Vitesco Technologies Group AG

XETRA:VTSC

Earnings Call Transcript 2023-Q1

[Heiko Eber, executive]

Thank you very much. Ladies and gentlemen, I'm very happy to welcome you to our call on the financial results of our first quarter 2023. The press release and the following presentation have been published today at 7:00 a.m. CET on our IR website in the Reports and Presentation section. As announced, we will provide a like-for-like comparisons for the new structure latest by the end of May. And for sure, we will also provide a recording of this webcast afterwards.

Now before we have a look on today's agenda, I have to draw your attention once again to the -- by now, hopefully, well-known disclaimer. Our CEO, Andreas Wolf; and our CFO, Werner Volz, have joined the meeting today to guide you through our presentation of the financial results of the last quarter.

As always, they will report on the most important developments at crew and business unit level -- I'm sorry, division level, I have to say, in the new structure in the last quarter including our current order intake level as well as our cash flow and balance sheet. And for sure, they will also touch on outlook for Q2 and the full year.

As always, both gentlemen will be available for a Q&A session after the presentation. But now without further ado, let me hand over to our CEO, Andreas Wolf.

[Andreas Wolf, executive]

Yes. Thank you, Heiko, and thank you very much, ladies and gentlemen for joining today. As said, the first quarter is in the books again under this very challenging environment, we were able to navigate our way through, I think quite well. Our strong focus on quarter 1 was especially on 2 topics.

Firstly, negotiating higher prices with our customers because of continuously increasing input costs, here, we are on a good way and are making strong progress. And secondly, further accelerating our growth in electrification in terms of order intakes. To this day, we have achieved an order intake of over EUR 4 billion in electrification alone.

Now step by step, with EUR 2.3 billion sales in quarter 1, adjusted EBIT margin of 1.6%, we demonstrated again our solid top and bottom-line development. Even though our first quarter was negative in terms of cash flow, it was in line with our expectations. Our transformation to Electrification continues. Let me give you a few examples.

With more than EUR 300 million of total Electrification sales, in the first quarter, the share of Electrification continues to increase steadily. We will see an even higher dynamic growth throughout the year since many projects are currently ramping up. Once more, our order intake proved our very attractive portfolio. Quarter 1 may have presented a rather slow start into the year. Here, we could win EUR 1.4 billion new orders in total, there of awards was roughly EUR 800 million in Electrification. However, as you know, major business awards don't follow our reporting dates, it is in the nature of our order intakes that those do not come in on a steady basis, already mentioned a couple of times. So with a little delay, I can confirm significant order wins as we speak and already mentioned before, we have in our order books Electrification awards worth over EUR 4 billion, leading to an order backlog of more than EUR 30 billion for the Electrification business.

This also means that we have fully backed our midterm Electrification sales target of EUR 5 billion. And I can tell you, quarter 2 is not over yet. It is very important to mention our current order intake for '23 is profitable and will contribute to our mid- and long-term profitability targets. Again, on an annual basis, I can reconfirm that we will see a similar order intake volume for Electrification as last year.

Our order backlog proves us that we have a compelling product portfolio. And with our strategic realignment, we made the next logical step for the full transformation of our company. As already discussed in our Capital Market Day in October last year, we have adjusted our organizational setup. In Powertrain Solutions, Klaus Hau will focus on the sustainable value and cash generation of our existing core ICE technologies. In addition, he is responsible to manage the phase out of both Contract Manufacturing as well as our non-core ICE technologies like pumps, injectors and turbochargers.

Thomas Stierle, heading Electrification Solutions is responsible to execute our electrification strategy. He will grow our Electrification business, focus on project execution and turn it profitable. At the same time, he will step-by-step transform our core ICE electronics business into an electrified future. We also incorporated a clearer structure with a focused management team, and we will ensure continuous reporting transparency, as already said. Through this realignment, Vitesco Technologies is further sharpening its strategic focus on electrification technologies.

