Elringklinger AG

XETRA:ZIL2

Earnings Call Transcript 2018-Q1

[Operator]

Dear ladies and gentlemen, welcome to the ElringKlinger Group analyst conference. [Operator Instructions] May I now hand you over to Dr. Wolf, who will lead you through this conference. Please go ahead, sir.

[Stefan Wolf]

Thank you very much. Hello, ladies and gentlemen. Welcome to our conference call on the Q1 figures 2018. I'm sitting here with my colleague from the management board Mr. Jessulat, our CFO; and Mr. Winter, who is in charge of Investor Relations. And we're going to guide you through a presentation that you have, I assume, at least on your screen, on your desktop.So let me start with some general remarks to the first quarter. This is -- leads to me the first slide that you can see now. We had a couple of headlines with respect to our business in the first quarter. First of all, top line grew organically by 5.4%. That was totally in line with our expectations. The EBIT pre-PPA is -- came in at around about EUR 38.4 million. That is comparable to the prior year figure, the figure of the year 2017. The EBIT margin came in at 8.9%. That is due to some headwinds. I will explain to that to -- and also Mr. Jessulat, who is going to do part of his presentation, will explain this -- the issues that we have here.As you know, we disinvested the Hug Group, the after-treatment business that we had acquired in 2011. We sold that and, the closing was finally effective March 1, 2018. We had in March an important meeting of the supervisory board where we had some restructuring of the management board of ElringKlinger. Mr. Becker, who is since 12 years my colleague on the board responsible for the production, our Chief Operating Officer, he took over the responsibility for our new important business unit E-Mobility. He concentrates completely now on battery systems and fuel cell systems. And we nominated -- the supervisory board nominated Mr. Drews, who is also with the company since about 11 years, who is in-charge of the business unit, Specialty Gaskets, since about a year, also for Cylinder-head Gaskets. He was named as successor of Mr. Becker as COO. That is effective April 1, 2018. And Mr. Jessulat, who is sitting here with me and is doing part of this call, too, the supervisory board extended his contract for 5 years as CFO of the company. So some changes in the board.And you will see that Mr. Drews is now completely concentrating on some restructuring issues in the production issues that we have in Switzerland, that we have in the U.S. So he is completely concentrating on that. And Mr. Becker is concentrating on our new business. You might know that we announced last week that we had a new order, first order for series production of our battery modules. We have a lot of projects in the fuel cell business. So he is concentrating on that and driving forward those future business units.We have established new affiliated company in Fort Wayne in the U.S. In February 2018, we have 100% of the shares of this new subsidiary. This is necessary to produce some of the lightweight parts that we have orders on hand in the U.S. We also made progress in the progression of the start of our production of the door module carriers that is going into production mid-2018, that is going to be produced in Chongqing in China. This is our fourth location now in China that we have opened. And we have implemented a lot of measures for improving our operational performance, and as I mentioned before, Mr. Drews is concentrating on that.Coming to the next slide. As I mentioned before, we have the first order for series production for our 4 battery systems, for solar vehicle of the company by the name of Sono Motors, here in Germany. This is a real big success for us, our battery modules that we had in several R&D projects. Now we have a clear order for series production. The order volume is up to several hundred million euros. The contract runs for 8 years. And we are going to produce that in location here in Germany, ElringKlinger production location. We'll start in the second half year of 2019 delivering those battery systems to Sono Motors.The modular concept of ElringKlinger is 48-volt battery modules storing 1.7-kilowatt hours. And the modules are in combination serving as a high-voltage storage device of up to 800 volts.The car model from Sono Motors, the name is Sion. It is equipped with integrated solar cells in the bodywork, provides the basis for CO2-neutral driving and is positioned within the budget segment of the market. So it's basically low-cost car. And the targeted customers are primarily in cities, in big cities, to drive here fully electric. And as I mentioned before, big success for us because it's the first order. And there are a couple of orders to come also for those battery modules, but this is the first order for series production for those new products of ElringKlinger.Coming to the next slide, that you see now on your screen. On the whole, the growth performance of the automotive -- automobile markets around the globe was quite solid in the first quarter 2018. So we are still on a very, very high level. In China, the demand for cars went up, again, despite the discontinuation of tax breaks for small vehicles that we had in previous years. So still China on a very, very, very high level. The car sales in this -- in the meanwhile, really biggest car market, single car market in the world, reached on about 6 million units in Q1, which is outstanding. We also saw that some of the Western European markets grew, again, coming back to old strengths, especially Spain and France. U.K. saw a downturn, U.K. is also a big important market, car market, but they saw a downturn of round about 12%, which was similar to the Q4 in 2017.The U.S. market was slightly higher in Q1. And we -- what we saw in the U.S. is the backdrop of price discounts and economic upturn, registrations of light vehicles rose by 6.4%. And the light truck segment, which includes the SUV cars, sports utility vehicles, that are very popular in the U.S., recorded a growth of 16%. So that is still growing very much this market.And if we look at South America, we saw many years downturn. We saw very weak situation in South America, especially in Brazil. But now already since 2017, we see a strong increase. And in Brazil, we saw a double-digit growth in Q1 2018. So markets are overall in a pretty good condition.So that's from my side, general remarks to Q1 and to the markets.And I will now hand over to my colleague, Thomas Jessulat, our CFO, who is going to explain in detail the financial figures of the first quarter.

