Duerr AG

XETRA:DUE

Earnings Call Transcript 2018-Q1

[Operator]

Welcome to the Dürr conference call. Ralf Dieter, CEO; and Carlo Crosetto, CFO of Dürr AG, will present the Dürr group's figures for the first quarter 2018 followed by a Q&A session.I will now hand over to Mr. Dieter, CEO of Dürr AG.

[Ralf W. Dieter]

Thank you, [ Ms. Imee ], and good afternoon, ladies and gentlemen, and welcome everybody. It is our pleasure to present to you Dürr figures for the first quarter 2018. And I'm joined by my colleague, Carlo Crosetto. We already sent you an overview of the impact of IFRS 15 and 9 on our figures in a separate e-mail some weeks ago. And you'll find a detailed overview of those effects in our Q1 report and on our Investor Relations website.First-time application of these new standards did not have any material impact on the Dürr group's net assets, financial condition and results of operations. Most of the figures for the first quarter '17 in this presentation are, therefore, slightly adjusted.Let me summarize the key highlights in the first quarter on Page 3. We had a good start regarding incoming orders and sales, surpassing last year's level by 5% and 4% on a comparable basis, that means adjusted for currency exchange effects and Ecoclean.Book-to-bill reached a very strong 1.2 and project pipeline increased by 30% compared to last year. EBIT before extraordinary effects declined by 15%. Adjusted for Ecoclean's EBIT contribution in the first quarter '17, operating EBIT declined by 8%. And this decline is caused by the margin decrease in Paint and Final Assembly Systems.Let's turn to Page 4. Incoming orders exceeded the EUR 1 billion mark again and could compensate the Ecoclean order intake of EUR 36 million in the first quarter '17. Order backlog increased by EUR 69 million to EUR 2.7 billion, ensuring high capacity utilization in 2018.Incoming orders in Asia were encouraging and made up for the decline in North America. And in China, we increased incoming orders by 19%. This was particular underpinned by the automotive business and Europe displayed steady business, and the proportion of orders generated in emerging markets again nearly reached the 50% mark.Let's turn to Page 5. Gross profits fell by 9% to EUR 199 million in the first quarter due to the lower sales and the pressure on margins in Paint and Final Assembly Systems. At 23.6%, the gross margin was at a good level and advanced the full year 2017 level, which was 23.1%.The lower gross profit and the absence of the extraordinary income from the sale of Ecoclean caused an EBIT drop by 41% to EUR 51 million. It should also be brought in mind that the first quarter of 2017 had included operating EBIT of EUR 3.5 million from the Ecoclean. And operating EBIT of the group came in at EUR 56 million in the first quarter '18 with an EBIT margin of 6.6%.Carlo Crosetto will now take you through our financials.

[Carlo Crosetto, CFO & Member of Management Board]

Good morning, and good evening, also from my side. Ladies and gentlemen, let me continue now on Page 6. Our operating cash flow came in Q1 at minus EUR 76 million. This decline was mainly due to a further increase of EUR 100 million in net working capital as well as changes in net provisions.One of the key factors explain the higher net working capital was the postponement of payments by automotive OEMs into the second and third quarter of this year. At the same time, we have increased inventories to avoid the risk of short-term deliveries, shortfalls of some key suppliers operating at high-capacity utilization levels.Our liquidity budget assumes substantially higher incoming payments from the automotive industry over the coming quarters. So for this reason, we confirm our forecast of substantially high cash flow in 2018 as a whole compared with the previous year, so 2017.On Page 7, you can see the individual components of net working capital in more detail. As I just already mentioned, inventories and prepayments to suppliers was mainly sharply to safeguard delivery capabilities. Annualized days working capital increased to an unsatisfactory level of 50 days.The overview of our work in process balance on Page 8 has changed due to new IFRS 15 rules. Due to these rules, we are no longer showing any prepayments received. Total contract assets stand opposite to total contract liabilities now. Billing in excess of cost on uncompleted contracts of small series production are included in total contract liabilities figure.The balance shows that the payments balance with our customers had shrunk in quarter 1 2018 to a figure of minus EUR 59 million from minus EUR 232 million 1 year earlier. We consider a figure of around 0 to minus EUR 50 million as a normal level. So we expect no major cash outflow in the next few quarters of this year.We understand that the key factor to their success is its asset-light business model and its focus on generating a significant return on capital employed. And because of this, we have sharpened measures to improve our working capital management.On Page 9, we describe a package of measures that has been taken to lower days working capital reasonable figure of around 40 days by the end of 2018.In addition to intensified internal communication and specific instruction for our sales team and project managers, we will also be adjusting the incentive system and give a net working capital a substantially greater weighting in our group targets.In the last conference call, we have dispensed with the chart on Page 10 a factoring and forfeiting operation, we're in a very narrow range. However, we recorded in Q1 a decline of EUR 25 million over the end of 2017. So if factoring and forfeiting volumes had been unchanged, cash flow would have been EUR 25 million higher than we are showing.A 26.7% of our equity ratio increased by roughly 2 percentage points compared to March 2017 -- so March 31, 2017. Meaning that the equity increased by EUR 42 million in this period. We expect a further improvement of our equity ratio during the course of 2018, and our total cash, including the other liquid assets, currently stand at around EUR 700 million.Our return on capital employed reached 42% in Q1, but we are confident that we will reach our guidance ranges of between 20% to 40% in 2018.I will now hand back to Ralf Dieter, who will highlight the performance of division and summarize our outlook.