Let us now dive a little bit deeper into the financial KPIs. The EUR 2.3 billion sales, which I mentioned earlier, correspond to a steady increase of 2.5% compared to the first quarter 2022. This development is in line with our expectations, taking into account the planned ramp down of non-core business, which also includes our Contract Manufacturing activities. Despite higher input costs and not finalized negotiations of cost coverages, we managed to achieve an adjusted EBIT margin of 1.6%. As we are executing our huge order backlog, CapEx increased to EUR 98 million or 4.2% of sales. When compared to previous years, we see now our CapEx ratio trending to the anticipated 5% to 6% levels. Our free cash flow was burdened by continued increase in working capital, which resulted in a negative value of around minus EUR 41 million. Here, increased inventories are the main factors.

Despite ongoing challenges, the worldwide vehicle production picked up slightly during the first quarter in '23. Europe saw by far the strongest recovery in the first quarter followed by North America. Improved availability of semiconductors was a key enabler. China, on the other hand, the weakest market -- was the weakest market in a very challenging environment, especially due to lower production volumes as we saw an advanced consumption already in quarter 4 of 2022. This was based on tax incentives and subsidies.

As we can see, in the bar chart, in quarter 1 of '23, our reported group level sales increased by 2.5%, which looks rather weak at the first glance if you compare it with the global light vehicle production. But please keep in mind that the phasing out of our Contract Manufacturing and non-core ICE technologies business is included in this figure. Organically, our Electrification and core ICE sales outgrew global light vehicle production by 1.7 percentage points.

So in total, I can say with full confidence that we steered our ship pretty solid in a rough environment. And as always, you will now receive more insights into the financial development by our CFO, Werner Volz. Werner, please.

[Werner Volz, executive]

Yes. Thank you, Andreas. Hello, and welcome also from my side, ladies and gentlemen. Let us now take a closer look at our top and bottom-line development at group level. Due to the phasing out of our non-core businesses, including Contract Manufacturing, our organic sales growth was at 1.4%. That excludes currency-related tailwinds of 1.4 percentage points as well as further consolidation effects. As Andreas already mentioned, we managed to maintain our profitability at 1.6% despite many challenges in the first quarter.

I need to mention here that we still are in the process of concluding our negotiations regarding the cost transfer of higher input costs. And once those are finalized, we will see a positive effect on both top and bottom-line figures. I do expect that we will have agreements by the end of this quarter, at least for the majority of our customers so that we should have a sustainable pricing markup by quarter 3. To sum up, this result is quite solid, considering all the headwinds we had to face during this first quarter.

Now to further ensure transparency, flexibility and efficiency, we streamlined our organization in 2 divisions. We know with that, you unfortunately have to adapt your financial models to our new structure and figures. To make your lives easier, though, we will provide a fact sheet with restated figures for fiscal year 2022 on our homepage while -- within the next few weeks, latest until end of May.

Now let's zoom closer into our newly formed division Powertrain Solutions. The main reason for an organic sales decline was the planned ramp down of our non-core activities, which also contains Contract Manufacturing sales of around EUR 245 million, down more than 10% year-over-year. Here, we will see a further acceleration of this decline in the rest of the year. That's why we saw slightly lower sales for division Powertrain Solutions now with Q1 sales of around EUR 1.6 billion. Due to positive onetime effects from claim negotiations and inventory revaluation, which at least partially compensated for the higher input costs, we still managed to increase our profitability, our continuous cost containment efforts also contributed positively.

Now this resulted in an adjusted EBIT margin of 7.3% for the first quarter. Our core ICE business continued to achieve double-digit adjusted EBIT margins.

Now let us shift over to our second division, Electrification Solutions. Despite several headwinds already mentioned, we did achieve a strong top line development, which was especially driven by our performance in the Asian and German markets. This equates to an outperformance of 7 percentage points comparing to global light vehicle production. When we move over to the profitability side, we were at a similar level as in the prior year. Due to burdening higher input costs, also here again and ramp-up costs for our most recent order wins, the adjusted EBIT margin came in at minus 10%.

Before we close this financial reporting section of top and bottom-line development, I wanted to provide more transparency on the categories Electrification, core ICE and non-core.

