Elringklinger AG

XETRA:ZIL2

Earnings Call Transcript 2018-Q2

[Thomas Jessulat, CFO & Member of Management Board]

Yes, ladies and gentlemen, we welcome you to our conference call on the Q2 figures 2018. First of all, I would like to apologize our CEO, Dr. Wolf, is not going to be able to attend the conference call as he is on an important business trip right now.For the second quarter, we noticed the following headlines with respect to our business. Top line grew by 5.6% organically by almost 12% based on the solid performance in all regions. EBIT pre-PPA below prior year figure is at EUR 26.3 million and the EBIT margin stood at 6.1% due to some headwinds mainly coming from capacity constraints in NAFTA region and increased raw material prices.We are operating within an increasingly ambivalent business environment right now. The effects associated with the process of WLTP certification may also have an impact on ElringKlinger. It mainly depends on the production schedules and possible adjustments of the OEMs.At the same time, it is hard right now to predict future direction taken by international trade tariffs. Will they be eliminated for Europe? Will they be tightened? Or will they be extended on automobiles? But generally saying, however, we're seeing an environment of more pronounced uncertainties, and based on the Q2 figures, we confirm our updated guidance for fiscal year 2018.We go to the next slide.In a nutshell, global car markets, based on production figures, developed quite favorably in Q2 2018, which amounts to 6.6% on a quarter-on-quarter basis. China announced lower import duties as of H2 2018, and for this reason, the 12% increase is for us clearly, [ above ] expectations. European Union, was preemptive effects in Q2 2018 coming, for one, from the introduction of new WLTP cycle as it is effective as of September 2018, and increasing production figures in the U.K. in anticipation of tax increases is also an effect that we see in H2 2018. U.S. light vehicles production fell below prior year level despite the economic upturn, and demand for light trucks increased further. And last, but not least, we saw strong increase in India and Brazil with double-digit growth in Q2 2018.When I get now to the financials, I would like to comment on the facts and figures of the second quarter 2018.Order book situation figures were mainly affected by currency effects driven by a strong euro. The order intake increased by EUR 46 million or 11% when taking into account foreign exchange effects. Incoming orders stood at EUR 468 million, which is 13% of last -- prior year level. Order backlog also expanded. It rose by EUR 39.1 million or 3.9% to a new record level of EUR 1,033,000,000 -- EUR 1,038,000,000, excuse me. And foreign exchange-adjusted order backlog is even up by 6%. Sales figures also represent strong demand, and deconsolidation of the Hug subgroup diluted growth by minus EUR 10.9 million. Foreign exchange effects burdened sales by EUR 13.6 million or 3.3%. And therefore, we saw an organic growth of 11.6% or, in euro terms, EUR 47.5 million in Q2 2018.On Slide #6, now the earnings figures are presented for the second quarter 2018.EBITDA stood at EUR 49.3 million. EBIT pre-PPA decreased to EUR 26.3 million. And EBIT margin pre-PPA went down from 9.1% to 6.1% year-on-year but improved from 4% quarter-on-quarter if you consider the one-off gain from the Hug divestment in the first quarter 2018.Now what are the main drivers of earnings? Number one, compared to previous year's quarter, we faced higher costs for increased headcount and continued elevated level of raw material prices. In Switzerland, process of migration broadly on track, and it depends on the second half 2018, the full optimization impact on earnings will be realized. In NAFTA, the relevant countermeasures are addressed and will be continued in the upcoming quarters, and we are seeing strong growth in Q2, outperforming the production markets.On the next slide now.When we have seen the high demand of the customers and order books in the first half of 2017, we have started several measures last year in order to cope with the higher volumes. And first of all, we have reviewed capacity and ordered new machines. At the same time, we have hired additional staff and strengthened the internal training. Third, we are in the process of optimizing the logistics processes, a measure which has already started very early in this process and is still ongoing. And where possible, prices were adjusted with customers. All of those measures target one goal. We want to get the additional cost managed which have resulted from the high demand of our customers. We're happy about the technological leadership of our products and the high demand for our solutions, but we have to design the organizational structure and the operational processes correspondingly. We are quite confident that these measures will result in a sizable improvement of our EBIT level over the next quarters but, in my expectation, mainly in 2019.Come now to Slide #8.The net working capital increased by 6% to EUR 606 million. And in relation to the figures, December 31, 2017, a total of EUR 20 million was attributable to inventories and a total of EUR 37 million to trade receivables, a positive trend when viewed in relation to organic revenue growth of 8% in the first half 2018.The disciplined CapEx spending led to a decrease in investments in planned property equipment by 9.4% to now EUR 38.4 million. Major parts of it were