Duerr AG

XETRA:DUE

Earnings Call Transcript 2019-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 2019, followed by a Q&A session. I will now hand over to Mr. Dieter, CEO of Dürr AG.

[Ralf W. Dieter, Chairman of Management Board & CEO]

Thank you, Mrs. Moore, and good afternoon or good morning to those of you joining us on the U.S., and welcome to our first quarter conference call. Today, we have a special format. I would like to mention the beginning because we have our open house this week where we have, for the whole week, invited more than 1,000 customers to come in and see our latest innovation, not only in the equipment and in application but also particular, in software and IoT applications. And there will be also here some guests in the room, some analysts which were coming to see our innovation center on. Therefore, we have delivered the conference call to 3:00. So we have to stop at 3:00. So maybe if you have your questions sorted by priority that we can finish by 3:00. Thank you very much. So then I would like to start with the Page #3 in the presentation which gives an overview about our key figures and you can see that we had a very strong incoming orders and also sales despite difficult business environment. Our book-to-bill rate was at 1.2 and we still have a very high order backlog of about EUR 2.8 billion. To mention that the figures were influenced by the acquisition of MEGTEC/Universal and adjusted for currency and acquisition effects, incoming orders are still up 1% and sales was up 6%. EBIT declined only slightly despite underutilization in some areas and execution of some orders in the paint area which we acquired in 2017 and '18 where now we are bidding and we also have to face some higher production costs in Germany due to the tariff and wage increase from the previous year. The operating cash flow improved by 33 million, and Carlo will point that out later in more detail, but for the Q1 it's a typical development. Very positive is also our service business, which grew by 22% but just to be clear, the 22% is also influenced by MEGTEC/Universal. Without that acquisition, it's about 10% growth, which is also still very strong and shows that we are really able to leverage our installed base. But we also to be careful for what's out there, we have taken a lot of cost-cutting measurements and have intensified them also. We have restricted hiring very much so that we are focusing only on key positions in order not to increase the capacity. On the next page, number 4, you see the distribution, as always, among the regions of the order intake. China, you see with the minus of 45% but this would not worry us because it's just temporarily. We have, in China, very strong pipeline and we are working as we speak on some larger orders also particular from EV, or the electric vehicle manufacturers, are the new ones and you will see in the second and third quarter, a totally different picture here in China. Americas was strongly up mainly due to large order we got in Mexico. And Germany was minus 29%. It's also just an effect because in the first quarter last year, we had 2 large brownfield revamped shops totaling about EUR 60 million, which are, let's say, making the numbers look like they are but -- so it's basically stable more or less. In Europe, more or less the same, very also good is that in Asia but without China, we have a strong growth and this also underlines our penetration of the Southeast Asia market, Korean market that we are successful there as well.So that's, I think, the picture of the order pipeline total is very stable and it was about previous year level.Now I would like to hand over to my colleague, Carlo, to give you further details about our financials.

[Carlo Crosetto, CFO & Member of Management Board]

