Elringklinger AG

XETRA:ZIL2

Earnings Call Transcript 2019-Q1

[Operator]

Dear ladies and gentlemen, welcome to the analyst conference Q1 2019 of ElringKlinger Group. At our customer's request, this conference will be recorded. [Operator Instructions]May I now hand you over to Dr. Stefan Wolf, CEO, who will lead you through this conference? Please go ahead, sir.

[Stefan Wolf, Chairman of the Management Board & CEO]

Well, thank you very much. Hello, ladies and gentlemen. Welcome to our conference call on the Q1 figures 2019. Let me inform you about the agenda of today. It is as follows. I will start with a quick wrap-up on markets and the most important headlines of the first quarter. Then our CFO, Thomas Jessulat, will walk you through the financial figures of Q1. Afterwards I will close with the outlook and then of course at the end, as usual, you have the opportunity to ask questions and Mr. Jessulat and myself, we are going to answer those questions and we are more than happy to answer your questions.Well, let's start. For the first quarter, we noticed the following headlines with respect to our business. Markets started very poor into 2019. Nevertheless, our revenues reached EUR 441 million. In organic terms, this equals an increase of 2.6%. EBIT pre PPA was below the prior year figure and came in at EUR 6.9 million. That's an EBIT margin pre PPA of 1.6%.As expected and we discussed this already at our analyst conference in Frankfurt some weeks ago, the first quarter was very weak. EBIT was burdened by new U.S. antidumping and countervailing duties. Again we had higher material costs and also personnel costs increased. Mr. Jessulat will explain the effects impacting the earnings situation in more details later in this call. In light of the weak markets, we initiated a bunch of additional cost saving measures in Q1. These should take effect starting in the second quarter and should help to improve earnings from Q2 onward. Overall, with the improvements we expect to see in the second half of 2019 and we confirm our outlook therefore for the full year. As you already know, in the first quarter 2019, we closed a syndicated loan with a volume of EUR 350 million over a minimum term of 5 years. This further improves our financing structure, as you will see on the following slides that are going to be explained by Mr. Jessulat. From an operational point of view, we are currently in the ramp-up phase of our new U.S. plant in Fort Wayne in Indiana. We are also working on the preparation for the SOP for our new battery contacts. And of course the optimization measures, especially North America region, are ongoing. Let's have a look at the market development in the first quarter. As I already mentioned, the start into the current year was very, very weak. Global markets based on production volumes are slightly decreased by around 4%. As you can see in the slide that you will have on your screen right now, this was the poorest start into a year for almost a decade. In North America, we saw the market down by 2.4%, while car production in the U.S. was even down by 1%, the production of light trucks could still expand by 1%. In the European Union, we saw a decrease in all major markets, partly still due to effects from the introduction of WLTP, partly due to the weak economy overall. The decline amounted to 2%. In China, first signs of weakening became visible already by the end of last year in the fourth quarter. Trade conflict and tariffs are now hitting the biggest automotive market, leading to a downturn of production figures of more than 5%, which is a lot in such a big market. And last but not least, India and Japan were also down by 2% respectively, 6% compared to the first quarter in 2018.So far to the global car market, and let me now hand over to Mr. Jessulat for the explanation of the quarterly figures.

[Thomas Jessulat, CFO & Member of Management Board]

