Elringklinger AG

XETRA:ZIL2

Earnings Call Transcript 2021-Q2

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

Yes. Thank you very much. Ladies and gentlemen, a warm welcome to our conference call on the second quarter and the first half of 2021. As always, I will start with some headlines on the second quarter. After that, my colleague, Thomas Jessulat, our CFO, will present the financial figures on the second quarter. And I will then close with the confirmation of our outlook on the rest of the year. And of course, at the end, you will have the opportunity to ask questions, and we are more than pleased to answer your questions. ElringKlinger continued its strong start to the year in the second quarter of 2021. The group generated revenues of EUR 394 million, plus of 56% compared to the prior year quarter, but you have to see that this was a real bad quarter in the corona year 2020. If foreign exchange rates had remained unchanged, the figure would have been up by as much as 58%, while global light vehicle production is seen at 49% in the same period. After the pandemic-related slump in revenues last year, the group managed to improve its earnings performance noticeably. In the second quarter of 2021, it generated earnings before interest and taxes of EUR 23 million, up EUR 55.4 million of the prior year figure. At 5.9% in the quarter, our EBIT margin is within the targeted range of around 5% to 6% for the full year 2021. In addition, we generated sustainable operating free cash flow in the first 6 months, allowing us to further reduce our net financial liabilities. Net financial debt was slashed by EUR 217 million to EUR 363 million. Upon introduction of the efficiency enhancement program at the end of the first quarter of 2019, net debt had amounted to EUR 796 million. So that's quite a step down if you compare those figures. Moreover, our syndicated loan facility has been expanded by a further EUR 100 million. In this context, the entire loan of now EUR 450 million has been extended until early 2026. From a financial perspective, this puts us in an even more robust position than before in support of the ongoing transformation process and our future endeavors. As we have mentioned in our conference call on the first quarter figures, EKPO Fuel Cell Technologies, the new entity, which both ElringKlinger and the French supplier, Plastic Omnium hold interest started operations on March 1, 2021. Over the past months, we have seen nominations which underline the outstanding technology. First of all, EKPO has been awarded by Green Corp Konnection to supply stacks for industrial applications of high-power systems and for the use in the 2023 Dakar Rally. This implies that NM12 fuel cell stack from the ElringKlinger Group is taking part in this Dakar Rally fulfilling highest output requirements in an environmental-friendly way by emitting water vapor as exhaust gas. The specific racing conditions are uniquely tough proving ground for our products. Moreover, EKPO has received a high-volume series production order for the supply of fuel cell stacks. The contract awarded by Aachen-based mobility company, AE Driven Solutions covers the total volume in the high double-digit million euro range over a period of several years. The fuel cell stacks of the Type NM5-evo ordered by the company will be used in delivery vehicles, the aim being to offer environmental-friendly drive technology in urban areas. Series production is scheduled to start in the first half of 2022. Having been hit by dramatic slump in the first half year of the previous year as a result of the coronavirus pandemic, global automotive markets saw a major increase in vehicle production sales in the first half year of 2021. Global light vehicle production grew by 28% in the first 6 months. Faster market recovery has also been prevented recently by bottlenecks in the semiconductor market, you all know that from the news. In the second quarter, global production of light vehicle increased by 48.6% to 18.8 million units. However, Europe and North America have not yet regained the precrisis levels seen in 2019 when 22.1 million vehicles were produced worldwide in the same period. Well, ladies and gentlemen, those are my preliminary remarks on the markets and on the situation at the ElringKlinger Group overall. And I would like now to hand over to my colleague, our CFO, Thomas Jessulat, who will guide you through the numbers.

[Thomas Jessulat, CFO & Member of Management Board]

