Saf-Holland Se

XETRA:SFQ

Earnings Call Transcript 2018-Q1

[Operator]

Good morning, ladies and gentlemen. And welcome to the SAF-HOLLAND SA Conference Call regarding the First Quarter 2018 Results. [Operator Instructions] Let me now turn the floor over to your host, Mr. Stephan Haas.

[Stephan Haas]

Good morning, ladies and gentlemen also from my side to our Q1 results conference call, which will be hosted by Dr. Heiden, CFO; and Mr. Borghardt, our CEO. By the way, I would like to mention that Mr. Borghardt will be linked in from the U.S. So we hope that lines stay stable. And I think we have 1 a.m. in the morning there. So it's quite an undertaking. As always, the presentation will be followed by our Q&A session afterwards. And with that, I will like to hand over to Mr. Borghardt.

[Detlef Borghardt]

Yes, Stephan, thanks a lot for the introduction. Good morning, also from my side, ladies and gentlemen. As Stephan said, it's the middle of the night here in the West Coast in Los Angeles, but anyhow, today is important enough to dial-in and to guide you through today's presentation. With this, I would like to go to the overview on Page #7. We will talk about the business summary Q1 this year. I will do that. I also will do the market update. Later on, I'm going to hand over to the financials, done by Matthias. And then, I will do again the last 2 slides talking about the market forecast for the rest of the year and talking about the company outlook. Now with this, I would like to turn your attention to Page #3, with the business summary. This is 1.5 pages. I will start with the first point, which is the safe development. I'm very glad to report today that our Q1 2018 numbers, we saw very nice sales growth, another sales growth of organically 8.8% to EUR 312 million. So that was a very good development compared with the previous year. Unfortunately, due to the weak dollar against the euro the -- which impacted our sales significantly, we can report that we reached EUR 294.9 million, which is a 2% -- 2.6% growth compared with EUR 287 in the previous year. Coming to the gross profit. In Q1 that was burdened by mainly 2 effects; one is additional operating expenses by almost EUR 4 million, which -- and I believe this is really important to mention already at that point of time, but we will talk about it later more in detail, which is significantly lower than Q4 last year, with EUR 6.3 million. So from EUR 6.3, down to EUR 3.9. Why is this? We have still ongoing realignment process -- of our processes and logistics in the U.S -- the plant consolidation in the U.S. and that's another topic. We still see significant increase of steel prices that's going on, that is globally, and that cost us in the first quarter of this year roughly EUR 4 million, which most of them we will get from -- we will get back from customers. But that, of course, burdened the gross profit in the first quarter this year. Yes, from gross profit to EBIT, this is bullet point #4. In Q1, our adjusted EBIT decreased to EUR 20.3 million compared with EUR 25.1 million the previous year. If you compare the Q4 EBIT, 2017 was 6.7%. So EBIT margin increased by 20 basis points to 6.9%. So this goes in the right direction. And please take into consideration that last year in Q4, we booked EUR EUR 4.5 million as a one-time effect based on positive purchasing effects. So if you really compared the adjusted EBIT in Q4 in 2017 versus first quarter this year, the improvement is significant. The Americas, which is, of course, the biggest issue in the reduced EBIT in Q1 this year compared with last year. When we talk Americas, the region did last year in Q4 minus 4.3% and now we are already close to breakeven with minus 0.7%. But again, we will come to that more in detail on the next slides. The reported EBIT, so not the adjusted EBIT, but the EBIT amounted to EUR 17.2 million in the first 3 months compared with EUR 21 million the previous year. On the next page, Page #4, there are 4 more bullet points. As a business summary, the effective tax rate of the group fell to 26.4% compared with 32.7%. All of that results for the period reached EUR 9.8 million compared with EUR 11.3 million in the previous year and our basic earnings per share achieved EUR 22 compared with EUR 26 in the previous year. And then we go to the adjusted basic earnings per share amounted to EUR 27. Now with this, I would like to turn your attention to the market, market update on Page #6. I would like to start with the trailer market in North America. And as you can see on the headline, very solid order intake. When you compare the different years 2016, '17 and '18, so the light gray bar, the dark gray and the orange, you can see a very nice continuous improvement year-over-year. For example, in January we saw 17,000 units, it means trailer net orders, that is not [indiscernible] ratio, that's as net orders compared to 32,000 in last year, 2017, and now, 41,000 in 2018. So that continued month over month. So in March, the net order intake was 34% up compared with the figure of 2017. And in the first quarter, the trailer orders have gone up 28% to reach more than 100,000 units in 1 quarter, which is a very nice number. Lead times are increasing. Most of our customers here in North America are booked out until August, September. By the way, pretty much the same situation in Europe, but I will come to that later on. And also everybody is fighting with challenging in terms of supply chain, getting material and the biggest problem, or more and more a bigger problem is to get the people. Workers are very difficult to get, welders, assemblers, et cetera. So that's another big issue, which is high order intake. But anyhow, it's a good problem to have. And the trailer market in the U.S. this year will grow probably up to 5%, 6% compared with last year. But again, I will come back to that on the, more or less, last slide. If you go to the truck market in North America, which is on Page #7. The numbers are even higher. Here's a comparison of year 2015, '16, '17 and '18. As you saw -- you can see that in '15, we saw already 35,000 units per the months of January and February. They drop significantly in '16, increased slightly in '17. But now in 2018, we are back, I would say to the good old times. We saw in March, for example, almost 47,000 units, which is a month-over-month improvement by 17%. And then, unbelievably, 106% increase year-over-year. So in the first quarter this year's Class-8 net orders and Class-8 trucks is the main business we are in, the net orders almost doubled in the Q1. So as I said already on the trailer markets, customers, that means the OEMs are struggling a lot with this high order intake. Customers are booking more and more trucks. The lead times are 7, 8 months now. So it looks like that all sales except the half -- the first half of 2019 could be another good year. But again, I come to that later on when we talk about the overall market trends. Last slide on that is the heavy truck market in Europe, Page #8. You can see a slight decline now in March of this year with 1.6% lower year-over-year, which is, I would say not really an issue. In the first 3 months, the heavy commercial vehicle new registrations have been 3.8% higher compared to Q1 2017. And that the leads to the indication that the truck market in Europe -- the heavy duty truck market in Europe will increase by roughly 4% this year compared to last year, which was already a very good year. Now, from the market trends, I would like to talk about the financials. First of all, on Page #10, the group sales and the adjusted EBIT. You can see, as usually on the left-hand side the development quarter by quarter. So in Q1, we achieved EUR 294 million, almost EUR 295 million. If we look at organic growth, we would have reached EUR 312 million, which was an even