Yes, doctor. Thank you, ladies and gentlemen. A warm welcome also from my side. I would like to comment the financial results for the first quarter starting on Slide #5. Despite the market decrease, our order book situation is quite solid. Order intake increased to EUR 498 million. Adjusted for currency effects that represent robust growth of 0.5% and indicates sales growth also in the months ahead. Therefore the order backlog also expanded. It rose to EUR 1.077 billion, a plus of 5% respectively, 3% when adjusted for foreign exchange effects.We realized sales growth in the first quarter 2019 despite the challenging business conditions. Q1 sales came to EUR 441 million after EUR 431 million in the first quarter of 2018 and the deconsolidation of Hug and New Enerday eluded growth by minus 1.4%. Foreign exchange effects pushed sales by 1.3% and that was particularly driven by a stronger U.S. dollar. And all in all, we saw solid organic growth of 2.6%. As you can see on the next slide, we see here our global sales split. We saw again a very strong growth in North America. The sales share in this region increased significantly to 23% in Q1 from 19% last year. At the same time, the vehicle production in North America fell by 2.4%. In fact, North America was the only region within the ElringKlinger Group showing positive sales growth in the first quarter 2019. In all other regions revenues came down versus the previous year's quarter. With regard to our business divisions, we realized increasing sales in our strategic future growth areas, lightweighting and the E-Mobility division. Lightweight products and E-Mobility components both achieved strong growth rates. Therefore, Lightweighting/Elastomer division, our biggest business unit, further increased its sales share in Q1 to now 28% of total sales. E-Mobility could also on a lower level push its sales share to around 2%. Sales in the other classical business areas, meaning shielding technology as well as cylinder-head gaskets and special gaskets decreased. Slide #8 presents the earnings figures for the first quarter. EBIT pre PPA reached EUR 6.9 million and the EBIT margin pre PPA stood at 1.6%. Let me outline the main drivers of this development. First of all, you have to consider the missing one-time gain from the Hug disposal which amounted to EUR 21 million in the first quarter 2018. Effects on the negative side are duties hedged and negative impact of EUR 5 million in the first quarter of 2019. In the first quarter 2019, the U.S. government announced so-called antidumping and countervailing duties on aluminum which is imported from China. Those new duties came into effect in Q1 and were even compiled retroactively for defined periods in 2018. They amount to a significant total of 115%. Of course, we immediately took action to limit the impact by those duties and we reallocated all our U.S. demand for aluminum to suppliers outside of China, so that in the second half of 2019 we won't see an impact anymore.Also higher raw material prices burdened our earnings by EUR 5 million. Prices for plastic venues increased even further. And prices for aluminum and steel are still on the very high level. Let me also remind you that the tariffs on steel and aluminum which came into effect in June 2018 in the U.S., are still in place.In North America, we see a high demand but relevant countermeasures addressed and are effectively implemented. We could, for example, stabilize the extra cost for special freight. And on the other side, we also recorded higher personnel costs. Due to high demand, we had to increase the headcount in those facilities by more than 300 over the course of the last 12 months. On the positive side, in Switzerland, the migration of volumes is finalized since the end of 2018. During the course of 2019, we will address the further optimization of the fixed cost base and positive effects are expected rather towards year end of 2019. The position others includes impacts from among others, higher personnel costs, R&D capitalization and decrease in PPA. To sum up the earnings situation, the net income attributable to the shareholders of ElringKlinger fell to minus EUR 1.5 million. The decrease of net income was also due to the high tax rate in Q1 and this was related to losses at subsidiaries for which deferred tax assets could not be recognized. Accordingly, the earnings per share was in negative territory, amounting minus EUR 0.02 after plus EUR 0.41 in the first quarter of 2018. Of course the current earnings situation for us is not satisfying. We expect an improvement in the quarters to come based on several reasons. An upturn of markets, especially in China, this will also give us more tailwind regarding our margin mix. Number two, the incremental cost increases due to wage and material price increases will diminish [ hence ] from the second quarter of 2019, in comparison to the second quarter then of 2018. As mentioned, we have implemented countermeasures regarding the antidumping and countervailing duties. This means no more burden from those duties in the second half of 2019. Also at our plants in North America, we expect a further improvement. At our Swiss location we also expect an improvement for the fixed cost base until year end. And in addition, we implemented additional cost savings measures which are directed to improve the earnings situation in the short term. For example, we are reducing personnel costs by reducing overtime of our workforce. We suspended the annual employee bonus, scaling back leasing workforce and put in place a hiring freeze in the traditional business areas. We also carefully manage any other material costs and reduce any discretionary costs, for example, by replacing business trips with video calls or [indiscernible] marketing events.Let me now turn to Slide #10, showing the performance of our segments. Development of the OE business we already have discussed in the main issues. So I turn to aftermarket where sales in Q1 was mainly stable compared to the first quarter of the prior year, despite the tense political situation in some markets like Turkey or in the Middle East. Revenues stood at EUR 45 million. In new markets like North America and Asia, we saw satisfying business development with revenues increasing, even though on a low level. EBIT came in at EUR 7.3 million, representing an EBIT margin of 16.3%. And the slight dip in EBIT margin is due to costs associated with a market entry in North America and Asia. In regard to Engineered Plastics, strong demand from known automotive businesses led to a sales increase up to EUR 32 million and the EBIT was impacted by an increase of material prices, but thanks to stringent cost measures, EBIT achieved the prior year level of EUR 4.1 million and EBIT margin stood at 13% in the first quarter.We come now to Slide #11. Net working capital went up to EUR 606 million and compared to the end of December 2018, this represents an increase of EUR 39 million. Of this increase were attributable EUR 10 million due to currency effects, EUR 8 million due to inventories and also higher raw material prices, EUR 19 million due to receivables and an improvement of EUR 2 million resulted from the increase of trade payables as an FX adjusted value. The increase in inventories was for one driven by the shift of our supplier base in the U.S. in connection with the antidumping and countervailing duties. To avoid those duties, we changed the supply chain which resulted in temporarily higher inventory levels in the NAFTA region. Another effect was with regard to the ramp-up of our new plant in Michigan in the U.S.Our disciplined CapEx approach continued in Q1. CapEx was EUR 29 million and the CapEx ratio came to 6.5% in the first quarter, well within our targeted range of below 9%. Operating free cash flow was, as expected, still negative in Q1 and stood at minus EUR 19 million. And net financial debt increased to EUR 796 million where we have a little bit of closer look on Slide #12.Here, as I said, our current net financial debt amounts to EUR 796 million from the increase of roughly EUR 70 million compared to December 2018. More than half, EUR 46 million resulted from the first-time application of IFRS 16 and includes leasing liabilities. When we look at our debt structure after closing this syndicated loan with a volume of EUR 350 million over a minimum term of 5 years, we started to replace more short-term loans into long-term and that's what you can clearly see on our balance sheet. After 65% of known current financial debt by the end of 2018, the share of long-term debt stood above 80% [indiscernible]. More than EUR 653 million are due later than 2020. So far from my side, I will now hand back to Dr. Wolf for the outlook and some final remarks.

