Duerr AG

XETRA:DUE

Earnings Call Analysis

Navigating a Mixed Landscape with Strategic Focus

The company experienced a mixed business picture but maintained strategic focus on growth and margin targets. A new division was introduced to better align with the automation business, targeting 7-8% growth and aiming for 10% margins amid plans for boosting synergies and overcoming execution challenges from a past project. Material costs are seeing a downward trend for the first time after a long period. Although the China business depicts a varied outlook, with some slowdowns and exceptional strength in other segments, the company feels neither overly excited nor concerned. Overall, strategic shifts and cost measures, such as planned reduction of 600 workers, are geared towards adjusting to market demands and enhancing profitability.

Navigating Cyclical Downturns and Capitalizing on Automation Expansion

The company has initiated strategic adjustments in response to an anticipated temporary sales decline in 2024, particularly within its HOMAG division, which specializes in woodworking machinery. Despite the impending downturn, the firm has delineated cost-saving measures aimed at bolstering global market strength. Reflecting on Q3, a modest quarter-over-quarter sales growth of 4% to EUR 1.16 billion was recorded, yet marred by a downturn in order intake—a decline from EUR 1.3 billion the previous year to EUR 922 million. Nonetheless, a robust 7.1% margin improvement signaled diligent execution of high-margin automotive projects, service delivery efficiency, and the positive yield of the BBS acquisition, revealed in the order backlog swelling to EUR 4.5 billion.

Strategic Divisional Reformation and Market Potential

The company has reformed its divisional structure following the BBS Automation acquisition, elevating the automation segment to a standalone unit—Industrial Automation. This strategic move promises synergies and market dominance, particularly in e-mobility. The new alignment enhances customer solutions, as exemplified by combining assembly, balancing, and testing for e-motors. The reorganized Paint and Final Assembly Systems division is poised for a Q4 rebound in order intake, after a subdued Q3 marred by customer-induced project delays.

Financial Resilience and Free Cash Flow Certitude

The company is confident in achieving its targeted EUR 50 million to EUR 100 million free cash flow for the year, riding on the back of a solid Q3 performance, marked by sequential sales growth and enhanced margins due to improved supply chain operations and high service margins. This financial resilience highlights the company's robustness in weathering market variabilities and its strategic emphasis on efficiency and profitability.

Confronting HOMAG's Challenges with Targeted Cost Measures

Targeted measures at HOMAG, in light of the exacerbated cyclical downturn, include a reduction of its workforce by approximately 8% and a resulting cost-saving target of EUR 50 million by 2025, aimed at ensuring a sustainable cost structure. While forced redundancies are not in immediate consideration, they remain a possibility. This has led to a calibrated guidance for EBIT margin before extraordinary effects ranging between 2% and 4% for the segment in 2024.

Technology Leadership and Strategic Investments

Maintaining its technological edge while concurrently fortifying its local market presence, the company continues its investment in service capabilities, which contributes significantly to margin improvement. With the service share at 22% and a potential 10% margin target within reach, the company is confident about the bright prospects of its HOMAG division bolstered by comprehensive cost-cutting and modernization initiatives.

Adaptation and Overall Positive Outlook

The company has adapted its guidance to incorporate the expected restructuring charges and the impact of the BBS Automation acquisition. A fine-tuned divisional forecast promises a robust Q4 performance, with anticipated double-digit EBIT margins. Despite the hiccup at HOMAG, the management is confident in the company's direction, as it aspires to the goal of a competitive margin advantage and profitability across the business spectrum.

Earnings Call Transcript 2023-Q3

[Operator]

Good day, ladies and gentlemen, and welcome to the Dürr conference call. Dr. Jochen Weyrauch, CEO; and Mr. Dietmar Heinrich, CFO of Dürr AG, who will hold the presentation filed by a Q&A session. I'd like to hand the call over to Ms. Andreas Schaller, Head of Investor Relations of Dürr AG. Please go ahead, sir.

[Andreas Schaller, executive]

Thank you, George. Ladies and gentlemen, good afternoon, and good morning to those of you in the U.S. Welcome to our earnings conference call for the first 9 months and the third quarter. Thank you for making yourselves available on short notice as we are 1 day ahead of our original schedule. The reason is the announcement of details about the capacity reduction program at HOMAG last evening in a talk release. In order to give the complete picture and answer your questions in a timely manner, we decided to speed up publication of our Q3 earnings and provide all the information in one go. With me on the call today are our CEO, Jochen Weyrauch; and our CFO, Dietmar Heinrich. They will present the results of Q3 and the first 9 months, some details regarding the planned measures at HOMAG as well as the outlook, and we'll be happy to answer your questions afterwards. As always, our earnings presentation is available on our Investor Relations website, and we assume that you have it in front of you. Please be aware of our disclaimer regarding forward-looking statements on Slide 2. And now it's my pleasure to hand over to our CEO. Jochen, please go ahead.