Moving on to the next slide, I would like to split up the 3 mentioned categories. As you can see, we further increased sales in Electrification due to improved availability of production materials. Thanks to the ongoing ramp-ups, we will see an acceleration further throughout the year. I would also like to mention the improved EBIT margin of almost 2 percentage points, even though we had to bear higher costs due to new order intakes.

Overall, we are well on track to achieve our targeted midterm profitability goals, which means breakeven in 2024. To underline our point, I would like to highlight the steady improvement of our gross margin to more than 6% in the first quarter. And we foresee gradual step-ups here until the end of the year.

Core ICE, excluding Electrification improved sales to EUR 1.3 billion. As said, our core businesses slightly outgrew the global light vehicle production. However, we saw a decline in adjusted EBIT margin as we experienced, especially in this area, higher input costs. And as mentioned before, negotiations with our customers are not finalized yet.

As you can see on the last part of this slide, our non-core business is ramping down as planned. This includes our Contract Manufacturing business. You may have noticed the slightly improved EBIT margin here, but I would like to emphasize at this stage that this figure is including a positive onetime effect due to favorable settled claim cases with customers. So excluding these, our adjusted EBIT is more or less a black 0.

I want to make my message on this slide, very clear. First, we will focus on further growth in the Electrification area. Second, we will keep or even improve our sales and profitability level in core ICE. And third, the ramp down of non-core will be progressing according to plan, especially Contract Manufacturing, we will see significant decreases in the next 2 years. Now let me give you some more insights into our cash development.

As you can see, we experienced a lower operating cash flow. To a large extent, this was driven by lower profitability and higher net working in -- net working capital intensity. Here, we saw a continued buildup in our inventories. And yes, this is still a necessary measure, short term, to ensure production for our customers. Of course, we are not aiming to remain at these inventory levels in the long term. Our investments nearly doubled compared to Q1 of the previous year, resulting in an investing cash flow of minus EUR 118 million. As stated on the slide, this is mainly due to higher capital expenditures in context to recent order wins.

Again, here we are trending towards our anticipated range of 5% to 6%. Both negative effects burdened our free cash flow, which came in at minus EUR 41 million for the first quarter. However, this was in line with our internal planning as we are spending capital that is necessary to support the ramp-up in our Electrification business. We are thus confident to reach our guided EUR 50 million for fiscal year 2023.

And talking about our financing cash flow, it came in slightly negative, resulting in minus EUR 10 million, comparing with our previous year's figures, please consider that last year's first quarter financing cash flow included the EUR 200 million Schuldscheindarlehen. However, I want to highlight that we continue to remain a very healthy balance sheet. And of course, we did not take on further debt. Let us take a quick look at the balance sheet structure.

Our net working capital ratio slightly increased to 5.6% in quarter 1 of 2023, mainly driven by the increase in inventories. The net working capital intensity is beginning to trend towards our anticipated midterm range of 5% to 6% of sales. The net debt to adjusted EBITDA ratio decreased slightly from minus 0.5% to minus 0.4%. However, our net liquidity position of EUR 277 million underlines our still very comfortable liquidity situation. Considering undrawn credit lines, our available liquidity at the end of March 2023 was at EUR 1.5 billion.

The increase in our equity was mainly related to higher OCI from pension revaluation. Consequently, this also contributed to an increase in our equity ratio of about 39% at the end of the first quarter. As you can see, we continue to have a very solid balance sheet structure and cash position despite the mentioned challenges, which we experienced during the start of the year.

Now I want to touch on our last slide of this presentation before I then hand back to Heiko for the Q&A session. And last slide, of course, that is the outlook. Our business is still very much burdened by higher gross input costs, such as material and freight as we explained. And as mentioned, for these costs, we are in the final negotiation stages regarding the cost transfers. Our aim is to have an agreement for the majority by the end of Q2 with all our customers.