higher than the best quarter ever, Q2 2017. So sales-wise, we are really trending in the right direction. I'm very pleased with this development. On the profitability side, on the right-hand side, you see the development quarter by quarter. With 6.9% in Q1, we improved the situation compared with Q4. And as you can see in this overview, since Q2 last year, our profitability dropped to 7.5% and then, 6.7% in Q4. But now we turned the tide and we see 2018 more or less as a mirror of 2017. So that means the second half of this year will be stronger than the first half in terms of profitability. Talking about the share of group sales by channel and region on Page #11. You can see on the left-hand side that OEM business grew to 76.5%. So the aftermarket then, of course, fell a little bit to 23.5%. I would say this is not an issue, of course, we received high order intake from the OEM business in all regions, that means in China, APAC, Europe and the U.S. All the aftermarket kind of drove at the same pace. But this is also a good problem to have because the high population, which we pumped into the market now due to the high OEM business will turn into aftermarket business in 2 to 3 years from now. So this is good for the overall development of the company on the long run, anyhow. If you go to the sales development in the different regions, you see that EMEA/I is now at 56.7%, or still the majority of our sales, even higher than last year. The Americas shrunk to 34, that is mainly due to the negative translational FX effects. And the winner of the day, I would say, or winner of the quarter, is definitely our development in the Asia Pacific and China with 8.7% now compared with 6.4% only a year ago. So this is also a very good development and trending towards our Strategy 2020. So with this, I would like to go into the 3 regions more in detail. I'm on Page 12 now, starting with EMEA/I. As you can see the -- we see a very solid organic sales increase. The business really running on a very nice high level in Europe. We achieved EUR 167.2 million compared with EUR 160 million in the previous year. Currency-adjusted, there was a year-over-year growth by 5% on the already high market. So this is a very nice increase. All regions in EMEA/I have been part of that except the Middle East that was not so strong. But especially, Eastern Europe was very well in the first quarter, very nice order intakes, especially also from Russia. We mentioned that already the last time when we published the numbers for 2017, Russia definitely is coming back both on the OEM growth and aftermarket side. But also, some markets in south Europe, like Spain, Italy are still strong with double-digit numbers in gross. And Germany is very well. Scandinavia is not bad. The only water into the wine is U.K, the market is roughly 10% to 15% lower than the previous year, but it was expected and already part of our budget due to the business in U.K. So aftermarket also grew by 2.6%, very nice on an already high basis. And this is another very nice development of our factory -- of a new factory in Düzce, which is right between Istanbul and Ankara, stepped up production. You might remember, we opened the new facility in March last year. Very soon we started already the second shift. And now, since May, so this means this month, we are already running on a 3 shift basis, which is far earlier than we planned. But due to the high order intake of all over Europe, we have been able to fill the production in Turkey. And this is still not based on Turkish customers because the Turkish trailer market is still very weak and we see almost no signs of recovery. But due to the fact that the German plants in Bessenbach or around Bessenbach are almost fully utilized, we have been able to shift production to Düzce. We do essentially the same products, by the way, in Düzce than in Bessenbach. It's also called Intra. So the product is most likely the same. You would not be any difference, same suppliers, same production processes as well as the same people doing the same product. So for our customers in East and Western Europe, it doesn't matter, if we produce in Turkey or in Bessenbach. So therefore, this is high order intake, the Turkish plant is now very well -- or will be very well used in a 3-shift operation.Even better is the profitability on the left-hand side, the lower left-hand. We have been able to increase our adjusted EBIT from 10.3% in Q1 last year to 11.5% this year, it sums up to EUR 19.2 million. So a very nice development in profitability. Very constant double-digit profitability in the EMEA/I region. And that is very helpful in the overall situation. That was positive product mix effects, where, really, you see updated plants in Germany plus Turkey. So -- and good development with suppliers. So overall, 11.5%, I'm very pleased with this profitability in the EMEA/I region. Yes, I'm not so pleased with the next page, Page 13. Talking about our development in Americas, especially the U.S. On the sales side, we see a drop to EUR 101.9 million compared to EUR 108 million last year. That is mainly due to the weak dollar, as we already said. If we look to the Q1 2018, sales decreased by 6.1%, as I said, to EUR 101.9 million. The profitability that is even the bigger because they come back to the sales side, that is organic wise, the close of business by 7.6% to EUR 116 million that would be the organic growth. And I'm quite pleased with that as well. I'm not really pleased with the adjusted EBIT development. You see, last year, we did 7.1% or EUR 7.7 million, that decreased now to minus EUR 0.7 million. But, and these are the good news here, we turned the tide here. Last year in Q4, we had a negative EBIT and we increased it now to almost break even. So that shows that all of our activities, all the measures we took in place in the last couple of months, we see the results now. And we see a sequential improvement this -- last quarter and that will go on in the next couple of quarters. But again, Matthias will talk about it more in detail on Slide 16, which is to come and explain in detail, it was a bridge of the development in the gross profit and EBIT. Yes, talking about the other good region, which is APAC/China on Page#14. Very nice improvement, both in sales and in adjusted EBIT. We have been able on a currency-adjusted basis to grow the business by almost 50%. And this is despite the fact that the Chinese truck and trailer market is declining, we believe roughly 20% compared this last year. But please take into consideration that last year wasn't -- probably an all-time high, and that it was really a boom. But although the market is shrinking, we are growing, why is that? And you can see that on the third bullet point. The introduction of load limits, so-called overload ban and some stricter regulations regarding safety. Customers in China on the trailer -- especially on the trailer side need, we call it premium product. That means air suspensions, disc brakes, et cetera and that is our playground. That's what we are really good at -- and special vehicles, like car carriers, for example. This is where we are really good at and you can see that in our numbers. I'm very pleased with that. Our factory in China is fully loaded with orders. We are running 6, almost 7 days a week. And so that goes also in the right direction. We see higher capacity utilization and even more professional work in China. We also have been able to increase our profitability from 5% in Q1 2017 to 7% now in the first quarter this year. And please also have in mind this is all OEM business. There is almost no aftermarket business so far in China, this is to come. But to achieve 7% adjusted EBIT around the OE business is a very good result. So with this, I would like to hand over to Matthias, and I will come back on the last 2 slides.