[Jochen Weyrauch, executive]

Thank you, Andreas. Welcome to all participants on this call also from my side, and thank you very much for joining. We made very good progress with the development of a road map for the capacity adjustments at HOMAG during the past few weeks and discuss them with the employee representatives at HOMAG yesterday. We define the necessary steps that we need to do to cut costs to address the temporary lower sales volume that we expect in 2024. At the same time, we reduced this situation to further strengthen HOMAG on a global level and drive profitable growth after the cyclical downturn. Before we get there, I would like to review our performance in the third quarter and talk about the change in the divisional structure that we have implemented following the BBS acquisition. Let us start with the overview of Q3 on Slide 5. The key highlight for us was the strong margin improvement, but let's work through the KPIs one by one. After the strong first half year, we saw a temporary decline in order intake to EUR 922 million in Q3. This looks low, especially when comparing against the prior year's level of EUR 1.3 billion, but it is explained by the timing effect in the Automotive order intake. Project sizes in automotive can be very large, even almost reaching mid-triple-digit million Euro ounce. And therefore, it makes a big difference at what point in time a project is booked. In Q3 of '22, we booked 2 very large automotive orders in North America. This year, we booked large orders in the first 2 quarters, but not in the third quarter. However, the pipeline remains solid, and we expect a stronger Q4 with respect to automotive. Order intake at HOMAG dropped below EUR 300 million in Q3. This was lower than expected and an important factor in the decision to go for the capacity reductions. Sales revenues grew by 4% year-on-year and quarter-over-quarter to EUR 1.16 billion. This is a bit slower than the 7% growth we achieved in the first 9 months. We have seen delays in the execution of a couple of automotive projects because the buildings were not provided on time by the customer. This is outside of our CF activity, and therefore, we have to accept it as it is. For revenues, we also expect further growth in Q4. The order backlog increased to EUR 4.5 billion due to the acquisition of BPS Automation. Now we come to a very important figure from our point of view. The EBIT margin before extraordinary effects rose to 7.1% in Q3. We will look at the divisions in a moment, but I would already like to mention the new quarterly record of 9% that HOMAG still achieved in Q3. Main drivers of the margin improvement on the group level were the execution of projects with higher margins in automotive, higher service share and our continued focus on efficiency improvements. Free cash flow generation was positive with EUR 15 million in Q3 despite the buildup of net working capital during the quarter. Based on the development so far, we confirm the guidance for order intake, sales revenues, EBIT margin before extraordinary effects and free cash flow for 2023. Based on the road map for capacity adjustments that we discussed yesterday for HOMAG, we decided that we will book the expected restructuring charges of between EUR 35 million and EUR 50 million already in 2023. Accordingly, we've adjusted the guidance for the reported EBIT and net income. On Slide 6, we see the key financial indicators for the first 9 months of 2023. Order intake declined 11% due to the weak demand at HOMAG. Sales revenues grew 7%, driven by all divisions. EBIT before extraordinary effects increased by 26% and the margin improved from 4.8% to 5.7%. Net income rose by 35% accordingly. Finally, free cash flow came in at EUR 8 billion, which is below last year's level that benefited from high prepayments in Q3. We expect solid cash generation in the fourth quarter and remain on track to reach the guidance. Let's look at the order intake on Slide 7. I already mentioned the lack of large orders in Q3 due to timing effects. The automotive project pipeline continues to look solid, and we are expecting a stronger Q4. New orders are coming in with improved margins for all divisions except Woodworking Machinery and Systems. Looking at the first 9 months, the book-to-bill ratio stood at 1.06 billion. On Slide 8, we see the geographical distribution of order intake. Orders from China declined from the very high levels we saw in the past years. As already mentioned, we booked 2 large orders in North America last year, which explains the decline year-on-year after 9 months. Orders from Europe outside Germany were up, and we are seeing a good demand from Asia outside China. Our global footprint is a clear advantage for capturing demand. Now let's have a look at the changes we made to our divisional setup on Slide 9. With the acquisition of BPS Automation, the automation business has now reached a critical mass, and there are a lot of new synergy potentials within the business. Consequently, we decided to take it out of the Paint and Final Assembly Systems division and combine it with the former Measuring and Process Systems division to form a new division, which we call Industrial Automation. This division consists of 2 business units: the former Measuring and Process Systems and Production Automation Systems with BBS automation, Teamtechnik and Hekuma. [Indiscernible] has taken on the role of CEO of the new division. Production Automation Systems is run by Josef Wildgruber, the CEO of BBS Automation. You might ask why we put the new division together like this, and I would like to mention some thoughts behind the new setup, both Measuring and Process Systems as well as Production Automation Systems, our machinery businesses, and will act together in certain market segments. Combining their solutions, they, for example, provide of the -- for example, become the only supplier for e-mobility customers