These mentioned challenges have given us a strong headwind in particular in the first quarter of 2023. However, we are very confident to reach our guidance issued with our fiscal year 2022 results. Therefore, we confirm the guidance for following figures: Our outlook for sales of EUR 9.2 billion to EUR 9.7 billion. This is not only or -- this not only includes price increases due to higher input costs, but also counter impacts due to the planned phase out of non-core ICE technologies and Contract Manufacturing. The adjusted EBIT margin will presumably amount to 2.9% to 3.4% thus demonstrating that we are progressing with our transformation, also in a continuous challenging environment and despite the margin-dilutive effects we have mentioned before.

We expect our CapEx ratio to be between 5% to 6% for the entire fiscal year. Fully focused on our core technologies and Electrification. Lastly, we see our free cash flow target of around EUR 50 million for the full year.

Again, I want to underline the upcoming challenges we have mentioned earlier. But also, again, we are well prepared to tackle those also during 2023 as we did that in 2022. And with that, I have reached the end of my part of the presentation. Andreas and I are now ready for your questions. But first, back to you, Heiko.

[Heiko Eber, executive]

Thank you very much, Andreas. Thank you very much, Werner. [Operator Instructions] Operator, we are now ready to take the first question.

[Operator]

And the first question comes from Sanjay Bhagwani, Citi.

[Sanjay Bhagwani, analyst]

Gentlemen, first of all, congratulations on yet another sustained order intake. So I'll club my questions in 2 buckets. The first one is on Electrification.

So of this EUR 4 billion order intake, can you please provide some color on what the quality of this is like from one big or 2 big customers? And on the same, I think you said that the Q2 is not over yet in terms of the orders. So can you maybe provide some more color on what exactly did you mean by that?

And yes, the margin improvement on Electrification looks strong. I think the gross margins you mentioned is greater than 6%. So can you maybe provide some color on what is driving this improvement? And then I'll just follow up with the next one.

[Andreas Wolf, executive]

First of all, thanks for the question, Sanjay, talking about the order intake in Electrification and the outlook for Q2. First of all, the EUR 4 billion is, I would rate it a strong start into the year. And the majority of those contracts or new orders is again high voltage due to the fact that those wins -- larger part of those wins is very recent. We cannot yet share what type of orders we have won and which customers are behind.

We are just in clarification with the customers. But as soon as we have the clearance, we will also issue a press release. And I can promise you that you will be the first getting the information from our Investor Relations department.

So that's -- I simply have to respect that we have some, how can I say, working relationships with our customers when to do what, including publishing the names and the type of products. So I hope that you can understand that.

Now I want to give you a flavor of quarter 2 because I explicitly also said when I started my presentation with those 2 big points, where are we with negotiating higher price and order intake, I am optimistic. I can even say I'm very optimistic that still in quarter 2, we will have significant further order intake. And this is linked to, obviously, the pipeline I see in front of me and the fact that I'm -- in many cases, directly involved in the acquisition of those projects. And therefore, don't take me wrong, I'm a very humble and trying man, but I would say order intake is not a problem for '23.

I already said that I think during the beginning, that's not our problem or that's not something where we have to scratch our heads. So I assume that already Q2 will show that we are in the middle of the game and progressing as planned, meaning achieving the same numbers, same range of order intake like in 2022.

Yes, for the gross margin, I think Werner said it, we are already improving, and we see further improvements. Maybe you want to elaborate on that -- on the Electrification side.

[Werner Volz, executive]

Yes. Yes, and we're enjoying, of course, this improvement, and we're happy that this is in line with what we promised and what we also expected from ourselves. But what is behind it? Well, it's less operational problems or improvement of operational excellence, let me just quote me that, that one side. On the other side, it's scale effects. And third, it's more profitable business ramping up right now. So I think these are the major 3 criteria.

[Sanjay Bhagwani, analyst]

That is very helpful. And my second question is on the margin improvement bucket. So first thing on the Q2 margins, if I understood it correctly, you will be -- the pricing negotiations, those will be accelerating. So do you think you can hit the margin corridor -- like full year guidance margin corridor in Q2?