[Stefan Wolf, Chairman of the Management Board & CEO]

Well, thank you very much, Mr. Jessulat for the explanation of the figures of Q1 2019. Let's now talk about the more near-term future and then about the outlook for 2019. At our analyst conference in March in Frankfurt, we already showed you the graph on Slide #14 that you see right now, showing that the forecast for the global auto production was revised downwards each month. The pessimism for 2019 is still on the rise and the forecast for the upcoming quarters was reduced again in April. So coming from January with bad figures that worsens even more every month in the first quarter and now also in April. ElringKlinger managed in the first quarter to outperform the markets and our order intake is still growing, as Mr. Jessulat already explained, but in a much slower pace now. This is the reason why we believe in an upturn in the second half of 2019, which is of course supported by the low base of the prior year. We see some improvements in China, but let's see how things are going to develop in the months to come in 2019. Looking at the development of the several markets, we expect the following. North America, here we might see a slight decrease of around 1%. The demand for SUVs and light trucks is still high. But the demand for passenger cars is really down. Europe, the dampening effect from the introduction of WLTP are now phasing out. Nevertheless, the economy is weak and the uncertainties are still existing. We still have no clear view on the Brexit. Overall we might see a slow growth or even stagnation, so that there is no growth with regard to 2018.In China, the government already cut the VAT on car purchases in April. We expect to see another government stimulus in the second half year. Overall, the Chinese market should end the year with slight growth compared to 2018. South America should continue the growth path in 2019 that we already saw in 2018. Overall, we continue to expect global growth of between 0 and 1%, so not really much.If you look on Slide #16 that is on your screen now, with regard to the top line we remain confident to outperform the growth rate of global light vehicle production organically by 2 to 4 percentage points. Our Q1 development showed a solid outperformance in sales already. With regard to earnings, we expect to see a further improvement over the coming quarters and thus to reach our target of an EBIT margin pre PPA of around 4% to 5%. The improvement results from group-wide cost savings, stabilization of material prices and optimization measures in the group, we assume that no further burdening effect will arise and the markets will rebound in the second half of this business year of 2019. Well, last but not least, our expectations for further indicators for 2019 and midterms also remain unchanged. That's what you already have seen in our analyst conference in Frankfurt in March. Well ladies and gentlemen, so far from my side, the explanations to markets and outlook. I highly appreciate your attention and now Mr. Jessulat and myself are ready to take your questions.