[Thomas Jessulat, CFO & Member of Management Board]

Yes. Dr. Wolf, thank you very much. Good morning, ladies and gentlemen. Let me start with a view on the order book situation. Figures were mainly affected by currency effects driven by a strong euro. Order intake fell by EUR 20 million or 4% taking into account foreign exchange effects. Incoming orders stood at EUR 498 million, which is representing a 1% increase above prior year level.In terms of order backlog, it reflects a sustainably strong demand for ElringKlinger products. It now reached a record level of over EUR 1 billion year-over-year, foreign exchange adjusted up by even 9%. The sales figures also represent a strong demand, although reported revenues slightly decreased. The revenue contribution from M&A activities stood at minus EUR 4.2 million, and foreign exchange effects diluted growth by roughly EUR 22 million, mainly foreign exchange impacts result from the development of the U.S. dollar, Brazilian real and the Swiss franc against the euro. Revenues, therefore, organically grew by 5.4% or EUR 23.2 million.Slide #7 presents the earnings figures for the first quarter 2018. Based on the slide, a decrease in our sales figures, the gross profit margin fell to 22.1% in the first quarter. The higher cost of sales was driven by significant increase in commodity prices, in particular, prices for steel, aluminum and polymer granules increased faster than we originally expected.Selling expenses rose by EUR 3.4 million, driven by additional expenditures at North American sites having to respond to sizable requests from customers as part of their production scheduling.The higher operating income was up to EUR 27.5 million in the quarter and a review following the sale of Hug subgroup in the first quarter 2018. So this leads to an EBIT pre-PPA in the first quarter of EUR 38.4 million after EUR 39.1 million in the first quarter 2017. The EBIT margin pre-PPA is now at 8.9%, which is in line with the guidance of around 9% for the fiscal year 2018.The effective tax rate of 17.9% is relatively low from the group's perspective, which is partially risen by the disposal of the Hug subgroup. And the net income and earnings per share matched strong prior year performance.We now come to Slide #8. Before continuing, let me point out that we had only a marginal effect from the first-time application of IFRS 15, which is the new standard that came into effect, and ElringKlinger chose to modify retrospective method, which is the transitional effects for -- accounted for cumulatively in revenues results as of January 1, 2018.Net working capital increased by 2% to EUR 583 million. A substantial proportion was attributable to tools, and the increase in stock level year-over-year is risen by a number of new product rollouts.In the first quarter 2018, CapEx remained on the lower level with EUR 29.4 million, which compares with EUR 29.6 million in the previous year, which represents a CapEx ratio at currently 6.8%. And major part of it were attributable to expansion measures for the purpose of raising capacity levels and for new ramp-ups with a focus on sites in North America and Hungary as well as for modernization measures relating to buildings as well as the installation for product lines for upcoming large-scale serial projects at our headquarter in Dettingen/Erms.The inflow of cash from the disposal of Hug played a key role in Q1. Short-term loans were paid back, which led to a cash net outflow of EUR 26.2 million. All in all, operating free cash flow in Q1 stood at minus EUR 23.3 million. Net financial debt increased by roughly 8% to EUR 625 million but decreased compared to the year-end figure of 2017 based on the sale of the Hug Group. With regard to the equity ratio of 45%, we are clearly within our target range of 40% to 50%.Very quick on the next slide, markets. Global car production decreased in Q1 by negative 0.7%. And for ElringKlinger due to the appreciation of the euro currency effects dilute revenues significantly.Let me go now to Slide #10. Almost all divisions within the original equipment segment expanded the revenues, in some cases, substantially. Gasket divisions are, all in all, in a good shape, but earnings are affected by high demand for ElringKlinger products, in particular, in the NAFTA region. In the lightweight/Elastomer division, the launching contract of a hydroform-hybrid products is now in full delivery phase and production of cross-car beams for vehicles of next-generation in the U.S. market ramped up. The Shielding Technology performed below strong year -- strong prior year figure mainly driven by negative foreign exchange effects. The business unit is still lacking in earnings performance, mainly caused by high operational fixed cost base and the running relocation process in Switzerland.Currently, we are migrating production from Switzerland to our new production site in Hungary, which is in line with the schedules. The Exhaust Gas Purification division includes the sales from Hug, which was sold as of March 1, like we mentioned before, so that Q1 only includes 2 months of revenue streams from Hug. In addition, the division is exposed to project business, which includes a higher intra-year volatility in generating sales and earnings. And E-Mobility recorded revenue on prior year level and a slightly lower EBIT compared to the first quarter of 2017.And let me now turn to Slide #11, which shows the performance of the different segments. OE, or Original Equipment, as already mentioned, we have seen a mixed performance in the OE segment across all business units. And when we put it in numbers, sales decreased slightly by 2% and the EBIT margin increased slightly to 7.2%, which compares with 7.0% in the last year, supported by the sale of the Hug subgroup. Aftermarket sales is up 7% to EUR 42.9 million. Robust sales growth, especially in Eastern as well as in Western Europe, played a role here and the segment invested in the expansion of its product portfolio and optimizations with regard to the availability of materials. Against this, EBIT margin fell from 19.2% to 17.5% in this quarter.When we look at Engineered Plastics, sales here increased to EUR 30.6 million, including higher demand for products from the automotive industry and the mechanical and medical engineering sector. EBIT margin decreased to 13.4% as a result from rising commodity prices and development costs. And when we look at Services & Industrial Parks, they both play a minor role with sales amounting to EUR 3.5 million.And now I would like to give the floor back to Dr. Wolf.