[Ralf W. Dieter]

Thank you, Carlo, and let's move to Page 12. Paint and Final Assembly Systems recorded a 2% increase in new orders in the first quarter. The division registered substantial growth in order intake from China and Germany while new business decreased in the United States.The global project pipeline and, in particular, the total volume of projects to be awarded in the next 6 months by our customers is larger than the previous year.As expected, EBIT and margins continued to decline due to the strong competitive pressure with the EBIT margin coming to 4.6%. We are able to lower function costs much stronger than the decline in sales. But recently, we have seen signs of an improvement in the gross margin and order intake again.And the FOCUS 2.0 optimization program launched in February addresses the effects of the more difficult competitive environment and pressure on earnings. Via FOCUS 2.0, Paint and Final Assembly Systems is to return to an EBIT margin to 6% to 7% in 2020, however, costs are to be reduced by a figure in the mid-double-digit millions by 2020.FOCUS is giving clear priority to earnings quality over volume growth. As things currently stand, FOCUS will cause extraordinary expenses of EUR 5 million to EUR 10 million in 2018. And in the first quarter, consulting cost of EUR 2.3 million were allocated to the Corporate Center in connection with this FOCUS program.Let's move to Page 13. Application Technology continued to perform well in first quarter, posting a 7% increase in order intake while sales rose by 9%. The division was also able to grow its important service business. Despite the substantial increase in sales, the book-to-bill ratio came to 1.2. EBIT grew in sync with sales by 9%, resulting in an unchanged high EBIT margin of 10.4%.Page 14 shows the results for Clean Technology Systems. Order intake exceeded the high figure achieved in the first quarter '17 by 2%. The division registered strong demand for exhaust air purification systems in China, in particular. By contrast, the sales dropped by a 22%, reflecting the fact that order intake in the second half of '17 was relatively weak. This resulted in a temporary low-capacity utilization in some regions, which fed through earnings. In addition, energy efficiency technology business continued to generate losses. And we have initiated further measures to improve earnings in this area.On Page 15, we have additionally set out the Q1 '17 MPS figures adjusted for Ecoclean in the interest of greater comparability. In like-for-like terms, order intake in the first quarter '18 was down 17% of the previous year's very high figure, which had been fueled by extraordinarily strong demand for balancing and testing equipment in China in some larger orders, in particular. Like-for-like sales and EBIT remained steady. The EBIT margin came to 10.5%.Ladies and gentlemen, let me continue on Page 16 with the Woodworking Machinery and System division. The rollout of a new ERP system at HOMAG's headquarter in Schopfloch required an extended interruption to production at the beginning of the year. This negatively affected sales and earnings generation which resulted both key figures remained unchanged at the previous year's level. But order intake rose again by 12% above the record level of the first quarter last year.And in March '18, HOMAG received its largest-ever order worth over EUR 60 million from furniture producer, Forte in Poland. The operating EBIT margin came to 7.4%, down from 7.6% in the first quarter last year. Following the relatively muted start to the year, sales and earnings should pick up in the course of the year.Let's move now to Page 17. As you know, our Service business is a key driver of both customer satisfaction and value creation. Services grew slightly adjusted for FX and equity. Margins are unchanged on a high level, and we expect more positive trend in our Service business in the next quarters.Now let's turn to Page 18. Despite the somewhat muted start into the year, we are reconfirming our outlook. Our operating EBIT margin target is 7.4% to 7.8%, which indicates a more or less unchanged operating EBIT in 2018.So ladies and gentlemen, before inviting you to ask your questions, I would like to draw a short conclusion on Page 19. First, incoming orders and sales were up 5% and 4% on a comparable basis. Operating EBIT was down 15% due to the weaker Paint and Final Assembly Systems performance.The FOCUS optimization program is being executed and will lead Paint and Final Assembly Systems back to a margin level of 6% to 7%. And margins on order intakes stabilized in the first quarter at Paint and Final Assembly Systems and the project pipeline has increased.HOMAG's sales and earnings are expected to improve strongly during the next quarters. And cash flow should improve also in the next quarters. And therefore, we confirm our 2018 guidance and see no need for any change.Now, ladies and gentlemen, thank you much for your attention so far. We will now happy to answer your questions. I'll now hand back to [ Mrs. Imee. ]

[Operator]

[Operator Instructions] The first question comes from Alexander Hauenstein, DZ Bank.

[Alexander Hauenstein, Analyst]

Alexander Hauenstein, DZ Bank. I have a few questions. First of all, with regard to the optimization program, FOCUS 2.0, could you remind us here about the major points of action for your program and its progress on the time line? When will we see an impact on EBIT, is it 2018 already or is it more likely 2019 and to maybe kind of indication of how much this could be? And the question is, does the competition also adjust capacities here? So do your clients actually feel the impact as capacity is becoming scarce again? And do they already start to sign first contracts with higher margins again? So that would be the first question part.

