Saf-Holland Se

XETRA:SFQ

Earnings Call Transcript 2018-Q2

[Operator]

The conference is now being recorded. Good morning ladies and gentlemen, and welcome to the SAF-HOLLAND Conference Call. [Operator Instructions] Let me now turn the floor over to your host, Mr. Haas.

[Stephan Haas]

So good morning, ladies and gentlemen, also from my side, and welcome to today's conference call, which was logged on short notice. Education of preliminary P&L figures for the second quarter of 2018 and guidance adjustment for the fiscal year 2018. So once again, thank you for joining.CEO, Detlef Borghardt, and our CFO, Matthias Heiden, will take turns in presenting big developments. And as always, as you're used to, after the presentation, we will have the opportunity for a Q&A session. So please feel free to ask any questions you will have. Thank you.

[Detlef Borghardt]

Yes. Stephan, thanks. Also warm good morning from my side. Welcome, everybody, to this morning's conference call. As what Stephan said, thanks for joining us.As usually, I would start this today's presentation and will hand over to Matthias in between for a couple of slides. In total, we have 15 slides this morning, so a little bit shorter as usually, but we are going to guide you through this.I would like to start with the agenda on Page #2, where you see 5 bullet points. I'm going to start with the guidance adjustment for the financial year 2018. This will be 2 pages, that will be followed by a business summary. We will talk about the preliminary key financial figures for Q2 only. That will be followed by regional trends, of course, with the focus on North America, our business development over there. And finally, we will talk about the adjustment for the group target in sales and earnings for the financial year 2018.Now with this, I would like to jump to Page #3. We see business summary and the guidance adjustment.As you can see, there are 3 bullet points. Let me start with the first one. Based upon the preliminary Q2 figures for this year, we expect further developments for the remainder of the year. We, SAF-HOLLAND, we adjust our sales and earnings targets for the full business year 2018.So what's new now? There are 2 -- mainly 2 points. First one, that is bullet point #2 here, considering our group adjusted EBIT margin, we now expect the group's adjusted EBIT margin to come in within the range of 7% to 8%. Our guidance was previously in the range between 8% to 8.5%.Secondly, due to the stronger-than-expected organic sales revenue trend, driven by both upbeat market and the underlying structural growth in the first 6 months of this year, we stepped up our sales forecast for the full year of 2018. So what is new now? We will have organic sales -- or we are going to increase our organic sales this year by 5% to 7%. Previously, we said organic sales will increase to 4% to 5%.So going more into the details, I would like to turn your attention to Page #4 of the presentation.What is the reasoning? First of all, let's talk about the half year -- this -- in 2018's results. The sales growth of 9% came in with an adjusted EBIT margin at 6.9%. Two underlying factors here. First of all, the current market environment, marked by continued soaring customer demands, and this because of the strained industry supply chain, we believe that comes together -- that, together with our new production network ramp-up and the alignment, we believe that the slower-than-expected, especially in Q1 and also now in Q2, and this caused operational -- additional operational expenses.Just 2 numbers for your convenience about the market development. In the Class 8 truck market in North America, the numbers we have seen from January to May, the June numbers will be available very soon. But in the first 5 months of the year, the order intake for Class 8 trucks was up 58%, 5-8, and we still see that growing.On the trailer side, our other big market in North America, we saw an order intake increased by plus 10%, and also, this is going on further. So both is a bit constrained with entire supply chain in North America, and, of course, we are part of that.So -- and on top of that, we have burdening effects and risks from rising steel prices in the U.S. We are on very, very high levels now, much higher than expected in Q2. But also, going forward, we see -- we might see a further increase in steel prices, which is very difficult to predict in these days, and so this is, of course, a burdening effect.As you know, and we're continuously repeating that, we can pass on price increases, steel price increases to our customers. This is contractually given. But, and this is the big but here, this is always with delay of approximately 6 months.On the next page, Page 5, I would like to talk about Q2. Bullet point number first -- the first one, in Q2 2018, our sales growth was 15%, and this is, by the way, the historically highest Q2 ever, with a sales level of approximately EUR 345.4 million, previously was EUR 300 million, which is a very nice number and we are quite proud about reaching this historical highest high level.The organic sales growth increased to 11.7%, this is without acquisitions and without the FX effects. We will talk about later more in detail about that.The adjusted EBIT in Q2 2018 came in at EUR 23.8 million, which was roughly EUR 3 million lower than previous year, with EUR 26.7 million or, percentage-wise, down by 10.9%. But, and this is really important, sequentially higher than Q1 with EUR 20.3 million. The adjusted EBIT margin came in at 6.9%, previous year was 8.9%, and this is, of course, lower than anticipated on our end.And last bullet point here, the burden from increased operating costs related to the restructuring and realignment of our production network in U.S., coinciding with this sharp -- really sharp steel price increase in North America. Of course, this was the same for the first half of this year.On the next few slides, Matthias will explain that even more in detail, and showing some graphs to explain that -- yes, more in detail. So Matthias, I would like to hand it over to you.