attributable to additional capacities with a strong focus on the North American sites and for new ramp-ups in the group.Operating free cash flow in Q2 stood at minus EUR 19 million, which compares with minus EUR 10.2 million in the previous period.On the next slide now.Markets -- global light vehicle production increased in Q2 by 6.6%. And in regard to ElringKlinger, due to appreciation of the euro, currency effects diluted revenues significantly. Revenues expanded in all our sales regions. Strong growth, especially in NAFTA, the rest of Europe and in Germany.On Slide 10, ElringKlinger expanded revenues across the major business divisions in Q2 2018. Gaskets divisions are in line with our expectations, but earnings are affected by high demand for ElringKlinger products, as mentioned, in the NAFTA region. We see lightweight and elastomer now as the strongest business unit of the group in terms of sales. Since the end of last year, the large-scale volume door module contract ramped up in Hungary. And in the second half of this year, production in Changchun in China is going to start. Shielding Technology is below strong prior year figure, also driven by negative foreign exchange effects. E-Mobility recorded revenue and earnings more or less slightly below prior year level.And let me now turn on here to Slide #11, which shows the performance of the different segments.With NAFTA demand in raw material prices, we have already discussed the main drivers for the original equipment segment. Aftermarket sales up by 5% to EUR 42.3 million, especially in Eastern Europe and South America that we have set up and are following up here a clear strategy in this segment in terms of improving availability of materials, accelerating market penetration in China and enforcing business in NAFTA. Engineered Plastics, sales increased by 14% to EUR 30 million. Strong demand from the automotive industry and the mechanical engineering sector were the main drivers here. And the successful execution of optimization measures within the production and stringent cost management increased EBIT margin to 17% in Q2 2018.And now I come to the outlook.Against the backdrop of stable economic conditions, we stick to our 2018 expectation that global markets are likely to maintain the positive performance. In Europe, we still expect growth in Southern Europe and a general stable situation in Germany. In Asia Pacific, the markets are expected to grow by approximately 3%, and we will see, in our opinion, a high demand for SUVs in the main market in China, while growth in Japanese market be at best moderate if not slightly negative. In regard to NAFTA, egged by a rising truck market and a subdued demand for light vehicles, NAFTA will be more or less stable but on a high level. And in total, we expect global vehicles production to increase by 2% to 3% in 2018.Global uncertainty has become more pronounced in the recent months, and let me emphasize 2 factors which might be relevant for the second half of the year. First, we have seen the U.S. tariffs on steel and aluminum being implemented at the end of May 2018. And in the meanwhile, there has been a discussion to expand them on automobiles. And this will hit the entire industry in Europe for sure, and we don't know if this will be escalated even by other countries. We continue to state that no one will benefit from a tariff cycle, and it will be to the disadvantage of the global economy and it will affect ElringKlinger as well. But besides the precise direction, it is hard to predict the extent to which these tariffs will influence key corporate financials in general. And second, there is a discussion ongoing if there's an impact on WLTP on European production figures in the second half of 2018. Up to-date, there is not really detailed statement on that but the growing signs of production cuts. And if the production schedules of the OEMs are broadly reduced, this will hit automotive supplier and thus ElringKlinger as well.And when talking about risks, let me also add that we are strongly working to benefit from the changes and the growth within the industry on the one hand by optimizing our cost structures and, on the other hand, by building the strength of our excellent position in the future for polishing technologies.Nevertheless, operating within the mentioned increasingly ambivalent business environment, ElringKlinger at present remains confident that it can exceed the global automobile production expansion by 2 to 4 percentage points in terms of organic revenue growth. And additionally, the group can confirm its 2018 EBIT margin target of around 7% before purchase price allocation is revised in June. And in the medium term, the group plans to outperform the growth of global automotive production and successively improve the EBIT margin pre-PPA.On the back of our latest guidance update in June, we also have updated expectations for further indicators in 2018. Net working capital as a percentage of total sales slightly above prior year level. Operating free cash flow slightly below prior year level. ROCE slightly below prior year level. And when we talk about CapEx ratio, remains unchanged between 9% and 10% of sales, unchanged, as well as R&D cost between 5% and 6% of total sales, and as well unchanged the equity ratio target, which is, as usual, between 40% and 50%.Now I come to the end of my presentation. And ladies and gentlemen, I highly appreciate your attention. And now I'm ready to take your questions. Thank you very much.