[Stefan Wolf]

Okay. Thank you, Mr. Jessulat for the explanations. I'll just try to get to the next slide. Yes, go back. So, yes, if we look at the expectation for 2018, for the rest of the year, you see that against the backdrop of stable economic conditions, the global markets are likely to maintain their positive performance. We see in Europe, especially slow growth in Italy, Spain and France as 3 of the big 5 car markets in Europe. We see a stable situation in Germany and probably ongoing weak situation in Great Britain, but overall Europe is stable.If we look at the Asia Pacific markets, we expect the growth by approximately 3%. We will see, again, high demand for SUVs in the main market in China. And also the Japanese market will grow moderately, but it will grow in 2018. And if we look at the NAFTA region, the truck market will increase this year. And we also see an increase on a very, very high level in the NAFTA region already by roundabout 1%. A lot of that is driven, of course, by SUVs that are very popular in the NAFTA region. In total, we expect the global vehicle sales to increase by 2% to 3% in the full year 2018 on a global basis.Looking at our expectations for ElringKlinger for 2018. There are numerous factors that intensify general environmental and some of uncertainties. The -- those global uncertainties have become more pronounced in the recent months and pretty clear. I will just give you some examples of that. Just take the ongoing discussion on this diesel subject. We see that diesel registrations are down, again. We see rising geopolitical tensions and strong movement to national interest of a lot of countries. The -- already the implementation of U.S. tariffs, which are not here in Europe, but I'm pretty sure that they will come, that really will hit us with several millions. And we see already impacts because some of the pre-materials that are needed from our field suppliers in the U.S., now they have to buy that from China, and they are already hit by those U.S. tariffs. And of course, we see an ongoing increase of commodity prices, especially material prices and here especially aluminum and our high-quality spring steel.We are operating within this difficult environment. We will further increase our sales and continue to optimize our cost structure, of course. And also we are working on the units that we have locations, that we have worldwide, that are operating on a very high utilization right now, so to here increase -- continue to optimize our cost structure.In the medium term, ElringKlinger will benefit from the early activities in future automotive technologies. Let me name it once again. That's our battery technology. We already talked about the order from Sono Motors. Some more is to come here. And also, of course, our fuel cell technology is very well respected worldwide in the market.So looking at the financial outlook 2018. We confirm our guidance for the fiscal year 2018. We will outperform the global automotive production by 2 to 4 percentage points in terms of organic revenue growth. And we expect an EBIT margin pre-PPA of around 9%. We also confirm our expectations on the further indicators for the fiscal year 2018. Just to name a couple of them, we see a CapEx ratio between 9% and 10% and net working capital below prior year level and slightly improved operating free cash flow. In the medium term, we plan to outperform the growth of the global automotive production and to successively improve the EBIT margin pre-PPA year-after-year. So we fully confirm what we already mentioned in our conference call -- last conference call that we had when we presented the figures of the year 2017.So ladies and gentlemen, that's from my side what we wanted to tell you, Mr. Jessulat and myself, that we are now more than happy and are ready to take your questions.

[Operator]

[Operator Instructions] The first question is from Marc Tonn of Warburg Research.

[Marc-René Tonn]

First question would be, when we exclude the EUR 21.1 million gain from Hug in the first quarter, the operating margin was at around 4%. It was precisely 4.0%. You stick to your guidance for the full year. You mentioned that you see some additional headwind from potential tariffs, from increasing raw material prices. So what makes you so confident to just bring up the operational profitability from 4% in the first 3 months to 9% on average for the next 3 quarters? And if you are still confident to reach this figure, how should we, let's say, think about the phasing of that? Will Q2 already be at this level? Should -- will this be a, let's say, tremendously year-end loaded development which you'll see in the current year? I think it's very hard to understand. And why Q2 should be that much better than Q1 in terms of profitability -- underlying profitability, excluding the one-off, because one-off will probably not return in all the 3 remaining quarters? Second question would be on the composition of the cost side. I mean, we've seen this decline in the gross margin first quarter. But just a question about confirmations. Is this purely material cost driven? Or is there anything else behind that, wage cost, which play a role? I saw the D&A was more down year-on-year despite the strong CapEx, which you show. And should we think about the difficulties in the NAFTA region all being attributed to selling expenses? And thirdly, on the G&A costs, on this general and admin, do you expect there any major shift now from having increased the management board from 3 to 4 members? It would also be helpful to get some indication there.

[Thomas Jessulat, CFO & Member of Management Board]

Thank you for your questions. In terms of your question 1 and 2, it is clear here that Q1 margin and the outlook for the year is a challenge, yes. One-off is included here in the guidance for the year taking into account a conservative stand in regard to operations to put it in an overall perspective. When we look at the missing part here, when we look at the comparable result to Q1 2017 from this quarter, then I would say we have a split half and half into one structural component. And the structural component is material prices. And I would say of this half, the material prices are representing 2/3 of it, roughly speaking. And in regard to material prices, it's a matter of timing when the recovery of the extra cost when then can take place. So it's merely a timing matter. And it's certainly not Q2. But it's a question whether it can take place in this year. So -- but this is an uncertain number for me. The 1/3 of the structural is structural personnel costs that we have in the group, which is having to do with the adjustment of the overall organization from the size of ElringKlinger and the other side, of course, into the efforts of ElringKlinger to go into new businesses. And when I take a look at the second half in terms of the EUR 21 million, then we would talk about a little bit of extra cost in Q1 that we had in Switzerland based on some relocations. But the capacity situation is more or less relaxed from Q2 on. So, therefore, we see, in fact, improvements here. And -- but we have some, of course, trailing factors in terms of the structural costs that we have in here and not a good starting point in terms of the EUR 10 million we're looking for. And on the other side, we've got roughly 2/3 of NAFTA-related costs, which is something that we address as soon as possible. It has something to do with limited capacity constraints based on unplanned higher demands from the customers. But this is how I would divide the EUR 20 million that we missed in Q1. Part of it will be recovered, and part of it will not be recovered. But based on this setup coming out of Q1, we have no data point as of yet that led us to believe that we won't miss -- we won't reach the 9% guidance.