who can provide consulting, assembly, balancing and testing of e-motors out of one hand. In fact, already before the acquisition, Schenck was a very relevant supplier of balancing machines for BBS, for example, regarding assembly lines for e-drives. In addition, some machines of the balancing portfolio provide a high degree of automation, for example, the automated tire fitting in thin relines. With the new division, we provide a sharper profile of our business activities going forward. On Slide 10, we can see the new divisional setup. We stay with 5 divisions in total. In the different columns, we see the description of the areas of activity. The current headcount and the sales volume of 2022 with the exception of industrial automation systems where we show the pro forma sales for 2022. With the acquisition of BBS Automation, we have taken another step in our strategy for profitable growth. Now let's have a look at the divisional development in the sea. We start with Paint and Final Assembly Systems on Slide 12. As we follow the new divisional setup, we have taken production automation system figures out of the prior quarters. I already mentioned the timing effects in order intake in Q3 and that the order pipeline remains solid. As such, we expect a higher order intake in Q4. I also told you that we experienced delays at a couple of projects due to customer-induced delays in civil construction. This temporarily slowed revenue generation. On the other hand, the EBIT margin before extraordinary effects improved significantly in Q3 and for the first 9 months. In Q3, we reached more than 6%, which is in line with our strategic target for this business. We believe that this is not the end of the story and that we can do even better as order intake margins continue to improve. You can also see how this margin translates into high our ROCE values due to the capital-light nature of this business. All in all, we now start to see the benefits of our value before volume strategy. Let's turn to Application Technology on Slide 13. Here, the same common supply regarding order intake and sales generation like in Paint and Final Assembly Systems. We also see a strong EBIT margin improvement to 11% before extraordinary effects in Q3, which is well in line with our target for this business of more than 10%. The margin improvement was driven by a strong service business with solid margins. Next is Clean Technology Systems on Slide 14. Order intake in Q3 was a bit weaker due to delays in decision-making and customers, some of them rethinking their regional strategy. Sales growth remained solid and was mainly driven by the execution of projects in Germany and the U.S.A. Also, this division could significantly improve EBIT margins due to strong project execution and an increase in service margins. At 8.3%, we are well above the strategic target level of 6% for this kind of business, and this directly translates into a very high ROCE. Now let's have a look at our new division, Industrial Automation Systems on Slide 15. The numbers include Teamtechnik in Hekuma that were formally reported under Paint and Final Assembly Systems, the former division Measuring and Process Systems and 1 month of BBS automation. Order intake in Q3 and the first 9 months was lower than in the prior year, which is mainly due to timing effects. In the automation business, we are also looking at larger project volumes and timing plays an important growth. We expect a strong order intake in the fourth quarter, which has already gained momentum in October. Sales revenues grew by more than 20% in the first 9 months in Q3, which was partly driven by the consolidation of BBS Automation. But even without the consolidation effect, sales volumes were up double digit in the first 9 months. The EBIT margin before extraordinary effects improved compared with Q3 and the first 9 months of last year. The margin benefited from the acquisition of BBS Automation and the solid performance of Measuring and Process Systems. On the other hand, we experienced margin dilution due to some long run projects that are currently still being executed at one of the Teamtechnik sites. We were taking on during corona times when demand was relatively low and were impacted in addition by cost inflation. We expect them to flush out over the coming quarters. In addition, we expect synergies with BBS to start to kick in and at the same time, we constantly provide best practices from the Dürr Group however it is. We are very excited about the new division, and we will work hard to realize its potential going forward. Now we come to HOMAG on Slide 16. Order intake in Q3 declined to less than EUR 300 million. We only see limited downside potential from here and there are some larger projects in the pipeline. However, project timing is uncertain, and therefore, we took action. Sales revenues still benefited from the large order backlog and remained above EUR 400 million in Q3. For the first 9 months, we recorded a small sales growth of 2%. The EBIT margin before extraordinary effects further improved and reached a new quarterly record of 9%. Big drivers were the price increases conducted in the past as well as cost savings and efficiency improvement measures. HOMAG is a strong EBIT contributor in 2023. And with the measures we are taking now, we want to strengthen the resilience and prove the business. The important part of our strategy is a strong service business. On Slide 17, we can see that service sales grew faster in Q3 than the overall sales and the service share improved to 29.8%. At HOMAG, we build up service capacities in 2022. And we now see that this pays off as we could even slightly grow the service business in the market environment where some customers have very weak utilization. On the group level, service margins further increased and supported the positive margin development. Dietmar, I’ll hand over to you for the finance.

