Duerr AG

XETRA:DUE

Earnings Call Transcript 2022-Q1

[Operator]

Welcome to the Dürr Conference Call. Dr. Jochen Weyrauch, CEO; and Dietmar Heinrich, CFO of Dürr AG, will present the Dürr Group's segments for the first quarter of 2022, followed by a Q&A session. At our customers request, this conference will be recorded.

I will now hand over to Andreas Schaller, Head of Investor Relations of Dürr AG.

[Andreas Schaller, executive]

Thank you, Martin. Ladies and gentlemen, good afternoon or good morning to those of you in the U.S. Welcome, everybody, to today's first quarter 2022 earnings call, which takes place a bit earlier than expected due to a to an ad hoc release that you issued yesterday. You will hear more about the background in today's presentation, and we will be happy to answer your questions in the subsequent Q&A session. As always, our earnings presentation is available on our Investor Relations web pages, and we assume that you have it in front of you.

With me on the call today are our CEO, Jochen Weyrauch; and our CFO, Dietmar Heinrich. Please be aware of our disclaimer regarding forward-looking statements on Slide 2. After this short introduction, I directly hand over to our CEO. Jochen, the floor is yours.

[Jochen Weyrauch, executive]

Thank you, Andreas, for the short introduction, and a warm welcome also from my side to all participants on this call. As Andreas said, we are week earlier with our earnings call than originally planned. The reason is that despite a decent Q1, we had to adjust our earnings guidance for '22 after having carefully reviewed our latest forecast for the rest of the year.

The outcome is as follows: First, we had a very solid start into '22, and we will go into more details for the performance in Q1 in a minute; second, demand drivers are intact, as you can see from the record order intake we achieved in Q1. We have not seen any relevant order cancellations and are confident that we will achieve our original guidance for order intake and sales revenues. This is also supported by positive exchange rate effects.

Third, looking at earnings, we have to accept that improvements in the supply chain that we had originally expected by middle of the year will probably not come to a large extent before the end of 2022. This is also due to the latest lockdowns in China and especially in Shanghai, where the Dürr Group operates 3 plants. One of them continued production under special authorization, but 2 of them have closed since early April.

Together with the direct -- indirect impact of the war in Ukraine, this leads to a higher cost inflation than originally planned. We were able to compensate part of this by an outstanding dedication and commitment of our purchasing and product development teams and by forwarding another part of the cost to our customers. However, there remains a portion of unplanned costs that we can temporarily not cover, and this led us to adjust the earnings target for '22.

Fourth, as just said, we see this as a temporary effect and remain confident that we will reach our midterm target of at least 8% EBIT margin in 2023 or latest in 2024. One reason for our confidence is that fundamental demand drivers of our, business like the decarbonization of production processes, all the transformation towards e-mobility and sustainable construction are resilient or have maybe even gained momentum through the current crisis. In addition, we have increased prices and introduced price adjustment clauses in our contracts to better compensate the cost inflation going forward.

After this short introduction, let me start now with a review of our performance in Q1. After that, I will briefly comment on the performance of our divisions before Dietmar will go into more details regarding the financials. At the end, I will present to you the updated guidance for 2022, and we will have sufficient time to answer any questions you might have.

The highlights of Q1 are on Slide 4. With EUR 1.4 billion, we have achieved a new quarterly record in the order intake, and this was driven by all divisions. We received large orders for automotive production equipment where e-mobility was once again an important factor. HOMAG recorded a new quarterly record for order intake as well, with orders with more than EUR 570 million. We also see good demand for environmental technology from the chemical industry, specifically also for the production of battery materials.

The order backlog reached a new record level with almost EUR 3.9 billion. This is a very solid base for sales growth in the coming quarters and even years. What I would like to stress is that the margin quality of our backlog is quite satisfying and reflects the margin recovery in order intake that we have seen since 2021. Sales revenues improved by 15% compared to the weak first quarter of 2021, but it could have been higher without the increasing supply chain constraints. Book-to-bill stood at a high level of 1.55.

EBIT before and after extraordinary effects improved year-on-year. This was supported by higher utilization at HOMAG and improved efficiency due to our capacity adjustment and optimization programs in the last years. The service share of sales remained above 30%. However, when comparing the margins with Q3 and Q4 of 2021, we can see a decline due to the increased material costs. Orders executed in Q1 2022 were accepted at a time when cost inflation was still at lower levels and price adjustment clauses were not a regular part of our contract.

Free cash flow generation once again exceeded expectations and was driven by the positive profit development and high prepayments related to the record order intake. Finally, as mentioned before, we adjusted the earnings part of our guidance for 2022, but left the guidance for order intake, sales revenues and free cash flow unchanged. We also confirm our midterm target of at least 8% EBIT margin.

On Slide 5, we see an overview of the key financial indicators for Q1. Order intake increased by 36%. This includes EUR 60 million positive exchange rate effects. Sales revenues grew by 15% and included EUR 21 million positive FX effects. EBIT before extraordinary effects increased by 53%, and the margin reached 4.9%. The foreign exchange effect was EUR 2 million. Net income more than tripled from a low level. Finally, free cash flow even exceeded the high level of Q1 2021, with a reduction of net working capital being the main driver.