[Operator]

[Operator Instructions] We've received the first question. It comes from Henning Cosman of HSBC.

[Henning Cosman, Analyst]

Please, can we start with maybe unpacking this incremental EBIT increase in the OE division compared to the first quarter? So it was, I suppose, EUR 8 million, roughly, higher. If I remember correctly in the Q1 call, we had said you weren't really expecting any compensation for raw material. The capacity constraints in North America, notwithstanding if there are alleviated a little bit. But if possible at all, if you could just sort of talk us through the drivers of the incremental improvement quarter-over-quarter a little bit and indicate whether you see that as sustainable now also for the third and fourth quarter. I suppose implied in your guidance is that you're now expecting a group run-rate of about EUR 26.5 million, similar to your Q2 level. But if we could talk about the incremental drivers vis-à-vis Q1. That's my first question, please.

[Thomas Jessulat, CFO & Member of Management Board]

Yes, from an operational perspective, I would have to differentiate between 2 areas of our specific interest. The one is Swiss operation where we say we are within further optimization. Now there is a stable operation in Switzerland, and that proves now to really get better relative to Q1, in Q2 and, in my opinion, also going forward. When we look at NAFTA, we were, in Q1, more like in the middle of optimization efforts, in the earlier process situation, so to say, in terms of getting to higher capacities and manage the higher volumes. And the NAFTA, I would say, is more like on a similar state. So the underlying is that we see improvements here from an operational perspective in the OE segment from Q1 to Q2, but we will need to see further improvements. I think that's very clear. In particular, when we look at the 7% guidance for the year, that we'll seek further improvements towards more like the second half of the year. Now I don't know whether this answers your question okay, but I'm, let's say, trying to describe a little bit the progression that we have in particular NAFTA and also in Switzerland.

[Henning Cosman, Analyst]

And with respect to raw materials, are you already budgeting reimbursements in the second half for some of the higher prices that you've experienced?

[Thomas Jessulat, CFO & Member of Management Board]

No, no. I mentioned this also in the last call. My expectation is not that I get reimbursements in 2018, but still there is some price adjustments that were done in 2018 already. There is some more of it in the second half but not in regard to the material price adjustments but more in regard to other, let's say, contractual negotiation items, yes. The material impact on Q2, I see on a similar level compared to Q1. So there is not really a relief. Markets tend to be a little bit weaker now. But based on the inventory turnover, not sure whether we would be able, if this would continue, if we would be able to really benefit from that in 2018. There is a chance, but it's still very early. Prices came down a little bit, but it's too early to say if we benefit from that in 2018. And again, material reimbursements, not in my plan for 2018.

[Henning Cosman, Analyst]

Okay, great. And as a second question maybe, you said there's increasing signs of production cuts, partly WLTP-related. I'm just trying to get a better feeling for what you mean with increasing signs. So I think, it -- I -- just for example, with the last August update, they are now going for minus 2.5%, Western European production in Q3 already. Of that, minus 10% in Germany. So when you say increasing signs, do you mean over and above that? Or is that already a situation that you would consider threatening to your full year guidance?

[Thomas Jessulat, CFO & Member of Management Board]

No. Let me say this. The estimations even for the market don't play a role in our capacity planning. We look at the releases from the customers, and we have to adjust capacities in regard to that. And there is more information from different manufacturers that there is something in progress in regard to that. When I look at my release this year, then I don't see anything as of yet. So it's uncertain in regard to that. And whether it's going to be or it could be [indiscernible]%, 4% or another percentage number, I don't know.