[Stefan Wolf]

Maybe some additional remarks. If you look at the personnel costs, of course, we had an increase up from April 1 now, 4.3%, which is the new contract between the unions and the employers' association in Germany. This is basically in line with what we had expected. So that was already in our budget included. It's a little bit higher than what we had in the budget. But one thing you have to consider that it is a tradition at ElringKlinger since many, many years that we pay to all the employees in Germany a bonus every year because of the good performance of the previous year. So if I just look at the ElringKlinger AG and the subsidiaries, we had to build a reserve in March in the first quarter of roundabout EUR 3.7 million, which was not budgeted. That is the bonus for all the employees here in Germany. So we pay, again, EUR 1,450 per person for -- as a bonus for 2017. That is a tradition here at ElringKlinger and that, of course, burdens Q1, which is, of course, not in Q2. So almost EUR 4 million are not in Q2 that we had seen in Q1 in extra personnel costs. If you look at the material costs, of course, we are going to try to recover most of that. And if I look at the aluminum cost that really increased tremendously. This is something that had a big influence in Q1. Of course, we are trying to recover that from our customers. We have addressed that already. But first of all, we have it in our books. So if we get compensation, and normally we get compensation from the customers for those material price increases, you will see that maybe in Q3 or Q4, because that is always a matter of ongoing negotiations, that's pretty clear. And one thing I also have to say that very, very clearly, we have seen increased material prices based on the fact that especially our suppliers of high-quality spring steel in the U.S., they need pre-material that they buy it from Chinese steel manufacturers. So that means they are fully hit by the tariffs. This is the true part of the story that Mr. Trump is broadening the own industry in the U.S. because they buy a lot of pre-materials in Europe and in Asia, the steel industry. And of course, also, those increased prices are in our books at the first time. But we have addressed, of course, the customers because I do not accept that all -- that Ford and GM in U.S. that they basically do not take those costs and that we take those costs by, from my point of view, an irrational action of an American President. So our American customers have to pay that. It's pretty clear. But, of course, first of all, it burdens our P&L. And then, of course, we see a compensation, I would say, in the second half of the year. And your last question with regard to the management board now having 4 people on the board instead of 3. This will not have a big impact on cost because you might recall that we have been 3 people on the management board for quite a couple of years. And our colleague Mr. Schmauder, he left the management board about 2 years ago. And the structure of his contract was different to what we have now for our COO and for our CFO. So in total, this will not increase costs tremendously. Yes, pretty clear.

[Operator]

The next question is from Christoph Laskawi of Deutsche Bank.

[Christoph Laskawi, Research Analyst]

Christoph Laskawi, Deutsche Bank. I'd like to come back to the cost headwind that you had in Q1. You stressed that some items have been as budgeted, which is fine, I guess. But looking at the raw materials and additional costs from NAFTA, you've guided for, say, EUR 5 million to EUR 10 million each for the full year. And now we already, according to your split, are at around EUR 7 million on the rounded number. So have those costs been as budgeted as well, and do you stick to your full year guidance for those? Or do you actually see an increasing headwind? And what would guidance be for those 2 items? And other question would be, since you stressed that Switzerland saw some basically lacking efficiency gains that you expected, or that might be shifted. Is EUR 10 million still the target for the year? And do you still -- are you still confident to reach it? And what's the visibility on all 3 items that you have? Can you actually say, look in Q2 most of it will ease and we will see a much improved profitability, or is it not as clear? On NAFTA, also, could you just remind us on which customers and products are causing the capacity constraints? And another one on the order that you just had, it's giving you credibility on your approach to diversify your portfolio on the one hand. The question would be, then how much of risk could it be in financial terms if you need to invest upfront? Could you give us an indication on the total amount that you need to spend in order to build up the production line that should supply the contract?

[Stefan Wolf]

When we look at material, we saw in some areas, based on political developments, a more sizable increase compared to what the expectation was. This has eased somewhat in certain areas in the meanwhile. So yes, in the short term, we are beyond what we originally had thought over the year. It's a question if this stays the same in terms of the material prices in the markets, or if we see some further easing. Since we have a material turnover every couple of months, there is -- it is -- at point in time, it's still too early to say where we're going to be ending up. Currently, we saw a little bit of decrease in regard to that, a little bit of easing. If it continues, we don't know. EUR 10 million is still the target in Switzerland in terms of improvement. When we say that we come from a 7-day operation, we're on most parts of the production in Switzerland now on a 5-day week. It shows that we're having a relaxed capacity situation right now. So we still shoot for the target. However, some of the extra costs stemming from some relocation efforts is weighing. NAFTA, as I explained before, it's mainly trouble in regard to selling the head gasket production. And individual customers, please understand this is not something that we advertise. And when we take additional orders, let me say in general assessment here, we try to build our assessment in terms of the financial solidity of new OEs and others in terms of the contracts that we make to the best possible. Therefore, we think that the risk, if you want to say so, is limited. But understand please that we cannot probe much more in detail in regard to that.

[Stefan Wolf]

And with regard to our new business units, be it battery technology or fuel cell technology, of course, if we get orders like this one now from Sono Motors, we have to invest, pretty clear. But this is worth it at all because this is pretty high 3-digit-million contract that we got here. This is a real success in our new business units for E-Mobility. And of course, we have to invest here, but on the other hand, we get real good sales and very good margins in those projects.

[Christoph Laskawi, Research Analyst]

But you are unwilling to quantify the investor front or just roughly brief indication. And another follow-up question would be, since you shoot for recouping the higher raw materials, especially in the NAFTA region as well, how much room is there really in current negotiations if clients are actually demanding more and more volume, and you are sort of stretched to supply that. Are they willing to give in quite easily? Or is it more challenging than it has been before?