[Ralf W. Dieter]

Okay. Mr. Hauenstein, Dieter speaking. So first of all, the major points of action to summarize on a high level because there are many, many points. But first of all, the cost reduction and we call it cost or the project cost down, which means the equipment cost, which requires also we work on leaner designs, but also the whole execution cost of a project, from engineering down to the site management. So we are looking in all areas where we can improve and take costs out. The second one is that we have some activities in our processes, which will take longer time because we started out with engineering where we use different methods of working to become more efficient. Basically to say, to do the same work with less people or the opposite with the people we have more work, but at the moment we are looking at the first one. I think that's the major point besides some where we are changing the sales organization to be -- to have more focus and to be more selective on projects. Nevertheless, I said that the project pipeline is pretty full, which is also for me interesting to see again because it's kind of a repeat of 2005 that the market is -- the volume is increasing. But your question when the competitors by the way so far we know, the Asian competitor, they are stable in terms of set up, but they've reported losses in the first quarter. But our friends around the corner here, we also see that they don't increase, but they are more -- all they have to do to keep the people because of some issues. The customers will have to learn in the next -- months and quarters that there is not enough capacity in the market may be to do all the projects. This is kind of customer education we had in 2005, but it will take time. Because they always think that everything can be done, which is out there. But the situation is great for our program because it puts us in a situation where we can be selective and look for the higher-margin order and are not forced for utilization reasons to take low margins orders. I think that's the whole name of the game. Then it's the impact on EBIT. Some of them maybe this year, but you have to expect that most of it will be in '19 and '20. Because there are not measures which will have an impact overnight like reengineering of products take some time and process changes take time. So for your guidance, expect the EBIT improvements in -- starting in 2019, okay?

[Alexander Hauenstein, Analyst]

Yes. Very clear. And another one, please. You spoke about some short-term supplier issues here. Could you please shed some more detail? What exactly is the bottleneck here? And which parts or divisions are affected? And when do you expect this to be overcome again?

[Ralf W. Dieter]

Yes. I think when you follow little bit in press, the machinery and equipment industry at the moment is quite fully loaded and you'll hear all over supply constraints. And mostly affected at the moment is HOMAG because they have a huge order increase in backlog. And there are suppliers, which are by the way famous names, which suddenly say instead of 4 weeks delivery, we have now 3 months delivery, which has forced us also to increase our inventory. So we've put on stock what we could get in order to not to have too much delay on the lead time of orders. So HOMAG is also -- the other divisions are affected, but mostly affected is the HOMAG side. But also little bit Schenck on the PFS side, I would not see that as too much a problem. APT also, we increased the stock because we have here lot of repetitive parts from key suppliers the same by the way big names. And therefore, that's also part of the reason why we increased our inventory significantly because we wanted to be able to deliver, also spare parts is important to deliver.

[Alexander Hauenstein, Analyst]

So I understand, you probably have loaded up already. And you don't see the necessity for you to do this again from next quarters? And on the other hand, is it right to assume that the situation is not going to change until year-end?

[Ralf W. Dieter]

As to your first question, you're right. We don't assume that we will increase here more, that's -- let's say, that's not our intention. And from today's perspective, that's our goal. Whether this goes through the year that we can't say today, but I think we are at a stock level now where we can manage, which we would rather see an improvement during the course of the year that we can use again a little bit.

[Operator]

The next question comes from Philippe Lorrain, Berenberg.

[Philippe Lorrain, Analyst]

Philippe Lorrain from Berenberg here. I've got a couple of questions. I mean, the first one is really on, let's say, how the mix of your activity between project business and machinery business can have an influence on your cash flow generation and your net working capital? Perhaps we can start with that high-level question and then I have got a couple of follow-up on that.

[Ralf W. Dieter]

To answer that, it's not so easy, but I can say from a high level, on the HOMAG side, we have quite a stable prepayment behavior of the customers, yes, where we have -- the main pressure is on the automotive side. And this reflects in PFS and APT. This is the same also for the Schenck business. The numbers aren't indeed large but here from the machinery side, the payment terms are even worse. But the impact on our cash side is on PFS and APT.

[Philippe Lorrain, Analyst]

Okay. Is it fair to assume perhaps that in the machinery business, generally speaking, you have higher net working capital as well because of the, let's say, the higher volume of inventory and generally speaking as well probably the balance that you just have in the receivables and payables?

[Ralf W. Dieter]

That's a correct assumption. I'll give you an example when we sell a machine from RoTec as our balancing machine to the automotive customer, the payment terms are, there is no prepayment, yes. You have to -- you get an order and then you deliver, you get 80% of the cash of the amount of the order. So we have not to differentiate between machinery and equipment, they have to differentiate between OEMs, automotive and non-automotive business.

[Philippe Lorrain, Analyst]

Yes. Okay. Then on your days working capital goal, I mean, I noticed you target for this year something like 40 days. And what would -- given the target that you would like to stick to in the longer term, especially because you've been increasing inventories this year. So I guess, that the 40 days is going to be slightly inflated and perhaps there is a cash inflow from net working capital to expect actually next year, is that correct?

[Carlo Crosetto, CFO & Member of Management Board]

Philippe, this is Carlo Crosetto. Let me take this question. I mean, you've seen that our days working capital of 50 days are developed to a level, which we think is not acceptable. And we have set ourself a goal for this year to bring it down to 40. The question you raise is more beyond the 2018. I think it's fair to assume that we would like to stick to that goal also for the following year, so something between 35 to 40 days. We need to make sure that the measures that we have sharpened are actually going to deliver these improvements. But I also would like to highlight that we like to measure -- I mean, if you just look at the working capital requirements and now the advance payment story, there really our focus is to manage the business in terms of days working capital, not in absolute working capital number. Because as our business will hopefully continue to grow, we will actually be spinning a bigger wheel. So for us, it's key that days working capital are under control and stay competitive. Because as I mentioned in my initial remarks, our asset-light model is, what I think, make us an attractive investment for shareholders. So we need to make sure return on capital deployed ultimately stays above 30%, so 30% to 40%. So that's how we measure it. And there are different measures that we have summarized in one of the slides, but there is more than that of course.