[Henning Cosman, Analyst]

Okay. And finally, maybe on the midterm margin evolution. I'm not asking you for guidance for next year. But just directionally, I guess we could think if you wanted to maintain the 7%, that would imply that you have to compensate the positive one-off from the Hug sale. So roughly EUR 20 million incremental EBIT next year. Is that in the scope of what you're budgeting? Or is that part of what you're planning for next year?

[Thomas Jessulat, CFO & Member of Management Board]

That is the '19 challenge for ElringKlinger. That is the '19 challenge. I do not think that we are on level in the first half of 2019. It's going to be a gradual improvement, along with optimization efforts. But yes, you're right, in regard to EBIT margin, it's a challenge for 2019.

[Operator]

The next question is from Sascha Gommel of Crédit Suisse.

[Sascha Gommel, Research Analyst]

My first one would actually be related to your balance sheet. And I remember that during and after the financial crisis, Dr. Wolf repeatedly stated that suppliers with weak balance sheets tend to have more problems signing contracts with OEMs. So my question is, do you experience, in meetings with OEMs, that they're flagging your financial leverage? That would be my first question. The second one would be, your leverage will probably reach more than EUR 700 million net debt by the end of the year, which is more than 3x net debt-EBITDA. I struggle to really see that organic free cash flow will get that down in the foreseeable future given that this year, you will burn cash. And based on the discussion we just had on your margin for next year, it's very unlikely that free cash flow will be on the cards for next year as well. So I was wondering, is the family blocking any capital measures because they're not able to participate? Also, in terms of size, when I look at your current net debt compared to your market cap, it would be quite sizable in my view. So I was just wondering if you start to have like any views and thoughts around your leverage and how you would actually want to get that lower. And then very lastly, your CapEx seems to be much more under control than in the past, but your intake is accelerating a little bit. So I was wondering if, with the higher order intake, you also need to invest more in the future.

[Thomas Jessulat, CFO & Member of Management Board]

Okay. To your first question, weak balance sheet is not something that we see as an obstacle. And the balance sheet, in fact, is, in my opinion, is not weak, but we have, in fact, the topic when we talk about net debt-to-EBITDA. So it gets me to your second question here, and I have to say that we have full focus now on optimization towards free cash flow. And the number one point here is to improve earnings quality, clear. Number two, to change CapEx policy, which is also including now your third question. We optimize in regard to CapEx, and we are very tight in controls here in regard to that and do not focus anymore on the setup of real estate for ElringKlinger, yes. It's more like that we -- that we lease, and we focus on equipment that gives us the right return on capital. And the third here is on working capital, payables, optimization -- inventory optimization even though that on the inventory side, it's tough. I have to say that it's tough when we have double-digit increases in a region and you get tight, for example, on raw material inventory turnover. It's probably not the right time to do it, but we take all preparation now that if the market tends weaker, that we can realize, based on tight controls on ordering behavior and management of inventory, that we realize positive cash flows coming out of working capital, yes. The debt level isn't focus, but priority now on here is to get it down by measures that are internal, and we do not see right now, besides optimization efforts on earnings quality, what I mentioned before, the need for capital measures.

[Sascha Gommel, Research Analyst]

Can I just...

[Thomas Jessulat, CFO & Member of Management Board]

But this has to be follow-up very clear.

[Sascha Gommel, Research Analyst]

But can I just follow up? Because let's look at last year. You had around about EUR 140 million EBIT and you were burning through EUR 270 million. I just struggle to see that your earnings can improve that much that you generate sizable free cash flow in order to reduce a EUR 700 million debt pile. I just struggle to put real numbers behind it. I can see that you can improve and fine-tune your numbers on working capital and CapEx, but your earnings basically need to double in order to have a sizable impact on your leverage.

[Thomas Jessulat, CFO & Member of Management Board]

Yes, when you look at earnings, there is a lot of output-related processing costs in our cost structure in the group. And it's significant. It is significant, and I see that. And based on capacity and availability of machine, we are going to be able to bring that down because this is exactly what I see right now, to some extent, in terms of the benefit out of stable processes in Abschirmtechnik in Switzerland. So this works. It will work. It's a matter of time. But I agree with you that along with further CapEx for additional capacity, that it needs to be balanced very carefully. But the structure of the balance sheet is not the problem. In my opinion, it's more like the earnings quality.