[Matthias Heiden]

Yes, thank you, Detlef, and good morning and a very warm welcome from my side as well. With these introductory comments from Detlef, let's take a closer look on Page 6, at the composition of sales in the second quarter.As you've already heard, our top line increased by 15% to EUR 345.4 million, including the contributions from Orlandi and York, namely EUR 21.1 million. While we do not intend to publish numbers for Orlandi and York each and every quarter, we felt it appropriate to give you some further insight beyond the sum of EUR 21.1 million at this point because those companies appear in our consolidated financials for the first time in the second quarter. And in doing so, I can share that Orlandi contributed around EUR 7 million in revenue for the 3 months that they were included, and York, around EUR 14 million for the 2 months that they were included.For Orlandi, this came with the mid-teen margin that we had already shared with you previously when we announced the acquisition, and for York, this came below group average with a low single-digit margin for the 2 months we have included them for.FX translational effects was still negative with EUR 11.1 million or an impact of minus 3.7%, leaving us with a strong organic growth of 11.7% or EUR 35.1 million in total.Turning to Page 7. What does the sales picture look like across the regions? Well, the overall message continues to be that the positive trend in organic sales growth continued in all regions, with EMEA continuing above 5%, at 5.2%; the Americas growing strong at 15.1%, and APAC/China at plus 38.3%, with this last number reflecting strong growth on already solid prior year comparables.If, on Page 8, we move further down the P&L to the adjusted EBIT. Let's take a quick look at the reconciliation of the reported EBIT to adjusted EBIT for the quarter.Excluding restructuring and transaction costs totaling EUR 1.6 million and PPA impacts of EUR 2.6 million, the adjusted EBIT amounted to EUR 23.8 million compared to a reported EBIT on the left-hand side of EUR 19.6 million.Before handing it back to Detlef, who will talk about the regions in more detail, I would like to highlight 2 additional aspects. Firstly, only EUR 0.3 million out of the EUR 1.6 million restructuring and transaction costs comes from the Americas region. And secondly, on the PPA item, I would like to clarify that the major impact of this increased number comes from an increase -- or is resulting from the York acquisition, where we had an inventory step up to be accounted for. At this point, we see PPA at this Q2 level for the remainder of the year. In 2019, this number should start to regress to about EUR 2 million because the impact of the aforementioned inventory step-up will start to wear out.With that, I pass it back to Detlef for the moment.

[Detlef Borghardt]

Matthias, thanks for the detailed explanations. I would like to talk about the Americas more in detail on the following page, Page #9.Matthias will come back and also do some more precise details on that, and then later on, I will talk about Europe, EMEA and then India and China and APAC.But first of all, probably most important in this data, Americas. So what you can see on the left-hand side is the sales development. As I said already earlier this morning, the customer demand in North America is still high. That order intake is challenging everybody in the supply chain. So -- but due to the high market share in most of the core products we do in North America, we, of course, benefit from this soaring customer demand, and so, organically, our sales grew by 15.1% in North America.Due to the fact that we report in euros and not in U.S. dollars, we have some negative exchange rate effects with minus 9.8%. So in euro base, sales reported was up 5.3% to reach EUR 123 million, previous year was EUR 116 million, and this is up EUR 21.1 million versus the first quarter of this year. So we've seen increasing development there, which goes definitely in the right direction.On the adjusted EBIT side, further below. You'll see that, finally, we turned the tide here into second quarter this year. The adjusted EBIT came in at positive EUR 0.7 million. Of course, this is very disappointing compared with last year, with EUR 7.3 million or respectively 6.3%. But for everybody, in Q2 2017, we haven't had any plant restructuring, plant consolidation. North America, we started with that at that point in time, so we enjoyed both quite good market development plus quite nice margins.But as we already explained now, in Q2 2018, 1 year later, we have the operational expenses -- additional operational expense of EUR 2.3 million, which were incurred, and that is due to the startup inefficiencies, as we said already.We had, still, some add-on expenses for express freight and logistics costs, both in and outbound. So that means from suppliers to us, but also from us to our customers to deliver in time and to get all the material to the customers, but also to our factories. And we had also still some compensation payments in accordance to supply agreements for late deliveries.But the biggest piece of it is the steel price, which burdened us with EUR 4.3 million, which is a very high number. But as I said, we see now, finally, a successive margin improvement versus Q1 this year with minus 0.7%.On the next 2 pages, Matthias will explain that even more in detail so that you'll have a very full transparency -- higher transparency on the Americas' development. Matthias?