Let's look at the order intake on Slide 6. As mentioned, we achieved a new quarterly record of EUR 1.4 billion. We received large orders for production equipment for EVs from established automotive OEMs and start-ups and larger systems orders for woodworking machinery in China. Due to, among other things, price increases in the past months and the introduction of price adjustment clauses, we have improved margins of our order backlog and reduced risks going forward.

On Slide 7, we see the geographical distribution of order intake. All geographies contributed to the overall growth with double-digit growth rates with the exception of Germany, where we experienced a decline compared with the strong start in Q1 '21. China continued to be strong, and the order intake in the Americas almost doubled. With this strong start and looking at the well-filled pipelines, we are on track to reach our order intake guidance for 2022.

Now let's have a look at the divisional development. We start with Paint and Final Assembly Systems on Slide 9. Order intake in Q1 was very strong and at the highest level since before the corona dynamic. Demand in China and U.S.A. was very good and e-mobility was a key driver. Sales revenues grew year-on-year but were still on a relatively low level. We are expecting some larger projects to increasingly contribute over the next quarters.

EBIT margin showed some improvement but were impacted by higher material costs and lower margin projects that were acquired at the beginning of the pandemic. Reported EBIT includes a positive extraordinary effect of roughly EUR 5 million related to a legal case at Hekuma that was decided in our favor. We expect revenues to accelerate in the second half of 2022 as project execution ramps up.

Let's turn to Application Technology on Slide 10. Order intake was high, driven by North America and Europe. Sales revenues grew sequentially, once again supported by a strong service business. Our production plan shows an increasing number of painting robots to be manufactured in the coming quarters. The EBIT margin development was solid, despite the supply chain constraints. Prices were raised at the beginning of the year, all in all, a good performance of our robotics business.

Next is Clean Technology Systems on Slide 11. Higher order intake in Q1 was driven by strong demand from the chemical industry, including from -- orders from producers of battery materials. Sales revenues grew in many regions, but most pronounced in North America. Service growth was particularly high. On the margin side, however, we are experiencing a temporary dip due to the fact that material costs increased quickly and could not be forwarded to customers in a timely manner.

However, we have addressed this topic and are expecting an improvement over the next quarters. At the same time, we are spending more for R&D to further develop our battery coating capabilities. In summary, short term, we will still see some pressure on margins due to higher material costs. We see significant growth potential due to the higher order backlog.

On Slide 12, we can see the summary of development at the Measuring and Process Systems division. Please be aware that the numbers for both years now include the tooling business that was transferred from HOMAG at the beginning of the year. '21 numbers were adjusted with the exception of return on capital employed.

For order intake and sales, this resulted in an increase of a low double-digit million euro amount. Order intake was very strong in the first quarter, driven by North America and China. Large orders came from e-mobility, but also aerospace customers.

Sales revenues were constrained by missing parts and this also had a negative impact on margins which remained at about the prior year's Q1 level. Price increases were implemented in early 2022 to compensate for the cost increase. All in all, the demand environment has clearly improved, and we see a strong recovery potential once the supply chain normalizes.

Last, but not least, let's take a look at HOMAG on Slide 13. Order intake in Q1 achieved a new quarterly record with way above EUR 500 million. This was driven by several large orders in the furniture business. At the same time, the demand from the wooden construction sector remains high. However, you should not expect that the Q1 level is the new normal going forward as it was partly influenced by investments that our customers shifted from Q4 '21 to Q1 '22. But we are clearly on a very good track to reach a strong order intake for the full year.

Sales revenues were close to the record level of Q4 '21. We clearly see that the investment in our service team pays off as the service business continues to grow. The EBIT margin further increased driven by the efficiency improvements of the past 2 years and the implemented price increases. All in all, the development at HOMAG was relatively strong despite the supply chain constraints that we were also experiencing in this business.

We have mentioned the service business already several times. Now let's look at some numbers on Slide 14. The service share of group sales remained above 30%, in line with our target. All divisions grew service revenues year-on-year in Q1. The service margin was stable on a good level sequentially. Compared to the first quarter of last year, we saw only minor changes in the composition of the service share with modifications gaining slightly compared with spare parts. Demand for service remains strong and this business is a clear differentiator for the Dürr Group.

And now, Dietmar, I hand over to you for the financials.

[Dietmar Heinrich, executive]

Thank you, Jochen, and also welcome to everybody from my side. I start with Slide 16. Q1 saw a very solid start into the year despite cost inflation and supply chain constraints, especially the free cash flow was a highlight and even surpassed the strong level of Q1 2022.

Now let's have a look at some financial details on the next slide. On Slide 17, we can see that sales revenues grew year-on-year by almost 15% but declined sequentially by about 10% compared to the fourth quarter of last year. Considering the supply chain constraints that Jochen already mentioned, we believe that this is a decent performance.

From a geographic perspective, Europe gained share mainly driven by the growing business at HOMAG and the buildup of new automotive capacities in Turkey. Asia without China lost share and large projects in South Korea were completed. China and the Americas were about stable.