[Dietmar Heinrich, executive]

Thank you, Johan, and welcome to everybody also from my side. I'll start with Slide number 19. The positive sales and margin momentum has continued in the third quarter, and we are moving towards our targets for 2023. Let's have a look at the financial details on the next slide. On Slide 20, we can see the revenue development over the last 7 quarters. Sales in Q3 improved both sequentially and year-on-year. We expect further sequential sales growth in Q4, driven by the typical seasonality, solid project execution and the contribution of BBS Automation. Regarding the geographical distribution, we can see how the order intake development of the past year translates into sales this year. The America and Europe are gaining share, whereas China lost share. The overall distribution reflects a solid geographical diversification. Let's move to EBIT on Slide 21. We can clearly see a strong improvement in Q3 compared to Q1 and Q2. Gross profit was the main driver of the margin improvement. Important factors to mention in this context are the improved supply chain, the high service margin and the realization of better project margins. The overhead costs grew about in line with sales. We actually expect a further improvement of the EBIT margin in the fourth quarter. On Slide 22, we can see the free cash flow development. After the seasonally weak second quarter free cash flow has turned positive in Q3 and the first 9 months, again, the improvement quarter-on-quarter was however limited as we experienced a strong increase in net working capital. In addition, CapEx and taxes increased. On the other hand, interest payments were lower. Based on a stronger order intake in Q4 and then improved margin, we are confident to reach our guidance of EUR 50 million to EUR 100 million free cash flow in this year. On the next slide, Page 23, you can see the net working capital development. The increase looks quite high at first size, but only EUR 63 million from this increase are actually from an operational buildup. The rest is due to the consolidation of BBS Automation, which drove up trade receivables and contract assets. Inventories declined quarter-on-quarter despite the acquisition as our focus on inventory reduction delivered results. Contract liabilities have come down sequentially due to the temporarily weaker order intake in Q3. Nevertheless, today's working capital increased to 47.6 days, which is within our target range of 40 to 50 days. I can assure you, we continue to manage net working capital very carefully and focus on the reduction of inventory in continuation of what we already achieved. The next slide, Slide 24, we can see the increase in net debt at the end of Q3 due to the acquisition of BBS Automation, the leverage to reach 1.6, and it is our target to stay below 2x net debt to EBITDA as such. We will focus on deleveraging going forward and will restrict M&A activities to smaller bolt-on. Even after the acquisition, our liquidity headroom remains comfortable. Cash and cash equivalents amounted to about EUR 950 million at the end of Q3. As you can see on Slide 25, and we have an undrawn cash credit line of EUR 500 million at our disposal. We syndicated a bridge loan of EUR 300 million that we used to finance the acquisition of BBS Automation as a maturity of 12 months, but it can be extended by another 12 months if needed. Our financing is not subject to financial covenants. When you look at termination rights and is based on standard documentation of the loan market association. We are actually convinced that we have a sound financial profile. Focus remains on generating cash from operations and stringent net working capital management. We are also reviewing our portfolio constantly. With this view from the financial side, I would like to hand back to Jochen for the outlook.

[Jochen Weyrauch, executive]