[Operator]

[Operator Instructions] The first question we received is from Akshat Kacker from JP Morgan.

[Akshat Kacker]

I have a few. The first one is on the Swiss cost optimization. Out of the 10 million target for the full year, how much was achieved in the first quarter? I'll take them one by one, if I may.

[Thomas Jessulat, CFO & Member of Management Board]

In the first quarter, when we look at Switzerland, we have on a bottom line basis, similar level to the previous year. The improvements in regard to the optimization of the site, they are well underway. But they are pretty much backend loaded for the year, so first quarter, not much.

[Stefan Wolf, Chairman of the Management Board & CEO]

And one thing, let me add this. One thing, let me add this. The order intake in Switzerland was pretty weak in the first quarter. So we had sales number was down compared to Q1 2018. So we had, of course, an effect here in the result because we were lacking orders.

[Akshat Kacker]

Understood. The second question is on NAFTA. You managed to reduce special freight in the U.S. in the first quarter. Can you share a rough opportunity to cut that number further, maybe a rough euro amount of whatever special freight in the region in the quarter that you can cut in the coming quarters?

[Thomas Jessulat, CFO & Member of Management Board]

I'd say it's a low single-digit amount for the first quarter. Clearly when we look at process data, then we see here a good trend based on a lot of efforts that we have put in, in regard to getting the operation here into a better and more efficient operation.

[Stefan Wolf, Chairman of the Management Board & CEO]

And one thing you have to see, we changed Chinese material that we imported to material that we buy from American suppliers now. Which is -- I have to say -- which is more expensive than the material that comes from China.

[Akshat Kacker]

For sure, yes. Second, on NAFTA raw materials, you also mentioned that in your annual report that you've started negotiating contracts with price escalations with OEMs. Can you give us a rough percentage of how many contracts have you been able to do this with? And do you expect to recover some amount in the second half? Because we still see a raw material headwind in the first quarter. I know it's because of other things as well. But just a broad idea of how should we think about that into 2019?

[Stefan Wolf, Chairman of the Management Board & CEO]

I cannot tell you how many contacts those are. But basically we negotiated with our customers on the number of price increases for material. That is one number that we have calculated and we have addressed this to our customers. But believe me or not, it's not funny to have those discussions. Because they are all also under pressure. They have the same situation that they have material increases in-house, but also from other suppliers. So that's a pretty tough and pretty hard discussion that we have. I would say it's a high double-digit number that is under discussion still open, everything is open. Wherever we are able to do that, we are really forcing the customers into payments and once contracts expire, we offer them to go on with those contracts, which most of them have to do because they are dependent on us, but on a totally different cost base, higher cost base. We increased the price.

[Akshat Kacker]

And maybe the last one on tangible CapEx, can we assume this run rate for the remaining 3 quarters around EUR 13 million?

[Thomas Jessulat, CFO & Member of Management Board]

I would expect the second quarter much lower, a stronger third quarter and also a weaker fourth quarter from what I see. On average, I would expect lower amounts going forward. This was still a pretty strong quarter. The next one is my expectation would be much lower.

[Operator]

The next question received is from Christoph Laskawi from Deutsche Bank.

[Christoph Laskawi, Research Analyst]

Thank you for taking my questions, I would also like to go one by one. The first one will be on keeping the margin guidance and also the guidance for free cash flow. Could you give us a comment on the current trading? Do you have discussions with OEMs that actually point towards a second half acceleration or do you get orders or at least call-offs that support that development? Because as you already also have elaborated on, the expectations from IHS and other forecasting agencies have been revised down and also the OEMs are fairly cautious still in their comments. So do you have a good visibility on the volumes currently or is it still unchanged to our last call or meeting with Q4 where visibility was pretty low?

[Stefan Wolf, Chairman of the Management Board & CEO]

Well, the visibility is we see orders coming in and basically we rely on the next 3 months. Sometimes they still change that. I would say visibility is not as high as it used to be in the, let's say, years 2017 and back from that. Nevertheless, we believe and we showed this one slide. We believe that the car market is picking up, especially in China. We see, as I mentioned before, we see subsidies, VAT, a cut has been in force already. We see more subsidies of the Chinese government in the second half of the year. So that market should pick up. And we also see some improvements in other markets, but on a pretty low level. Still if things are picking up that of course will help us and will support to generate sufficient margins in the quarters to come to reach our guidance. Otherwise, we would have revised it today.