Now let's move to EBIT on Slide 18. The EBIT margin before extraordinary effects improved year-on-year but remained below the level reached in Q3 and Q4 of 2021. The EBIT bridge shows that strong gross profit growth was the main driver for the EBIT increase. The gross margin, by the way, reached a high level of 23.6%. Overhead costs rose year-on-year, mainly pushed by sales commissions due to the record order intake and higher research and development efforts. Extraordinary effects were lower than expected as the gain from the legal case at Hekuma almost completely compensated for the negative PPA effect that we have guided for on a quarterly level.

On Slide 19, we can see the free cash flow development. We recorded an excellent free cash flow of EUR 75 million in the first quarter. EBIT growth and the improvement in net working capital were the main driver, partially compensated by higher taxes paid and higher CapEx. The line item Other includes the effect of a lower buildup of provisions in Q1 2022.

With EUR 75 million free cash flow in Q1, we are already in the middle of the guidance range for the full year, which is unchanged as we will explain later. However, it should be noted that we expect the net working capital to grow with increasing business activity and that CapEx spending will be higher over the next quarter given the capacity enlargement at HOMAG as previously announced. For more details regarding the net working capital, let's look at the next slide.

Net working capital dropped to EUR 367 million, as we can see on Slide 20. This is equivalent to only 36 days working capital, which is clearly better than our target range of 40 to 50 days. Main reason for this reduction was the strong cash inflow from customer payment which is reflected in the increase of contract liabilities by about EUR 140 million. Inventories and contract assets rose with business activity, but not as far as contract liabilities. We expect the level of net working capital to normalize over the course of the year.

On the next slide, Page 21, we can see the impact of the high free cash flow on our net financial status. Net debt improved to only EUR 11.4 million at the end of the first quarter, which is equivalent to a gearing of only 1%. As EBITDA over the last 12 months increased to about EUR 320 million. The leverage was reduced to almost 0. We keep our guidance of net debt between minus EUR 75 million and minus EUR 125 million at the end of the year unchanged, which leaves some flexibility for dividend payout, net working capital buildup, as already mentioned, higher CapEx and potential M&A activities.

And let us summarize or let me summarize. We are very pleased with our solid balance sheet.

Finally, let's have a look at our liquidity headroom on Slide 22, actually nothing new here. We feel very comfortable with available funds of EUR 1.4 billion in the next maturity only coming up in April 2023. As such, we can fully focus on developing our business.

With this view from the financial side, I hand back to Jochen for the outlook.

[Jochen Weyrauch, executive]

Dietmar, thanks. Let's turn to the outlook and start with the market development. On Slide 24, we see the March forecast of LMC Automotive for light vehicle production in 2022 and until 2029. As a consequence of the war in Ukraine and its impact on the automotive supply chain, LMC has reduced its growth forecast for light vehicle production in 2022 to only 7%, which is equivalent to about 82 million units. The key question is when the strength in the automotive supply chain will ease.

However, comparing our business with the automotive production levels over the last year, we have seen almost no correlation between production levels and order dynamics. And by the way, that was true in the past as well. Mid- to long term, LMC continues to see a growth potential to above 100 million vehicles per year.

On Slide 25, we see the development of the markets relevant for HOMAG. The view has not changed since February. Going forward, we expect a relatively stable market size of somewhat above EUR 4 billion, which is characterized by the ongoing consolidation among furniture producers.

On the right side, you see the addressable market for machinery and systems for wooden construction elements. Here, we continue to expect the compound average growth rate of more than 6%. We are well positioned to grow the HOMAG business over the next years by expanding our market share and growing our service offering to our customers.

With Page 26, we have added an additional slide to our deck because we have seen that growth potential for our business has been cut in some analyst models. We would like to argue that the demand for our products is driven by long-term fundamental trends that are resilient. We believe that investments into the decarbonization of production remains high on the agenda of our customers, maybe even higher in the light of the war in Ukraine and an accelerated move to become independent from fossil fuels.

In the past months, we have experienced high interest from automotive customers to electrify processes that were so far powered by gas. For example, when it comes to the ovens of all air purification systems. We provide consulting services to find the right solutions, and we have the right product in our portfolio. We also believe that the transformation towards EVs will come with high speed, and we experienced increased demand from the chemical industry for environmental technology for the production of materials needed in lithium ion batteries.

Demand for affordable housing remains high, and we continue to see a shift to wood as sustainable construction material also for multistory buildings. A cover of this presentation shows one of the machines produced by our subsidiary Vaiman, that is used by our customers to sample prefabricated wooden construction elements. Based on these trends, we believe our demand drivers are intact for the next years, and that's what makes us confident regarding our future growth prospects.

Now let's take a look at the revised guidance of the Dürr Group for 2022. The guidance assumes that the war in Ukraine does not develop into a worldwide military conflict and that the lockdown in Shanghai will end in the coming weeks. We will only give a guidance for the group as a whole at this stage and resume guidance on a divisional level, most likely with the results -- Q2 results, sorry.

The table on Slide 27 shows the details of the revised guidance. After the strong start and looking at the order pipeline, we keep our guidance for order intake unchanged at between EUR 4.1 billion to EUR 4.4 billion. We also confirmed the target range for sales revenues of between EUR 3.9 billion and EUR 4.2 billion.