Yes. Good afternoon, or good morning also from my side. We're now on Page 5 and you see here some of the key figures of the profit and loss statement. The first one is gross profit on sales. The margin did decline from 23.6% to 21.7% in the quarter compared to the year before and as we see in the slides, mainly driven by higher production costs, so wage increases, especially in Germany and due to competitive pressure but overall, given the increase in the top line, gross profit on sales has increased 3.9%. Something that as usual affects our results, are the so-called special effects or purchase price allocation and items around purchase price allocation integration. This was in line with the previous quarter, EUR 6 million is the amount that was booked as extraordinary effect and the big portion thereof EUR 5.1 million was related to purchase price allocation so there was, let's say, smaller amounts for other smaller restructuring efforts. Overhead costs did increase 9%. Of course, lower than our sales, which grew 13% but I would also like to highlight that without MEGTEC or without the exchange rate impact, our overheads would have probably just increased about 1%. So we are definitely looking at keeping our overhead costs in line and the only increases we had in overheads was really related about paying sales commission, especially in the U.S. So we had a good revenue situation and some increases in sales staff within HOMAG. But overall we were quite pleased with the overhead cost of development without the integration of MEGTEC.I would like to move now to Page 6. And as usual, we present the net financial status developments compared to the end of the year. There are some swings that I would like to explain in more detail. The first one is related to IFRS 16. Due to the IFS regularity changes, our leases have, of course, be included in our financials and this had a negative impact of EUR 99 million in the net financial status. So this is the first block that you see on the slide of minus EUR 98.8 million.What is unsatisfactory is the increase in net working capital of EUR 87 million. Of course, the increase is lower than the Q1 of 2018 but as we have mentioned many times in previous calls, this is something that we try to make sure that it remains reasonable and the efforts within the company are still there to make sure that we have at least engaged working capital of this net working capital development. So we are doing better than the Q1 of 2018 but it's something that is still need to be worked on. Positive news is clearly the improvement in our cash flows or free cash flow which has improved over EUR 30 million on a Q1 comparison, which is indicating that some of the measures are working.I would like to move now to Page 7, and as we have for the first time really introduced IFRS 16 in our numbers at least in the call. We thought it would be a good exercise -- or a good information to show what is the impact both on the balance sheet side and on the profit and loss side with regards to Q1. And of course, the expectation for the full year. I was mention before the EUR 99 million financial liabilities but on the profit and loss side, we do have a positive impact on our EBITDA numbers. EBIT is also slightly better, but then, of course, our interest expense deteriorates by the same amount. And operating cash flow will be better by EUR 24 million. And on the free cash flow, it shows 0 because we have already adjusted free cash flow so they can be fully comparable. So that's why you will see no change there. On Page 8, we have again shown the breakdown of our net working capital and as the title says, it is unsatisfactory development but -- especially inventories and prepayments have increased by EUR 21 million in the first quarter. So something we are, of course, monitoring very carefully, but I also would like to highlight that this is development of net working capital is pretty typical pattern during the first quarter usually then it tends to improve as the project is executed throughout the year and should improve also throughout the year. Days working capital are on same level as the first quarter of 2018 at about 50 days working capital.Page 9. We also wanted to show how is the work in process balance developing. We always said that our total balance for the full year should be in the range between 0 to minus EUR 100 million. That is currently not the case per March 2019, but we still confirm that the full year target range will be between 0 and 100 -- and minus EUR 100 million, as we've always said. Customer payments clearly show a further temporary shift due to a few specific projects that we have and it's also a question of building and how you execute them. So we're still confident that for the full year, our statement remains valid having a negative balance.If we move now to Page 10, we wanted to give you who are analyzing our figures a better feel of how our net financial status has actually developed. We have the reported net financial status in the first line with minus EUR 135 million at the end of March and then compared to end of last year or the first quarter of 2008 (sic) [ 2018 ], then what we have done is we have adjusted this number by adding the IFRS 16 numbers that was adjusted at the beginning of this year, and then we have added the line total balance that you are seeing in the previous page, which is work in progress less billing and then we have come up with a so-called adjusted net financial status. So it is true that the net financial status has declined by EUR 22 million in the last 12 months but I also would like to remember or highlight the fact that we did spend EUR 148 million acquisition. Lately, about EUR 8 million, EUR 9 million for Benz, EUR 34 million for the acquisition of the 8% of HOMAG shares and EUR 103 million for -- roughly EUR 103 million for MEGTEC. So without these acquisition, actually our net financial status would have improved by nearly EUR 130 million, EUR 126 million to be precise. So I think it's something that we wanted to make more transparent how the real net financial status has developed.On Page 11, we have added the factoring and forfeiting information just to show how much or how little window dressing we make. So it's -- we're EUR 9 million, we were basically very low range compared to the end of last year or the end of the first quarter -- sorry -- of the end of 2018 and the end of 2017. So with EUR 9 million, I think, it's pretty fair to say that there's hardly any major factoring or forfeiting activities to improve our figures.On Page 12, you see here some of the key balance sheet figures or equity figures and the gearing. I'm happy to see that the equity has increased over EUR 1 billion mark. The ratio has slightly improved to 27.7% and as we mentioned before, the net financial status should improve -- will improve during the next quarters and the return on capital employed should also get in the range of 20%, 30%. I also would like to highlight that the ROCE, or return on capital employed, decline compared to the first quarter of '18 is mainly due to an increase of about EUR 300 million in capital employed. And keep in mind that EUR 110 million are attributable to the consolidation of MEGTEC/Universal, another EUR 100 million are basically attributable to the implementation of IFRS 16. So it looks much bigger than really it was the impact of working capital than the numbers really indicate. So again, overall, a good equity and gearing situation. And with this slide, I would like then to pass back to Ralf Dieter, who will walk you through the different divisions.