[Matthias Heiden]

Yes. Thank you, Detlef. Like in the previous quarters, we would like to provide additional insight into the burdening effects on the adjusted EBIT of the Americas region for the quarter.So you see the usual depiction of the additional impacts on our adjusted EBIT here, with the overall additional operating expenses, as Detlef said, having come down to EUR 2.3 million, compared to the EUR 3.9 million that we had in the first quarter.You see how they are made up on the slide. Here, we used the term customer debits, Detlef referred to this as the compensation payments, for example, for late delivery and the expedited freight and plant efficiencies of minus EUR 1.8 million, giving us the sum of EUR 2.3 million. What I would also like to point out at this point in time is that while, certainly, some of these logistical challenges are homemade and are caused by our own plant consolidation and the subsequent streamlining of processes, this also all happened in an environment or on an industry, for that matter, with an increasingly disruptive supply chain at this point in time.Additionally, we have now added, on the right-hand side, the impact of the steel price, amounting to EUR 4.3 million. The impact of this was EUR 2 million in the first quarter. This explains in sum why our improvements on the add-on operating expenses do not fully drop through to the bottom line because our improvement are outperformed or outweighed by the steel price increases. If one were to eliminate both effects for a second, one could see that our business in the Americas continued to improve on a pure operating basis.Before moving on to the next slide, allow me one technical comment in case some of you chew on the numbers or the reconciliation on this chart from left to right. It just so happens that this works out from Q2 2017 to Q2 2018 on the bottom line because the region at this point is only a little bit above the breakeven point, which means that the earnings growth does not contribute a lot of additional adjusted EBIT, which is why this bridge works out as a sum from left to right. But this is more technical in nature to enhance your understanding of this slide.Turning to Page 11 now. I would like to talk about the development of the add-on operating costs over time. While the overall cost situation resulting from the inefficiencies of our realignment and the ramp-up of our production network continues to be unsatisfying, with our measures still ongoing, and Detlef will comment on that in just a second. This slide shows the successive improvement since our low point in the fourth quarter of 2017, and now with the return to positive territory with a profitability of 0.6% in the second quarter of 2018. So while the improvements are taking time, we do what we say and we keep working hard on it.And with that, I'll pass it back to Detlef with the question what the next steps in the execution of our action plan are.

[Detlef Borghardt]