[Philippe Lorrain, Analyst]

Okay. And perhaps the last one. Just on your guidance for the cash flow. I mean, you guide for a significant increase in cash flow this year versus last year. How should we think about that in terms of magnitude? Because I was doing some really basic math here. You guide for EUR 180 million to EUR 200 million of net results. Is CapEx and G&A are roughly the same level of EUR 80 million that would be quite neutral? We see at the end of this quarter a buildup of net working capital of EUR 70 million to, let's say, EUR 80 million, something like that. So if I was to take that measure and imply the basically the net working capital stays more or less where it is for the coming quarters, it would come to a free cash flow of somewhere close to EUR 100 million. Is that kind of calculation correct? Or yes -- or do you see the things to be differently?

[Carlo Crosetto, CFO & Member of Management Board]

Yes, I mean, when we give guidance, we give guidance towards year-end. So we don't give guidance by quarters on cash flow. But I think your statement is correct. Look, it's very simple. I mean, if the order intake is stable or increasing ultimately and we're generating revenues in the same level, then ultimately cash has to come in. And we've been arguing in the last conference calls that there has been a delay in payments or reduction in advance payments. So ultimately, once you build, let's say, -- let's call it a normal level of working capital, although, it's not normal 50 days. I think it's fair to assume that our cash flow at year-end will be higher than what it was in 2017, I mean, our operating cash flow. Of course, if we acquire and pay dividend and stuff like that, that's a different story. But in general, we do expect the business to improve from a cash flow point of view, assuming that our -- we're even able to improve days working capital. So EUR 100 million free cash flow, I think, that's a number you said is okay as an assumption to use.

[Operator]

The next question comes from Sebastian Growe, Commerzbank.

[Sebastian Growe, Analyst]

The first one is on the Woodworking business. HOMAG obviously has seen very, very great order intake in the first quarter. And as you've already said in your prepared remarks, you also benefit from the award of larger projects. Could you just give us a sense on what that means for the margin quality in the backlog? So generally speaking, the differential between, say, the smaller bread-and-butter business and larger projects or how should we simply think about that from a structure point of view? The second one on Paint and Assembly. In your prepared remarks, you said that you've stated -- sorry, that you have seen some signs of a gross margin improvement on recent orders and it's a simply function of the improved cost structure under the FOCUS program? Or is this really that the price pressure is easing in that business? And then lastly on working capital. You said that, I think, on the quarter 4 conference call that you were expecting a major advance payment from a Chinese customer. Can you just update us on if there has been any positive development in the quarter 1 or when you would expect this advance payment to come in? And finally, you also mentioned that working capital is going to play a greater importance in the management incentive structure. So what is the way to now compared to what it was before is my question here.

[Ralf W. Dieter]

Okay. So I will start, Dieter speaking, with HOMAG, a EUR 60 million project as I reported, we booked in the first quarter from Forte is an extraordinary size of a project. It's basically a whole factory with all HOMAG equipment. Last year, we had also a EUR 30 million large order in the first quarter. So when you compare it, it's not -- let's say, that the order intake was over -- covered by this large project. Your question whether in small projects, we have higher margins and/or in larger ones? This answer is not easy to give because we have all those, we have for sure smaller projects whether it may be higher margins, but also the opposite depends on the commodity situation. But most important is that when we bought HOMAG in 2014, they made losses on those larger projects. And due to the work we have done over the last years, today, we make money. And so a EUR 60 million project is a good opportunity to make, also in absolute terms, good margins. And what makes me, let's say, very, very proud is that we were chosen by this customer because of our Industry 4.0 capability, not because of our machines. Because we also built the order infrastructure of an IoT plant for this customer. And I think that's a -- it's a wonderful project for this.

[Sebastian Growe, Analyst]

So you would say that overall rather even if you were to compare say small and mid-size orders compared to large orders and after the work that they have spent there?

[Ralf W. Dieter]

As I said, it will be difficult to fix that answer, but, let's say, from the general trend, larger projects are maybe in percentage terms a little bit lower than smaller ones. But as I said, they contribute with a larger absolute demand, which is happening to cover the cost there. Second question, PFS margin. You obviously saw a stabilization. Basically, a slight improvement compared to the whole margin average in 2017. This is due to our cost measures partly, but also the fact that we are now also have some order from customers who value our competence. Let's say, that way, it's not just who is the cheapest, it's rather who can do it. And you know that every customer isn't the same and in particular, the new EV pioneers for them, it's most important. They get a reliable partner who does an job on-time, on-budget. So I think the value of margin decrease, we have gone through. But the hill to go up is a little bit ahead of us. So we have the slight increase of the value, but not a steep uphill, no. Okay?