[Matthias Heiden]

Yes, thank you, very much, Detlef. Good morning, everyone, also from my side. As usual, I have the pleasure to take you through the P&L, beginning at almost the very top with the gross profit. And then, take you through some additional balance sheet items. If we start on Page 15, with the gross profit on the right-hand side, you see the usual qualitative list of factors influencing this. We talked about currency headwinds, we talked about inefficiencies at the plants, which resulted among other things and an increased temporary workforce. But what I would like to do is think about and explain some more details on some of the most pressing factors, which you see in the middle of that slide. If we look at gross profit overall for the first quarter, it came in at EUR 50.6 million, that is, obviously, significantly lower compared to the EUR 57.2 million in Q1 of 2017. In terms of the gross margin, we're looking at 17.2% compared to 19%. As stated by Detlef, all of this, because in the gross profit all of the impacting factors still come together, nothing is adjusted. Still impacted by additional operating expenses, particularly, obviously stemming from the U.S. plant realignment. But also, significant steel price rise of EUR 4 million at group level, leading to upfront material cost. As a reminder, we recovered the majority of this only with the time delay of approximately up to 6 months, with the majority of customers. However, if we look at the sequential development of gross margin, we see an improvement of 20 basis points. Despite -- and this is important because you also need to take into consideration when looking at the development of adjusted EBIT. Despite the fact that in Q4, we had a EUR 4.5 million onetime effect caused by volume-related positive purchasing effects. If we now take a closer look on Page 16 at the Americas region, we are committed to continuing the full transparency and disclosure to U.S. sales, by breaking down the additional operating expenses into their building blocks. But I would like to start at the high level of the EUR 3.9 million of the additional operating expenses because it is important from my perspective to underline, that we did not only see a sequential improvement compared to Q4 but with the EUR 3.9 million, we're even slightly below Q3. So the theme of the successive improvements in realigning the plants now that we have come to the late stages, this is towards the end of 2017 of the plant consolidation and now, with successive steps in 2018 is reflected in this number already. The EUR 3.9 million then break down into the customer debits, which is what we are responsible for. This is the charge we received for late delivery to customers. It has been around expediting freights to, on the one hand accelerate our delivery to the customers to exactly avoid those customer debits on the one hand, but it also includes elements of freight-in, accelerating the material arrivals, so to speak, into the plants. And this is, of course, not only caused by ourselves, but also by something that Detlef already commented on, we see an increasingly disruptive supply chain in the industry. So we still need to pay freight here and there. But if I look at -- we have a daily monitoring tracker for this in the Americas. If I look at the daily development of these numbers, they are improving and we are confident that over time, we get our arms around this and that these numbers will become smaller and smaller. Steel price related to the U.S., just as an additional information item that is the last sentence in the gray text box amounts to EUR 2.0 million, I'm sorry. And lastly, I would like to mention that the mix -- product mix and segment mix that is with regard to what we saw, it was not favorable either in the first quarter of 2018. If we turn the page to Page 17. Q1 adjusted EBIT margin, we have commented on this quarter-over-quarter improvement, up to 6.9%. It was below the prior year figure of EUR 25.1 million, with a nominal amount of EUR 20.3 million. If you do the math and factor back in the additional operating expenses, we're still not quite at the previous year number, but it does put the EUR 20.3 million into perspective. Turning to -- sorry, turning to the reconciliation between reported EBIT and adjusted EBIT. You see a relatively normal usual amount rising from the depreciation and amortization from PPA. With regards to the restructuring and transaction cost, I would like to offer the breakdown of the EUR 1.9 million there, EUR 0.9 million of this relates to the U.S. plant consolidation. Those are in subsequent severance payments because we went in and did restructure parts of the organization, which resulted in severance payments, which we booked here. The rest, i.e. the other half of that amount relates to transaction cost for the 2 M&A transactions that we shared with you, mainly York and Orlandi and that gives you the bridge from EUR 17.2 million, reported EBIT to the adjusted EBIT of EUR 20.3 million. If we then go to Page 19 and look at how we get from an EBIT from EUR 17.2 million to a net income of EUR 9.8 million, but there we have the finance results -- number one. And number 2, the text area on the financial results, we have slightly