Yes. With that, I would like to go to Page #12, with the headline Management Action Plan, we reported that first time in last quarter of last year. We said, okay, due to the challenges in North America, we develop together with the North American team some activities or, let's say, a lot of activities. We are working on that. We are absolutely on the right way, and that we'd like to summarize it with a couple of bullet points here what we did already and what we are going to do.First of all, sourcing. We have optimization measures in place. Sourcing is important for us, and especially in these days with, as you know, higher steel prices. But especially with a very tight supply chain, sourcing is key. If you don't look at material in time and in the right, yes, size, then we have issues. So therefore, sourcing is a key activity.We have, in Germany, implemented already 4 -- almost 4, 5 years ago, in planning optimization tool that is digital advanced planning optimization, which we started now in North America as well, which will align sales and order with production and the entire supply chain's processes.That helps a lot. We are very successful with that here in our German plants and also in North America business to come. With this hand-in-hand, third bullet point, optimization of the scheduling process, this is also very important to make sure that we have the right, let's say, orders in the system and can produce on time.That goes hand-in-hand with enhancing capacity utilization. We are working, let's say, on the full power in all the factories in North America, and we have to and we are still going on to optimize the existing capacity.Training of employees, it's a key activity. Of course, if you implement new machinery, new equipment and new plants, then you need to train the people. And unfortunately, we haven't been able, in the course of the plant consolidation, to bring over the people from -- the workers from our plants in Holland and Muskegon, which we closed last year. So nobody of them followed the equipment, so therefore, we needed to train our employees in the new facilities and that takes time, it takes more time than expected, but we are working on that and that's making good progress.We are planning in the -- an additional trailer axle manufacturing line. We are working on the full capacity utilization in the Warrenton plant in Missouri. This plant wasn't part of the plant consolidation so far, and we didn't touch it, but we see -- we see increasing demand, and you might remember a very nice order we got caught from a very big fleet in North America recently for fully-dressed system, including a disc brake. And all these together, with the normal, let's say, demand from our customers on the trailer side, we need to increase capacity, which is, of course, a luxury problem to have, but this comes on top. This will be in place in Q1, at the latest, Q2 next year. But we need to do that to serve our customers on time.Focus on the aftermarket, also very important. Here, we make the margins. We reduced already our backlog in the aftermarket. There is more to come, but with better focus on the operation, it was higher utilization of work capacity, we also can serve our aftermarket customers much better than in the past.Last but not least, but extremely important, from my point of view, one of the most important things are the last 2 ones. This is focused on profitability that means price increase.Now, finally, we put a price increase in place from 1st of July this year. If you will ask how much, I would say it was in the mid-single-digit range -- mid-single-digit percentage, all our products and all our customers. And of course, this will help dramatically in the first -- in the second half of this year, Q3 and Q4, to increase our overall profitability in North America. And hand-in-hand, we intensified our price pass-on process in North America. All that comes together with an increased support from our German colleagues here, which we've sent over and will send over in the next couple of weeks and months to North America. We have some specialists who worked successfully on the plant consolidation here in Germany 2 years -- 2.5 years ago, and these colleagues will help our North American colleagues to speed up the processes and to speed up the activities, which I mentioned here on this page. I'm very sure, I'm very confident that this will help on top to come to the positive numbers back in North America in Q3 and Q4.So with this, I would like to turn your attention to Europe, which is on Page #13, which is a very nice slide. If you see the sales and the EBIT development in EMEA. And by the way, now we're talking about EMEA without the I -- without the E anymore. India is now part of our China APAC reporting structure and not part of the Europe anymore. So it has to do with the acquisition of York, which we did in April. And most of the business from York, having the production in India and in China, but most of the business from them is in the APAC region. And therefore, we thought and we believe it makes sense to have India as part of APAC and China and not as part of Europe anymore so, therefore, we changed the reporting structure on that from now on.In summary of the sales development in EMEA, you see that in the second quarter this year, the sales growth of 11.5% to EUR 177.9 million, previous year was EUR 159 million. Of course, the overall macroeconomic environment is favorable. Our markets are positive, except, Duzce, Turkey is still weak, and U.K. showing some first weaknesses, but all other markets are good. Some of them are very good, and we see so far no weakness at all in the European markets, both for trucks and trailers.Orlandi contributed from April on. And on organic sales basis without Orlandi, sales was up 5.2% on a year-over-year basis. The aftermarket grows also very nicely, 4%, and that's already from -- on a high basis.That all leads then into the EBIT development, extremely favorable in Q2 2018, we see now an adjusted EBIT of EUR 20.4 million, which is a raise of 17.9%. And the adjusted EBIT margin came in with 11.5%, and previous year, it was 10.8%. This is supported by a very positive mix, and really, we can see that operational leverage. As I said already, we did the plant consolidation 2.5 years here in Germany. And now, that's part of the nice development, we can see the results part of that.Also very nice, on the next page, Page 14, you'll see the business performance in APAC/China, EMEA. You see all graphs showing in the right direction, going up. And a summary on the sales side, APAC/China in Q2 this year, as I said, that includes India now, shows an increase by 86.2% from -- coming from 23.9% to 44.6% (sic) [ EUR 23.9 million to EUR 44.6 million ]. York contributed approximately this EUR 14 million in sales. If we take York out, then we see, on an organic basis, sales rose by 38.3%. This is mainly driven -- this is unchanged by all the new regulatory load limits on commercial vehicles in China, stricter safety regulations.There's more to come. There are new regulations in -- will be in place from 1st of January next year and also 1st of January 2020, making air suspension and air disc brakes mandatory for trucks and trailers transporting hazardous goods. So we see a further increase in that, and that will help both APAC/China in terms of sales and also in adjusted EBIT.Adjusted EBIT, that's the last one here, in the region increased to EUR 2.7 million, previous year was EUR 2.1 million. Of course, as expected, we have temporary margin dilution from York we include in the numbers now. And in total, the adjusted EBIT margin came in with a very solid 6.1%, previous year was 8.8%. But once again, last year, the sales wasn't that high, it was only in breadth of EUR 23.9 million and then, with EUR 2.1 billion, the percentage was quite high.A little bit too high, I would say, so the 6.1% are a solid number, a good number. And please have in mind, all this is, especially in China, without almost any aftermarket business. In China, that is purely OE business, which is traditionally lower in margins than the aftermarket. But the aftermarket will come in, in 2 to 3 years, as most of you know. And so we'll now increase population, which we can harvest in the future.Now with this, I'm almost at the end of our today's presentation. On Page #15, you see the summary of the adjusted financial targets for this year and our midterm planning until 2020.On the left-hand side, you will see now our new outlook for the financial year 2018. The organic sales, and I'm going to repeat that now, will increase to 5% to 7%, assuming, and this is important to mention, stable FX rates and unchanged scope of consolidation, plus we see contribution from Orlandi and York now with roughly EUR 60 million in sales.Some of you might remember, after the acquisition -- after the announcement of the acquisition, we believed it will be EUR 50 million-plus. So the integration of those companies are absolutely on track. The post-merger integration works very fine. And also, the sales development from those companies is better-than-expected, so, therefore, we increase also here our outlook to EUR 60 million.Then on the adjusted EBIT margin, we said 8% to 8.5% earlier this year as our corridor for the financial year 2018. We change it now to a corridor of 7% to 8%.Net working capital and CapEx changed -- will not change, that remains at 12%, respectively, EUR 38 million to EUR 40 million.Last but not least, our outlook for 2020. There's absolutely no change on that. Organically, we will grow the business to EUR 1.25 million, plus some acquisition, so in total, the sales target at the end of 2020 is EUR 1.5 billion, with an adjusted EBIT margin of at least 8%, and net working capital ratio of 12%, and, in this time frame, we will come back to normal levels in terms of CapEx.Yes, with this, we are done with our today's presentation, and I would like to hand back to Stephan.