[Carlo Crosetto, CFO & Member of Management Board]

I think you had a question about how do we incentivize improvement in days working capital. How this change, if I remember correctly? I think just to be clear, days working capital has always been part of our target of our senior management team. But we felt that in order to increase the focus on it that this percentage of the impact of days working cap and the total bonus compensation should be increased. So we are seeing an -- we're going to increase the impact of days working capital has on the total or target achievement of senior management. I just want to highlight this is just one of the measures we are looking at or we are going to implement in order to improve days working capital. There are other measures, which are also very important that also need to be addressed. And as we have like shown on Page 9, a summary of those, all of them have to work to make sure that we can achieve this goal. For example, we don't, of course, finance the factories of our customers, we always keep saying that. But we want to make sure that every single day of the project if not every single month is actually cash flow positive for us, not over the project lifecycle, et cetera. So it's very important that a more strict cash flow management is implemented. But ultimately, as you correctly say, if the manager feels in his pocket then it's easier to implement these measures.

[Sebastian Growe, Analyst]

Fair. But are we willing to give us at least directionally an idea of how much of your working capital now counts for the overall incentive package compared to what it was before?

[Ralf W. Dieter]

We would not like to disclose that, but it's significant. And we basically are talking about doubling the impact, which is not the total bonus we can issue, but it's part of it. And what Carlo also said, we also made the whole organization worldwide realize this importance, again this is a more impact because we had too many years where we had too much cash and people obviously a little bit focused on it. Also, our customers are sometimes trying to avoid payments by keeping us on site because they have not enough people to run the plant. So there's a lot of effects. It's quite complex and that's why all these measures are complex.

[Sebastian Growe, Analyst]

Okay. And then finally on the advance payment from a Chinese customer?

[Ralf W. Dieter]

Yes, I don't like to talk about single customer orders, but we expect -- I do this last time and we expect that in the second quarter. But it could be also third quarter because, particularly this customer is a little bit unreliable in terms of timing when he does what.

[Operator]

The next question comes from William Turner, Goldman Sachs.

[William Turner, Research Analyst]

I have a couple of questions. The first one is on cost inflation. What have you agreed for your labor cost increases for 2018? I'm guessing it's around 4%? What was that relative to the year before? And are those increases going to commence from April onwards so it was not impacting the last quarter? And then...

[Ralf W. Dieter]

Can we answer that and maybe...

[William Turner, Research Analyst]

Yes. Sure, sure.

[Ralf W. Dieter]

Go one by one and then we have not to write so much. For sure, we have to follow the IG Metall salary increase, which has been agreed. And that's for the total year about...

[Carlo Crosetto, CFO & Member of Management Board]

4.2%.

[Ralf W. Dieter]

4.2%. That also applies to our nontariff payment, and -- but that's only -- not even 50% of our population. The rest is outside of the [ world ]. In China, we had seen in the last year is 10%, now this year less. So overall, this -- it's like the term and increase was higher than we anticipated. In the last years, we had -- we always had put into budget 3% for the year to now 3%. And so this has an additional impact on roughly EUR 10 million on our -- 9, we have to swallow this year.

[William Turner, Research Analyst]

And -- then also, I guess, are you seeing any increases -- just given that your supply chain is quite constrained, are you seeing any prices from your components buyers? Are they pushing your prices too? And then why I'm going to lean to with these questions are and how are you planning to offset, especially given that pricing environment and PFS is quite tough at that moment. Will it just be right taking out costs?

[Ralf W. Dieter]

As of the component price, I'm not in detail about every component, but the situation is -- what I know is that we normally talk to your suppliers to decrease prices. But you're right, in some area where we huge shortages, I think we will not negotiate that. But in general, yes, there are some increases, but we also -- on the equipment side, we always try to benefit from our global sourcing network. And we are not only rely -- we don't need only to rely on a supplier here in Germany or Venezuela. So this impact from the purchasing side I would not see as a problem, overall.

[William Turner, Research Analyst]

Okay, great. And one final question. I noticed there was a outflow from utilizing of our provision. Could you explain what the provision move was in the cash flow statement?

[Ralf W. Dieter]

Sorry, I didn't understand the..

[William Turner, Research Analyst]

There was a EUR 9.2 million cash outflow in the cash flow statement from a provision. Can you explain what that was?

[Carlo Crosetto, CFO & Member of Management Board]

Yes, I don't have it in front of me, but I think it's related to an increase in provisions for potential losses on some of the project that we booked may be with a slightly negative price factor. But that's the most of it and then there are other general provisions.

[Operator]

The next question comes from Jasko Terzic, Metzler.

[Jasko Terzic, Research Analyst]

My first question is regarding your comments on improved project pipeline and in automotive because it confuses me in that respect that you're also saying that order intake volumes in Paint and Final Assembly could decline. So could you give us here some clarity, what exactly do you mean with improved pipeline and still declining order intake?

[Ralf W. Dieter]

Okay. You're right. It's a bit contradictory. What we are facing is a market, which is 30% higher in terms of volume. At the same time, we state that we potentially have less order intake in Paint. We don't know yet to be honest with you. If the projects have enough margin or less satisfactory margin then it could be that we have not a decrease in order intake in Paint, yes. What we said is, we want to reduce potentially that we are not forced to take orders on every means. So -- but if we look at the market and this has changed since the last 2, 3 months -- 2 months actually that this may be a potential that we have not a decrease in order intake in PFS.

[Jasko Terzic, Research Analyst]

Okay. And you were talking about the market pipeline. So it's not about your volumes you have seen last year. And now your expected volumes should be above that level that was not the meaning, it was a pipeline from the market?

[Ralf W. Dieter]

Yes, yes, it was the projects, which we are working on to be awarded to next 6 months. That's what we are talking here about always. And this volume has increased by roughly 30% compared to last year same time, which is good news.