The strong order intake in Q1 makes us confident that there are enough new projects to execute in case of delays and on the other hand, sales revenues are supported by positive exchange rate effects. For the EBIT margin before extraordinary effects, we lowered the target range from between 6.5% and 7.5% to between 5.0% and 6.5%. The reduction is driven by higher cost inflation as a consequence of longer-than-expected supply chain constraints. That are also intensified by the lockdowns in China and increasing indirect costs as a consequence of the war in Ukraine.

The widening of the target range reflects the still high uncertainty regarding the further development. Consequently, the target range of the reported EBIT margin is adjusted from between 5.9% and 6.9% to between 4.4% and 5.9%. For return on capital employed, we now expect the range of between 13% and 18% compared with between 17% and 21% before. The net income should turn out between EUR 100 million and EUR 150 million instead of between EUR 130 million and EUR 180 million as originally planned. The guidance for free cash flow remains unchanged at between EUR 50 million and EUR 100 million. We expect that lower earnings will be compensated by a lower buildup of net working capital due to continued solid repayments and by reduced CapEx spending levels that will trend more to the lower end of the guidance. Consequently, we also keep the target range for the net financial status unchanged at between minus EUR 75 million and minus EUR 125 million.

All in all, we see the supply chain induced earnings pressure as a temporary effect with focus on 2022. We've already increased prices and will continue to do so if needed. In addition, we have included price adjustment clauses in new contracts in order to reduce the risk of future material price hikes.

Looking at the strong fundamental demand drivers of our business, we remain confident for the future and keep our midterm targets unchanged. Our strategy and the midterm targets are shown on Slide 28. I would like to point out that we remain very confident that we can reach our 8% EBIT margin target in '23 or latest in '24.

Let's summarize on Slide 30. We had a solid start into 2022 with a quarterly record order intake and a high free cash flow. Revenues and EBIT grew year-on-year but reflect supply chain constraints and cost inflation. As we believe that the cost inflation will be higher and the supply chain constraints will last longer than expected, we have adjusted the earnings part of the outlook for 2022.

Targets for order intake, sales revenues and free cash flow remain unchanged. We see the margin pressure as a temporary effect from supply chain and cost inflation issues and confirm our midterm targets. Specifically, we remain confident to reach our 8% in '23 latest 24. Thank you very much for your attention. Now we're happy to answer any questions you might have.

[Operator]

[Operator Instructions] We have a first question is from Ingo Schachel of BNP Paribas Exane.

[Ingo-Martin Schachel, analyst]

My first one would be on your order backlog and margin quality. I think you mentioned the introduction of price escalation clauses. But can you give us a bit more detail or anecdotal evidence, for example, in paint systems? What percentage of your procurement volumes or specific parts of the procurement volume are now under price escalation clauses?

And also on your statement that you're happy with the margin quality of your backlog or that the margin quality supports the margin improvement trajectory. Just to clarify, that's based on the, let's say, assumption that the supply chain remains constrained and inflation remains high? Or would you say it only supports the margin improvement trajectory if supply chain normalizes in the second half of the year? That's the first question.

[Jochen Weyrauch, executive]

Okay. Ingo, thanks for the question. I'll answer in terms of our price escalation clauses, and I'm sure Dietmar see the equipment, the backlog margins are [ available ] where we can talk a little bit about the development. I can tell you that in the last -- pretty much since the beginning of the year, we are not taking larger orders in the automotive for Paint and Final Assembly Systems anymore without a form of price indices, be it cost plus be it escalation classes in order to cope with the very much unpredictable material cost changes. And that has helped supported by especially the strong service business that we have, and maybe Dietmar can comment a little bit on the development of the backlog margins.

[Dietmar Heinrich, executive]

Yes, happy to do. So basically, indeed, as Jochen mentioned, with incoming orders that we took, we are on a similar level like last year and also implemented our measures then to we have actually provided a coverage then into a margin protection on the way forward. So we do feel actually more comfortable with the guidance that we provided in line with this.

[Ingo-Martin Schachel, analyst]

And if I -- if we look at your margins and the content that you only provide divisional guidance in August, which is fair that maybe you can already give us a very broad comments regarding, let's say, HOMAG versus automotive whether, let's say, one of those 2 areas, the say, margin pressure, or implied cut to your full year expectation is higher or, let's say, around 1%, 1.5% in both HOMAG and automotive?

And maybe you can also comment a bit on how bad the margin in the second quarter might be, I think that's probably trough profitability. Just wondering whether we should expect the margin in Q2, which is, let's say, lower than the year 2020 when it was 3% or the let's say, closer to the Q1 level than that?

[Jochen Weyrauch, executive]

Yes, the pressure on the cost side is, in general, if you look at the equipment business, it's equally relevant in all the divisions because -- there is, as you know, in general, our business model is not very much based on how high own value-adding, maybe a bit more at HOMAG compared to other businesses, but there is a large amount of our P&L that we purchase. And that's why you see an impact in all the businesses.