[Stephan Haas]

So the floor is now open for questions.

[Operator]

[Operator Instructions] First question comes from Yasmin Steilen from Commerzbank.

[Yasmin Steilen, Research Analyst]

So can you please share more details on your EBIT guidance, as the range of 7% to 8% is rather wide -- or it's wider than usual? What proportion of the guidance cut is related to the higher than initially anticipated costs or additional costs in U.S. or related to the plant consolidation? And to what extent does this guidance also reflect costs related towards the planned additional trailer axle manufacturing line, which should be, if I understood this correctly, be finalized in Q1 next year? And what's your assumption for the additional raw material burden in the second half? And also, just to the clarification, what is the reason for the unchanged CapEx guide, despite the additional trailer axle manufacturing line?

[Detlef Borghardt]

Yasmin, let me try to ask -- answer the second part of your question, and then Matthias will answer the first part. Yes, the CapEx is the -- the cash outs will be next year for the additional equipment, which we need in Warrenton. And it's not finally decided what we are going to do, that means is it enough just to increase the assembly line or do we also need to do something on the welding and painting equipment, which will be a little bit more expensive. But all that, whatever we will decide, will be in line with our normal CapEx for next year, which we cannot say it for now, but it will definitely be lower than this year and probably back to normal. So that means we -- I'm going to, let's say, to order the equipment, which takes times. Delivery time for all this equipment is quite long, and therefore, it will take until Q1, Q2 before this is really, let's say, in progress, and we can -- you'll see higher capacity. Regarding the steel price, yes, this is the $1 million question of today. If we would know that, then, of course, our corridor on our guidance for this year would be not 7% to 8%. But, and this is something I believe nobody knows in these days, if the steel price will increase even further in North America, and we are already on an extremely high level and the increase in the last couple of weeks was much faster than anybody, everybody thought this, this year, so we definitely don't know, it can go even higher, okay? We can reach $950 to $1,000 per ton, which will be extremely high. Some people are already talking about higher numbers, but it could now normalize in the next couple of months, but especially, as I said, we don't know. So that is the effect from North America, which could be easily double, let's say, more than USD 10 million as a burden. But on the other hand, let me just finish. On the other hand, we don't know what will happen in Europe and the rest of the world. It could be, and that is what we expect, the steel price will decrease to whatever level, so that means that will be, of course, very favorable. All this is not predictable, and the input, let's say, the demand on that is, yes, as I said, we don't know. Slo therefore, we said, it could be, if everything goes wrong, okay? And we have still a high volume, high sales, which we do not do the price increase for the second half of the year, then there will be high burden in the 31st of December this year, which we can get back next year, but not this year. If everything is fine, okay, if everything goes in the right direction, then the mid range of the 7% to 8% is possible, but this is a really the big question. But maybe Matthias, he will enlighten you more on that.

[Matthias Heiden]

Yes. But let's give Mrs. Steilen answer -- or a chance for a follow-up question, because I think she just wanted to ask in between.

[Yasmin Steilen, Research Analyst]

I was just wondering, so, basically, the lower end means that everything goes wrong, so we have further increase of the steel prices in the U.S. and no relief from European activities?

[Detlef Borghardt]

Yes.

[Yasmin Steilen, Research Analyst]

And the other way around. So, at the upper end, it would be really kind of a relief also, saying not a significant increase, again, in the U.S. and on the other hand also a the decline of steel prices in Europe?

[Matthias Heiden]

Yes. And to be perfectly honest, Detlef, you already covered both parts of the question, if I'm not mistaken, at least that is what I wrote down. But Mrs. Steilen, let me just add one thing also for the benefit of the audience because the fact that we chose the wider range, the broader guidance here, is not to lead you astray or to leave the community with insecurity. It is more also a reflection of our process, and Detlef described that verbally, how we did scenario planning for the second half of the year. And you just summarized the different scenarios leading to the lower end of the range and then more towards the mid range, the mid of the range and beyond, perfectly well. But it is also a reflection of the scenario planning on steel price and everything that comes with it.