And then on the accruals. So to what I'm trying to get my head around is, then you actually provided your full year guidance of 2.9% to 3.4% margin guidance, did you already have this approval tailwinds in your mind? Or we can expect or not? And then let's say, if you did not have budgeted for that, then probably you end up exceeding the full year guidance, no? Yes, if you can provide some more color on that.

[Andreas Wolf, executive]

First of all, maybe I can start. The margin -- no, I will explain the mechanics of our negotiations.

So because also here, in the majority of cases, I'm also directly personally involved, which gives me a very good overview where we are. And again, I can only tell you we are extremely confident that what we plan for '23 as price increases will also materialize just to underline that again. But the mechanics is the following: You have to negotiate, you have to conclude, you have a result and then it is translated into agreements, but later on into price adjustments, we are talking about price adjustments, not onetime payments.

And those price adjustments have to be executed, have to be done in the systems -- in the customer's systems. We talk here about sometimes 10, 20, 30 legal entities and hundreds for some customers, even thousands of line items where the prices have to be keyed into their system therefore we have always this time lag between having already concluded the negotiations compared to what do we see in the quarterly numbers.

So my expectation is with what I see today, when can we conclude what we said that the majority will be basically over end of the quarter that quarter 2 should be in the range of the targeted [ part ] of the full year, maybe a little bit to the lower end, let's see how we progress. Again, with that mechanics I just described, but we should be moving up, having that -- those contracts negotiated, but not yet display, but then in Q2 -- starting Q2 being somehow in that range. That is the picture I currently have. Hopefully, Sanjay, that answers your question.

[Sanjay Bhagwani, analyst]

Yes. That's very helpful. And on the approval side, so what I'm trying to understand is like your guidance of 2.9% to 3.4% margin, did this already have this revision of provisional of these approvals? Or this is something you just realized now? So what I'm alluding to is like if you got this tailwind, which you hadn't hoped for and which is nonrecurring in nature, then how should I think of this full year guidance number? Did you already have this in your budgeting or this just came now?

[Werner Volz, executive]

Well, now we're in May, Sanjay, and I appreciate your question. And of course, we obviously are striving for improving our profitability. But right now, impacting the first quarter net debt into our profit -- that [ probably ] would be too earlier.

[Sanjay Bhagwani, analyst]

I'm sorry, your voice was breaking. I didn't hear you. The last line.

[Werner Volz, executive]

So again, so yes, this was an extraordinary effect for the first quarter, but we're in May now, and we guided adjusted EBIT margin range of 2.9% to 3.4%. And yes, we are thriving, of course, wherever we can to improve profitability but to increase our guidance due to this onetime or extraordinary effect in the first quarter that would be too early. So right now, we stick and stay with guidance 2.9% to 3.4%.

[Operator]

The next question comes from Michael Jacks, Bank of America.

[Michael Jacks, analyst]

On the EV Powertrain market in general and recent RFQ activity, could you perhaps comment on the component mix coming to market? Is it still heavily weighted towards power electronics? Perhaps what are the trends you're observing there?

And have you noticed any changes in competitors' behavior around pricing or changes in the composition of the peers that you're coming up against?

And then my second question is just on pricing and availability of electronic components. Just curious if price increases materialize in line with your earlier expectations and whether or not perhaps you're seeing some evidence of a more competitive environment or price is softening?

[Andreas Wolf, executive]

Yes. So first of all, no big change when I look to the order intakes or the current EV market, no change means for me, the majority goes to high-voltage applications. We still see also no big change when you would elaborate or think about in sourcing also, we still see the full span of products from components to fully complete electric axle. So no major change, also not from the competition side.

I mean we elaborated on that another rounds. So I don't see a major change. I always repeat that when talking about this market, it is a very conservative market. There is a couple of big players in, and that's not really changing. So therefore, it stays intact or it stays in -- with boundary conditions, we already discussed in the past and which I don't see that they will change in the next couple of months.

Pricing or availability of components and related pricing, so availability of components is getting better and better. That's the good news. So I would assume you also referenced to semiconductors, the second half of the year will improve in some case, even significantly improve. And the signals I'm getting out of the market is that starting '24, maybe it's even over.