And we manage it as we were trying to explain during the presentation with the price increases on the one hand, with long-term contracts that we have on the supplier base, that health and consequently, we believe that we can deal within this magnitude that we have shown, which I think would be quite a good outcome actually.

[Andreas Schaller, executive]

And we have the second quarter margin pressure, I think, was the second question...

[Jochen Weyrauch, executive]

Yes. And this is definitely -- or it's a point that we do see that actually the second quarter will be a bit weaker in regard to the margin. We are not guiding on a quarterly, but you can expect that we should be in a range -- or we should be lower than the level that we had in the first quarter by around 1 to 2 percentage points.

[Ingo-Martin Schachel, analyst]

Okay. That's very helpful. Congratulations on pretty strong order intake this quarter.

[Operator]

The next question is by Alexander Virgo by Bank of America.

[Alexander Virgo, analyst]

I guess a couple, if I may. I wondered if you could give us a sort of a hint as to how much of your margin headwind is from logistics and constraints rather than raw material costs? The second question would be, given the length of time in your business cycle, the conversations you're having with customers now and pricing that you're putting through the order backlog now or that your order intake now, I should say.

How should we think about the trajectory of the margin improvement over the next 12 months? I guess, is the heart of the question. You must be pushing pricing through now that reflects the current situation in terms of raw materials and components.

And then the last question was just a case of how much of the order intake that you're seeing, would you estimate is a function of your customer base nervous about making sure that they have access to delivery slots, if you like, and sort of prebuying to try and lock in their own pricing with you guys at current levels and try and mitigate some of the inflation that they can see coming down the pipe?

[Jochen Weyrauch, executive]

Thank you, Alex, for your questions. Let me start from the third one backwards. We don't see -- like you see maybe with the component suppliers, Siemens or others that customers would buy from us earlier than originally planned just in order to secure shipments. This, we don't see.

We see customers ordering despite the fact that delivery times have increased, but we don't see customers in any significant amount ordering ahead of time in order to cope with the delivery times. And your question would lead to the fact would the orders this year have an impact maybe on next year or following quarter, we don't see that.

Second question, in terms of the length of the impact on the margin from orders, a bit different by divisions. At HOMAG, we have started relatively early with price increases as early as first quarter of last year already. And since then, have done 3 price increases and plan for the fourth as we speed. So there some part of the backlog, obviously, is already sold under higher prices.

The picture is a bit different. The longer the lead times are, like, for example, in PFS, typically, lead times for projects are somewhere between 15 to 24 months. when it comes to larger orders. But also in the past, we have some price escalation clauses. It's not that in all the cases, we have to absorb the full impact of material prices.

Plus, as I mentioned, we have with a lot of our suppliers, existing agreements that have some sort of a life span, which helps us, of course, as we can still, in many cases, use frame contracts that were made before price escalations. Then you were asking about the impact of the supply chain constraints on costs. So I think we have to differentiate.

One is supply chain constraints like it all started with the famous semiconductors and still that is the case. There, it is just a fight in many cases, to get the parts on time in order to secure timely shipments of our equipment. The second is price increases for material. And that, of course, has the impact as we were describing. And logistics, yes, logistics have become much more expensive where in the past, a standard container from Shanghai to Hamburg was probably EUR 3,000. It is, in many cases, now EUR 13,000, EUR 14,000 or more -- but we have reacted to this.

Unfortunately, we are able to do so with our local for local strategy. Where in the past, for example, we've used maybe China more as a source also for Europe, we're using, for example, Poland at similar costs. So there's a couple of issues that we have to manage. But all in all, it comes down to the availability of parts and increases in material costs that we have to manage. And as a consequence of our scenarios, we've adapted the guidance as we described.

[Operator]

Your next question is by Sven Weier of UBS.

[Sven Weier, analyst]

The first one is another follow-up on the adjustment clauses on the indexation. Did I understand correctly, you just implemented that for PFS. And in the other ones, you're dealing with it differently. I'm asking because I suppose that also the lead times in the machinery business has become quite long. And I was just wondering how reliable the supplier contracts really are what you have found out about that because we've seen a situation like [ Q1 ] that they had these supply contracts. But at the end of the day, they were not honored by the suppliers. So yes, that's the first one.

[Jochen Weyrauch, executive]

Yes, thanks. Good question, Sven. It's not just PFS, but we're dealing with price escalation open book, those different instruments to be flexible, but not so much in the machine building because their lead times are shorter, and we're having more and longer-lasting subsupplier agreement. And I can really say with very few exceptions, our suppliers with which we have long-standing relationships have honored their agreements.

And I'm personally very much involved in when it really becomes critical in terms of securing supplies, fortunately, in our case, this works relatively well. Nevertheless, of course, there is some impact. Otherwise, we would not adjust the guidance. But in the more it comes to the construction business there, the more we are exposed, and this is where it is most important that we deal with contracts that give us a chance to adapt our cost in changing also pricing. On the machine building side, shorter lead times, longer-lasting standard agreements with preferred suppliers help us to mitigate the impact...

