, as I mentioned before. I've never seen that before in the last like 25 years. I have to be honest. And we are really watching this. And this will have an impact in this year, I'm pretty sure.

Yes. And just because you speak about that circle, let's say, of inflation and all these impacts that you are facing from that and the delays in investing that to your customers and, hence, the delay as well in realizing the margin, how should we think then about the targets that you had for 2023 for the adjusted EBIT margin to be around 8%? Is there a likelihood that's going to be delayed just because we've got that strong inflation in the cost base and that you're pricing basically to offset that internally and also pass that through to your clients?

No, I don't think so. That's reachable, and 8% is a good number for us. It's reachable. I hope that in the first half year, everything is getting a little bit better. Let's hope that the conflict in Ukraine is going to end in the next couple of weeks, I really hope so, and that we come somehow back to -- well, there will be not a normal like in 2017, in 2018, so we don't think and don't calculate that there will be ever such low prices in steel, energy, some -- like we had some years ago, like 3, 4 years ago. But it will be a new normal. And basically, prices are increasing. Prices for trailer increased already 3x this year. I just came back last week from the TMC, which is the trailer truck show in the U.S. The people are really bullish. Everybody is fully booked. Both the truck and the trailer manufacturers, they're ramping up further production. Very happy. The only thing is the labor shortage. So some more companies are moving over to Mexico, installing plants to get new capacity. And for them, like a 7%, 8% inflation, okay, it's normal. It's like it is, but we're going to pass that on to customers. The ultimate customer is people, okay, normal working people. But I think we have some turbulences in the first half year. And towards the middle of the year, it's easing and then better. Let's hope I'm right.

Yes, exactly. Let's hope. I mean at this point, it's just like an educated guess anyway. But just to understand, so for you to reach this 8%, so it's basically internal work on offsetting anything like on the cost side, basically price discipline towards your clients, be it in aftermarket or in OE. Is there anything more, let's say, that we need to consider that would help you to reach this 8%? Or is it all achievable as I was mentioning already?

It's the points you mentioned when it comes to the European side but also for other regions. But don't forget, we have 2 other regions. We have APAC, which accounts for 10%. I'm very happy at the moment with the development, okay? It could be much better if China would, for us, develop a much better now. We're in a good way. But specifically, with the huge infrastructure projects in India, I'm happy; Australia, fine; Asia, I'm quite satisfied. So they did a good job in '21. But 2022, I'm pretty sure they will be doing even much better job now. And don't forget, 35% of our revenue comes from North America or from the Americas. Here, we had big issues between 2017 into 2019. We did our homework in '20. Now '21, you can see we already reached 6%; last quarter, even better. And this is going to be better in the future. And if you take all 3 regions together, a very well-performing APAC region, a much better performing Americas region and then a good European region, then the 8% is not a rocket science.

We will take our next question from Nicolai Kempf of Deutsche Bank.

Nicolai Kempf here from Deutsche Bank. First of all, we appreciate that you provide a guidance as some companies are unable to do so. My first question would be on the regional split. So I understand that supply chain issues are rather linked to Europe. But are the other headwinds like energy, freight, labor, are these global issues? Or do you see one region more impacted by -- or than another?

This is a global aspect, okay? I would say not so much in APAC. We got price increases, freight. The driver shortage is not existing, so you have a lot of drivers. Everybody is happy to drive a truck in APAC. That's a good thing. Not so much in the Middle East. Middle East is also doing okay. You also have energy inflation, steel price increases in North America, but they already had that massively in 2021. So this was the region where the steel prices increased the most. You have driver shortage. You have labor shortage. But a lot of companies, as I mentioned before, they moved already some years ago are now moving to Mexico to have access to the huge labor force they have down there to also reduce a little bit cost. So as I said, they are at the moment quite happy with the market development. Now at the moment, the big issue is here in Europe. We already saw a really heavy increase in steel prices. Freight was going up, energy also in '21. But now with this Russian invasion, everything accelerated heavily. And let's hope we have a peak and it's coming to a somehow normal level, as I said, in the second quarter of this year. But at the moment, it's globally, not so much, as I said, in APAC. U.S., they are living with that. And in Europe, it's now really a heavy increase, and everybody has to deal with that.