[Thomas Jessulat, CFO & Member of Management Board]

To be honest, it's different. It's different from customer to customer. There are customers where it's easier. I will not say that it's easy, but it is easier. And there are customers where it is more difficult and you have to negotiate. But we are pretty clear on that and pretty strict on that. And we also have implemented a system now that new contracts we will have clauses in there that there is an automatic adjustment of material prices once they go up. So that is a different way how we do it in the future, especially with the products -- aluminum products. But it's always a matter of negotiation. And I'm now more than 20 years in this industry, and we always have been successful to get something from the customer once material prices have increased. They are -- we're normally successful here.

[Operator]

The next question is from Sascha Gommel, Crédit Suisse.

[Sascha Gommel, Research Analyst]

First question would actually be on E-Mobility, again. You reported flat sales more or less of around about EUR 4 million, despite that you actually invest so hard in this business. So just maybe you can shed some light on why there is no growth coming yet. And when do you actually expect growth to come in? And then, second question would also be on your battery contract with Sono Motors. My understanding is, it's a very small startup company and the success of the end product is far from certain. So how do you make sure that your risk is minimized or manageable in terms of the upfront investment you're taking? Because it could still be the case that they never actually reach the stage of serious production for their product. So I would really be interested in your risk management approach to that. And then last but not least, if we would exclude your disposal of Hug, your free cash flow was, again, massively negative. I understand it's a function of your very low level of profitability. But your balance sheet leverage keeps creeping up and your relative leverage metrics keep creeping up as well. And your dividend payment in the second quarter will move the leverage up further and further. My question is how sustainable is the dividend strategy going forward basically?

[Stefan Wolf]

Well, let me start with the first question. E-Mobility, of course, this is still a small business unit. But it is very, very important for the future of this company. We will benefit many, many years from the large number of combustion engines that are going to be built in this world. But the numbers are going to decrease in the years to come. And what we do in E-Mobility and there is, of course, some investment, but it's moderate. And it is always related to contracts that we get. It is absolutely necessary to do that to secure the long-term existence of ElringKlinger. Because we will see massively changing world in our industry. And as I mentioned before, we will benefit from the fact that we will see -- still see millions of combustion engines that are going to be built but the numbers are going down and we have to focus on those new business units what we do intensively. And it is a success to get such an order as we got from Sono Motors. Of course, it is a startup. Of course, we look into that very closely. And of course, we only invest if we get orders. And of course, we have also payment structures with them and contracts that secure that we're not going to invest and then lose money. But if you look at all the companies that are out there working on those, let's say, low-budget cars, E-Mobility cars, people movers, public transportation cars, those are all young companies. Those are the so-called new OEs. Most of them are startups. And if you're not working with them, you just give up so many chances and we had a clear strategy already a couple of years ago that we go with those companies, that we accept orders from those companies. But we have a strategy in our contracts that gives us the position that we're not going to lose money once they will not be successful. It's -- from my point of view, it is pretty clear that you have to work with those companies. That is the future. You learn a lot. We also have improved our technology tremendously in the last 3 years in the E-Mobility business. And of course, sales are low right now. Look at the numbers of new registered cars, E-Mobility cars here in Germany or also in Western Europe. It is a starting business, but it is a very interesting business. And it will generate a lot of sales and especially a lot of profit in the future. I expect that from 2021, 2022 we will see here tremendous increases in sales and profits, and it's worth investing into that. You will see that once we have 2020, '21 or '22. We will see that tremendously in the results of ElringKlinger in the years to come. And we have no alternative, to be honest. We have no alternative. And we do not think in quarters. With regard to our new products, we even do not think in business years. We think in decades. And the company will turn 140 years next year and I want that this company still exists in 50, 60, 70 years. And that means that today we have to set up the company in a way that it will be successful in 10, 20, 30 years with those new products in those new propulsion systems that we see that are coming in large numbers. And so it's not a question of a quarter or 2 quarters or 4 quarters. It's a question of 3 to 5 years, once we see remarkable sales and profits here in this new business unit.

[Sascha Gommel, Research Analyst]

Can I quickly follow up? Because I mean, if I look at the long-term trend, we're coming from a margin of 20%, and even in the financial crisis, your margin was in the high single-digit. So the transformation to the fact that in Q1 your margin basically reached 4% and your OE margin, if I exclude the Hug sale, was barely breakeven. It was 1% roughly. I mean, how long does the transformation really take? Is it another 5 to 10 years, as you indicated with E-Mobility? And how certain can you be that those contracts will be so profitable in the future?

[Stefan Wolf]

I'm pretty sure because I know the contracts and I know the calculation. So that is no question. So that is pretty clear, once that runs, that is fine. But you have to see we explained already, Mr. Jessulat also explained pretty clearly, all the extra cost and the burdens that we have in the first quarter. That's pretty clear. And we have some pre-investments for those new business units. It's also pretty clear. And we have to do that to set up the company in a way that we will be so successful in 10, 15, 20 years. And that is, let's say, part of our job description here to secure the company long term. You also had a question to the dividend strategy. So far we always wanted to share the profit that we made in the year before with our shareholders. And as of today, there is no change with regard to that. And we have to see how things are developing and we will see how the decision is going to be next year for the fiscal year 2018. So it's still very clear. We had a solid and ongoing clear dividend policy that we let our shareholders give them a share of what we earned in the year before.

[Sascha Gommel, Research Analyst]

Okay. One follow-up and then I'll let it go. How can you calculate a contract like the latest one you received in terms of profitability considering that it's not even clear that company's ever selling a car?

[Thomas Jessulat, CFO & Member of Management Board]

Again, we apply strict risk management relative to new OEs. But what in detail the measures are, that information is under full confidentiality and we cannot disclose that. I hope you understand. But it's very clear that for the new players, that risk in regard to them has to be addressed in a different way compared to the established automakers.