[Sven Weier, analyst]

Understood. Thanks for the additional color. The second question is also on the order intake. And obviously, with the strong number you had in Q1, you have already quite derisked the full year in a way and it implies quite a slowing in the remaining quarter. So is that just you being conservative, but you don't really see that option 2 yet? Or do you already see slower order intake in Q2 from today's point of view?

[Jochen Weyrauch, executive]

We typically obviously look at a full year basis, I can say, of course, at the end of Q1, more confident than we were probably at the beginning of the year when it comes to the full year order intake, maybe that gives a bit of flavor -- and I can say with the pipeline that we see in all of the businesses, so far, we see no clubs. It's really very positive to see at this point that in one of the divisions, we see a change of any scenario from like before the war in Ukraine or the lockdowns in China. So continue to see in our CRM very healthy pipelines in all of the divisions.

[Sven Weier, analyst]

And what has happened on the HOMAG side because when we started the year in February with the guidance you were originally expecting a slowdown. And now, I guess, also Q1 has probably surprised you positively. The pipeline still seems good. So what's been the swing factor here that has made it so strong?

[Jochen Weyrauch, executive]

First of all, as we were reporting some of the projects that could have booked already end of last year were basically rolling into this year that has some impact. Second is, we have been maybe a bit more on the careful side for this year as in a few cases, it might have been difficult to see in HOMAG, how much of the business that we booked last year was a bit driven by incentives in some of, especially the European countries.

And maybe there was less of this than what we had assumed, which then helps the business to go forward. Nevertheless, we stick with what we said last year was an exceptional year. And let's see how much of a very good year we can make this year.

[Sven Weier, analyst]

And if I may, the final question, it's more a technology question because I've seen other companies involved in clean tech starting to go into carbon capture. And I was just wondering if that also we have a possibility for you guys.

[Jochen Weyrauch, executive]

How should I best answer that question. Your idea is very well justified. So this is a -- so whenever you're involved in what we do, it is natural to also raise that question. Well, I cannot perfectly give an answer now, but it's a logic way, the way you think.

[Sven Weier, analyst]

I'll ask again have the next CMD.

[Jochen Weyrauch, executive]

Please do so. yes.

[Operator]

The next question is by Daniel Gleim of Stifel.

[Daniel Gleim, analyst]

The first one would be on the supply chain bottleneck debate, assuming you're right. And at the end of this year, all of the supply chain bottlenecks should abate, how much savings could this provide in '23. I'm only talking about the availability of parts, not the cost inflation, please?

[Jochen Weyrauch, executive]

Can you -- how much can you just, Daniel, repeat a little bit the end of your question. I did not technically understand it.

[Daniel Gleim, analyst]

I'm wondering if your assumption is right that the supply chain bottlenecks should end at the end of the fiscal year. How much savings that could provide in '23? I'm thinking about the EBIT bridge from the end of the fiscal to your midterm guidance, [ 23% ]. And how much of the step-up could be due to the supply chain bottlenecks abating?

[Jochen Weyrauch, executive]

Yes. Not easy to calculate because as I was trying to explain, there is a few consequences of what's happening as we speak. Supply chain as such, first hinders us in terms of realizing sales because not all of the cases, we have the parts right on time. So that is more a top line issue first rather than a bottom line issue. Nevertheless, there is a bottom line element to this as well. as if you would visit some of our facilities today, you would see that we have semi finished equipment in our production, which, of course, creates inefficiencies.

These inefficiencies obviously cost money. And I would say that is also some sort of probably single-digit number easily, but very difficult to measure, I must say. The issue for us in terms of the bottom line is more really the inflation on the material cost side rather than inefficiencies or under recovery from not timely production.

[Daniel Gleim, analyst]

And if I think about the guidance change for '22 and the EUR 50 million odd, which this implies in absolute terms, how much of the EUR 50 million, very roughly could be cost inflation and how much inefficiencies that you just mentioned.

[Jochen Weyrauch, executive]

I would say the vast, vast, vast majority is material price increases.

[Daniel Gleim, analyst]

All right. Let's talk about that then. I would be quite keen to understand a little bit where we stand on the pricing of the new equipment. If you keep the services on the side, and I appreciate on your comments that might be accretive. But if you think about the new equipment only and the orders that you take now in April, how much of the cost inflation do you already cover with price increases or the price escalation clauses that you referred to?

[Jochen Weyrauch, executive]

I can -- if I just pick one order that I have in the back of my mind, which is a triple-digit million project, we're discussing with the customer, we have made an offer beginning of the year, which we are now revising and the prices or our offer value has gone up significantly more than 10%. And this, I would say, is not very unusual for current circumstances.

[Daniel Gleim, analyst]

This is the absolute increase. But if you think about the cost coverage, how far are we there already 50%, 80%, give us a little bit, a hint of how much further you have the prices versus you [ need ].

[Jochen Weyrauch, executive]

Understood. -- projects that we price with the current knowledge and again stressing the example I've given with this customer, I'm not even ready to give a fixed price. I said as we speak, this is a certain amount more, but we have to find either via open book or via price indexing a way to further escalate pricing when required. So of course, the plan is to forward all cost increases from new projects to customers.