Okay. Understood. And just one follow-up. I think you mentioned that the second quarter this year will be especially under pressure. Is this also related to the higher raw mat prices?

Well, I said that specifically the first quarter will be margin-wise extremely under pressure. Well, the pressure continues as long as we have this war going on and there is a shortage of raw materials and steel and components. I think that the second quarter for everybody will be still very demanding. I said earlier that we are doing the next price round April 1, so this gives us a little bit of a relief. But the first quarter for us will be very challenging.

We will take our next question from Werner Friedmann of A's & I's.

Three questions from my side. The first would be on China. Because you took the impairment there, can you comment a little bit more on your current production setup, your production cost and sales success you have there?

Yes, let me take the question. This is Jörg. Yes, as you have seen in the presentation, the outlook for China is not that promising both for truck and trailers. We see a double-digit decline. And for sure, we have also anticipated this in our models and have not only changed our assumption for 2022 but also for the years to come. Basically, what you do, you calculate a so-called value of use. This is a discounted cash flow model, and you compare this with your assets you have in the subsidiary. And based on this analysis, we came to the conclusion that it is reasonable to do this impairment. This is a prudent business decision to do this impairment. And as said, we have quite a good product in the market. The CBX25 is well perceived by our customers. However, as the market is down, very reluctant to buy given the very, very high cost inflation we also see in China.

And then to add to this, there is another complete COVID shutdown in a lot of provinces so the people are not allowed to travel, and they have to stay back home for quarantine. So massive increase in COVID cases in China, which led to our decision, okay, the next couple of weeks is not going to get better in China, so we made this cautious decision.

Okay. Second question would be on the outlook you gave in the medium term, so 2023. And following, you're speaking of a strong growth outlook in EMEA, which is basically a mature market, and it is on a pretty good level. So can you elaborate on the reasons you believe that there will be a strong growth there?

Well, our latest update we did in end of last year and the year before was that by 2023, we are going to increase with a profitable growth coming from 2018, 2019. And the margin EBIT -- adjusted EBIT margin will be around 8%. We stick to this. We also see the increase in transport volume. I have to go back to -- unfortunately, to the COVID year 2020, what happened, a lot of people that just ordered online, they still continued to order online. So we see in 2020, 2021 a massive increase in freight space capacity needed to transport all the little boxes with the shoes or the clothes inside. And this is not going to get back. So the increase in volume for trucks and trailers will be increasing in all areas, mainly in Europe but also in North America.

Okay. Last question would be on your comments on depreciation in the current year. You said it's going to be slightly up. Does that include the impairment for the China operations?

This does not include the China operation. This was a onetime effect we have recorded in 2021. And it's outside the normal course of business, of course.

[Operator Instructions] We will take a follow-up question from Philippe Lorrain of Berenberg.

Yes. Just a quick one on energy costs. Would you mind sharing with us roughly what kind of percent of the top line we are speaking about? Is it closer to 1% or perhaps closer to 1.5%, 2% especially after the rebound we've seen in electricity prices and gas prices as well?

Philippe, if I understand your question correctly, you want to know what percentage our energy cost is in terms of our sales?

Yes, exactly.

That's a tough question. I cannot answer this from the top of my head. What I can tell you is that the energy costs specifically in Western Europe doubled or tripled from end of last year to February, March. And this is also the reason for a lot of energy-consuming productions, foundries, for instance, that they are coming and asking for much higher prices because everybody is set by energy in their production.

Yes. Do you have as well any foundries or any extremely, let's say, energy-intensive production processes?

Well, we also need, of course, energy to run our production, okay? We have highly robotized and automated but not like in a foundry. We don't have own foundries. Our suppliers do. What we have is a joint venture with a French foundry making our top plates for the U.S. market and some for the European market, where we have 33% of the joint venture. And also here, we see a massive increase in energy costs, of course, which is in France. But as I said, it's Western Europe. Everybody is facing at least an increase, so double increase or a triple increase in energy costs at the moment. And let's hope they are coming down again.

There are no further questions for the moment, and so I hand back to Petra Muller.

Okay. Thank you, operator. Thank you, everybody, for listening. This concludes our Q&A session. The next SAF-HOLLAND call will be on our Q1 2022 results on May 10. Thank you for joining us today, and goodbye.

Thanks, everybody. Stay healthy.

Bye-bye.