[Christoph Laskawi, Research Analyst]

The second question on the IFRS 16 impact, could you comment on the net impact on EBIT? Was it a negative or positive? And also on where you book -- obviously you take it out, the D&A uplift, in the operating cash flow. Do you book it, the respective outflow, in the financing cash flow or investing cash flow? Could you just comment on that?

[Thomas Jessulat, CFO & Member of Management Board]

Okay, IFRS 16 overall, we've got a EUR 46 million increase, like I mentioned before. We've got a 1 quarter depreciation of EUR 2.8 million which you will see in the operating cash flow as an addition. Expectation is roughly the EUR 12 million over the year in terms of depreciation. Net effect on EBIT is EUR 0.4 million and cash flow again is the positive EUR 2.8 million.

[Christoph Laskawi, Research Analyst]

Thank you, so the net impact is a positive or basically the interest component that is then booked on the financial line or is it negative 0.4?

[Thomas Jessulat, CFO & Member of Management Board]

That is it's in the EBIT, so it's before financial expense of financing [indiscernible].

[Christoph Laskawi, Research Analyst]

Okay, last question would be on the working capital. If you expect to see fairly good growth or growth picking up in the second half, and obviously in Q1 the working capital improvements that you have potentially achieved have been overshadowed or offset by the inventory pick-up. How can you, in an environment where growth even picks up further, still manage to improve, especially on the receivable side which was highlighted as the area with the biggest potential?

[Thomas Jessulat, CFO & Member of Management Board]

Yes, on the inventory side, when we look at the overall working capital, we see real good improvements in companies, such as Switzerland, for example. The main negative impact in the first quarter 2019 was due to the change of material, mainly in our Georgia location in the U.S. And here the program that we have sometimes it's interfering with changes of suppliers or also with, let's say, safety inventory that we maintain during a start-up phase like in the new location of Indiana, which is also increasing overall the figure of working capital. Overall I see us on an okay way, and we will also see in Georgia that once now the change is completed that we'll make some progress here. So here I'm pretty confident. We see on the payable side, we see a little bit of improvement here. And I would expect step by step that accounts payable are going to be increasing too. And on the receivable side here is ongoing activities in regard to optimizing here receivable structures. We have some foreign exchange effect here in there. And what we also have to take into account that working capital also includes tools, and we came from amounts of more than EUR 100 million down to below EUR 90 million now in terms of tooling inventory. And I would expect in the phase where growth of the classic business area is going to be taken down to some extent that we'll see more sell-off of this component, the tooling inventory, to levels that are below the very high levels that we have seen in the past. And for example in regard to the start-up location, Indiana, there is going to be a double-digit amount of tools to be invoiced and removed out of inventory through the course of 2019. So here overall I'm still pretty confident that we will see some better data points in the following quarters.

[Christoph Laskawi, Research Analyst]

Okay, thank you, just a minor question as a last one. The interest cost in the cash flow statement went up quite a bit. Is this largely related to the refinancing? And are you willing to share the rough cost of the new [indiscernible] that you have or?

[Thomas Jessulat, CFO & Member of Management Board]

Yes. Yes, it's part that. And also I would expect interest cost and cost of financing to go up going forward to some extent, based on the structure that we have. And I mentioned in one of the last calls that I would expect here lower single-digit amount as a higher interest carry and financial expense cost.

[Operator]

The next question we received is from Felix Eisel from CCA.

[Felix Eisel, Founder and Partner]

On free cash flow, operating free cash flow guidance for the year, could you give us a bit more color how confident you are in achieving this I guess slightly positive result? Where do you expect to come out in terms of operating cash flow and maybe a full year number on CapEx? And then I'll have a follow-up question after that.