[Daniel Gleim, analyst]

Very well understood. Thank you for that. You mentioned that the backlog margin has improved. Can you maybe quantify that by how much? And what I'm really interested in is to understand a little bit better how much the current order intake margin is higher than the current sales margin also better understand what could be the margin uplift from the new pricing?

[Jochen Weyrauch, executive]

Good question. Dietmar, can you comment?

[Dietmar Heinrich, executive]

Yes. Actually, it at the margin improved and not going too much into the details, but it's what we see in the sales level in the first quarter, the order intake is in a range of around 2 to 3 percentage points higher.

[Daniel Gleim, analyst]

Very clear. And maybe one last one. Ingo previously asked the question. You mentioned that the Q1 level might be 100 to 200 basis points lower. What is the margin comments, my line was really bad.

[Dietmar Heinrich, executive]

What is the margin?

[Jochen Weyrauch, executive]

The margin in Q2.

[Dietmar Heinrich, executive]

Yes, was the margin in Q2...

[Jochen Weyrauch, executive]

That's right, yes.

[Daniel Gleim, analyst]

Very clear.

[Operator]

The next question is by Nicolai Kempf of Deutsche Bank.

[Nicolai Kempf, analyst]

It's Nicolai Kempf from Deutsche Bank. Given that we see the price inflation across the sector and many auto suppliers are big [indiscernible] currently, is your impression that OEMs are at the moment more open to expect higher prices.

[Jochen Weyrauch, executive]

The answer is simple. Yes. I am in the automotive industry for a few decades now. And as much as I love this industry as much as I know, the pressure that's typically created by OEMs. And I'm not saying there is no pressure anymore, but the OEMs have understood that they have to adapt. So discussions like the discussions we have right now on price escalations, et cetera, these discussions, I think, would not have been possible a year ago or even half a year ago.

They know that they have to adapt because otherwise, and we are in a good community for that part of the business with other automotive suppliers that they cannot continue this way.

[Nicolai Kempf, analyst]

Yes. Understood. And my second one, maybe a follow-up kind of, but whatever linked factor to achieve an 8% margin next year? So how much net input prices to come down or by how much need at production need to come up in order that you keep your midterm target?

[Jochen Weyrauch, executive]

Yes. On your last comment first. Fortunately, our business is not directly proportional to the automotive production volumes because CapEx, and we are CapEx suppliers to the OEMs is planned on a longer-term basis. So fortunately, we're not so much bound to the strong fluctuations. So typically, of automotive production like direct material suppliers.

When you talk about how do we create an uplift of, in the end, 2.5% in order to achieve the 8%. There will be a little bit of a volume element so that we can materialize on our economies of scale to some extent because we've adjusted with the restructuring to a certain level of production volume.

And the second is that we manage the margin in a sense of keeping as much as we can material consumed by -- under control. And I'm a bit more optimistic towards the end of the year versus the full effect of price increases. Our business that's more related to machine building, like HOMAG, the increases that we've made. Just to give you an idea, we have made more than double-digit price increase over the last 12 months.

Once that kicks in, this will kick in stronger than potential for the material price increases and will help us to stabilize or increase the margin further. And as I mentioned also on the construction type of business, where we are now more aggressively and more successfully managing the prices as we have now more and more time to react versus the cost inflation on the material side.

[Operator]

The next question is by Philippe Lorrain of Berenberg.

[Philippe Lorrain, analyst]

Philippe Lorrain here. A couple of questions. One is on your current guidance for the unchanged order intake and the unchanged sales guidance. To me it seems like if I pencil in the FX gains that you have on the one hand and also the price increases that you speak about, perhaps this guidance reflects a slightly more conservative view now on volumes, which I would say in the current environment could be fully justified. Do you agree with me?

[Jochen Weyrauch, executive]

On as very well said, Philippe. On the order intake side, I'd immediately sign your comment. On the sales side, we have a mix of, on the one hand, FX gains. On the other hand, supply chain constraints. And let's see how the balance of the 2 turns out in the end.

[Philippe Lorrain, analyst]

Yes. I agree on your comment with regard to sales and the supply chain constraints. So that leads me to the next question. What is the kind of growth that we can assume both for probably order intake and also sales in the coming years if we take into account the fact that long term, your business is not at risk that the trends are fully intact, according to you, that you've increased prices. Yes, so I guess the question is when could you -- the EUR 5 billion mark of sales be reached? Perhaps 2024, 2025, way too early? Or how do you see things right now?

[Jochen Weyrauch, executive]

So if I listen to you, the skies are blue, that's fine. On -- first of all, yes, we believe that the long-term trends are intact. If you look at our sales guidance for the year, which includes some foreign exchange effects, as we said, let's see how they will turn out later this year or maybe next year, you are more expert when it comes to impact of interest rates on foreign exchange, et cetera, than we probably are.

So let's see what the realistic baseline sales under normal foreign exchange rates would be. And if you then apply the typical growth rate, GDP plus somewhat, you can calculate how long it theoretically takes to talk about the EUR 5 billion mark. I wouldn't want to do that too much today. Let's see how our business develops. But if you look at the about EUR 4 billion of sales a bit more this year, the EUR 5 billion is 25% more based on organic growth, that's the way to go.