[Yasmin Steilen, Research Analyst]

Okay, perfect. And so the guidance, obviously, as the ramp-up of the trailer axle manufacturing line will only happen next year, does not reflect any costs related to this?

[Detlef Borghardt]

Yes.

[Operator]

And there is another question, and it comes from Harald Eggeling from ODDO BHF.

[Harald Eggeling, Analyst]

Steel prices, again. First, which steel qualities are we talking about? Because I see the, partly, big differences. Second question, have you, in July, already received some imbursements of January? And third question, mixed effect NAFTA, has this improved versus Q1? And have there been any constraints why this digital advanced planning optimization tool has not been implemented earlier in the U.S.?

[Detlef Borghardt]

Yes. Let me start to answer your question regarding steel, steel price, which qualities. Yes, this is not so easy to answer because we have so many different quality of steel which we buy. That means we buy sheet material, okay, with different qualities, but we also by forgings. We buy castings. So there are different qualities which we handle, so there is no one answer, okay? I would say we source -- we buy, more or less, all different types of qualities. So we always do the CRO, which is the C-R-O index, which is very important, and most of the customer contracts are also based on that. Okay? So -- and then there was the other question. I just noted the -- with the advanced planning optimation, we call it APO. Yes, we started to implement this in North America recently. Not so fast here in Europe. There are several reasons for that, but basically, now, we see that, in Europe, it works perfectly fine, almost perfectly fine. There is no perfect system, but now, we said this make sense to implement that in North America as well. So a little bit issue in North America, planning of customers is, how to say that, not so easy than here in Europe. Also, in Europe, we have ups and down and market is volatile, but I believe our customers have a little bit better view into the future to anticipate how orders will come in or it will happen plus or minus in the short and midterm. In North America, that is very difficult to do. As you know, it is a very volatile market, and to have an advanced product optimization tool in place means it all starts with customers. All the demand is depending on the quality of our customers' forecast. So in North America, that is a problem, as I said, and we are working on that. And we -- but we believe, with all the issues we have now, that customers are now more willing to work with us on this so to implement it. But again, this part of the system is the most important in North America, a little bit more difficult than here in Europe. There was a mix -- a question of NAFTA mix, could you explain what you mean with this question?

[Harald Eggeling, Analyst]

Yes. I think in the Q1 figures, you outlined a negative impact of close to EUR 2 million mix effects, resulting from, I think, you did not serve the aftermarket that you desired and in the EBIT price, the mix effect was not given for preliminary Q2?

[Detlef Borghardt]

Yes. In a nutshell, I'm not going too much into the details, but the aftermarket, we serve better now in Q2, so that is one reason of the improved margins now. And we said that already in Q1, we will focus on that even more. If we have some capacity left for the aftermarket, we've creased it in, okay? Not to a certain -- to the extent we should, because as we said, the OE demand is too extremely high and we would like to avoid any further penalties from customers. But there's, as I said, more to come in Q3 and Q4. We need to work on the backlog on the aftermarket so to bring it to, yes, to the lowest minimum until end of this year and the next couple of months. But in a nutshell, the product mix improved slightly in North America due to the higher aftermarket share.

[Harald Eggeling, Analyst]

Okay. And the reimbursement of steel prices, have you seen any so far?

[Detlef Borghardt]

Yes. But not -- the problem is -- a little bit, okay? But the problem is that steel price is increasing and increasing, okay? We are always running behind. And the problem is, here, especially, big problem is, I would not like to talk about problems, but in this case, this is really a problem, that the steel price is raised so sharply and so fast that we are really, really behind. And the burden, as you have seen in the numbers, is extremely high. So that means we make something up, but it is far, far, far not enough.

[Harald Eggeling, Analyst]

Okay. So it's [ 0.3 - 30.5 ] for July or whatever you have incurred from reimbursements? So clearly below EUR 1 million?

[Detlef Borghardt]

For July? I don't know, because, as I said, we implemented price increases from July 1, okay? And as I said in this mid-single-digit number, again, this will kick in from, yes, from -- since 2 weeks now -- for 2 weeks now, sorry.

[Operator]

And there's another question from Julien Batteau from Pascal Advisers.

[Julien Batteau]

A very quick question on the guidance for '19, because you repeated it in the press release, expecting 8% to 9% EBIT margin. There are many, many moving parts in your numbers since the last 2 to 3 quarters. What are the elements, the negative elements burdening EBIT this year that you are sure not to encounter next year, basically?