[Ralf W. Dieter, Chairman of Management Board & CEO]

Yes. Thank you, Carlo. And let's start with Paint and Final Assembly Systems, we had a very strong order intake in the first quarter. Already mentioned, large orders in Mexico and India just to name some of them. The project pipeline overall in the Paint business is very satisfactory on a level which is unchanged and also positive is that the first quarter order intake margin improved also by an improved cost position we have worked out, out of the FOCUS 2.0 program. The EBIT increased slightly. The margin itself declined due to the billing of older orders as I already said in the beginning, which were coming to be invoiced. And that's just damaging a little bit the first quarter but this will change over the course of the year. And we see that also as an effect out of the FOCUS program.On Page 14, we have a look at the Application Technology. Here, we have a slightly moderate start but this is nothing to worry about. It's just about the timing with the quarter and we see a very stable business during the year, although the pipeline is quite stable and good. So that's something we are looking positive on. Sales side also just temporarily affected by some millions. The EBIT margin is at the same level like last year and I think that's important information. Also important is because we saw one of the messages of the news was that we -- that ABB become stronger. ABB is our strongest competitor worldwide, definitely, but we have others and our market share in this business, which is more than 50%, has not changed. So we are still, by far, the market leader and ABB mainly got market share from the other ones like FANUC and Yaskawa and just for that information. Anything you will see later when we have the open house tour that the innovations which are here out are really breakthrough and we'll make sure that over the next years, this next business here will be on leading edge and will defend its leading market position.On Page 15, we have a view on the clean technology systems now including the MEGTEC business, MEGTEC/Universal business. Therefore, we have some influences. It's difficult to compare but you can see that this is now EUR 112 million in the first quarter order intake. It's a good sales side, EUR 88 million. The EBIT, you see was minus EUR 0.7 million, that includes PPA effect as well as some costs we have with the integration. I'll come back to that. Operationally, the EBIT was about 1.2 -- plus EUR 1.2 million in the first quarter. The integration itself is well underway. We are working on consolidation of locations because some of them are on the same country, even city. We have major IT projects ongoing. We have to replace ERP systems in MEGTEC/Universal. The sales side is organized now and we were lined up also the purchasing organization. So I think from the project then we have -- of the integration we are well on track and the transfer information not in the numbers yet will come also only in pieces not in one, but we are very optimistic to get a very big order, which is unique, more than EUR 30 million, which will be come in slices, so don't count that for the second quarter please. But it's a major order because of the combined offering we have as Dürr and MEGTEC and this was a compelling offer for the customer which he can't get otherwise on the market. So I think because of this shows that this acquisition really was a good one and will bring up its fruits in the next years to come.On Page 16, we have Measuring and Process Systems. The order intake was stable. A little bit more than last year. The revenue was a little bit down because last year, in the second half of last year we had a quite a slow order intake on the balancing business, which then has led to less sales and you know this business is more than 30% gross margin so less sales is affecting EBIT quite immediately. So their EBIT margin came down to 7.4%. But also we are -- I think I mentioned it already that we are investing here a lot in -- more than in the past in R&D. Particularly, we are developing -- beside all the digital products, we are developing a new generation of measurement software, which is the core of our balancing machine and this is a major investment going over the next 2 years to have here a leading software package available which will improve and also the competitive situation of that business. We have further good position here in E-mobility, not only in the paint side. We have developed special machines for balancing of electric motors for EV cars. Also the filling side, some new innovations. Also here, we're benefiting from that trend.On Page 17, we look at the HOMAG business or, of course, Woodworking Machinery and Systems. The order intake was 20% -- nearly 20% below the record level of 2018. Keep in mind in the first quarter 2018, we had a EUR 60 million order from a customer, which later, we had to take -- not to count, but to take out of our books because this customer couldn't manage to get the financing for this big investment. So if you take the EUR 60 million out and the difference is not so much, but overall, here, the business when I look at the regions we have stable business -- growing business in North America. Europe is quite -- let's say, in total, quite flat. China is still weak as it was last year. And the reason mainly is that the furniture business is still growing in China more than 10%, but the top 50 manufacturers of furniture in China which are our customers, they have invested heavily the '16 and '17 in that -- with new treatment, new plants. And they are, at the moment, these plants are being installed and are just starting to run and they want to utilize these plants first before they talk about larger investments. So we think that in 2020 onwards, we will see larger investments again in China. So the market is intact, but they are all being a bit careful due to the tariff war which out there and I think that's something here to be mentioned. Otherwise, it's stable.Page 18, the Service business as I already mentioned, strong growth. And so we are very satisfied with that and I already mentioned that the increase of 22% was mainly due to the fact that we had added now MEGTEC/Universal, but overall, it's more than 10% -- about 10% in the -- let's call it, business performed activity here, or old business along that, you know what I mean. Basically, results. So that's the service side. And on Page 19, we would like to reiterate our outlook and confirm it. As you know, order intake-wise we are looking at a number between EUR 3.8 billion and EUR 4.1 billion. I think that should be achievable. Over on the sales side, 3.9 between -- from EUR 3.9 billion to EUR 4.1 billion. And the EBIT margin, as we guided will be 6.5% to 7.0%, that we also reconfirming here. So we're optimistic that we can do that and the actual forecast we have in the business is supporting that for the year. And so we are quite optimistic to achieve that. As long as the world doesn't go more crazy as it is already. Then I would like to make summary on Page 20. For the first quarter the strong business expansion we are very happy about, even we have challenging market conditions in all the regions in the world. The book-to-bill rate strong with 1.2 and the order backlog is EUR 2.8 billion. We've had a good utilization for the rest of the year and then also into 2020. The moderate earnings development that's for sure, but it's an improvement we expect during the course of the year by the effects I already mentioned. For sure, we have competitive pressures always in the divisions in all business, but we are reacting with cost-cutting measures but also productivity improvements, new developments, innovation and I think part of that you will see later here in the open house. We're also very careful with overhead costs and I think, we will also see that this year, we will have a low rate of extraordinary costs, which should at the end lead to an earnings improvement in 2019.The cash flow improved in the first quarter as Carlo was pointing out. And the net work capital, we are also working on to improve and I think that we will see improvement during the year. I think the estimated IFRS 16 impact in 2019 that Carlo I think already was pointing out and I think we are very well on track with the integration of MEGTEC/Universal and that we will see improvements during the year. And again, finally, our guidance is unchanged. And now, I think we are happy to take your questions. I have to -- for the organization here, we have people here in the room, which will need to raise their questions by microphone. And we will start with the room first and then we will hand back to the audience on the phone and hand then later back to Mrs. Moore. Mrs. Moore, we'll give you then a sign, okay?