lower net financing cost of EUR 3.9 million. This is not caused by the repayment of the bond. The repayment of our corporate bond only took place towards the end of April. The root cause of the slightly lower finance -- financing cost and that's the better financing result by EUR 400,000, is caused by slightly lower interest-bearing loans, that's only EUR 100,000 million and the rest comes from the expenses from unrealized FX losses on foreign currency loans and dividends. If we look at the tax side, tax ratio at group level has come down to 26.4% compared to 32.7% in the previous year. And the result for the lower net income booked here is a reduction on losses, at subsidiaries for which no deferred tax assets were capitalized to a very technical position this quarter, but that explains the change here. If we go to Page 20, this is basically a visualization of what Detlef has said around basic EPS and adjusted EPS. It's the logical result of what we have explained so far, given that we're still at 45.4 million shares outstanding. Going to Page 21, we are now moving into the area of inventories, net working capital, subsequently free cash flow. Here, we see that the inventories are up, all the way to EUR 151.8 million compared to EUR 133.7 million at the end of the year, mainly due to the organic sales growth that we see, but certainly also with elements of the seasonal pattern, which is why the time series to the left of the text is probably helpful in this regard. Compared to the prior year, just to build on this notion of the seasonal pattern, the EUR 151.8 million compared to EUR 145.7 million at the end of March 2017. In terms of days of inventory outstanding, that went down 1 notch from 57 days to 56 days. But overall, if we then transfer that to the next level, which is the net working capital in the lower half of the slide, you see a very similar picture where the net working capital amounted to EUR 158.3 million, in absolute terms. And here we see, again, strong sales impact -- sorry, strong sales increase impacting as well as seasonal effects on the one hand, but certainly also the increase resulting from sales increases and trade receivables, when comparing this to December 31. It is important now that we are close to transitioning to the next slide, with regards to the cash flow that it does play an important role where we grow at this point. And that is, certainly, in emerging markets. And I'm sure you will appreciate that emerging markets and you could see this growing share in what Detlef had described, do come with different payment terms. So it does take slightly longer to collect money still from customers. However, it's important to point out that at this point, and I wanted to explain this very closely, I do not see a deterioration in the quality of the receivables portfolio. Net working capital ratio stood at 13.4% compared to 12.6% at the end of Q1 '17. It's a little bit too high for my perspective. We're working very hard on that. Because if we go to the next page and the presenter had already moved it to Page 22, the free cash flow at minus EUR 29.5 million is not where we would like it to see. That certainly needs further attention. But this will happen by bringing down the receivables, i.e. accelerating the cash conversion or the cash collection and by making sure that we don't spend too much time and money and effort on building out inventories for the order intake that we have already seen but does need a little bit of streamlining and attention. The team is working on that, as said, under my close monitoring. Yet, having said that, while there are some operational reasons that need streamlining, I would also like to offer a little bit more of an explanation with regards to the change in numbers. And here I would like to add some numbers to the qualitative statements in the text box. The last line of the text box refers to the reasons: net working capital stepped up CapEx and higher income taxes paid. So if we attach numbers to these groups, you have the higher net working capital of EUR 13.5 million, a stepped up CapEx by EUR 1.2 million and higher income taxes paid by EUR 5.6 million. So if we factor that back in, that does put minus EUR 29.5 million, a little bit into perspective. With regards to the full year target. Allow me to jump ahead a little bit and anticipate a question that I would be likely to face anyway. We're still holding on to the full-year target to land between EUR 30 million and EUR 40 million on free cash flow. If we turn the page to Page 23, and we look at net debt, the equity ratio that -- we start on the right-hand side of the slide, is still reflecting our strong cash position there, almost unchanged. It's slightly below 30% and net debt increased to EUR 142.6 million, but this is due to an increased cash and cash equivalent position. This ties in nicely, for lack of a better expression in this context, with the money that is tied up in working capital at this point, which has not hit bank account yet, but still certainly an acceptable development on net debt and the equity ratio. And with that said, I'll pass it back to Detlef, who will now talk a little bit more about market forecasts on the one hand and the company outlook on the other hand.