[Sascha Gommel, Research Analyst]

I see, okay. And then lastly, just a modeling question. You had an increase of provision of EUR 3.7 million quarter-on-quarter. Can you just share what that was, please?

[Thomas Jessulat, CFO & Member of Management Board]

Different items. I have to say largest item is the provision for future losses based on higher material costs.

[Operator]

The next question is from Marc Tonn of Warbugh Research.

[Marc-René Tonn]

Just a couple of questions from my side as well. First one would be, you are confirming your targets for top line growth. And also, I think there's a strong outperformance of global car production here in the first half of, if my calculation is right, it was within the vicinity of 7% or more, 7%. You're targeting 2% to 4% for the full year. Is it really something which is based on your order book or on how you see your projects phasing? Or is it just being very, very conservative for the second half year given the uncertainties with regard to production, for example, due to the WLTP effects in Europe? And then secondly, I mean, if you have, let's say, a target of only limited outperformance, you're ahead of this number in H1, and you are, let's say, now pursuing CapEx discipline, is there any risk that you might end up in a situation, again, where your capacity is presumably not sufficient to fulfill delivery obligations going forward from that? That was the first question. Second question, when I look your selling expense ratio, it was down quite nicely in the second quarter already. Should we take from that, that, at least a special Fed issue in the U.S. is behind and that you are, let's say, so far down the road in the optimization process there that this is done? And the next question is also related to that. You mentioned price increases towards the customer as one factor to reduce losses or to improve the business there. Is it really negotiated already? Is it firm or is it still in the negotiation process?

[Thomas Jessulat, CFO & Member of Management Board]

So in regard to your first question, I mentioned and I argued all the way along over the -- over several quarters now that the product pipeline that ElringKlinger has is fairly strong. Now we have the ramp-up of a corporate cost carrier in California on the one side. We have 2 sites that are ramping up in regard to the door module, Hungary, which is up and running right now. And in the third quarter, Changchun is going to be online in regard to that. And when you look at the structure of inventory, with roughly EUR 100 million of tooling that I mentioned that we carry, then it shows a strong pipeline of new products that come to market. So therefore, it is really new products coming to market. And you see also that in regard to the portfolio of ElringKlinger, that some other business units now gain a little bit more volume also relative to the EGR business, yes. CapEx spending, I have to say, is that we are not limiting, not at all, on capacity, but we are limiting, if we can, on real estate and other assets that we could use to leasing contracts. This is a clear change in policy. And in the last 2 years before 2018, there were roughly 1/3 of CapEx spending going into infrastructure, and this is something that we want to bring down as part of our optimization of free cash flow. Special freight, as a very specific information in Switzerland, is coming down to near 0. In NAFTA, we are a little bit earlier in the process. So there, we still struggle to meet customer demand. On your fourth question, in regard to customer renegotiation, not on material price adjustments like I mentioned before, but those agreements are firm. I talked about -- I talk only right now, 2018, but they also have impact for the years to come, yes. I hope that answers your questions.

[Marc-René Tonn]

Coming back to growth in the second half, it was more related to that. I mean, you were very strong in terms of top line growth organically in the first half, but still, I think you had just 2% to 4% outperformance guidance for the full year. Whether you really see a slowdown in the second half or whether this is -- we should more think about this guidance as being cautious?

[Thomas Jessulat, CFO & Member of Management Board]

Well, it's based on the information I have on hand.

[Operator]

The next question is from Christoph Laskawi of Deutsche Bank.

[Christoph Laskawi, Research Analyst]

The first one will be on the NAFTA additional cost guidance. Could you just quantify what additional costs you've seen in Q2 and if the guidance for the full year still stands at, say, EUR 20 million, EUR 25 million? Because from your statement, it sort of looks that you don't really expect major improvements this year but largely next. The same for raw mats. Do you keep the guidance basically in the same range? And what's to come in H2? Because looking at obviously the margin that you printed in Q2, it's an improvement versus Q1 but still below the target range. And if you don't see major improvements, I guess we will wonder what you would need to meet the target finally. And then on WLTP, you mentioned that there's a risk or increasing signs that production volumes might be cut. Do you see that largely as a top line risk or also a risk on earnings considering that the OEMs that's most at risk, so to say, BMW and Daimler, could be of a fairly decent mix for you? So would you see also an earnings impact from that? And on the working capital build, is that coming off again in second half? Do you expect it to reverse? Or is there a shift also into next year?