[Detlef Borghardt]

Yes. That is, I believe, pretty easy to answer. First, at steel, okay, we talked about that now for a couple of minutes. This will come to an end, okay, whenever and wherever, but nobody expect that the steel price will increase even more next year, because what will happen if this will increase further in North America, then customers from the steel industry will go to other countries, maybe China or maybe Europe. We also started that already, okay? That means if we cannot afford North America anymore for, let's say, reasonable prices, then, we will import, okay? Even though we have a 25% increase on tariffs, okay? What we see right now in North America, it would make sense or it starts now to make sense to import and paying the tariffs. So that is one thing, steel price. And the other one is, the plant consolidation is an issue, okay? And it's -- we are slower than expected. But this will be done end of this year, definitely, okay? That means there will be no burdening factors next year anymore, and these are the biggest 2 challenges this year, which put a lot of pressure on our margin, and this will not be the case next year. So, therefore, we are confident with the 8% to 9% corridor for next year. Let me add, if the markets will continue, okay? This is, of course, overly important. But what we can see in -- probably you can allow me to add that, what we can see that -- is that the order intake from our customers, both in North America and Europe, is strong, as we reported. And for some vehicles, so special vehicles, special trailers, the lead time from our customers is now 12 months and more. So that means they are all already confirming orders for the third -- I'm sorry, the first and second quarter next year, so that might give you a hint that the development, the market development should be quite positive also next year.

[Operator]

And there's a question from Nicolai Kempf from Deutsche Bank.

[Nicolai Kempf, Research Associate]

Yes, Deutsche Bank. I have one question on the organic growth increase in guidance. Is this all mainly attributed to the U.S. or to Europe and APAC?

[Detlef Borghardt]

Matthias, are you going to answer that?

[Matthias Heiden]

Yes, I'm happy to do that. I think, it actually goes across regions. It goes back to the point that I mentioned earlier on the organic growth where I described the historic performance, that continued to be positive across regions. So all regions contribute, overall, to the increase in organic sales guidance, which is great to see. But needless to say, that we're certainly making a special effort in North America to improve there as well, to get as much product out the door as the customers demand. I think that would be the fair answer from my side.

[Operator]

And the next question comes from Philippe Lorrain from Berenberg.

[Philippe Lorrain, Analyst]

Philippe Lorrain from Berenberg. One question, first, perhaps on your new target for organic growth. I mean, you mentioned 5% to 7% right now. You achieved a rate in H1 that was stronger than that. Order intake for trailers and trucks into U.S. are still up, which points to probably also increasing production rates in the following quarters. We understand that all regions have been quite strong and not only the U.S. So does the 5% to 7% organic growth guidance for this year perhaps look a little bit conservative? I can remember that, in Q1, you mentioned that you were expecting to perhaps adjust the guidance at the time of the commercial vehicle IAA, basically, in September. So what's the view right now? Is it conservative? Or do you feel that it is really just a realistic guidance?

[Matthias Heiden]

Yes, Philippe. Thanks for the question. Is it conservative or not? Again, we are not in September, okay? We are in July only, but we increased already our guidance here because we have now seen a very strong first half year, now the second half should be good, that's what we can see. We cannot go through the roof here for one main reason: capacity-wise, okay, we are almost at the limits, okay? That means -- and it's not only us, okay? That's the whole -- that's the entire supply chain, including the truck and trailer OEs. That is the reason why, as I mentioned, they have now started to confirm orders, let's say delivery for Q1 and Q2. So and -- but also in the supplier base, okay? And there is a limit, and therefore, otherwise, the OEs would deliver all of these materials already this year, but they can't. So therefore, there is a limit in terms of capacity. And secondly, there is a high basis, okay, where we come from now for the second half. So -- and therefore, for now, it is the 5% to 7% that we feel comfortable.

[Philippe Lorrain, Analyst]

Okay. I was just asking as well because since you are speaking about increasing the price for your components. Obviously, from H1 watch, you're going to have as well a price increase, which is going to play out into your sales bridge. So I was just wondering if this 5% to 7% organic growth perhaps is more, let's say, based on what you expect in terms of volumes than more really what you expect in terms of a combination of volume and price.

[Detlef Borghardt]

Yes. It's always a combination of volume and price. But of course, the price increases we put in place now and which we will put further in place will have some effects on volume, okay? But, okay, we will see -- But as I said, there is a limit in terms of capacity utilization. We cannot do 101%, okay? We can only do 100%. Okay, we can do sometimes 101%, but this is coming to an end. Again, the 5% -- 5% to 7% for now, we believe is a good number.

[Philippe Lorrain, Analyst]

Okay, great. Then I've got like a following -- a follow-up, quickly, on the startup costs. I was just wondering did that mean that the EUR 2.3 million that you saw in Q2, it seems to me like there is, really, this normalization trends playing out here. So how far behind schedule are you on, let's say, bringing down these actual startup costs? Or perhaps, yes, how should we think about -- would you still have that in the guidance for the next quarters?