[Thomas Jessulat, CFO & Member of Management Board]

Yes. Generally more like in the midterm improvement on earning, not earnings based on figures we have seen here. It's not a short-term larger impact that I would expect here. I would -- a larger impact coming out of the reduction of CapEx spending and I mentioned that I would expect here that we'd go into the double-digit region, the high double-digit region of CapEx spending in 2019. And I would expect also more to come from, like I mentioned before, from the reduction of working capital. So I am pretty positive. We have initiated a lot of activity here in regard to that. We see in companies where we have a good and stable situation that the tools we employ, they are pretty effective. They work. North America is a little bit of a different story, which we can see here in the first quarter, where it's not so easy in the first quarter here based on change of the supplier and also the start-up to run really on very thin levels of material. But overall I'm pretty confident that we are going to be able to manage that.

[Felix Eisel, Founder and Partner]

Okay, and then the second question, I know it's been asked before. But I'll give it another try. On your covenants, could you share where the levels where they're set at the moment. And if not, could you at least answer the question whether they're set based on IFRS 16 leverage definitions? And if you can't share anything at all, why is that? Thank you.

[Thomas Jessulat, CFO & Member of Management Board]

Yes, generally we don't disclose details here in regard to covenants. What we say is here is the typical covenants is what we entered into. But we do not, and I apologize for that, but we do not disclose more detailed information here, like we have said in the past.

[Stefan Wolf, Chairman of the Management Board & CEO]

It's not only based on us, but it's also in agreement with the banks that did the financing.

[Operator]

The next question received is from [Peter Hart] from [indiscernible] Research.

[Unknown Analyst]

I was also asking about the covenants. So my questions have been asked already.

[Operator]

[Operator Instructions] The next question received is from Frank Biller from LBW.

[Frank Biller, Investment Analyst]

There's two questions I do have. The first one is on E-Mobility in the first quarter. Maybe you can give us a figure of what amount was the loss here in the first quarter, I guess it was a loss still, and when the breakeven is expected. And the second one is development on the OEM business. So we have seen a loss in the first quarter. And you stated that especially the second half should be much better than the first quarter here. What about the second quarter? Have we already seen the trough in the first quarter or is it still worse in the second quarter?

[Thomas Jessulat, CFO & Member of Management Board]

Let me ask your E-Mobility question. We have right now several projects in the preparation phase. So therefore we are in the start-up and we have start-up losses in this area. And it's still in the range of single-digit amounts, where we see losses in E-Mobility low to middle single digit amounts, what we see here.

[Frank Biller, Investment Analyst]

So lower than last year? Last year it was about EUR 2 million I think first quarter. Below that or higher?

[Thomas Jessulat, CFO & Member of Management Board]

No, I think the losses are slightly higher compared to last year based on again based on start-up activities, with start-up costs, start-up losses that we have in several projects.

[Stefan Wolf, Chairman of the Management Board & CEO]

But sales increased from 1% to 2% of total sales in the E-Mobility sector. So you see that it's going into the right direction.

[Frank Biller, Investment Analyst]

And what about OEM business and the margin development second quarter?

[Thomas Jessulat, CFO & Member of Management Board]

OEM margin, they are influenced by mainly the costs in order to come up with the volumes in North America. Special freight is typically in selling expenses. And we have in the gross margin we have personnel and general efforts in order to reach volumes. And I would expect in the quarters to come that we have a positive impact here in regard to when we look at countervailing and antidumping, here I would say that a lower double-digit amount for the full year, where we have improvements relative to what we have seen in the first quarter. When we look at improvements in terms of cost related to output that I also see a lower double-digit amount as improvement for the quarters to come, not per quarter but for the year. So it's going to be a lower to mid -- let's say single-digit amount per quarter, and also based on the savings activities and the cost savings that we initiated. It is also I would expect on the year it's a high single-digit amount. So that during the next quarters, the expectation is that from an operational perspective, we should see improvements from a cost side. From a market side, we still for the next quarter would expect a weak market and then a stronger market towards the second half of 2019. This is the way I would sum it up.

[Operator]

The next question received is from Tim Schuldt from Pareto Securities.