[William Turner, Research Analyst]

This is Will Turner from Goldman Sachs. I have two questions. The first question is on Application Technology. Now your sales declined and obviously, your group-wide cost inflation has been quite high in 2019, in particular labor. What was the drivers behind -- how did you maintain margins of 10.5%? Or what was the contributing part?And then my second question is on Measuring and Process Systems. You expect improvement for the rest of the year? Can you just elaborate more color on why you expect an improvement for the rest of the year?

[Ralf W. Dieter, Chairman of Management Board & CEO]

Okay. The first question is why could APT keep the return on sales is mainly due to fact that we have improvement in the order execution. We have also better margins in the order intake and by also, we have some activities like industrial business, where we had losses in the past, we are improving now, so I think that's the major drivers here to improve. Second question. If I understood you right, you said why do I think that MPS, the Measuring and Process will improve during the course of the year? First of all, that from the order intake side, it looks stable, that we will manage that. Also we have taken cost measures here. And so we are quite optimistic. And then the first quarter has always been a difficult then on the machinery business.

[Alexander Hauenstein, Analyst]

Alex Hauenstein from DZ Bank. Two questions. First of all, on HOMAG, has the price competition and the underutilization become worse in Q1, maybe even more than you initially expected? Or why did you intensify here your cost reduction program in Q1 if this is the case? Or was that all as planned? And the second question for Clean Tech...