[Stefan Wolf]

And you can see that there's no difference to other contracts. We always have a clear calculation method and there's no -- it's a little bit complicated, more complicated to calculate, let's say, a complete battery module than a cylinder gasket here. But it is basically a scheme that we have, and based on that, we calculate our prices. It's pretty clear.

[Operator]

The next question is from [ Akshay Kakkar ] of JPMorgan.

[Unknown Analyst]

My first question is on the gross margin. What is the size of the pre-investment or one-off launch course in this quarter that should not be expected in the coming quarters? And my second question is more strategic. Is there a potential to spin out any other assets to realize value or delever? For example, the Plastics division, are you thinking on those lines?

[Stefan Wolf]

Let me let me start with the last question. If I look at our Engineered Plastics division, I would say I have between 2 and 5 requests per quarter from companies that would like to buy that business. But it is highly profitable. It's a very good business. It is also part of our strategy to grow outside of the automotive industry to have in about 5 to 10 years, let's say, 20% -- 15% to 20% outside of the automotive industry. And there is a big role in the ElringKlinger Kunststofftechnik. So pretty clear we're not going to dispose that business. It was different with Hug. There is a clear development of combustion engines in the years to come. So that from my point of view it made sense. Now, at this time to disinvest in a company that is purely related to the combustion engine and take the money to invest that in our newer strategic business units, battery technology and fuel cell technology, that made sense. But the Engineered Plastics business is not for disposal. Pretty clear on that.

[Thomas Jessulat, CFO & Member of Management Board]

In regard to the gross margin, my earlier explanation on the EUR 20 million, if you subtract the amount, the increase that you find in selling expenses plus the little bit that you find in R&D and some in G&A, all of the rest is in the gross margin. So I hope not.

[Unknown Analyst]

Is EUR 3 million, EUR 4 million number, a good number?

[Thomas Jessulat, CFO & Member of Management Board]

Say it again?

[Unknown Analyst]

Is a EUR 3 million, EUR 4 million number a good estimate?

[Thomas Jessulat, CFO & Member of Management Board]

No, because what you have in a gross margin area, it's a double-digit number.

[Stefan Wolf]

And once again I want to point out. One effect that we had in Q1 is the bonus payment to all the employees in Germany. Those are EUR 3.7 million in personnel costs which is one-off issue.

[Operator]

The next question is from Michael Raab of Kepler Cheuvreux.

[Michael Raab, Head of Automobile (Thematic) Research]

Michael Raab, Kepler Cheuvreux. Obviously, the interim conclusion of what you're saying is that some of the headwinds that you've sort of budgeted for going into this year has come stronger than you originally anticipated. So I guess, this year benefiting from roughly EUR 21 million of a tailwind from the Hug sale, this provides you with an active base effect next year. So when it comes to try and at least maintain the 9% EBIT margin that you're sort of shooting for this year, I personally think you will have to take additional measures and probably stretch yourself even more. So what's currently on your mind in terms of additional measures you could take going forward to make sure that next year there is not, again, a margin disappointment, please?

[Thomas Jessulat, CFO & Member of Management Board]

The activity here on the classic business side is very clear. And we explained that the one item here is the improvement in Switzerland, that we continue and drive improvements as fast as we can. And the second one to eliminate bottlenecks in the NAFTA area. They are the key items here. When you would assume that we had higher material costs going forward, then you may be right saying that it could be hard in 2019 to improve or to maintain the margin level. But up to now, I think this is speculation because we don't know how material markets will turn out in '18 and '19, and so therefore, it's high uncertainty, and it's really not a clear answer on that.

[Michael Raab, Head of Automobile (Thematic) Research]

All right. And in view of what we just discussed, what additional measures do you want to take on the cash conversion front? I mean, apparently, yes, there is a strong correlation, visibly so, between the development of earnings and free cash flows typically, which all else equal means if you were really to reach the improvement that you talked about and keep the margin flat, that perhaps would help your free cash flow generation next year as well. At least try and improve it. But I think in terms of managing working capital or perhaps CapEx, that may be an additional, let's say, challenge. Any take on that, please?

[Thomas Jessulat, CFO & Member of Management Board]

Yes, it's -- the areas that we work on here to improve operations in the bottom line, for one, when we look at cash flow. Second, to maintain and further maintain discipline in CapEx spending despite the fact that we have new orders coming in here for new technologies. In regard to working capital, to drive a good turnover ratio in terms of receivables, drive down inventory management by -- or the inventory levels by improved management on that and to extend payment terms with the suppliers, in particular in Germany. So the topics are really not new. It's rather a matter of execution now.

[Operator]

The next question is from Frank Biller of LBBW.

[Frank Biller, Investment Analyst]

Frank Biller from LBBW. It's just 2 questions remaining here on my sheet. The one is the one-off gain of the sale of Hug, EUR 21.1 million, was that in line with your expectation? And the other question is, for the whole year, is it still a total amount of roughly EUR 10 million positive coming from this sale? And the other question on your margin. So am I right, your margin target for 2019 still is north of 9% on an operational level and this includes some one-off burdens coming from the new order of Sono Motors, which obviously leads to a margin dilution here 1919 -- 2019?

[Thomas Jessulat, CFO & Member of Management Board]

Okay. So to your last question here, even now it's not clear that it's all going to be a burden to ramp this project up. But we cannot go more into that because that would include contractual details, again, that fall under confidentiality here. And the sale of Hug approximately is in line with the expectation. However, also in regard maybe to your second question, the closing was taking place. But typically in those tiers there is a final reconciliation based on some audited numbers and that is not concluded yet. And therefore unless that is concluded, I cannot give any more details on that as of now.

[Operator]

The next question is from Florian Treisch of MainFirst Bank.