So that many -- and when we have that in writing, it's not just interpreting messages. We have that in writing that the major component suppliers are telling us that they should cover our demands the latest beginning of '24. So in 6, 7 months, but already indicating that should be the case starting in quarter 3.

So that is a big relief that will help us also to better manage our business as explained, the inventory is going up because we have stop-and-go traffic, so to say that, that will all be easier to be managed than afterwards.

Now the pricing part of it, it's clear that if you can cover and there's no competition any longer to get the one and the last component for whatever price, I would expect that the price increases or the price mechanism situation will normalize again. And also to answer that question, yes, we see that already now, and that's in the ballpark of what we anticipated for '23. So, how can I say, the big pain is behind us and the big increase also in material cost, I would, from today's perspective, see as not being behind us, but the climax is at least behind us.

[Operator]

So the next question comes from Christoph Laskawi, Deutsche Bank.

[Christoph Laskawi, analyst]

The first one being on the electrification ramp in the coming quarters, you already pinpointed to that accelerating, obviously, in line with your targets in the months ahead. Should we expect an uptick already with Q2? Or is this very back-end loaded if you could comment on that and around the key drivers there.

And then just on the inventory side as you built quite a lot in Q1, is this more or less a timing thing as well? Should we expect that to go down with Q2? Or is it more problem that you'll have to work down throughout the entire year and the improvement is also more back-end weighted?

[Andreas Wolf, executive]

Maybe I'll start with the Electrification sales picking up or accelerating throughout the year. Yes, we should see already higher numbers in quarter 2 because I mean, if you just do the mathematical exercise, of EUR 300 million x 4, we would land at EUR 1.2 billion, and that's not what we forecasted so far. So yes, we will see already in quarter 2, an acceleration and then further on. Now that's -- we see that in the call also that's a given.

I'm not so optimistic looking to the inventory side. Yes, we have special task forces and teams working on it. But due to the fact that when you change your sourcing parameters in the system, it always takes a while until it takes place. Now in line with what I said before that overall, the number of turbulences is going down, we should be able to manage -- better manage inventories this year. They will come down but I would be a little bit hesitant whether we see already significant step-downs in quarter 2, but I would be more optimistic to say quarter 3 onwards, we will see those effects.

[Christoph Laskawi, analyst]

And a follow-up on the Electrification growth. Is there any costs related to that accelerating, which means the margin could be at risk to slightly weaken? Or should we just expect the positive leverage to improve margins in that field as well?

[Andreas Wolf, executive]

I mean you heard already that in Electrification, we are in quarter 1 on a single-digit gross margin level and with what we see today, we should increase this gross margin maybe to a low double-digit level. And that is showing that in the next quarters, it is the acceleration of sales because capacities, et cetera, are all installed, it's not linked with higher burden but should lead to an improvement of the -- situation.

[Operator]

The next question comes from Giulio Pescatore, BNP.

[Giulio Pescatore, analyst]

The first one on the one-offs. I mean it does sound like there were a few one-offs in the quarter. So can you just maybe help us isolate them.

I think you mentioned one-off payments linked to claims and then some inventories evaluations, a [ vessel ] of approvals. So just trying to understand what these one-offs -- the magnitude of these one-offs in the first quarter.

And then the second one on the outperformance. Can you maybe help us understand how much of a regional-mix tailwind did you have in the quarter? And how much pricing benefited top line in the quarter? Because, I mean, to be fair, I was a bit disappointed with the level of outperformance you showed not because you're not growing well on the Electrification side, but because the regional mix should have been a big tailwind for you in Q1, so if you can help us on that.

[Werner Volz, executive]

Yes, I'll try to give you an answer even though -- Well, I cannot specify the detailed amounts. Well, these are one-offs with regards to also in the normal course of our business. Well, you have to understand that, for instance, if customer demands are fluctuating, we typically would go after the customers and would try to negotiate [ volume ] claims. So that is one of the things that is quite normal to our business. And this is going to happen also in the future. This happened in the past. So that was one issue that we settled.