[Ralf W. Dieter, Chairman of Management Board & CEO]

Sorry, can we do the first one first, because I am getting older and it's just too many questions then. No. HOMAG the price competition has not changed in the first quarter, it's already -- I mean, it's as usual there, yes. I think what we have seen there is that we have basically a situation where we have some areas lower occupation of the factories and there we are reacting and the cost measures are mainly costs we want to avoid for the future. So we had -- the growth of that market at the moment is not as we first anticipated. So all the hirings related to that we have basically frozen. And we also are very -- we spend a lot of money in innovation there, where we look at what is really needed. So just the normal stuff. Nothing exciting. Just to keep costs under control in particular also on the overhead side.

[Alexander Hauenstein, Analyst]

Okay. And on Clean Tech, why was there some kind of underutilization and what's going to change here going forward? And what should you look for here in the second quarter and beyond? Was this all on your initial plan here? Or is the earnings progression and margin development still on track compared to what you have guided for?

[Ralf W. Dieter, Chairman of Management Board & CEO]

Yes, we had some underutilization basically, particularly in Europe or in Germany because of a weak order intake last year in that area which has now recovered. And so that's why we see that. And for us it's on track because we anticipated that already last year because in that business also we have 12, 15 months project execution timing. And that's why we're optimistic that it's getting better. And the order intake is quite strong as you can see. They're optimistic. But it does remain initially in Europe, not in China. China we are totally more than utilized.

[Philippe Lorrain, Analyst]

Philippe Lorrain from Berenberg. One quick question on APT and especially on this industrial product segment. How is that evolving? Is it still doing losses? And is it right also to assume that the underlying margin in that segment, i.e. without the IP subsegment, would be closer to 11% to 12%?

[Ralf W. Dieter, Chairman of Management Board & CEO]

If -- your last sentence is quite accurate, yes we still have some losses there, but we reduced them to the part. If you look very carefully at that business and I think we are now coming up, that's why we are close to the surface. We have, for example, in the [ plumbing ] business, which is also one of the industrial business, but there's also automotive. We have new customers with higher margins and so we are very keen on getting this year under control in the way that we can see in 2020 a positive number. That's our objective. We knew that it would take some years to get out of with all volume question, market acceptance question. We did a lot here on that side. We consolidated, for example, the [ plumbing ] for in Final Assembly here to Bietigheim, but it was in a different location and to get it better under control I think we are doing full focus during the year. But it would be at the end of the year still slightly negative. But your assumption is right, without that you would be more than 11% plus in EBIT, i.e. more stable actually in the year -- yes. Yes.

[Philippe Lorrain, Analyst]

And the second question is on HOMAG. So you guys for -- more less like stable order intake for this year. And if we take the point. We understand that China has been weak recently, should come back in 2020. If we plug-in everything together, China and the rest of the world, beyond 2019, what would you expect for order intake growth in that segment?

[Ralf W. Dieter, Chairman of Management Board & CEO]

Good question. The market -- when you look at the market, let's say, from the officials who look at that market and forecasted growth, it's not more than 2%, 3%, yes. But I always tell my people we have a market share of about 30%, 35% so the growth of the market is not only the growth, which we can grow but we can also take market share. But we do this carefully because -- when you take too much, then you know that the margins are under pressure. But for sure, we want to increase our market share. That's our growth plan. And I think this year will be tough in China as for the reasons I've said because it among the lower level even than last year in the first quarter, which we have to compensate by the other regions and I think that flat development will be quite satisfactory to our opinion at the moment. But next year will be better, if nothing else changes. And you all can help, buy new kitchens and then our business grows.

[Gordon Schönell, Analyst]

Gordon Schönell, Bankhaus Lampe. The EBIT margin in Q1 in PFS was, I would say, kind of weakish despite the strong growth in service business. Was that in line with your plan or is there any indication on your guidance range that you're looking more on the lower end of the EBIT margin guidance range or...

[Ralf W. Dieter, Chairman of Management Board & CEO]

No. The PFS slightly reduction to margin was totally anticipated because we look at our order execution and this is a business you can look at for 15 months. We knew that we had some lower margin, or very weak margin orders coming through and that was totally expected, yes. So, no surprise for us at all. And that's why we also know that -- because we see already on orders we took to a lower margin the improvement in execution due to the measures we have taken in FOCUS 2.0, they're slightly optimistic that in PFS will pick up slightly this year. No change in our guidance on that subject.