[Florian Treisch, Director]

Maybe allow me a personal comment from my side. Looking at your reporting at least last couple of quarters now, please stop being in denial here. But clearly if you look at the target for the quarterly now report are so far from any other peers here. You're clearly the only one seeing these [indiscernible] segments. You're the only one explaining it by market environment where all others are not seeing it. So please adjust your view here. You want to be perceived as a good company with a well-managed execution and you basically did completely the same, if I can cite you. EBIT is comparable to last year's figure, basically half, if you exclude the one-off. Second point, bonus for the good performance in the year '17, another one-off, another profit warning, another meaningful one-off. So clearly focus on execution here and not playing that you are the E-Mobility winner here and you have 99% of your business model under control. But that's more a personal statement. Now coming to my questions. The first is on the management reshuffling. The question is why have you not nominated a dedicated EV specialist? I believe you have enough issues when it comes to operation production. And at that moment you are replacing a COO, making him an EV expert. Why are you not going for an EV expert here? The second question is on the lightweight plant in California for new EV or powertrain mobility. Can you give us some indication, you're probably not sharing details when it comes to the client, but at least, is that plant profitable or are you seeing a meaningful negative run rate per quarter? And the last one is, as we are only seeing this 1.2% adjusted EBIT margin in the OE business, which is hardly profitable, can you shed some light on the product group perspective, i.e. are gaskets still profitable, is lightweight really as profitable as you indicated in the past? Or are we seeing mix effect on some of the ramp-ups here? But clearly giving us a better feeling where are you when it comes to dedicated product groups.

[Stefan Wolf]

Well, first of all, Mr. Becker has a very long expertise being the COO but also heading this new business unit. And we have a very, very dedicated and very good team here, be it engineers that are developing those new products. And the question is always, what do you mean by an EV expert. I think he is the right person to do that, and he is very skilled. He has a lot of experience also in this field, and he is concentrating on that. I think that is a right choice. So -- and as he knows also, all the history of those products and development of those products and those new product lines here in ElringKlinger, I think that's a strong value. And from my point of view, it would have been not the right way to look for somebody that comes from outside and does not know this history of those new ElringKlinger products. So I fully support that decision of the supervisory board, and I think it's a very, very good choice. The lightweight plant in California, we have already announced that a couple of times. That is for a customer that produces right now the third model as an electrical vehicle. We are not allowed to mention the name, but you know who I mean. And this plant is running good. It's running in our expectations, and it is generating profits here, pretty clear. And what was the third question? I'll let Mr. Jessulat answer the third question.

[Thomas Jessulat, CFO & Member of Management Board]

On the margins on the business units, this is not something that we publish, for obvious reasons. But by looking at the equity number, I agree with you that incremental sales in some of the classic business units with an incremental negative margin is compensating good new products with good margins coming into the group. This is what you see so far. Maybe now with the material cost even with 1 sector more. But generally speaking, new innovative products completely meets our expectations here. And what we see as negative results weighing in, it's from those areas that we have talked about. But I understand what you say because if you don't see it broken down, then it may lead you to one conclusion in regard to profitability of certain groups of products. But this is not really our concern. Our concern is that we have to properly address operational excellence topics in the group and adjust the necessary organizational steps in the whole ElringKlinger Group with the size that we have today with the many locations that we have today. This is truly the topic and this is the way I would want to answer your question.

[Operator]

The following question is from Henning Cosman of HSBC.

[Henning Cosman, Analyst]

I just had a few clarifications. I'll ask one by one. So the first, Mr. Jessulat, could you please confirm when you said the outlook is a challenge now. I mean not that I disagree with you at all, but I just wanted to confirm that, that was what you said.

[Thomas Jessulat, CFO & Member of Management Board]

Yes. Outlook is a challenge for 2018.

[Henning Cosman, Analyst]

Okay. Great. And then on the actual phasing of the improvements, you've talked about this EUR 20 million shortfall. And also clarification to what you said, I think you said some of that can be compensated, some of that can't be compensated. So my understanding is that some of the shortfall will continue into the second quarter and possibly the third, which in turn then implies that once you get to Q4, to still get to your 9% profitability level for the whole year, you would have to exceed that 9% profitability level in Q4 quite clearly. Is that the right way to look at it?

[Thomas Jessulat, CFO & Member of Management Board]

You would have to stay in some quarters, eventually, above 9%. That could be the case. But the way I look at that, when I talk about, do we have the data points as of yet. As of yet, we don't have them. And we have to make this assessment on a quarter-by-quarter basis and the overall assessment like you say is a quarter thing.

[Henning Cosman, Analyst]

Okay. So and just in absolute terms, you do agree that you'll have to find organic profitability of EUR 10 million, EUR 15 million in the following quarters of 2018, which weren't there in the first quarter. So there will be a very clear swing, be it from cost or otherwise higher profitability?

[Thomas Jessulat, CFO & Member of Management Board]

I think so.

[Henning Cosman, Analyst]

Okay. And then just finally, that's a clarification on something that Dr. Wolf said. I think you said the bonus is a big tradition at ElringKlinger, but yet you said it wasn't budgeted for this year. So I just wanted to understand how that works, if it's tradition and you are also planning to do this going forward, why don't you budget for it?

[Stefan Wolf]

Because we normally decide on that in the supervisory board meeting in March in the following year. And, of course, we could budget that and then if we decide not to do it, and also it's not clear which amounts we are going to pay. That is always decided once we have the final result and the final auditor's report in the supervisory board meeting in March. We could think about putting something in the budget and then just if we pay less, then just take those through the results. But that is the way how we do it every year, that we decide in March. And as it is not decided at the end of the year, we cannot really put that into the balance sheet or into the P&L.

[Operator]

The next question is from Michael Punzet of DZ Bank.