[Detlef Borghardt]

Matthias, thanks a lot. I'm still awake, so I can do that. Yes, I'm on Page 25, where we see market trends '17 -- no, I'm going to call it '17 but in forecast, '18. Yes, as you can see, as an overview, there're a lot of pluses. I mean if you look to the right side, change in percentage year-over-year with only one exception, this is a trailer market investor in Eastern Europe [indiscernible] for this at this point in time, yes, Mr. Beecroft from the company, CLEAR, is forecasting a minus 5% on 2018 in the trailer production. We, as a follow-on, we can't see that, not for now. It's going, probably, in the other direction. Our order intake is very high, you saw our sales in Q1 increasing by almost 5%. You see no weakness at all from any markets, coming on -- when we talk about trailer production, as I said we are fully loaded in the German plants. We are ramping up production on a third shift now in Turkey. So we see no weakness at all. It's a little bit too early to say the year is done because we are in front of the AAA in September, late September this year in Hanover. And AAA is always a tipping point, where you can say, "Yes, the market will continue like it is or like it was in the first 9 months of the year and it will continue for the last quarter and the following year or it might change." Again, so far we see no -- any signs of weakness and the year 2018 could be another very good year, and the 300,000 trailers in production, I believe, we believe, the number will be even higher. So green light here for Europe and the minus 5% are probably not the right number. This is important for us because you see on the right-hand side, this stands for 40% or approximately 40% of our total sales, so the European trailer market is a big key market for us. Now coming to the North American trailer market, which are the first 2 lines here, you all will see that ACT and FTR are a little different in their forecasting but they are both at roughly 5% to 6% growth this year to 330,000 units, approximately, in North America. I actually would like to confirm that, the order intake is higher as I've said already, most of the trailers are booked out until September this year, most specifically, like tank trailers. For example, as the year is done, they are confirming their first orders for early 2019. By the way, it's the same in Europe. If I might look in 2019, although, you can't see it on this slide, I saw some numbers, for example, from ACT, talking about minus 5% for trailer in North America next year. I also looked up this number, I'm here on the big customer event, Investor Day, here in Los Angeles. I was at a very big industry event 3 weeks ago in Albuquerque in New Mexico, talked to a lot of big guys here in the industry. And a lot of them said we don't see any reason why the trailer demand will fall or will be less next year or the next years in North America. There are a couple of reasons for that, and maybe -- I've touched on a few of them. First thing is, e-commerce is growing tremendously and that triggers transport. Not only the last mile delivery but also transport from the big hubs to the small hubs countrywide, as working the same in China that is in Europe. So this is definitely one of momentum for growth to the need -- industry needs more trailers. Then we have the ELI now in place, which is the Electronic Logging Indicator, in German, that's a [indiscernible], something which is mandatory in Europe for years now, I believe 15 -- almost 20 years. In the U.S. it's mandatory for, I believe, 2 weeks now. That will increase the problem of driver shortage because the drivers, the truck drivers, cannot drive now 11, 12, 15, 16 hours in a row. They need to do a break after 4 and then after 8 hours. The need for capacity on the road will shrink even more and that, in light of the overall huge problem with driver shortage will -- there is another need for more trailers on the road. The truck trailer ratio is going to change from 1 to 1.1, 1.2, maybe to 2. Some people talking about only it will change from 1 to 3. I don't see that, but this also will drive the demand for the trailer and more and more [indiscernible] companies reducing trailers as a store. So then we have new technology, air disc brake is coming. So that means the fleets need to invest in new equipment, they cannot run the equipment for 15 years anymore. So overall, the minus 5%, which are in the air, forecasted by ACT, maybe that will not happen, maybe we see a very stable, even growing in the next year and the next years to come in North America. We will increase capacity, by the way, in Warrenton, in our facility in Missouri where we'll be doing trailer axles and suspensions in the first quarter of next year. That was planned already for this year but it didn't cut the [indiscernible] in time or the suppliers for machinery or equipment sold out as well. But in Q1 next year, we will increase capacity with new [indiscernible], welding lines and also the assembly line. So we will be prepared for anything which will come in higher trailer numbers. So one story about trailers, talking about trucks for a minute, line #3, North American Class 8. You see the forecast on ACT and FTR both are around 30% plus. So both the more than 327,000, 330,000 trucks Class 8 to come. I also would like to confirm that we see that in our order intake as well. And this will have a spillover effect in 2019 because as you have seen already a couple of minutes ago, the truck OEMs do not have enough capacity to fulfill all the demands for this year. They need to bring orders or book orders in 2019, which is good, so we like that. This stands for 11% of our total sales. Please bear in mind that's fifth wheels only. Okay, and these are fifth wheels, yes, we're sure of that. And we are the market leader in North America for fifth wheels for more than 40 years now. And we continue to have a very strong position. And we also do truck suspensions, we do coupling products, et cetera. So in total, that stands for 11% of our sales. Yes, last but not least, the European truck market forecast from LMC is probably about plus 4.3%. Also, we see that the amount is high. Also, Russia here is helping coming back, but this is for us more of an indicator. Business-wise, it stands for less than 4% of our total sales into our fifth wheel production in [Xiamen].Yes, with this, I would like to turn to the last page of today's presentation, Page 26 for both the financial targets this year and our midterm planning. For this year 2018, we would like to confirm our guidance, that means organic increase of 4% to 5%, plus the contribution from our latest 2 acquisitions, Orlandi and York. Those will come up with roughly EUR 50 million plus, plus any other potential M&As to come. There is a note, assuming stable FX rates and an unchanged scope of consolidation, I believe, that's more and more important to mention. Because you see the influence also in Q1 numbers this year for SAF Holland, so this is, I believe, worthwhile to mention. The adjusted EBIT margin will be in a corridor between 8% and 8.5%. Net working capital ratio at 12%. As Matthias said, our today's net working capital is too high, 12% is the target.On CapEx, we will invest more money than usually this year, something between EUR 38 million to EUR 40 million. Why is that? We are going to build a new huge facility in China. We have talked about that already, a 46,000 square meter factory. And we invested a high-single-digit euro amount in everything, including SMART STEELS, it means digitalization for our company, and all our products and services.So coming to the Strategy 2020, unchanged. Most of you have been on our earning calls since 2016 when we launched the Strategy 2020. So organically, we would like to go to EUR 1.25 billion until the end of 2020, plus another EUR 250 million via M&A activities. Adjusted EBIT margin at least 8% and net working capital, 12%, and CapEx around 2% to 3%, so roughly EUR 28 million to EUR 30 million per year. Now with this, I'm at the end of today's presentation with the 26 slides. And I would like to hand back to Stephan, and I believe we are open for questions as usual. Thanks, for listening.

[Stephan Haas]

Yes, ladies and gentlemen, please go ahead with your questions, we're looking forward to answering.

[Operator]

[Operator Instructions] And the first question comes from Alexander Wahl, Warburg Invest.

[Alexander Wahl, Stock Analyst]

First one on the U.S. I mean I appreciate that these cost overruns have declined sequentially, but could you provide some additional details on how you expect these costs to develop going forward? And also, whether it is a reasonable assumption to expect that at least at Q4, you will see no additional OpEx from this side? And related to this question, also a second one, you just mentioned that you faced increasing problems in getting materials through your plants and have to pay for additional -- for that. How confident are you that such costs that are not really under your control will not persist going forward?