[Gordon Schönell, Analyst]

So have you worked down nearly all the legacy projects in that segment? Or are there still some very weakish orders in the book?

[Ralf W. Dieter, Chairman of Management Board & CEO]

There are still some in the books, but as I said, we also have managed to work on those with an improvement on the margin, with some of them quite significant, which I'm very happy about because we already used measures out of FOCUS 2.0 on those projects. So I think that the biggest problems we have behind us in that area.

[Gordon Schönell, Analyst]

Okay. and maybe one last question. So you mentioned ongoing competitive pressure in all the business. You answered this questions with regard to HOMAG's that basically nothing has changed within the last few weeks or months. Is this also the case in your Paint and Final Assembly Systems business? So it's...

[Ralf W. Dieter, Chairman of Management Board & CEO]

It's unchanged. It's strong and we just wanted to point, don't think that it's easy. That is all, but it's still strong, but it's not different 2, 3 months ago.

[Peter Rothenaicher, Analyst]

Peter Rothenaicher from Baader Bank. First then on HOMAG. Last year, you had some problems that -- the setup of production, the changes in production environment took somewhat longer than expected. How are you progressing here? And with that, I was a little bit surprised that you talked about underutilization in part of HOMAG despite the higher order backlog, yes?

[Ralf W. Dieter, Chairman of Management Board & CEO]

Yes, this is a very diverse picture in HOMAG. The production problems, we several times mentioned. Basically, the higher order increase we had in '17 and '18 was the reason why we could not make all the HOMAG which was needed. And we were just overwhelmed. I always said I would have loved to have this increase 2 years later because we still have a lot to do there. We have taken -- we have all the findings, we have all the projects and it's mainly process work, also it's the pre-work, but mainly process work, how we do engineering, everything and we are well underway. We have also a lot of Dürr expertise in there involved. And I'm very optimistic that HOMAG 2 years from now will be totally different in how they execute the business, but you have to give here time, it's not a task overnight. Here in APT, we did that job maybe some of you were still around from 2005 to 2008. We did the same changes, which was other than bringing APT to a new level of profitability and now we'll see the same in HOMAG but we have to give some 2 years' time to make this. But we will see gradually progress I think late next year.And then you say underabsorption, yes, for example, shop floor plant is mainly system business and other plants are more the single machine business and here we have some underabsorption because of some of the big larger project. The larger project business is down compared to the -- to '17 or '18 -- '17 and therefore, we had some underabsorption. But we had also a lot of external people we got rid of so I think that we can manage that.

[Peter Rothenaicher, Analyst]

My second question is on the guidance. So if it's unchanged but with regard to order intake and sales, in the recent call you mentioned you're confident to reach the upper end. Is this still a well-lit view?

[Ralf W. Dieter, Chairman of Management Board & CEO]

On order intake, yes, and sales is a calculation out of this so I am pretty optimistic on that, because the pipeline is very healthy at the moment, but competitive.

[Ingo-Martin Schachel]

Ingo Schachel, Commerzbank. I think most questions have already been answered. Maybe 2 quick follow-up ones on the Paint Systems margin quality or the lower margin in the first quarter I think you were expressing that you already anticipated this when you gave full-year guidance but regarding the root cause, why are those projects under backlog? Are those projects were low margin when you took them in terms of budget gross margin or were you -- was it because of wage inflation or execution that those turned out to be weaker than the...?

[Ralf W. Dieter, Chairman of Management Board & CEO]

No. No, no, execution problems, it is mainly because we took them in because we also have to defend the market share, yes? And we had a competitor, as you know, who went a little bit crazy in terms of pricing. He has stopped that. And therefore, we know that this is behind us at the moment.

[Ingo-Martin Schachel]

And then on the HOMAG, on the competitive pressure debate, I think you outlined a scenario where you think for a few more quarters the Chinese market is going to be weak. So if I would also understand what you said as a commitment that HOMAG as the market leader would not turn more price aggressive even if there are 3, 4, 5 more weak quarters in China and that you would, even then, if the low -- the utilization is lower would strive to defend price service there?