Thank you, Dietmar. Let's turn to the HOMAG measures and the outlook. Let's have a closer look at the capacity adjustment program on Slide 27. In light of the stronger-than-expected cyclical downturn in demand for woodworking machines, the current capacities at HOMAG cannot be fully utilized in the coming quarters. We've defined measures to reduce capacities on a global level by about 60, which corresponds to 8% of HOMAG’s workforce. Roughly 60% of the cuts will be in Germany. The target is to achieve sustainable cost savings of EUR 50 million by the end of 2025. Half of that amount is planned to be reached in 2024. The measures to cut jobs include volunteer programs and early retirement schemes. In forced redundancies are not planned at the moment, but cannot be completely ruled out. We expect restructuring charges of between EUR 35 million and EUR 50 million that will be booked in Q4 2023 and have considered them in the updated guidance that I will present in the business. In addition to the capacity adjustments, we also plan to make use of flexible labor measures like short-time work and the reduction of time accounts as well as operational cost savings to bring down costs even further. Based on these measures, we now feel comfortable to give a target range for the EBIT margin before extraordinary effects of between 2% and 4% for Woodworking Machinery and Systems in 2024. Together with these cost-saving measures, we will further improve the efficiency, global setup and product mix at HOMAG. We will continue to invest in our technology leadership, but at the same time, we will also strengthen our local setup in the various markets to develop and produce machines closer to our customers and optimize costs on a local for local basis. We have already invested in additional service capacities and we'll continue to focus on increasing the service share at Home. On Slide 28, I would like to address the topic of the 10% margin potential at HOMAG. We have seen some critical comments after the profit warning on October 19. And I would like to point out what we already achieved and what is still to come. In the past 3 years, we have implemented the measures we defined in 2019. We closed the production site in Germany, modularized the production portfolio for furniture production, modernized processes and IT tools and invested into service personnel. As a result, we have achieved a new record EBIT margin of 7.8% in 2022, despite the significant headwind from supply chain bottlenecks. Those who joined us at our last Capital Markets Day in November 22, might remember the warehouse at HOMAG and Schopfloch, that was packed with machines due to missing parts. If we could have shipped these, we would probably have already reached or being close to the 10% margin target in 2022. On the right side of the slide, we can see the further potentials going forward. Increasing the service share is one important lever. In 2022, the service share of sales was at 22%, which is clearly lower than the group's average and leaves a lot of potential. For each percentage point increase in service share, we add about 25 to 30 basis points to the EBIT margin. That's quite significant and is a key focus topic for us. We've also invested in modernizing the production environment, for example, new logistics centers going into operation directly at the production lines in Schopfloch and Holston in early '24. On top some changes in global footprint and product mix. We will further grow the Construction Element Solutions business and increase the localization of production and development with a focus on best cost countries. Last but not least, we will reduce fixed costs through the cost-saving measures I just described. Taking all this into account, we are very confident that we will reach the 10% margin target going forward and become more resilient with respect to market cycles. We will be happy to discuss this further also at our Analyst Meeting on 21st of November. Let's turn to our guidance for '23 on Slide 29. We confirm our target for order intake, sales revenues and EBIT before extraordinary effects as well as free cash flow. With respect to order intake, we even see the chance to reach the upper end of the guidance and for sales revenues, we expect to come out in the lower half of the guidance range. We have adjusted the guidance for the reported EBIT, ROCE and earnings after taxes considering the expected restructuring charges. For ROCE, we also took into consideration the increase in capital employed for the last 4 months of the year after the acquisition of BBS Automation. On Slide 30, we can see the breakdown of the guidance by divisions. We updated this overview according to the new divisional setup and the performance we have seen so far. Looking at order intake, we have increased our expectations for the automotive business, mainly Paint and Final Assembly Systems and application technology at Paint and Final Assembly Systems, the number is the same as before, but the scope is different as we have taken out the automation business. On the other hand, we have slightly reduced expectations for Clean Technology Systems due to project decisions that are delayed, and we cut our expectations for order intake at HOMAG. The revenue guidance reflects the new divisional setup, Paint and Final Assembly Systems is a bit lower due to taking out the automation business and due to the project delays we talked about. Clean Technology Systems is higher based on the very good project execution. The outlook for EBIT before extraordinary effects improved for Paint and Final Assembly Systems and clean technology assistance due to the solid performance and higher margin projects. At HOMAG, we have lowered the range due to the increasing headwinds from lower order intake. The outlook of the new division Industrial Automation Systems includes the contribution of BBS automation for the last 4 months. Comparing this with the first 9 months, we can expect a very solid fourth quarter from order intake and sales revenues as well as a double-digit EBIT margin before extraordinary effects. Now let's summarize on Slide 32. We introduced a new divisional set up to better reflect the automation business. We see a solid project pipeline in automotive and are on track to reach the upper end of the guidance range for order intake. The EBIT before extraordinary effects has improved significantly in Q3 and HOMAG and we even reached a new quarterly record at HOMAG with 9%. We have defined measures to cut costs and strengthen HOMAG during the upcoming cyclical downturn. All in all, we believe that we are on the right track towards becoming a competitive capital goods player with adjusting our product portfolio for higher margins and with driving profitability of our business. The cyclical downturn at HOMAG might delay the process. But in the end, we believe that we will be successful. Thank you very much for your attention. Now we are happy to answer any questions you might have.

[Operator]

[Operator Instructions] Our first question today is coming from Philippe Lorrain, Societe Generale.

[Philippe Lorrain, analyst]

I've got a couple of them. The first one is on your remarks regarding the sale revenue recognition in PFS due to customer induced delays in building construction. So just one project? Or is it parts as well related to maybe trending that potential customers are financially struggling and therefore, wish to slow down the project execution.

[Jochen Weyrauch, executive]

Thanks, Philip, for the question. No. It's not one customer. Actually, it's pretty much close to a handful. And it's definitely not related to any financing issues. It is really related and not very unusual, but it's now maybe a bit of a higher amount of customers who just in different regions, actually in all 3 major markets that we have are just behind schedule and then driving just slower execution of projects because we can expedite them at some point. So then we will speed up at some point once buildings are ready as customers typically urge us to catch up some of the time they've lost with the erection of their own buildings. But as a matter of fact, we currently have to face delays. Multiple customers, multiple regions, not at all financing issues.