[Thomas Jessulat, CFO & Member of Management Board]

So the last question was what, on the CapEx?

[Christoph Laskawi, Research Analyst]

On working capital.

[Thomas Jessulat, CFO & Member of Management Board]

Okay. Okay. To your first question, the NAFTA additional costs, when I take together the high demand costs, NAFTA and commodity relative to Q2 2017, then I talk low double-digit number. In regard to commodity prices, difficult to say. Like I mentioned, it's depending on further development of the commodity markets, if there is a change there, but not so much a change for 2018. And on the high demand NAFTA situation, there is some bottlenecks that are solved, and there is some in the second half that are being addressed. The ones that are being addressed will trigger some CapEx in 2018 or, if pushed out, beginning of 2019. So there is some more coming in that time, but I think it is going to be in a way that we are not shooting over the guidance that we have given. In regard to WLTP, top line risk, will we see an earnings impact on small changes? Probably not so much on higher changes. Yes, there is a risk for ElringKlinger that some items hit bottom line, but it's -- since I do not know right now the level of change in the production plans, therefore it's really difficult to say is it a minor -- with a minor impact or is it something more sizable. Working capital requirement, as your final point here, is we -- the receivables are going to be building up based on sales. So this is going hand-in-hand with the typical payment periods that we see here on an inventory level. We are working hard here to limit much further increases relative to the -- to growth in sales. And so far here, we have managed to stay underneath the growth rate in terms of buildup for inventory. But this is hard. We work on the increase in payment periods with the suppliers. We work on the inventory items. And okay, accounts receivable is more like a buildup related to sales. So therefore, I come to the conclusion that what I mentioned in terms of net working capital is going to be slightly above prior year level, I think, for the full year. But next year, I think we will be able to benefit from the improvements that we have done.

[Christoph Laskawi, Research Analyst]

Okay. Then a follow-up, if I may, on the improvements on the earnings side that you expect for the second half. You said that there's limited hope that price increases on the base of rising raw material prices actually come through in the second half. And you also say NAFTA is remaining challenging and there is limited improvement but more in 2019. Still, you need some improvement to reach the guidance and print an underlying margin of at least 7%. Could you just remind us on where those improvements are coming from, your leverage on Switzerland? But I guess then, it needs to be more than that.

[Thomas Jessulat, CFO & Member of Management Board]

Number one, support for NAFTA region in order to avoid output-related costs. Number two, really benefit from a better situation in Switzerland. The rest is product mix.

[Operator]

The next question is from Akshat Kacker of JP Morgan.

[Akshat Kacker, Analyst]

Akshat Kacker with JPMorgan. I'm -- in [indiscernible] rather, selling expenses, I think, came in better than my expectations. Can you please quantify the progress made on Swiss production relocation out of the EUR 10 million target for the year and how much is left for the full year? Also, my second question is on rate inflation. Earlier, you had guided for a EUR 8 million impact for the full year. How much of that has been booked? And given the headcount increase in Germany and reduction of workforce from Hug, how do you see the impact in the second half? Also, I just wanted to confirm the raw material impact on EBIT in the second quarter. And if I heard it right, that the second half impact should be similar to the first half?

[Thomas Jessulat, CFO & Member of Management Board]

Selling expenses in the regard to the targets, Abschirmtechnik, special freights, and so forth I think we're on the way. Second half needs to show whether we could get to the EUR 10 million, which is a big challenge, in my opinion, but we are on the way in regard to improvements that are really lasting improvements in Switzerland. Now the second question, I have to say, it didn't get it all. You asked about the impact in regard to Hug for the second half of the year. Could you restate your question?

[Akshat Kacker, Analyst]

Yes. I'm looking at the rate inflation basically in Germany given the headcount increase. It is somewhat offset by disposal of workforce from Hug. And you reported a EUR 6.4 million increase in wages. So how do you -- how are you looking at wages in 2018?