[Ralf W. Dieter, Chairman of Management Board & CEO]

Yes, I think we are not out there to -- we could easily gain 5% market share by lowering the price by 5% or 10% but this would damage that market and why should we do that, yes, just because of 2 or 3 quarters, yes.

[Ingo-Martin Schachel]

And then just quickly on the prepayments made in the first quarter, can you tell us whether that's again more emerging markets or China-related, I'm not sure how specifically you would narrow that down geographically?

[Carlo Crosetto, CFO & Member of Management Board]

Yes, Ingo, I can answer this question. I mean, this is something that can easily vary based on a project coming in, on execution phase, and where we are in terms of payment, but a lot of the swing or most of the swing that we have seen in the last quarter is driven by the fact that there's a lot more work in progress especially with some of the divisions, like APT, than we had before. Before, for example, the last -- if we just compare the quarters, last year there was a higher percentage of projects that APT had won together with PFS, so they were enjoying the better payment conditions that PFS was able to negotiate when you usually negotiate a big paint shop. In this year, in Q1, APT has won percentage-wise more project on a stand-alone basis and the payment terms, for example, are not as good as if they would have won together with a paint shop. And that's one of the reasons and that's actually the biggest deviation. The other impact is coming from the integration of MEGTEC, which we didn't have. So that is also affecting this balance and then we do have a small deterioration within the all bids of CTS and the Measuring Processes, but again, it's all work-in-progress related. I mean maybe the good news is that we're going to get paid. So the money is coming in and it's just a question of what quarter we're comparing and what's the ratio of projects won on a stand-alone basis versus with a paint shop.

[Unknown Analyst]

Two questions on Clean Tech, please. The first is on the restructuring there at MEGTEC, you have also talked about some site optimization. Does that also include site closures?

[Ralf W. Dieter, Chairman of Management Board & CEO]

I would not call it restructuring. It's basically the result of a synergy project but that's why bought this company because we saw a lot of synergy. And we basically don't close sites, we will mainly on the office side, engineering side, we put, for example, MEGTEC China it goes to our campus which makes sense, yes. A plant closure is not involved in that.

[Unknown Analyst]

Okay. And the second one is on the introduction of new ERP systems at MEGTEC. How much have you learned from the introduction of new ERP systems at HOMAG to avoid such a say bottleneck issue or cost overruns? And what is the impact of that, what you assume for MEGTEC?

[Ralf W. Dieter, Chairman of Management Board & CEO]

Just to answer this -- if we would have bought HOMAG 4 years earlier, this would not have happened in what you have just mentioned because they had different -- we have quite experience in rolling out ERP systems and we have done this many, many times. In the HOMAG there was a system which was already pre-defined, in our opinion too complex, and that we have some off figures. But I, think we have overcome that. MEGTEC, they have really a very bad IT infrastructure and I think we will also have -- we'll see benefits out of introducing a common system, in particular together with our CTS division that they can seamless work together, this is part of the synergies and I think we are well on track and you will see here no news from us that we say CTS has than revenue because we introduced ERP. Don't worry about that. If there are no questions at the moment here in the room. Then I'll hand over to Mrs. Moore to ask people on the phone.

[Operator]

[Operator Instructions] The first question is from Christian Cohrs, Warburg Research.

[Christian Cohrs, Analyst]

Just two questions. Just one by one. First, maybe -- sorry for coming back to the working capital and cash flow. But I just checked my notes from Q1 last year and at that time, you were also quite unhappy about your cash flow performance at that time. And I understand that you faced additional on your headwind from more work in progress in Q1 '19, but last year, you also mentioned that you have initiated some countermeasures like creating stronger awareness at employees, greater role of working capital and the incentive scheme. Have you seen any work of these countermeasures and are they now fully in place? And secondly, at that time you also said that you're striving in the midterm to days working capital target of 35 days to 40 days. And just now, after the MEGTEC exhibition, do you think now we'll see changes in your group portfolio that this target of 35 to 40 days is still achievable? And yes, That's question number 1.