[Detlef Borghardt]

Maybe I can start -- try to answer the question. Thanks, Mr. Wahl, for your questions. Yes, starting with the last one, getting material in, yes, that is an issue, but this is manageable. Most of our components -- the components, we have a dual supplier strategy. So we are very confident that it's under control. But, every day something new comes up. And again, I talked to many people in the industry, everybody is facing the same issues, it doesn't matter if it is steel, if it castings, whatever kind of materials. But this is more and more under control, suppliers ramping up the production as we do, as everybody was doing. So I would say this will get better and better. And so I'm not really excited about that. You asked about Q4 and more additional OpEx. Yes, we don't plan for that, that should come to an end in the next couple of months. And the first one was the -- yes, you said that the cost overruns will decline and that is exactly what we have planned for. As I said, the measures which we took in place, now we see the effect -- the positive effects.

[Alexander Wahl, Stock Analyst]

Okay. And then, a third one also on the adjusted EBIT margin that we saw in the first quarter. I mean, when I add back the EUR 2 million for higher steel prices that you obviously incurred and the EUR 3.9 million in additional OpEx, I still get an adjusted EBIT margin of only 5.1% that compares to 7.1% we have seen in Q1 '17. So could you just elaborate a little bit on what additional effects have contributed to this 200 basis point margin decline?

[Detlef Borghardt]

Yes, there are several reasons. One is as we've said, this is a product and customer mix that is always the same and maybe I sound like a broken record, but as was the case with our markets, when the demand is increasing and we see now these unbelievable increase in demand in, most likely, Truck Class-8 production in the U.S., then the product mix almost change to -- margin-wise to reverse side. That means we are not doing special products, special fifth wheels, very special air suspensions for trucks, et cetera. We do them, but only, in fact, to a small extent. The majority of our orders are standard products, that means very standardized fifth wheels, very standardized suspension, et cetera, which is nice for the volume, okay? Nice for the output. But margin-, it is not the best mix. So it is always the same in increasing markets, in booming markets, that the margins are under pressure, plus the aftermarket is still suffering, okay. Normally, we have certain fair share of the aftermarket in our total sales. If we need to deliver the OEMs first, then that's what we do, and that's what we have to do contractually, we always delay supplies to the aftermarket, which will come later, okay. But we are still facing a huge backlog in the aftermarket but of course, as you know, aftermarket products or we also say, the aftermarket are highly profitable. The business is there to a certain extent or to a certain percentage then the overall margin is under pressure.

[Operator]

The next question comes from David Klus, Bankhaus Lampe.

[David Klus, Analyst]

So just a short question on the Iran at home deal. Do you expect any effects from the cancellation? So for example, that you get blacklisted in the U.S. if you continue with your business in Iran or -- if yes, could you just give us maybe some indications what would be the impact on revenues and so on?

[Detlef Borghardt]

Maybe, I can take this question as well. We got pretty much involved with that. Yes, Iran business for us, nothing really special. From the U.S. now -- I really cannot recall it for how many years, all our business out of U.S. is not existing with Iran. That is not allowed, it means neither our people nor our products have any contact with Iran, we don't have anything produced in North America -- I'm sorry in the USA and ship it to Iran business, not the case for several years now. All of what we are doing is coming out of Europe or China, but mainly out of Europe. There have never been any restrictions or ban on the products we do. They are not sensitive and these are just axle suspensions and landing gears, and some fifth wheels. So there's no problem with that. Overall, Iran was pretty weak the last couple of years anyhow for us, mainly due to financing problems of the fleets' [ease of use] in Iran, so they need to buy new equipment. And you might remember, some of you who I talked 1.5, 2 years about Iran as probably is a choker in the overall European business because the pent-up demand in Iran is huge. The [ease of the U.S.], of not investing in trucks and trailers, very old equipment and a very old fleet in Iran. So that picked up last year and you also might remember that we said, we have been able to full the production especially in Turkey in Düzce with orders from Iran, which we didn't expect at that level. And that was very good because the Turkish customers didn't order, as I said already. But we see now already for almost 3 to 6 months this is declining. Again, financing problems. So overall, if I look to our plants in Düzce, which is a small one compared to our factories in Bessenbach, and it's less than 10% of our orders are -- let's say, are in relation to Iran customers. So -- if this will -- we go back, okay, we would easily fill that with products, with customers out of Western and Eastern Europe. As I said, we are struggling with capacity anyhow. So if Iran does not have these problems, which are to come, but for us, as a company, it is not an issue at all for now.

[Operator]

At the moment, there seems to the no further questions. [Operator Instructions] And the next question comes from Nicolai Kempf from the Deutsche Bank.

[Nicolai Kempf, Research Associate]

So I have one actually on the margins in Europe and APAC, which improved pretty nicely. Maybe, you can just highlight what are the measures here or is it just better capacity utilization?

[Detlef Borghardt]

Could you repeat the second part of your question, please because there was a little bit problem in the line?

[Nicolai Kempf, Research Associate]

It was just because of better capacity and higher sales volume? Or what are other reasons for improvement in margins?

[Detlef Borghardt]

Yes, okay. Matthias, should I?

[Matthias Heiden]

You can go first. I'll chime in, Detlef.

[Detlef Borghardt]

Okay, fine. Yes, that's a good question. Because we see Europe -- the development of -- I mean, Europe probably as a benchmark for the other areas in our company as well. Because this is really, really a nice development. And there are several factors. One is, of course, utilization. Capacity utilization always helps. We haven't increased our fixed cost that much in the last couple of years. And then, of course, it saves if the top line with growing to cover fixed cost and better and better under the old mathematics. Behind that nothing changes on that. So high utilization always helps to drive earnings. That is one thing. Second thing is, we have been very successful in the last 2 years, 2.5 years with development of suppliers. We started these global sourcing activities that all was in line with our reorganization early 2016, coming from business units to regional units. And so, with that we also reorganized our purchasing activities, global sourcing activities and that helped on -- also tremendously, especially in Europe because it has a high volume. The third point is, we did plant consolidation in Europe 2015, facing -- consolidating from 3 factories down to 2. In Bessenbach, there are some additional investments. That project ran very, very low and we see all the benefits now with the plant consolidation in Europe, the increased capacity, quality, flexibility and volume, so -- yes, overall numbers so and this -- with this high utilization now that kicks in more or less perfectly now. And so it runs on a very high level. Next point is aftermarket also developing very well. The network -- or network -- sales network in the aftermarket is, yes, I would say, not 100%, but almost 100% in all countries in Europe. Plus in the Middle East, we opened subsidiaries as you might remember in Dubai a couple of years ago. We increased our stocks in several countries like Spain, in Russia, et cetera. So all means higher availability of spare parts, higher sales of spare parts and that goes along with very nice margins. So overall, there are many, many reasons why we increased our profitability in Europe so much.