[Jasko Terzic, Research Analyst]

Okay. Then the second one is also on order intake regarding your MPS division. Could you give us a feeling if the comparable base from Q2 onwards is easening? Or in other words, do you expect to get back to like-for-like growth from Q2 onwards?

[Ralf W. Dieter]

This I can't promise yet, but because in the first quarter '17, we had one customer, which gave us a lot of orders on the end of line sight and also on the -- and we had also strong order intake, particularly in China on the balancing side. Whether we will manage the same level end of this year? At the moment, we are planning to go to that level or maybe a little bit beyond. But this is too early this year. I can tell you after the second quarter better.

[Jasko Terzic, Research Analyst]

Okay. And my final one is on your margin prospects. You said that margins should start to increase in '19. I have 2 questions regarding -- or 1 exactly. Does it mean that the level of margins in '19 should be above '18? Or in other words, will we be bottom out in '18 or should we bottom out in '19?

[Ralf W. Dieter]

We're talking about PFS here?

[Jasko Terzic, Research Analyst]

Exactly. Only PFS.

[Ralf W. Dieter]

So in PFS. As I said, I think we are -- we have reached the bottom of the valley. And I expect that now improving also then in '19. Is that what you're asking or?

[Jasko Terzic, Research Analyst]

So from today's perspective, it looks like the bottom will be found in '18?

[Ralf W. Dieter]

I think we found it already. I think the margins in the first quarter are slightly better than the average of '17.

[Operator]

The next question comes from Christoph Laskawi, Deutsche Bank.

[Christoph Laskawi, Research Analyst]

The first one also on PFS and sorry to pick on that. You commented on the pricing environment didn't -- that actually for orders the pricing environment is getting better. My question will be is that just relative to what we've seen in the last couple of quarters where pricing really was tough? Or is it that you already see the project that you can pick on the margin levels that we've seen a couple of years back? So basically very healthy and that the improvement that you guide for in 2019 and 2020 should be quite steep, especially also with your FOCUS program that you reach margins as we've seen before? And then...

[Ralf W. Dieter]

Can we just answer one after other would be...

[Christoph Laskawi, Research Analyst]

Yes. Sure, sure, absolutely.

[Ralf W. Dieter]

Sorry. I know what you're pointing out, but the level of margins we had 3 years before and you're talking about 2012, '13, where we had a special situation where maybe the project that the market that double as the capacity of suppliers. This will not come back that's what we stated several times. And that's why we said today, PFS goal is 6% to 7% in '20 and not 8% and above like we have seen in the past. So this will not come back. Second, margin improvement doesn't grow overnight. This is -- it's in process of slightly increases because the customers have to -- yes, also internally you have to swallow that and to argue about it and to justify and this is not a fast process. I don't know how old are you, but I remember 2005 when I had to hear the crisis, the customer took us from 2005 to 2007 to educate to pay more, again in piece by piece. And so it's a slow process, but a steady one hopefully.

[Christoph Laskawi, Research Analyst]

Okay. And on the prepayments that you see, especially from OEMs. You've highlighted in the past that when started basically with one customer that was sort of reluctant to give prepayments. And now it appears there's probably other OEMs in the auto industry are sort of showing the same behavior. Do you see as a structure of trend that they are less willing to do the prepayments and that the business should be working with the assumption that you'll see the prepayments in general? Or is it just a phase or sort of a fluctuation in the current industry phase?

[Ralf W. Dieter]

I understand your question. I think what we -- and that Carlo said it before, I think we have reached now the level which we have to get used to. They still have prepayments. It's not that they don't pay prepayments. But not like in 3, 4 years ago, when the customers were offering us 50% of the order as a prepayment to get a higher discount. This is not the case anymore, yes.

[Carlo Crosetto, CFO & Member of Management Board]

Yes, I think for your model, I would assume that we're staying more or less at this level of prepayments. Hopefully, it will change, but I think it's unrealistic to plan anything else at this stage.

[Christoph Laskawi, Research Analyst]

Okay. And last question will be on HOMAG. You basically guide for an improvement over the coming quarters. Are you already see that in Q2 quite notably or rather second half of the year?

[Ralf W. Dieter]

I think we still have to -- to answer you, I think, it will be slightly increased in the second quarter, but it's more in the second half because the effect out of, for example, this SAP implementation, where the factory was 4 weeks down that we have to catch up here. And this will not be overnight. So second half would be more realistic.

[Operator]

The next question comes from Daniel Gleim, MainFirst.

[Daniel Gleim, Director]

There are actually 2 of them. The first one would be a follow-up on the last one. When you're referring to the catch up in the second half, are you referring to revenues or to margins?

[Ralf W. Dieter]

To revenues and also increased EBIT. Margin in percentage maybe not. We're talking about whole market in our area.

[Daniel Gleim, Director]

Yes. The last question. I mean the midpoint for your guidance is 10% for the year. We're roughly flat at the moment. And I'm just wondering how the sequential evolution will be? Because at some point, you need to overshoot, of course, the guidance midpoint to be in the ballpark. And then wanted to just understand when this will happen?

[Carlo Crosetto, CFO & Member of Management Board]

Just to be clear, you're referring to EBIT margin 10%. I didn't understand your comment, sorry.

[Daniel Gleim, Director]

No, the top line growth for '18. The guidance of midpoint is 10%. In the first quarter, we have seen flat growth. So at some point, we would expect the reacceleration potentially to the mid-teens. And I was just wondering whether this will already materialize in the second quarter? My understanding from response was more in the second half, right?