[Philippe Lorrain, analyst]

Okay. But to me, it seems like if I take your guidance as of today for 2022, and bear in mind the fact that we've got 2 positive contributors to the order intake, which are the FX and the price increases, volume could actually surprise now on the base of basically like the first statement that you had for the beginning of the year. So we could end up with order intake exceeding actually the EUR 4.4 billion mark. That wouldn't be too surprising in my mind.

If we bear in mind the fact that we've got supply chain constraints, so that's putting a break perhaps on your sales this year. However, these orders do not disappear, they are just executed and feeding through the P&L a little bit later. So we're going to have a catch-up effect at some point, which is quite probably quite significant with the margin contribution. So that's how I was coming to that kind of statement, we should have like a catch-up at some point, adding to the structural trends.

[Jochen Weyrauch, executive]

Fair enough. I mean what you probably want to hear from management is when they would then achieve EUR 5 billion on a sustainable basis and not just driven by FX effects where we don't know how they will look like next year. Nevertheless, all your statements made before, we can only underline. We believe that really the drivers continue to be intact. What we also wanted to show is that -- and that's really a conviction we believe to sit on the right fundamentals. We've talked about the construction elements business for HOMAG and HOMAG overall.

But also on the automotive side with customers really needing to modernize their production base and do that in and follow sustainability, you've probably read today that BMW has declared that their plant in Hungary will be a carbon-neutral facility. And guess who is involved in building this facility. So all of this is really driving our business going forward.

[Philippe Lorrain, analyst]

Okay. Fair point. Just wanted to come back to your long-term growth guidance, the 23%. Could that be a bit low bearing in mind the fact that you're still like at the very beginning of battery coating business and also because you are exposed to the med-tech vertical now, to some extent, which is growing normally high single digits, plus all the trends that you're speaking about. So should we expect at some point as well a revision to the long-term growth targets?

[Jochen Weyrauch, executive]

I -- let's say, we hope that your statement is true regarding looking at our growth rates being conservative. However, our focus first is in margin expansion at this point more than pure sales growth.

[Philippe Lorrain, analyst]

Okay. Correct. And just finally, a couple of questions more regarding the margin. So you've shown some confidence in reaching the 8% EBIT margin by 2024, the latest, but you also mentioned next year. So I think for next year, the question mark is going to say as well, what's the cost inflation doing in the short term? Do you agree that the time when you reach the 8% EBIT margin right now will probably depend mostly on the cost inflation trends.

[Jochen Weyrauch, executive]

I would say that has a very strong impact, definitely, yes.

[Philippe Lorrain, analyst]

Okay. And is the 8% margin before after PPA, that's more maintenance?

[Dietmar Heinrich, executive]

The 8% is operational EBIT, right? Basically, that but also the impact already this year coming from PPA was -- is very limited. It's around 0.5 percentage point we are targeting indeed, as Jochen mentioned, also on a consistent basis.

[Philippe Lorrain, analyst]

Yes. Okay. Perfect. And a final question more regarding price negotiations and so on. I'm not quite sure you've been answering that in most detail. But in existing contracts where you [ upped ] prices, have you tried already to push for escalation clauses being implemented on such contracts? And if yes, do you manage to do that successfully?

[Jochen Weyrauch, executive]

Yes. The answer is yes. And on the first question, the answer on the second question is in a couple of cases. has not always been successful, but we've been successful in more cases than we had probably or I had initially anticipated. And you often also have the chance to improve margins during the course of a project because in many, many cases, customers change the scope of supply during the lifetime of a project, which often gives us a lever, if you will, to also work on the margin. So a combination of the 2 has helped in many cases already.

[Philippe Lorrain, analyst]

Okay. Perfect. Thank you very much for the precision, especially, with regard to the scope of supply. That's interesting.

[Operator]

Our next question is by Will Turner of Goldman Sachs.

[William Turner, analyst]

So you've decided to keep the free cash flow guidance for 2022 unchanged. And that's despite obviously lowering expectations for earnings. What were the other variables which have changed that have resulted in you doing that and why?

[Dietmar Heinrich, executive]

That's basically on one side, you're right, we will see a drop in the profit, but we will compensate also with lower CapEx, as Jochen already indicated as well briefly.

[William Turner, analyst]

Okay. So it's primarily CapEx, not anything different on your working capital expectations?

[Dietmar Heinrich, executive]

That was the working capital, we even expect an increase now in the remainder of the year. Then based on the high order intake in the first quarter, we also had a high level of initial payments for coming from our customers. And as I said, the net working capital for the remainder of the year is expected in a target range of 40 to 50 days. But as I said, we are steering them also in regard to the CapEx.

[Operator]

There are no further questions, and I hand back to you.

[Andreas Schaller, executive]

Okay. Thank you very much for your questions. Ladies and gentlemen, in case of any further questions, please contact me or my colleagues from Investor Relations. We're looking forward to staying in contact with you. Stay safe and goodbye to you all.

[Jochen Weyrauch, executive]

Thank you very much also from side of management. Take care.

[Operator]

Bye-bye. Ladies and gentlemen, thank you for your attendance. This call has been concluded. You may disconnect.