[Matthias Heiden]

And Detlef, if I may chime in before we move to APAC without wanting to drag this out too long, but I think it's important to add that if you go into the overall quarterly report that we published today in parallel and you do a little bit of a deep dive on our SG&A spending behavior, while we do not need to post that at regional level, you will see that at least at group level that certainly headquarters in Bessenbach is in the EMEA/I region, that the cost discipline has been very high. If you compare the SG&A ratio to the overall sales or you think of sales growth versus the growth of SG&A that boils down to the same thing. A very disciplined, and I believe it's fair to say that we're doing a good job on that. On the capacity utilization, Detlef, of course, hit the nail on the head. If I may specify just one item of that, which he had in his previous comments. But just to underline this, the utilization of the Turkish plant, obviously, comes in very handy because it is a cost-effective location for production and it does give us the operational leverage that we need to meet increasing demand. Shall we move on to APAC, Detlef, do you want to start on that too?

[Detlef Borghardt]

Yes, furthermore, you're actually right what you said, Matthias. Thanks for chiming in here. And yes, for APAC. APAC means 2 things, that is mainly Australia, which is one of our bigger subsidiaries and China, of course. So the better profitability, the same as I said that comes from Europe, copy/paste. Plus 2 more things. One thing is we had some subsidiaries in the APAC/China region in the past, which have been negative. So we turned them into positive results. So this was not a solid burden anymore. So that helps. Plus Australia is coming back, the mining industry is coming back, that means always investment in transport. And so -- and we are part of that so that helps as well. But the main contributor is China, of course. And here comes some monitoring on top beside all the other things I mentioned for Europe because we did pretty much the same in China. And, of course, due to utilization capacity. Utilization helps a lot. But in China, there is one more thing. We saw new high-value or let me say premium products. In Europe, we are talking pretty much the same products -- product range in the last couple of years. No big changes there. In China, we turned the tide here or the market turned and we have been part of that. From low-cost -- low-cost products to premium products, which of course, for the customer is very costly but they need to have these products. So -- and we are not selling just loose axles anymore without any brakes, so just a piece of steel. Now, we are selling systems. The same as we did in Europe, more or less 90% or 95% and we could do more and more in North America in fifth wheel systems, that needs an axle including the wheel end, preferably be -- is disc brakes, but it does not matter, it could also be drum brakes, including the suspension, sometimes uses slider. Then we have totally different profitability in the systems, higher value per unit. So content per value -- content for vehicle, sorry, is higher plus the profitability of the vehicle is higher. So all that comes in now and you'll see the numbers. There is, I would say this [indiscernible]. Hopefully, that does answer your question.

[Operator]

The next question comes from Philippe Lorrain from Berenberg Bank.

[Philippe Lorrain, Analyst]

Philippe Lorrain from Berenberg. I've got one quick question, actually, on your top line guidance for the full year. You kept that at 4% to 5% organic growth for the group. I appreciate it's early in the year, we've got Q1 that was a good quarter here. But from what you say about the markets, I understand you are quite -- actually quite bullish on both trailer and truck markets even for Europe. So how do we have to reconcile actually your guidance for 4% to 5% organic growth with the market trend? Is it just like a conservative view that you still have at this stage and we could expect perhaps then that you raise the outlook, which you do? Or is it just like you say, "Well, we have these few on the market so far. We don't want to turn too bullish on that right now in the guidance that we formulate for our shareholders because the visibility is particularly -- just too low"?

[Detlef Borghardt]

Yes, Mr. Lorrain. Of course, we would love, okay, to raise the outlook in the -- this point of time. But as I said, maybe in a side sentence, but -- especially for Europe as our biggest market and most important market. We need to wait until the summer break that means July, August preferably August, because then the IA in front of us and then we know what happens -- what will happen in the last quarter of this year. I am in this business for 28 years now, okay. And I have seen around the IA everything, okay, coming from good to bad, from bad to good, being constant, whatever. So this is always a trigger point and I'm really hesitant to give a very bullish forecast for now. This is too early in May. But again, it looks positive as I said, I don't need to repeat that. And again, if we see at a later point of time this year that today's development will continue, we have no reason to grow anymore, but again, it's a little bit too early.

[Philippe Lorrain, Analyst]

I have just a follow-up actually on the -- these additional operating expenses that you have for the ramp up in the U.S. Did I understand that correctly, that probably from H2 onwards, we shouldn't have any of these costs anymore?

[Matthias Heiden]

I will take that, Detlef. The understanding, Philippe, first of all, is not incorrect per se. But please do not nail us on the specific dates because given what I tried to describe as a mixed bag, I didn't mean to create the impression that we want to hide behind that, but we went for full transparency. It is our goal, but whether it is the first day of the first quarter or the sixth week of the third quarter, I cannot promise at this point. Please bear with us on this one.