[Ralf W. Dieter]

That's also our assumption, yes, but we're also taking by surprise hopefully to get earlier.

[Daniel Gleim, Director]

One more question on the 30% increase in terms of market volumes for PFS. Could you give us a sense on what the utilization rate was last year so we can put this into perspective? Or putting the question differently, will a 30% increase lead to full utilization or above?

[Ralf W. Dieter]

Above definitely. We will not be able to do all the projects. At the moment, in China, we have a project volume, which we are not able -- let's say, if everything would go to us, we would not be able to handle that. And I think the market will also -- down in China, there's not enough capacity. So that's a good problem to have. And it's needed that we have chance to increase the margins again.

[Daniel Gleim, Director]

And do you consider this year's level abnormally higher or is this just a return to growth, what is your sense of that?

[Ralf W. Dieter]

No, no. This is higher than a year ago. And I think a year ago was on a level than to year before. So it's an -- extraordinary is a wrong word. It's an increase we have never seen before. And -- but also there are lot of -- some of the projects are from this new EV startups. So maybe not each of those will be materializing. So we have to monitor but it's a good news that we have more projects than a year-ago except that it's a high number. And it's particularly driven out of China.

[Daniel Gleim, Director]

It's particularly driven out of China. Sorry, I wasn't sure?

[Ralf W. Dieter]

Yes, yes, yes, yes.

[Operator]

[Operator Instructions]

[Ralf W. Dieter]

Doesn't seem to be the case, Ms. Imee.

[Operator]

We received one more question. Our next question comes from Christian Cohrs, Warburg Research.

[Christian Cohrs, Analyst]

So there are actually 3. I go through them one by one. Firstly, you mentioned this 30% higher project volume is available in the market. Can you maybe elaborate what is -- what are the key drivers? Are these brownfield project, greenfield? Are these projects from players rather in receipt of immobility or traditional players with start combustion engines? It's question number one.

[Ralf W. Dieter]

Would you be disappointed when I say everything you stated is part of the increase. Yes, we have EV factories, we have also larger brownfields. Even also in China where factories are also aging now. We have very large projects in the U.S. which are mix of greenfield, brownfield and existing factory and part of the building is new and the other one is change of equipment. And we see that also from the traditional ones. And in China particular, because of the sales numbers, the capacity needs to be increased and therefore everybody is investing more or less here.

[Christian Cohrs, Analyst]

Okay. That's clear. Second one, you mentioned, I think, Carlo Crosetto mentioned, an unexpected postponement of prepayments in the first quarter. And I assume that purely the prepayment patterns are fixed and prescheduled. So actually the unexpected postponement mean that one of your or maybe even more of your customers faced some financial difficulties and is there any risk of that debt?

[Ralf W. Dieter]

No, no, no. The answer is no. But what you assume it would be -- if you have a order signed then prepayment date is fixed normally with other.

[Carlo Crosetto, CFO & Member of Management Board]

Like the advance payments.

[Ralf W. Dieter]

The advance payments. And the other side, we have -- it's the one we were talking about and one of your colleagues was asking, it was a customer who gave us 3 paint jobs, but not all 3 contracts. So on the third one, we are still working and that's why we had to delay of the prepayment.

[Carlo Crosetto, CFO & Member of Management Board]

And then, there is the other aspect is during the installation of a paint shop or the construction of a paint shop, for example, you get payments across the project. And sometime, when you reach a certain phase, you have to go to the open point list and you get a lot of list or things that are going to the customers that needs to be done. And this takes negotiations and this may lead to a delay of a partial payment into the next quarter or to the next month. So this is also the case. And some customers play a bit with this in order to delay cash flow payments. Some have issues with us and we discussed this. But in general, it's the usual process of having to go through this intermediate payments plus the fact that we're dealing with new customers who are maybe not as used to dealing with payments like may be the traditional OEM. But as I said, ultimately, it's just a timing issue and we see this going to improve in the next quarters with regards to advanced payments.

[Christian Cohrs, Analyst]

Okay. And so I assume there is no bad debt as you, yes, heavily confirmed.

[Carlo Crosetto, CFO & Member of Management Board]

No. Just to be clear that's one of the way we avoid bad debt situation because we have more cash than work in progress. So it's very unlikely that we have a significant bad debt to write-off with regards to these construction projects.

[Christian Cohrs, Analyst]

Okay, okay. Understood. Last question is just, usually, there is a trade-off between the margin potential of a project or -- of a new order and the generosity with regards to prepayments. And you also stated in your presentation that, yes, it's a trade-off between discounts and the amount of debt payments. So if you want to become stricter on the prepayment, advancement payment side on your cash management in general, do you expect that there will be some incremental headwind then on the margin side?

[Carlo Crosetto, CFO & Member of Management Board]

I mean, you're right that the 2 things go together. And usually, you win or lose in one way or the other. But to be honest with you, it also a bit of a mindset question. I mean, in the eyes of our sales team, in the past, maybe EBIT has been more important than getting additional advance payment because the perception is Dürr has a lot of cash anyway. So this is a bit of a mindset internally, it's not just a question of the customer negotiating harder. And with the FOCUS 2.0 program where we're trying to be a bit more selective in terms of which project to take on board and by trying to save we want to be as profitable with 20% less orders in 2020, that gives us the ability to be also more aggressive in terms of requesting better payment terms than maybe we can afford today or in the last year. So I think that, that goes a bit together. But you're right. You got to always negotiate and sometime you win and sometime you lose. And but procurement has become as I said a bit more focused on cash flow than it was maybe years ago, that's true.