[Detlef Borghardt]

Yes. That's not -- a little bit difficult to answer, but I would say it's a couple of months, okay? Otherwise, we wouldn't do the profit warning this morning, and then we would be on track. And as I said, the numbers in Q2, especially in months of June, are disappointing to a certain extent, because we thought June will be better, okay? So we are a little -- we are behind a couple of months, but we know what we do, okay? All the measures are in place, as I've mentioned in my presentation, and now we are going to speed it up even more, sending some German colleagues over to do, let's say, go to the last mile together with the colleagues. And at the end of the year, we will be, let's say, absolutely back on track. That's how we'll see it. So that means the additional burden of costs, regarding operational costs that's coming to -- this is almost now at -- back to normal, and I see no further, let's say, burdens on that in the next couple of months. Does it answer your question?

[Philippe Lorrain, Analyst]

And one more quick question on the steel price impact. I mean, you mentioned EUR 4.3 million as being the impact in your profit bridge now. How do we have to understand that? Because I got, from the previous questions, that you actually started having a compensation for including steel prices from the beginning of this year. So is it kind of a gross effect? Or is it kind of a net effect? I mean, does it have an impact on the margin, which is exactly the [ EUR 4.3 million ] divided by whatever you show in terms of sales? Or by how much has been, perhaps, the sales -- the revenues been impacted so far by these steel price issues?

[Matthias Heiden]

Maybe I can take that, yes. Maybe I can take that. Philippe, it is my understanding from the team that this is the net impact already. So this is already including the normal relief cycle from customers, which was what we were trying to explain in the earlier answer.

[Detlef Borghardt]

Okay, great. And I would like to add. We cannot increase price, let's say, every month, okay? Contractually, that is only 2 times a year, okay? That means in the middle of the year and end of the year with some customers, therefore, we said, we've got some relief, okay. We have a little bit different contracts, but with the majority, especially for all the big ones, et cetera, it's only 2 times a year. So therefore, the big bang came in 1st of July this year. Next one will be 1st of January next year, but in between, contractually, this is not possible.

[Philippe Lorrain, Analyst]

Okay. And perhaps just a last one. It's just really housekeeping. I mean, you showed the margin and the sales for EMEA and APAC/China. If we were taking out Orlandi for MEA and York for APAC/China, what kind of margin would we have seen in your figures now? Just to compare, basically, on an organic basis.

[Detlef Borghardt]

Good question.

[Matthias Heiden]

I can take that. Philippe, I can help you on your way, because I don't want to make it a habit to disclose the details, but I started the topic by disclosing or helping you on your way to disclosing the revenue numbers. If you go back to what I said around the revenue numbers and you do a rough calculation with the mid-teen margin for Orlandi and the low single-digit margin below group for York, let's say, somewhere around 4%, just as an indication for your math, then you can work out the impacts by doing the calculation, okay? And we can't let you go without congratulating you and the French team on the well-deserved World Cup win.

[Operator]

Okay. Currently, there are no more questions [Operator Instructions] And there's another question from [ Sven Eirevik ] from GoingPublic Magazine.

[Unknown Analyst]

Can you give us some detailed information about your e-mobility strategy, if there is a strategy?

[Detlef Borghardt]

Yes, certainly. This could take another hour, but I tried to make it as very short and precise as possible. Yes, we have a strategy, we call it SMART STEEL, that's the headline for all our activities in terms of e-mobility. But it's not only e-mobility, that means, for some, electrical-driven axles, which we are working on, but also in terms of -- we are talking about automatic coupling, this is very important for autonomous driving. We are also talking about tendering, that means reactive maintenance, things like that. So if you would like to have, let's say, more information on that, first of all, you can see it on our homepage, or, and I would really recommend doing an extra call on that because there are so many activities on our end to talk about and we really would love to talk about, because this is part of our future. We invest already quite significant in this area, and we will show some parts or let's say results, some hardware already in September at the IAA, which is the biggest truck and trailer, or let's say, the biggest commercial vehicle show globally, which will be in the second half of September. And so then we will, yes, launch a lot of initiatives, a lot of product on that, which is too early to talk about that now, but this will be probably, the other big bang on our side. But again, we are happy to have an extra call on that to give you more insight.

[Operator]

And there are no further questions.

[Stephan Haas]

Okay. So, ladies and gentlemen, if there are no further questions, thanks a lot for joining today on a very short notice. And for follow-up questions, please feel free to call the Investor Relations department anytime. Thanks. Bye-bye.

[Detlef Borghardt]

[Foreign Language] Bye-bye.

[Operator]

The conference is no longer being recorded.