[Philippe Lorrain, Analyst]

Yes. Okay, no it's fine. And then the last one just on your net working capital ratio. I mean you mentioned that the geographical mix has, of course, an impact on your receivable days. And I appreciate that's -- just asking you about this 12% target that you have. I mean you've got, on the one hand, geographical mix that's probably going to deteriorate further if I might formulate it that way, because you're going to do more and more business in the emerging regions, yet you keep this 12% target for 2020. So what kind of measures do you plan to put in place here to actually offset this deterioration that you would have on the receivable side? Or perhaps asked a bit differently, what kind of positions we look at in the working capital where we could find some further improvement?

[Matthias Heiden]

I can take that. Thanks for the question. Without wanting to avoid the concrete answer. I have to say all elements of working capital, you need to look at. Because that's how we manage working capital. We actually look at all aspects of that, which is why -- and you may recall this in the past we have also pointed to impacts from the accounts payables side, which, of course, can offset certain impacts on the asset side of the balance sheet every now and then. And now that doesn't work like that every single quarter to a significant degree, but just as an example that we're also working on that. The other piece, allow me to come back to the phrase that I used or the term that I coined, I said streamlining. And what I was trying to describe is that in the emerging markets, as we grow structures, as we grow our company, of course, some of the administrative structures, which obviously fall under my responsibility, needs to grow with that. So the teams are not only managing the growth operationally, but we also need to scale this on the administrative side of the house. And meaning we need to get our answer around the purchasing process. They're just in time of the purchasing process as well as the receivables management. That does take another moment or 2. So in that regard, I take your point on that we're going there and that we might see more of that, but that is exactly what we are working on and working against. So I'm working very closely with my team on the ground, for example in China, to address these issues. And hopefully, over the course of the year, we can show that we are still on target for the full year target. And that obviously, because you started with net working capital ratio, has an impact on free cash flow too.

[Philippe Lorrain, Analyst]

So I understand that you actually will have probably over time then, after this inflation in receivables, then normalization again once you have like better control of the situation. Okay, great.

[Matthias Heiden]

That is correct.

[Operator]

The next question comes from Julien Batteau, Pascal Advisers.

[Julien Batteau]

Sorry that we have to keep you awake so late. Two quick questions. One really, it's about aftermarket. Are you -- what is your view on growth over the last, not couple of quarters, but if I take 2, for your view, aftermarket is pretty slow. So maybe is it according to your plan? Or do you see any dampening factor here?And then a quick question on numbers. The CapEx -- you talked about -- extensively about bottlenecks and plants being fully loaded. Does it mean that CapEx might be high as well next year? And the last one is about this text cash out. Was it just temporary? Or should we expect a higher cash tax out this year compared to P&L?

[Detlef Borghardt]

Okay, I'll take the first 2 questions, if you allow me. Yes, aftermarket, I would not say it's pretty slow. It has also to do with the quality of business. That means for example in Europe -- and we need to slice that a little bit in different pieces because the aftermarket in the regions are quite different. If I start to see, let's say, strongest piece of it, which is the aftermarket in Europe, we could grow that on the top line even faster and more. But that would mean for lower margins. That means we are not going to buy market here, we are on the premium segment. We really force our premium product that needs -- for equality. We started a couple of years ago in the second line or second brand, which is called SAUER Quality Parts, that one is so-called A2 Quality. This started quite well and I'm quite pleased with it, but we are not driving that to, let's say, to an unlimited extent, because this is for some specific markets like Russia, the Middle East, in these areas and more in Africa. But in the core countries in Western Europe like Germany, Scandinavia, et cetera, [indiscernible] we are not selling that much of this at a low-cost aftermarket, because we see a clear trend of our premium products. That means I really rather prefer to slow the growth of the aftermarket slowly, but steadily, but definitely enjoy the nice margins. So I'm not willing to give that up. On the Americas, it's pretty much the same. Also, here we started with a second line called the Gold Line. This is mainly for Central America and South America and some customers in North America. Also, here we see some nice increase, but also it was pretty much to the same extent than in Europe, but also here we have focused on equality, that means premium quality in the aftermarket. To grow the top line, under cost of profitability, I'm not going to do that. So therefore, I'm pleased with it. And the aftermarket in other regions like APAC/China and then India, which becomes our latest acquisition now. Here, I see really the growth potential, because we're doing almost nothing there. Why is that? Because we have no population in the market. There's almost no fifth wheels, trailer suspensions, axles, et cetera. This is to come, so you need to have some patience here. We have it, that is part of our planning, our long-term planning. The aftermarket will kick in, in these areas, but it will take 2 or 3, 4 years before we see the first parts worn out and need to be replaced. So overall, I believe the aftermarket is doing a good job, and I will not say it's pretty slow. On CapEx, that was the second question. No, with the EUR 40 million, or around EUR 40 million this year, this may be a peak. Next year, it will be definitely lower. It will we back to, as I said, roughly EUR 30 million. It could be EUR 31 million or EUR 32 million, okay, don't nail me on that, but it will be roughly 2%, 2.5% of all total sales. That is a long-term plan and this is enough for us to invest in new FX facilities, new factories and also to finance our digital business.

[Julien Batteau]

And the cash tax?

[Matthias Heiden]

Yes, the cash tax, I can take that. You will find -- just for orientation purposes if you go to the report and cash flow -- consolidated cash flow statement, you are earning to the [10.2] payout versus the [ 4.6 ] in Q1 2017. By the way, that corresponds only to EUR 3.5 million on the P&L, so that explains part of the reason. And the short answer to your question, this will not continue over the coming quarters. Fixed payment will normalize over the course of the year.

[Operator]

There are no further questions.

[Stephan Haas]

So ladies and gentlemen, thanks a lot for joining this rather lengthy conference call. We will see each other again at the occasion of the Q2 figures in earlier August and enjoy the long weekend. Thank you. Bye, bye.

[Detlef Borghardt]

Have a good night.

[Operator]

The conference is no longer being recorded.