On the other side, we were able to settle a warranty claim. Also that is normal course of the business, but it happens as one-timers. Obviously, it's not gradually allocated throughout the fiscal year. And this is basically what we saw in the first quarter, and we were able to positively negotiate these situations and conclude that. And it is in the -- in a lower double-digit size and magnitude. Is that [indiscernible].

[Giulio Pescatore, analyst]

Yes. So it does sound like the adjusted EBITA at group level would have been close to breakeven if we adjust for this one-off effect. Is that fair?

[Werner Volz, executive]

Sorry, I couldn't...

[Andreas Wolf, executive]

Yes. That's true, yes. But it's part of EBIT one-offs because on the other hand, they burn through when you accrue for it. So yes, that's true.

[Werner Volz, executive]

Outperformance regional -- well, outperformance, regional, last year -- in the last quarter, of course, the Asian market, specifically Korea was a strong market for us and also on the German side, the German market outperformed and that, of course, helped our first quarter.

And pricing benefits from the cost transfers. Well, yes, we included or fortunately, we already could transfer some of the accrued costs to our customers, but it is yet obviously below what we have suffered as input costs and increased input costs. So it is less than 2/3 that we probably were able to recover as price increases in the first quarter.

[Giulio Pescatore, analyst]

Okay. That's very helpful, actually. Can I just maybe to squeeze in a last one. We saw carmakers increasing their inventories quite significantly in Q1. I think pretty much across the board, I think this effect spooked the market to a certain extent because I think we are wondering about the outlook for production in Q2. What's your take on this? Is this because they're preparing for higher sales? I mean what's causing this effect?

[Andreas Wolf, executive]

That would be a question more to the OEMs than to us, what we can see is that from a call-off side, it should be okay. Don't forget that the pipelines, the supply chains are still completely empty. And even assuming it would happen even the OEM sales, the car sales would slow down. We would continue to basically backfill or refill the supply chains. And therefore, I don't see an imminent impact.

And as I said, I cannot really -- we see for our products, a strong pool, I cannot really comment on why are there higher stocks on the OEM side.

[Werner Volz, executive]

Probably getting back to normal.

[Andreas Wolf, executive]

They are getting back to normal because if you -- that's a good hint because if you look to the typical KPIs being in the U.S. or on the Asian side, so what is the stock on hand? So how many days on hand do they have as the dealers as produce cars available, especially in the U.S., they had nothing. I mean the reason is clear, but they need to backfill and have that typical range like in the U.S., I don't know, 60 days upwards and not below 30 or 20, what they suffered basically in the last year. So for me, it is a correction and normalizing effect of the industry.

[Giulio Pescatore, analyst]

Yes, definitely. And it's good to hear from you that you don't think that that's going to have an implication on call offs.

[Operator]

[Operator Instructions] So the next question comes from Jose Asumendi, JPMorgan.

[Jose Asumendi, analyst]

And yes, congratulations on the order backlog that keeps on growing. I just wanted to maybe discuss a bit more, if you could give a bit more guidance towards the path of improvement between Powertrain Solutions and Electrification Solutions. Can you comment to hit this sort of lower end of the margin range in the second quarter, what kind of improvement are you looking within Electrification Solutions? And do you expect Powertrain Solutions to go back again to the high single-digit margins maybe towards the upper end of maybe close to double-digit margins on the quarter? That will be the first point.

And second point, with this kind of order backlog, I always wonder if you need to open a new plant or if CapEx needs to change? Not now, but maybe in the medium term, is this something that you think you need to do? Or as we -- as you have discussed in previous calls, the level of CapEx is still is adequate, and you don't really need to open any additional plants.