[Michael Punzet, Analyst]

Michael Punzet. I have 3 more housekeeping questions and 1 strategic one. Let's start with the housekeeping questions. First one is on your tax rate. That was really low in Q1 driven by the Hug disposal. Can you give us any kind of guidance for the full year? Second question would be on the order intake. Will you froze the order you received from Sono Motors and the order intake for Q2 and also in the order book? And I think that, well, this one and the more strategic one is, why should we be more positive on the positive -- on the positive margin effect on group margins for coming from new products taking into account that, I would say, in the past years, nearly every quarter we just have the missing contribution from new orders to your group margin and we now stay at 9% and when we start to [ cut my boot ], assume we were at 15%. So maybe you can explain a bit more, why should we be more positive on margin development in the next 3 to 5 years that we may come back in the double-digit range?

[Stefan Wolf]

Let me start the last question because our product mix changes. And I know what we have in the pipeline. I know all the development project that we have. I would say not a 100% of those R&D projects that we have here on hand are going to result in serious production deliveries to our customers. But even if it's only 50% or 60% of what we have on hand, and of course, we see the margins that we have calculated in those projects. So that is just -- we just see a change in product mix. And of course, the sales as of today are still low in the E-Mobility sector. But what we see in projects and you see that one of those orders is a high 3 digit million number for those 8 years of sales that we have in the contract. So we come into completely different, let's say, ranges of the cost for our products. The only thing I can tell you is that I know the calculations, and I know the product, I know how things are going to develop. It always is a question of how -- what are the numbers that are coming. Is it coming earlier? Is it coming a little bit later? But one thing that is clear, if we do not set up the company in a way that we have done it, and we still do in the future, then, of course, we could -- of course, we could cash out the company completely. But that is not the interest of the majority shareholder and I don't think that, that is the interest of, let's say, the majority of shareholders that we have. They want to have the company still in 30, 40, 50 years. And that means that we have to set up the company today that when numbers of combustion engines are dropping and they're going to drop in the next 5 to 10 years tremendously. It's still a good business. But the possibility for us to get new business in those traditional business units, it's limited. We still will earn good money. We still earn a lot of money. We still are going to produce cylinder-head gaskets in 40 years. I'm pretty sure, that still in 40 years we will produce cylinder-head gaskets but in much lower numbers. And we need those new products, that substitute products that are not needed anymore by the customers once we see a downturn of the combustion engine.

[Thomas Jessulat, CFO & Member of Management Board]

The tax rate for the year is the organic result at nominal levels plus the Hug transaction is tax-free or near tax-free circumstances. So this is the one-off that is essentially driving the tax rate here. And your second question on the order intake, once we receive releases from the customer for deliveries, at this point, if those orders go into order intake and order stock. That is not the case right now, for the new customer here. So we will see that at a later point in time when we get into operations in regard to that product.

[Stefan Wolf]

It is planned to go into serious production second half year of 2019. So I assume that the first numbers that go into the order intake from this project that we have with Sono Motors, you will see the second quarter 2019.

[Michael Punzet, Analyst]

Okay. And maybe a follow-up question. Could you please quantify the loss of E-Mobility because in the past you stated that number also in the quarterly report, but now with the Q1 report it was not included.

[Stefan Wolf]

We have roundabout roughly EUR 2 million.

[Operator]

The next question is from Tim Schuldt, equinet Bank.

[Tim Schuldt, Head of Research]

I have 2 remaining questions. One is with regard to this employee bonus. Just to get this right, what was the comparable number last year in Q1 and -- or was it in a different quarter last year? That's my first question. And then with regard to E-Mobility, you stated that you're looking a lot to these small startup companies and that there would be more business following. Am I understanding this rightly that we should look more for, let's say, these young customers in the future and maybe not so much to the dinosaurs of the old combustion engine world for new business?

[Stefan Wolf]

Well, first of all, let me start with your first question. I cannot tell you exactly the total amount of this bonus payment in Q1 2017. But it was the same amount per person, EUR 1,450. But we had less employees in the AG and in Germany. So that it's probably lower than the EUR 3.7 million. I would say maybe EUR 3.2 million or something like that. So that -- it's always in the first quarter. We have, of course, also projects with the old OEs that are also working on E-Mobility projects. Pretty clear. We're not only focusing on those new OEs. But it is very interesting to work with those new OEs. It's a completely different world. They are much more dynamic. They are much more flexible. They are very much interested in, let's say, new technologies. If you look at those Chinese companies that are -- also we have a lot of projects on hand with Chinese companies. They pay for development costs. So that is completely different. But, of course, we still also work with our old traditional customers in E-Mobility. And of course, we are also focused on products for the combustion engine. As I mentioned before, I'm sure that we will see the combustion engine also in 30, 40, 50 years, but in much lower numbers. So we're still into that. And that is, of course, also a big backbone of our business. But the business is more diversified in the meanwhile.

[Tim Schuldt, Head of Research]

Maybe just a follow-up in this regard, I have heard from the, let's say, northern German car manufacturer recently that all the orders for the battery business, for the tender, have been given away. But not all names have been announced. Have you won any additional business compared to or relative to this small company you've announced the order with recently?

[Stefan Wolf]

Sorry, but I cannot comment on that.

[Operator]

There are currently no further questions, so I'll hand back to you.

[Stefan Wolf]

Okay. So thank you very much for your interest and for your questions. If there are follow-up questions, as usual, Investor Relations is more than happy to take a call from you if you have additional questions in the next days to come.So thank you very much and we hear each other then in our conference call for Q2 2018. Thank you very much. Bye-bye.

[Operator]

Ladies and gentlemen. Thank you for your attendance. This call has been concluded. You may disconnect.