[Thomas Jessulat, CFO & Member of Management Board]

As long as I have locations that grow and we add business in Germany, there is some impact, but it's limited in terms of wage inflation because there is some repricing going on. And what we have mentioned before as part of our structural costs, that we have readjusted, so to say, the organization to deal with the size of the group. There is a little bit of that, that over time, it's being absorbed by a larger revenue basis. But there is a little bit of step-up that we have done that you clearly see in the group right now. Your last question, in terms of raw material, the raw material impact, I would say it's around maybe EUR 7 million when we look at Q2 '18 relative to Q2 '17, and I would expect this, as a conservative assumption, as a similar level that goes on even pricing set in comparison when we look at Q3. Later, when we look at Q3 2018 relative to Q3 2017, I think the gap is going to be narrowing because we have some impact in the second half of 2017 that we have seen.

[Operator]

The next question is from Michael Raab of Kepler Cheuvreux.

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

Michael Raab, Kepler Cheuvreux. Mr. Jessulat, when you talked earlier about the potential risk for the second half and alluded to potential -- or potentially growing signs of WLTP-induced production cuts, I just wanted to follow up on this by asking you whether you already see a reduction of call-off rates that have previously been indicated by your OEM customers. Is that already the case?

[Thomas Jessulat, CFO & Member of Management Board]

No. I -- this is what I said. We do not see significant adjustments as of yet.

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

Okay, that's the first thing. Great. The second thing I wanted to touch on is this. I mean, everything that we talked about so far in terms of wanting to improve cash conversion, which, by the way, is a laudable target, as well as balance sheet quality, I think, has been done under the presumption that there is no breaking down of the cycle. But if the cycle breaks down, the entire industry is going to shift into cash burn mode and then probably will contribute even more to global warming that it already does anyway. So the question is, when I look at your balance sheet structure, I see 1/3 of your financial liabilities are basically short term. So that means they need to be refinanced within the scope of one year. Have you prepared any course of action, any actionable plan for the event that we're seeing a, let's say, falling off the cliff of production volumes, we all know how sensitive the entire industry financial metrics are to that, in order to basically still get amenable refinancing conditions if you have to refinance 1/3 of your interest-bearing liabilities in that type of a scenario? And if so, what would that include, please?

[Thomas Jessulat, CFO & Member of Management Board]

Well, I have to say I have short-term EUR 50 million that I will refinance now in the third quarter in the longer term. Short term, in general, financing structure, there is a plan that I have that is part preparation for more growth, but it's also part of securing financing for the ElringKlinger group. And I disagree with the can't-go behavior of ElringKlinger in the case that we fall off a cliff, as you expressed it. I think if we fall off a cliff, ElringKlinger is going to be liquidating a lot of working capital assets that we have here as, let's say, a securing of growth that we see right now. So I think it's going to be a little bit of different behavior that you'll see here if, in fact, demand drops down significantly.

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

Which is true in the short term. But if I may amend my comments here, I think it's been historically observable in comparable situations that once you've basically reduced working cap by destocking or whatsoever, if production rates goes down -- go down sequentially, typically cash equivalent fixed costs prove to be very sticky. And the other thing I just wanted to check is, when I look at your Q2 balance sheet, I see short-term financial liabilities of EUR 250 million. So just to make sure this is really my correct assessment, if the EUR 0.250 billion, which is due for refinancing within the next 12 months, out of which EUR 50 million in the next 3 months. Is that what you're saying?

[Thomas Jessulat, CFO & Member of Management Board]

What I'm saying is part of it is short term being refinanced and part of it is bilateral loans with banks.

[Operator]

The Next question is from Florian Treisch of MainFirst.

[Florian Treisch, Director]

Two left. But first of all, I'm probably agreeing with some -- or my former speakers on an unsustainable high leverage here. If you have mentioned you are changing one policy in your spending behavior to say we are going for leasing rather than owning the real estate, if you would turn around the cash or the fact what you just mentioned, can you highlight to me again what kind of real estate do you really have to own? Looking at your balance sheet, there are probably a lot of real estate probably in it now. How much of it can you divest? And do you have any plan to divest? And the second question is on E-Mobility. As you have said, revenues are down despite your extremely positive comments on how well [ invert ] is developing. So first question would be, can you please give us same number for order intake as I believe order intake has to be fantastic here? The second point is [ auto account ] performance. Can you split out performance of -- also here and you're kind of legacy business? I believe that legacy is nicely down, and the question would be why is that. Where are the follow-up contracts for the product category here?