[Carlo Crosetto, CFO & Member of Management Board]

Yes, thank you, Christian, for your question. Yes, I guess then I'm disappointed also in Q1 2019 not just on Q1 2018. I think that's unfortunately always the case. Q1 doesn't tend to be the strongest quarter from a cash flow point of view for Dürr but it doesn't mean that we don't expect things to improve to the end of the year. So our statement that our cash flow will improve is remained unchanged. Regarding the measures, yes, we have implement these measures. And can I guarantee you that, that's probably one of the main jobs that the Board has is to keep tracking and pushing that we not just implement these measures, but that we ideally improve it. So there been no change in focus on that and the measure that we presented last year have, of course, been rolled out. But we have to accept the fact that we're not alone and we have customers and they're also fighting hard. And they also have to invest a lot. And this is always a balance between having an order or not having an order, to a certain extent. So that's something that pressure is there and we still want to win some of this business. With regards to days working capital, you're right, we have achieved 40, 41 days by the end of 2018. Q1, last year was also about 50 days, which we are now, but of course we would have ideally like to be below 50 days and we're working for sure to bring it back to those level. I don't want to comment at this stage we will be at 35 and by when, but clearly days working capital is something that we are clearly focusing on. Maybe one last comment, if I may, is you also have to look at in relation to the peers and I think it's fair to say that even with 50 days working capital today, which is not satisfactory it's by far ahead of the peer group. So I think we also have to consider this in your evaluation, but clearly, the goal is to improve that as this is one of the reasons why investing in Dürr is attractive. It's a very high return on capital employed, and that's something we are very conscious of.

[Christian Cohrs, Analyst]

The second question is more just of a housekeeping issue in Measuring and Process, you mentioned in your presentation for the margin decline that this is also attributable to higher R&D expenses, digital innovation. Can you maybe just quantify the amount? What was the extra spending in Q1? So that we just get some sort of gut feeling what is attributable to the sales decline and what is due to OpEx?

[Ralf W. Dieter, Chairman of Management Board & CEO]

That's a good question. Ralf Dieter speaking. You can count about EUR 2 million. Mrs. Moore, do we have further questions? Not at the moment?

[Operator]

At the moment we have no further questions via the telephone line.

[Ralf W. Dieter, Chairman of Management Board & CEO]

Good. Then I will ask here the room. Are further questions here in the room? Yes. One more from here.

[William Turner, Research Analyst]

This is Will Turner from Goldman Sachs again. I just have a follow-up question on the working capital and the increase in trade receivables. Is that concentrated in any particular region or any particular division or, well, customer?

[Carlo Crosetto, CFO & Member of Management Board]

Yes and no. I mean, yes, in the sense that it is getting more difficult to get paid in China with some customers. So that's definitely affecting our receivables outstanding, but also to be fair in China, the payable side is also longer. So the question from a net point of view is really not necessarily a dramatic change, but that's why I answer the question with partly yes, because it's something that is also cultural. The other question -- the other point you should be aware, William, is that in China we also get paid with bankers' acceptance draft. And as long as we don't pass them on or sell them, we are showing them as, of course, as a -- still an outstanding receivable. And technically, we could sell those immediately and generate cash and sometime for small amounts we do, but in general it doesn't -- it is probably cheaper to hold them to maturity especially when you still have a lot of cash sitting around, for example, in China. So I think it's something that is mainly driven by China. In general, we have a very good receivable follow-up, the organization and the project leaders are very well aware of this and are consciously following up. Ultimately, it's not about forgetting about the collection. It's about when you have a final acceptance or a progress payment, it's reaching an agreement with the customer that you get the right sign-off on time, but it's -- I think it's very well managed.

[Operator]

There are no still no questions on the phone lines. [Operator Instructions]

[Ralf W. Dieter, Chairman of Management Board & CEO]

So that's, obviously, not the case. Further questions in the room? Then I think that we can finish and close the call. First of all, thank you very much, everybody, who joined us for our first quarter results. It was a pleasure to answer your questions. And then we will continue here with the tour. But first of all, thanks for today. And I think next stage is knowing when we have next quarter, I don't know. August 9, I just hear. August 9, we have the next -- we are presenting our first half figures. So thank you very much for joining, and bye-bye for today.

[Carlo Crosetto, CFO & Member of Management Board]

Thank you very much from my side as well.

[Operator]

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