[Operator]

We received a follow-up question by Alexander Hauenstein, DZ Bank.

[Alexander Hauenstein, Analyst]

A follow-up on orders on Page 4. You mentioned that you expect the normalization in Americas orders. I understand that you probably mean a lower year-over-year. But how is it to be the case for the next coming quarters sequentially? I mean, in the Americas orders overall, is it going to rise in Q2, for example, compared to Q1 2018, so Q2 2018 versus Q1 2018? And is it mainly Paint-related? Maybe you can share a bit your view here for the next 1 or 2 quarters here what you expect in terms of the momentum in the States or let's say North America overall?

[Ralf W. Dieter]

Thank you. But I don't like to be in the sales meeting and we give order intake outlooks, but not on quarterly level, because it's totally impossible, okay. Given example, we have some 2 large projects in the U.S. to be awarded. Whether we get them or not, I hope we do, maybe one of them, maybe 2. And the difference between those numbers is so huge that I can give you now any outlook, which would be wrong. We expect that America has a lower level. Also during the course of the year, we expect to keep the level from last year, it could be much higher than last year. It could be less from today's perspective. Because your orders have a volume, which is so significant that, that the numbers would change totally to the one or the other side.

[Alexander Hauenstein, Analyst]

Okay. Understood. So while taking these 2 out, the trend would be slightly upwards? Or could you comment on that?

[Ralf W. Dieter]

The interesting thing on my [ chop saw ] is that this order intake is so unpredictable. Otherwise, life would be too easy. No, no, just joking, just joking. I think the Americas business overall in the HOMAG and Machinery side is, has been slower start, better [indiscernible] I think it's also in the U.S., there is a lot of uncertainty, it's the moment about the politics. So we have to see how things are moving on. Let's talk into this after the second quarter, then we have a better picture on that.

[Operator]

We received one more follow-up question by Philippe Lorrain, Berenberg.

[Philippe Lorrain, Analyst]

I mean, I wanted to go back to your comment on the order pipeline that is 30% higher than 1 year ago in automotive. And then you mentioned as well that there seems to be like a disequilibrium between supply and demand more in favor actually to the supply. So is it fair to assume that perhaps that could lead to, let's say, an earlier pricing recovery within automotive that would support the measures that you're implementing in the FOCUS 2.0 program?

[Ralf W. Dieter]

Well, it's definitely supporting it because -- but it will not stop in taking the measures of cost reduction. That's for sure. But as I said before, it take -- it will take some time before customers are realizing that the market could change to supplier market instead of a buyer market. Today, they still think it is still a buyer market.

[Philippe Lorrain, Analyst]

Okay. So it's really just rather a perception problem than reality problem?

[Ralf W. Dieter]

Yes, because when you talk to one OEM, he has no visibility about the other OEMs and what they're doing.

[Philippe Lorrain, Analyst]

Yes, yes. Is the disequilibrium more related let's say to certain regions or is it like at global level that you've observed that kind of thing?

[Ralf W. Dieter]

I think that's one of the hotspots is China at the moment because there are many out there. And also on the brownfield side, in Europe, there is a lot of projects, which are sitting there, which maybe they've got enough suppliers. So but it's from the greenfield, the larger orders, it's mainly China.

[Philippe Lorrain, Analyst]

Okay. And if I remember correctly like a few years back and around 2012, 2013, the market share you control in China in paint shop was about 60%, 70%. What's the kind of market position that you have right now compared to the past?

[Ralf W. Dieter]

This fluctuates -- the question is how about -- when you take order intake by year then it's a fluctuation, but I still see us between 45%, 55% market share.

[Philippe Lorrain, Analyst]

Okay. So more in line with what you have globally?

[Ralf W. Dieter]

Yes, yes. Because the 70% wasn't a bit of exception because we've build up capacity, the competitors didn't have, and so we could consume more orders than the others. Then we have now other Chinese competitors have build up capacity. So that's I think on a -- still I think on a fantastic level when you compare to the others who are participating here in this market our, let's say, more European competitors has much, much less share, much, much less.

[Philippe Lorrain, Analyst]

And just the last one. I mean, you are mentioning that basically there was a problem of perception between what your clients are seeing as being so far still buyers' market. And you tell us that we are going to turn probably more into a suppliers market in the coming years. Should that be seen as well as a positive on the way you'll be able to negotiate prepayment terms?

[Ralf W. Dieter]

I hope so and I think so, yes. Sales meeting over.

[Operator]

There are currently no further questions. I hand back over to Ralf Dieter for the closing remarks.

[Ralf W. Dieter]

Yes, thank you, Ms. Imee, and thank you very much you all for your questions. As always Carlo and I enjoyed the discussions and we would like to say now goodbye for the day. Wish you a pleasant afternoon or morning or afternoon, more afternoon and evening, and thank you very much for joining us again. And when is our second call -- second quarter call?

[Carlo Crosetto, CFO & Member of Management Board]

In August.

[Ralf W. Dieter]

In August. Then we talk again in August. All right.

[Carlo Crosetto, CFO & Member of Management Board]

Bye-bye.

[Ralf W. Dieter]

Bye-bye.

[Operator]

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