[Thomas Jessulat, CFO & Member of Management Board]

Okay. In regard to your first question, real estate, we have set up in the -- due to -- in the course of the globalization of ElringKlinger, we have set up a lot of what I would call them [ hub ] factories that ElringKlinger owns. And as we see now, there is more and more project factories that need to be set up. And in regard to the project factories here, we have a different policy today that we don't go into owning of those places but the leasing because we have visibility only over a period of maybe 5 or 6 years and then the project might be over. So in this regard, there is a change in terms of how we set up new factories. And when we look at real estate, generally it's not core business of ElringKlinger. Is there possibilities to divest? Yes. But is it something we have really short term? No. Let's say I'm thinking about it. In regard to E-Mobility order intake, it's -- there's no releases except for the cell conn tech products that we sell, as you all know, to our customers. There are releases from the customers. But besides then, we do not communicate order intake just as per project volumes. I can only say that we work on -- in the different fields. When we look at electric drive units, when we look at battery, when we look at fuel cell, we work with several customers there but still based on the compensation that we get there in part for maybe prototypes, in part also for engineering work. There is not enough size here to push this way beyond the 1% in terms of what we show here. And I think your final question was hofer, how much is hofer contributing. And the company that is hofer powertrain products that we have in full consolidation here, we have, per year, a low single-digit million euro sales basis with a, I would say, almost neutral -- I think it's slightly loss-making. That's a neutral contribution to the group.

[Operator]

The next question is Mr. Punzet of DZ Bank.

[Michael Punzet, Analyst]

Yes, Michael Punzet. I have 3 questions left. First one is a follow-up question on the E-Mobility business. Could you please quantify the [indiscernible] EBIT in the second half-- in the first half or in the second quarter? Then the second one is on your order intake. When I take the order intake from the end of last year, add the new orders and deduct the sales, then we get of EUR 40 million or 4%. Is that related to currency adjustments? Or is that related to some adjustments of volume assumptions of the underlying orders? And finally, only for clarification, I think you said earlier on the call that a 7% EBIT margin for 2019 would be a challenge, when I remember the last quarter we talking -- or had discussed a lot -- a very long -- a double-digit margin in mid to long term. Is it still a target for ElringKlinger? Or has -- or the structure's changed so far that you are maybe only looking for 9% to 10% margin rather than, yes, 13% to 15% or something like that?

[Thomas Jessulat, CFO & Member of Management Board]

Yes, from a communication -- let me start with your third question. From a communication perspective, we are focusing on improvement over the existing EBIT margin, and 2019 is going to be released next year. The -- your question with regard to order intake, there is nothing known to me in terms of sizable adjustments besides currency. When we look at order intake, so there's not anything that I know where any further adjustment is done. And if we get now to your first question, E-Mobility EBIT first half, minus 3.

[Operator]

The next question is from Henning Cosman of HSBC.

[Henning Cosman, Analyst]

Sorry, I just had a follow-up question. There seems to be some confusion here on the 7% target for this year. So I just wanted to make absolutely clear that that's including the positive Hug one-off and not the 7% underlying target. So the actual target would imply a margin below 7% for the second half to achieve the around 7% target. If you could just reconfirm that, please.

[Thomas Jessulat, CFO & Member of Management Board]

7% including Hug.

[Henning Cosman, Analyst]

Okay. Second half basically budgeted at below 7%, yes?

[Thomas Jessulat, CFO & Member of Management Board]

If you calculate with the -- let me see. If you come from the 7.3% -- or the 7.5% in the first half, you may say so.

[Operator]

As there are no further questions, I would hand back to you, Mr. Jessulat.

[Thomas Jessulat, CFO & Member of Management Board]

Yes. And thank you, everybody, for attending this call, and I look forward for the next month for third quarter numbers 2018. Thank you very much, and have a good day.