[Philippe Lorrain, analyst]

But that's pretty strange, to be honest, because if it's like so many customers at once and also like in different markets is perhaps related to any trend in their own supplier base or something in common? Have they commented on that or not?

[Jochen Weyrauch, executive]

No. honestly, I don't see a pattern. We just and of course, I cannot mention customers, as you might understand. But there is one project in the lower or the southern part of North America, not to mention a country where there is specific reasons why the building is behind. Then this is -- it's a very well-known OEM. Then another well-known OEM is building a new site in Eastern Europe. Similar issue. Then we have another project in, let's say, the Middle East and different reasons, different customers, but just at the moment, a matter of fact. But no pattern behind in terms of a common building supplier, one customer or any financing issues.

[Philippe Lorrain, analyst]

And then the second one was just like based on the comment that you made, you know that the groups on the backlog reached EUR 4.5 billion at the end of Q3, and that was also reflecting the acquisition of BBS Automation. Just of interest, was the contribution from BBS Automation something like perhaps like EUR 200 million to EUR 300 million, which is they would get from the back of the envelope calculation? Or can you communicate a bit of a number on that?

[Dietmar Heinrich, executive]

Philip, you're right, the number that you mentioned in the range of EUR 200 million to EUR 300 million, correct.

[Philippe Lorrain, analyst]

That's good. And then I've got 2 more questions, to be honest. The first one relates to HOMAG. It's actually 2-3 questions. So first, the comment on the pipeline at HOMAG saying that a few larger orders are in there. Do you see any trends in the gross margin for that specific pipeline? So is it weakening a little bit? Or is it kind of stable versus what you've seen in recent quarters?

[Jochen Weyrauch, executive]

Look, we have -- and actually, we booked one of the larger projects. On the margin, very difficult at the moment. On the one hand, we have increased prices in general. On the other hand, we see a bit more headwind in the market, of course, with lower projects in the market, and we will have to see how that turns out. But at the moment, I would say, at best, it levels out, there's a little bit of a headwind. On the other hand, cost reduction measures into, for example, we're now seeing the trend of reduced material prices for the first time after a long period, and we will have to see how that whole equation works out.

[Philippe Lorrain, analyst]

And regarding HOMAG again, the cash-out for the restructuring, will it all be in 2024? Or is it going to be spread across many years?

[Jochen Weyrauch, executive]

I would say the biggest part will be in '24. There might be still some into '25. But beyond that, there's nothing to be expected.

[Philippe Lorrain, analyst]

And the last one actually for Dietmar Tim. You mentioned that I think the financing is not subject to covenants. So did you mean actually all the promissory notes that you have got out? And can you elaborate a little bit on that piece?

[Dietmar Heinrich, executive]

We don't have, let's say, restrictions coming from the financing. Maybe talk about governance in that regard. And there is -- let's see how -- what I say there's no adverse impact on how coming from the financial market. So the promissory notes then we collect the in-time or we use them sometimes to forward them, especially in China, then to our customers or to discount. And so that's a normal course of this [Indiscernible].

[Operator]

Operator Instructions] We'll now move to Marta Bruska, calling from Berenberg.

[Marta Bruska, analyst]

Apologies if some of them [Indiscernible] those companies. So I was just wondering, I made comments a few times about the [Indiscernible] projects, we'd expect a stronger order intake in Q4. What would drive that in your view? And what are your thoughts on 2024 and would drive also the margin improvement that you expect there? And then I have one more.

[Jochen Weyrauch, executive]

All in all, we have a very good pipeline overall in automotive when it especially comes to PFS and APT. And we are also -- and that pattern remains very solid into '24. We have pretty good visibility for the first quarter and beyond. And that, at this point, we have very solid projects there where we have a very high probability of booking them. And the same is true now for Q4, where we had a few delays, which are not untypical in the business. And the pipeline, if we look in our CRM remains solid at this point. And we've been quite successful in really now translating not only, by the way, in PFS but also in APT on the new equipment business, our value before volume strategy.

[Marta Bruska, analyst]

Yes, I understand that we see those projects. But what do you think -- why do you book them, of course. I mean what drives the thing still to the investment in automotive because the carmakers have the bigger budget for us to spend on the CapEx. Is that because the OpEx was high for them? If you can give a little bit more.