[Tim Schuldt, Research Analyst]

I have a clear question with regard to your Slide 8 in the presentation where you show the EBIT bridge from Q1 2018 to Q1 2019. And my question is, you had actually a couple of effects which I can't find in there. I guess they're all in the others. But if that is the case, there must be also some negatives in the others. So first of all, you have stopped paying your employee bonus. So that was a positive of EUR 5.7 million if I've seen that correctly. Secondly you've highered your R&D capitalization. If my calculation was correct that was EUR 1.9 million. And there is the effect from IFRS 16 of EUR 0.4 million. So if you add that together and assuming that it's all in the others, that's plus 8. And what is the other minus 6 then that bring us to plus 2? That's my first question. And the second question with regard to your margin target, I've looked into your historical numbers and so far the weakest share of earnings in the first quarter I have ever found in my history -- and my history dates back to 2005, I think -- is 19% of the full year. If you would end up with 4% margin, that's around EUR 70 million to EUR 72 million. You are below 10% now. So we would have by far the strongest ramp ever during this period. And simply the question is, I've understood that there is a lot of effects which come into effect step by step. But we have also in this history, there is also the year 2009 when obviously we had a strong recovery after the financial crisis. And also you have mentioned that actually forecasts have come down from forecasting agencies for [indiscernible] production. And nonetheless, you're not changing your outlook. So how much safety margin do you have in your outlook?

[Thomas Jessulat, CFO & Member of Management Board]

On your first question, there is personnel costs, which plays a big role in regard to that. On the one side is due to higher employment numbers and hiring here, in particular in the new business fields. And on the cash side and on the non-cash side, a build-up of vacation accruals that happened in this period. This is the other side of your positive calculation here. But it's not all costs that is sort of run rate cost. There is also a portion in there which is accrual building, so to say, in regard to vacation and also overtime. On the second question?

[Stefan Wolf, Chairman of the Management Board & CEO]

And can I add one thing? You have to see that we have also a base effect in the personnel cost. We enlarged our personnel because of a lot of projects in the E-Mobility business. Of course we have a lot of new customers there and we have projects that of course we have to deliver all the R&D work that has to be done to get into serious production in 2020, '21-22 in those projects. But also with regard to personnel costs, we have a base effect because there was the negotiation of the new contract with the unions last year and that came into effect in April. So we have a 4.3% increase in salaries starting April 1 last year. And that of course is now already in the first quarter, those additional 4.3% in January, February and March. So that means that it's not only building up personnel, it's also a quite remarkable increase that has been negotiated last year. And I know it exactly because I negotiated the contract.

[Thomas Jessulat, CFO & Member of Management Board]

Okay, on the second question, do I get it right that you say for 2019 what is so to say, what are the factors? It's not a midterm question. It's a 2019 question, right?

[Tim Schuldt, Research Analyst]

Yes, the question is actually pretty simple. So far, you've never had -- let's say if you assume that you make your guidance, you will have to make an adjusted EBIT around EUR 70 million, let's say. So you have reached less than 10%. And historically even in the weakest year I could find, even in that year, you have made 19% of your total year adjusted EBIT in the first quarter. So you're really very weak for your full year guidance after 1 quarter. And I just want to have some sort of like feeling of confidence. How confident are you really and how much safety margin is for this year, not for midterm?

[Thomas Jessulat, CFO & Member of Management Board]

Let me ask you this. Let me say this. I would say it would be a challenge to achieve the upper range of the guidance. I see several factors that go into the year. On the one side, it's the business side with volumes out there and also we talk about some business changes that we may see in the course of 2019. So the factors in regard to the improvements and the speed of the improvement that we may have are also sort of having a lower visibility when you talk about assurance here and how much safety we have. In the mix, we say that for 2019 we are within the guided range. But there is some factors and not at least one factor is the U.S. President, where we may see in days or weeks some decisions that are going to be taken that have eventually an adverse effect also on the outlook that we have given so far. So it's really, I think we don't feel very comfortable to say there is -- based on the uncertainties that we see in today's business environment, a lot of safety in terms of the outside factors that we are confronted with. I would answer it like that.

[Stefan Wolf, Chairman of the Management Board & CEO]

I agree.

[Operator]

The next question received is from Michael Punzet from DZ Bank.

[Michael Punzet, Analyst]

I have two questions left. The first one is on your PPA. You pointed or your booked half a million in Q1. Is that the run rate we could expect also for the coming quarters so that we came up with roughly EUR 2 million for the full year? And the second one is on your R&D costs. You have a capitalization rate of roughly 10% is set also as guidance for the full year, and have you received any government grants in the Q1? And maybe you can elaborate on the amount, please.