[Andreas Wolf, executive]

Maybe I'll start with the second one, CapEx. So as you might know, we have a long-term plan of how are we going to ramp up the electrification business. If I look now to the order backlog because here, we basically have to install new capacities, the order backlog of the ICE one is more or less capacity install. So I would assume your question, Jose was also focusing more on the Electrification side. So now we have a plan. We know -- and you know those -- and I mentioned that those points like EUR 5 billion in '26 and then targeting with all what we know EUR 10 billion to EUR 12 billion in 2030. We know also what does that mean for CapEx, for engineering resources, but also what does that mean for the procurement side. Because for some typical and critical components thick MOSFETs et cetera, we have then also to make sure that supply of components over the next couple of years is secured. So there's always a complete picture over many years in all line items in front of us.

With all what we know today, the CapEx, which we mentioned, the 5% to 6% should be okay to basically support the capacity ramp up or the sales ramp-up for the next years in Electrification. It was a little bit long answer, but I wanted to give you that, let's say, a more holistic picture that we are not looking to one number only, but we have a complete thought-through, long-term view of where are we going. What are -- what is the impact top line on the related line items like CapEx, engineering, whatsoever procurement.

Is that answering your question, Jose? More probably...

[Jose Asumendi, analyst]

That's great. And if you could comment a little bit on the path of improvement through the year. Clearly, there's going to be an improvement across 2 divisions. How do we think about that path of improvement and there maybe the revenue split for the year?

[Andreas Wolf, executive]

That was the first question you asked. Do you want to comment on that? Or should I?

[Werner Volz, executive]

Go ahead, if you want.

[Andreas Wolf, executive]

I can start. And if I make big mistakes, Werner, you can correct me. So first of all, on the division level, improvements, where do they come from already somehow -- we touched on that point, that's scaling up with the Electrification business because I said some numbers like we are with the gross margin, what we expect for the outer years, we said that EUR 300 million is not representative. The first quarter sales for the full year, so we will see more back-end loaded, but starting already in quarter 2, sales increasing. That's one part of it.

The major part of it is also related to what we call [indiscernible] the price increases that we have with our customers because, as said, only the smaller part, could somehow find its way into our P&L in quarter 1. The major part will find its way in our P&L in quarter 2, starting quarter 2 and then obviously continue in quarter 3 and 4. Don't forget that our goal is -- and that's I would say, 99% of the cases, no longer to work with onetime payments, but with concrete price increases because then it's by far easier when you move into the next year, '24 just to negotiate with the customers, don't touch the prices, yes? We stay on those prices.

Onetime payments that is a little bit of a disadvantage or was the disadvantage in '22 are onetime payments, but you basically have them to renew, renegotiate the price level you have already reached again once you enter into the new year. So that would be my short answer. I look to left, no correction necessary. Okay.

[Operator]

So there seems to be one follow-up question coming from Sanjay Bhagwani.

[Sanjay Bhagwani, analyst]

Just one quick follow-up on Electrification margins. So I mean you alluded that the gross margins will step up throughout the year. And so is there a possibility that in Q4 itself that the Electrification becomes EBIT margin breakeven, given that in Q4, if your gross margins are stepping up, and on the back of that, you also received these R&D reimbursements itself in Q4. So do you see this could touch breakeven by quarter 4 or probably too early to comment on that?

[Werner Volz, executive]

Thank you, you never give up, I really appreciate it. Yes, we're going to continue to improve gross margin in Electrification, but to higher -- in gross margin, I guess. I don't know it's starting to improve overall profitability but we still -- breakeven targets for 2024.

Even though we also can expect higher reimbursements in [indiscernible] towards the end of this year. But please consider, we will see ramp-up costs coming with the new orders, and we're accelerating further. And I think that is not for free. So that needs to be considered. And again, I think, breakeven, it's getting more and more realistic for 2024.

[Andreas Wolf, executive]

We will tell you the precise date when we open the...

[Operator]

So as there are no further questions at this point, I'd like to hand it back to Heiko Eber.

[Heiko Eber, executive]

Thank you very much. So since there are no further questions, I would like to close today's session. Of course, if there are more questions coming up afterwards, feel free to reach out to our IR team any time.

Thanks to our team for preparing this call. And of course, a big thanks to all of you for your time and your interest. And I already wish you now relaxing weekend and looking forward to talking to you soon. Thank you very much.