[Jochen Weyrauch, executive]

Actually most, if not pretty much all at the moment of the orders that we get are not to increase production volumes as such as customers. They are -- with a few exceptions, we, for example, talked about that one project we booked in the Middle East during the course of the year. It's a new customer, no volume. But a few exceptions. But the rest is with respect to making our customers' production sites, either convert them from the internal combustion engine to e-mobility or help them to achieve their own sustainability targets. We will, for example, talking about the strategic partnership we've concluded with Mercedes, this is not about per se increasing production volumes and this public information because Mercedes has published it as well. This is to convert their sites, number one, improve their share of e-mobility, but in this case, even more importantly, that they achieved the sustainability targets they've given themselves until the mid-2030s. So this is why we're actually not showing in our investor presentation any more production volumes because this is misleading for the CapEx profile of our customers in our direction.

[Marta Bruska, analyst]

And if you were to guess for the next year, how much do you think because some part of your sales volume will be still linked to probably the production on one degree. Would we be displacing between that and the sustainability and EV conversion type? Would that be like 7 or something later?

[Jochen Weyrauch, executive]

I cannot perfectly understand you, Marta. I try to repeat your question, if it's not correct, let me know. So you want to know in terms of the CapEx, how much is conversion to mobility and how much is sustainability?

[Marta Bruska, analyst]

The 2 together versus in the run rate on your tankard the maintenance that we lend more to the production volume still.

[Jochen Weyrauch, executive]

I would say, at best 30 in new volume, probably even lower .

[Operator]

We do have a question coming in from Christian Cohrs, calling from Warburg Research.

[Christian Cohrs, analyst]

Also from my side, I have 3 questions. First, for Clean Technology, you mentioned some customers struggling with their investment decisions since they have not yet decided where to invest. Is this of any relevance for you since they might opt for regions where you have no presence? Secondly, when do you expect first orders from the Mercedes partnership to materialize? And lastly, can you provide us with an idea about the PPA expenses you will book for the BBS acquisition.

[Jochen Weyrauch, executive]

On PPS, first of all, in terms of the regions, we cover all the regions. But we see a lot of customers currently. And I mean, we're all aware of the energy cost in Europe, especially in Germany. And what we are seeing is some of our customers who typically are very global customers to rethink their CapEx strategy, not to really cut CapEx, but to reallocate it. And that leads to delays. So we still assume to catch the orders, but we have delays of maybe 3 months, 6 months because some of the customers are basically going through their own planning cycles once again to see where they best allocate the project. So we don't assume that this will midterm have an impact on the projects that we book. But short term, this creates delays in decision-making. On the Mercedes partnership, we will not book the first project this year, but not book far into next year.

[Dietmar Heinrich, executive]

Then on PPA, let me take it over Jochen. Actually, for the BBS acquisition, we expect with a PPA impact for this year of EUR 8 million to EUR 10 million and for next year of EUR 25 million to EUR 30 million.

[Operator]

We'll now over to Holger Schmidt calling from DZ Bank.

[Holger Schmidt, analyst]

I have 2 questions. And the first is on the new division, Industrial Automation Systems. How should we think about the future growth prospects? So the annual sales growth potential for this division? And also what kind of margin evolution can we expect here? And the second question is with regard to China. So the proportion of your business related to China has come down. How do you see the business prospects in China? And what kind of impact can this have on your profitability?

[Jochen Weyrauch, executive]

On the new division industrial automation systems, we have the [Indiscernible] PAS, production automation systems. There, our assumption is to grow around 9% to 10%. The remainder, which is MPS, which is our most our traditional shake business, that business typically grows at 3% to 5%. So I would say -- and this is 1/3 of the division, roughly 2/3 is now the new PAS. So I would say as a mix to do 7%, maybe into 8% should be the metrics.Then on China, we see a mixed picture to be quite honest. For PFS, and we have a very good pipeline, very strong looking forward for APT. PFS, it's been a bit slower. Yes, we have competition in all areas reduced to that. We're in China for quite a long time. And we are -- yes, a mixed picture, PFS, a couple of projects. We'll have to see how it turns out. APT quite strong. By the way, our PAS business, especially through BBS, very strong in China because we have high market share with the very successful players in China who, as you can read in the newspaper, some of them now already plan new production sites in Europe. This is actually where we also soon to be in a very good position as we are serving them already in China. At HOMAG, we have been strong in the past. Business has been a little bit weaker overall. I would say a mixed picture in China. I'm not enthusiastic, but I'm also not concerned. That would be a general statement.

[Holger Schmidt, analyst]

Just one follow-up to the new segment. You outlined the growth prospects, but what about the margin profile, the margin evolution that we can expect here?

[Jochen Weyrauch, executive]

The margin target is clearly 10%. With our new kid on the block, we're pretty much very close to that already. We still have some homework to do, as I mentioned during the call at in Teamtechnik from some past projects that we're still executing. Hekuma is performing very well, a small company that we have in Munich, and we have significant synergy potential, as we have described in earlier call when we acquired BBS through the very good Asian footprint of BBS plus the sales synergies for some customers who are already working on one project where we would get the first combined order between TeamTechnik and BBS.