[Thomas Jessulat, CFO & Member of Management Board]

Okay, on the PPA, I would expect a little bit more than EUR 2 million. And on the R&D cost, you're right. When we look at the capitalization rate, we have total R&D of around EUR 22 million, capitalized EUR 2.4 million. So we have got a capitalization ratio of 10.8%. I said last year that I would expect 10% to 20% capitalization rate. And based on our activities in the new business areas, I still say 10% to 20% with maybe a little bit of trending towards a little bit higher numbers. But nothing outside of that range that would be a significant deviation, I would not expect that.

[Michael Punzet, Analyst]

Okay, and government grants, have you booked something in the first quarter?

[Thomas Jessulat, CFO & Member of Management Board]

Yes, we have booked low single-digit amounts.

[Stefan Wolf, Chairman of the Management Board & CEO]

In millions.

[Thomas Jessulat, CFO & Member of Management Board]

Low single-digit million amounts.

[Michael Punzet, Analyst]

It's similar to last year, there was a figure of EUR 1.3 million?

[Stefan Wolf, Chairman of the Management Board & CEO]

Yes, pretty much.

[Thomas Jessulat, CFO & Member of Management Board]

You almost got it.

[Operator]

We received a question from [ Roloff Punin ] from [indiscernible].

[Unknown Analyst]

Thanks for taking my question, just one question left. It's on your operational insights from Page 2, especially on the start of production of the new battery contracts. I guess it is with Sono Motors. In the annual report, you hoped for start of production in the second half of 2019. Now it's changed to second half of 2020. Will this have any financial implications of this postponement and are there any other deviations from earlier production plans?

[Stefan Wolf, Chairman of the Management Board & CEO]

Well of course this will have an impact. It's based on the decision of the customer. Do you still hear me?

[Unknown Analyst]

Yes.

[Stefan Wolf, Chairman of the Management Board & CEO]

Okay, yes, well it's based on the decision of the customer. But of course it has an impact. We were planning on selling those battery modules already in the second half of the year 2019. Now it's postponed. Nevertheless, all the development costs are reimbursed by the customer, so that it will have of course and impact on sales and on earnings, but not on the costs that we have related to this project.

[Operator]

The last question we received is from Henning Cosman from HSBC.

[Henning Cosman, Analyst]

Please can I just ask a clarification on Mr. Jessulat's elaborations on the swing factors in the buckets on Page 8? I think you were talking about high single-digit to low double-digit improvements on the duties bucket and in the raw materials bucket. I just wasn't sure what the base for that was. Are you talking about swing relative to the Q1 over Q1, so that you end the year 2019 with a net positive balance in the low single digits, or was that a year-over-year swing? What's the base for your elaborations there, please?

[Thomas Jessulat, CFO & Member of Management Board]

A; The base, what I mentioned with the lower double digits and the middle single digit improvements is the expectation in terms of the question was in regard to improvements on the next quarters and how to achieve, let's say, the range that we have indicated. And the factors to repeat those factors, on the one side is the countervailing and antidumping, where we would not expect significant more cost, based on the information that we have today. Then it's improvements in terms of special freight operational efficiencies as a second point. And a third point was the savings program that we have initiated that is the third component where we would expect improvements in the quarters to come. And the fourth, maybe biggest point here, is also the second half, how is business environment going to be developing in the second half. And those are the main factors that drive essentially our considerations in regard to the coming quarters.

[Henning Cosman, Analyst]

And just so that I perfectly understand your wording there, if you see a mid-single-digit improvement in duties, for example, so that goes from minus 5 to 0, which means from Q2 '18 to Q '19 there would be no negative impact anymore. Is that how you think about it?

[Thomas Jessulat, CFO & Member of Management Board]

Yes. This is the way -- how I think about it. And this is then based on, let's say, baseline performance, changes on the upside in the expectations that we have in the quarters to come.

[Operator]

As there are no further questions, I'll hand back to Dr. Wolf.

[Stefan Wolf, Chairman of the Management Board & CEO]

Okay, thank you very much for all your questions. I hope you're satisfied with our answers. If there any additional questions, Investor Relations is more than happy to answer your questions. Just call them. And of course this concludes our call and we hit each other again in August with the results of the second quarter. So thank you very much. Bye-bye.

[Operator]

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