[Operator]

We'll now move to Andreas Ruf, of EUWID

[Andreas Ruf, analyst]

Andreas Ruf, from EUWID. I would have some questions regarding the capacity reduction program at HOMAG. Up to now, the capacity utilization at HOMAG shouldn't be that bad because HOMAG is still working on the order backlog? When do you expect the first negative effects on the capacity utilization?

[Jochen Weyrauch, executive]

So there is a bit of a turning point pretty much at the beginning of next year. However, having said that, in some of the businesses or some of the sites, we have already seen a little bit of a reduced utilization even during the last quarter, and we've balanced that overall. So it starts -- it has already started. Still, we were defending good margins. But most of this reduction in volumes will be in the first and second quarter of next year.

[Andreas Ruf, analyst]

You said that you want to reduce the number of employees by around 600 worldwide and 350 of them in Germany, which sites in Germany would have been -- will be mainly affected by the program and are you planning to decrease the number of employees? Or are you also investigating on positive closures of existing sites?

[Jochen Weyrauch, executive]

No, at this point, that's not an issue. And on the side, you might have some understanding that we are now in close discussions with the employee representatives. And for good reasons, we've now given a total number. In fact, next year, including the flexibilization of working time, we will, of course, reduce the capacity more than the equivalent of 600 people.

[Andreas Ruf, analyst]

And one last question. If I got it right, you said that there will be some changes in the product mix due to the capacity reduction program, which changes will be that?

[Jochen Weyrauch, executive]

Look, what we assume is that the construction elements business will pick up quicker. So we will have a bit of a different mix within what we're shipping. Actually, if you had followed the news, we were already assuming for this year the furniture business to come down. Now it's coming down more than we expected. However, we were assuming the construction elements business, so especially wooden houses, to pick up, which we are still very confident it will, but it has received so much headwind by the industry by construction costs by interest rates that we basically have a double dip here. We assume consequently that the mix towards -- especially on the solid wood houses and construction elements will improve over time going forward.

[Operator]

We have a follow-up question coming from Marta Bruska from Berenberg.

[Marta Bruska, analyst]

I would like to go back to China. Could you please let us more or less how big part of your automotive business in China today? And if you can comment in the next sense how many new robots you so far sold in China this year ahead of the half year as this is a growing part of the business this year in '20.

[Dietmar Heinrich, executive]

China, the automotive side, I'm just guessing is roughly 20% of the volume -- and in terms of the robots, I could not tell you from the back of my mind, but I can assure you that we have a very good market position in China, similar to what we have in the rest of the world, the number I could only speculate and follow up. We can follow that up. The world market for paint robots is somewhere between 2,000 and 3,000 a year. We roughly do 50%, and we have an adequate share in China. So that's maybe good enough for a rough calculation, but we could give you the precise number or more or less precise number after the call. I want to follow up with Andreas.

[Operator]

We have another follow-up question at this time from Philippe Lorrain, Societe Generale.

[Philippe Lorrain, analyst]

It's just a very simple one with regard to your new division, like the IS margin target at 10% and knowing that you have seen some headwind at Teamtechnik. So how long do you think it will take to process all these headwinds that Teamtechnik see basically an improvement there because I buy your view on companion with BBS and the rest of MPS doing actually fine. So it's just for me to understand what’s the timeline there.

[Dietmar Heinrich, executive]

Simple questions always a concern here. On Teamtechnik will still have to use a part of next year is not the biggest part. And we assume TeamTechnik probably not to be at 10% in '25, but has made the longest way. And in combination with the fact that BBS, if we take our PS business today, BBS is like 60% plus. And the Teamtechnik actually in Hekuma, the largest part of the business comes from BBS. We believe that we are not too far away from this anyway in '25 overall for the business with a bit of homework still to be done for Teamtechnik.

[Operator]

Ladies and gentlemen, as we have no further questions, I'd like to turn the conference back over to Mr. Andreas Schaller, for any additional or closing remarks.

[Andreas Schaller, executive]

Thank you very much, George, and thank you very much, everybody, for attending the conference call today. Let me remind you of our analyst meeting on the 21st of November. That's a Tuesday. In the afternoon, we started 4:00 p.m. German time. Definitely, it's some time to discuss further and present also further news and insights in the strategy update. So once again, thanks for your attention. I care for the questions, please do not hesitate also to ask the Investor Relations team, and we now wish you a nice rest of the day. Thank you very much.

[Operator]

Thank you, gentlemen. Ladies and gentlemen, that will conclude today's presentation. You may now disconnect.