Yes. Thank you, Dr. Wolf. A warm welcome also from my side. I would like to comment the financial results for the second quarter starting on Slide #5. The global recovery is also reflected in ElringKlinger's order books with an order intake of EUR 430 million in the second quarter. This represents a significant increase compared to the same period last year when the group recorded incoming orders worth EUR 193 million against the backdrop of lockdown measures. On the back of solid order intake, the group's order backlog also increased. The order book was expanded once again in the period under review, taking the figure to EUR 1,222 million at the end of the first half, movements in foreign exchange rates played only a minor role. In the second quarter of 2021, the ElringKlinger Group generated sales revenues of EUR 393.6 million, a sharp increase in the same quarter -- to the same quarter last year. Revenue was EUR 141.4 million or 56.1% higher than in the second quarter of 2020, which, of course, have been impacted by the follow-up from the coronavirus pandemic, particularly in Europe and North America. In the second quarter, revenue was diluted by EUR 4.9 million or 3% as a result of currency effects. Excluding these foreign exchange movements, organic revenue growth was EUR 146.3 million or 58%. There was no impact from M&A activities in 2021. On Slide #6, you see the sales split in the region in more detail. After a sharp drop in revenue in the previous year, there are now signs of recovery in all regions at a pronounced level in most cases. In Germany, as well as in the rest of Europe, the second quarter of 2020, in particular, had been affected by the impact of pandemic-induced restrictions. Compared to this period, revenue in the second quarter of 2021, therefore, surged by 37% to EUR 87.6 million. In the region encompassing the rest of Europe, the group saw revenue increase by 92% year-on-year, taking the figure to EUR 124.2 million. A similar pattern can be seen in North America, where revenue increased significantly in the period under review, up 67% to EUR 89 million. The Asia Pacific region recorded strong revenue growth in the second quarter of 2021, up 12.8% euro or 20% to EUR 75.5 million, particularly as China, unlike all the other regions had already returned to the path of recovery as early as the second quarter of 2020. At 78.5%, the original equipment segment continued to represent the largest share of group revenue in the first half of 2021. The individual business units also grew significantly in terms of revenue during the quarter under review. In the e-mobility unit, revenue almost tripled compared to the same period of the previous year. The revenue amounted to EUR 16.5 million in the second quarter of 2021, a EUR 23.8 million revenue for the first half of 2021 almost doubled compared to the previous year. Among the classical business units, metal sealing systems and drivetrain components achieved particularly strong growth in the second quarter of 2021, it grew by 85%. After the lightweight and elastomer technology unit has proved robust in the second quarter of 2020, due in part to business centered around lightweight structural components, demand increased significantly again in the quarter under review, up by 55%. And last but not least, the Shielding Technology unit also recorded strong growth of 35%. Slide #8 now presents the earnings figures for the first quarter. Following the slump in revenue last year and the successful continuation of the efficiency measures, the group was able to improve its earnings performance. The group recorded earnings before interest and taxes of EUR 23 million in the second quarter of 2021. The increase of EUR 55.4 million was mainly driven by sales growth and in addition, by further results from the global efficiency enhancement program within the group. So far, the impact on group's earnings from the global surge of raw material prices was limited to EUR 3 million. At 5.9%, the EBIT margin in the second quarter of 2021 was within the target range of about 5% to 6% for the full annual period of 2021. Including the strong first quarter of '21, the EBIT margin for the first half of 2021 was 8.7%. Net finance costs were lower in the period under review, down by EUR 1.7 million to minus EUR 4.6 million. And this was attributable mainly to lower interest expenses. Slight changes in the net result from currency translation were offset by corresponding changes in the share of the net result of associated companies. As for June 30, 2021, earnings per share attributable to the shareholders of ElringKlinger AG amounted to EUR 0.13 in the second quarter and EUR 0.72 in the first 6 months. Let me now turn to Slide #10, showing the performance of our segments. After the pandemic-induced losses recorded in the second quarter of 2020, the original equipment segment as a whole, considerably improved earnings to an EBIT of EUR 7.3 million after minus EUR 40.5 million in the second quarter of 2020. The visible recovery in revenues also prompted a significant expansion of earnings performance over -- of all 3 major units operating within the classical areas of business. The future-oriented E-mobility unit, which, in addition to the fuel cell business also includes battery technology and electric drive units posted negative EBIT in the quarter under review as well as in the first half of 2021. This was mainly due to a new series ramp-up and pre-series production. The aftermarket segment contributed EUR 53.3 million to group revenue in the quarter under review. And 36% year-on-year growth within this area was significant and the more pronounced upturn in the business after the easing of pandemic-related restrictions coincided with higher costs for freight and logistics within this segment as well. Nevertheless, the bottom line result remained at a high level, which was due in part to sustained cost discipline. And therefore, the segment saw earnings grew by EUR 2.3 million in the second quarter, taking EBIT to EUR 10 million. This corresponds to an EBIT margin of 18.8%. With revenues totaling EUR 31.8 million in the second quarter of 2021, the Engineered Plastics segment was again able to show prepandemic performance. In particular, sales generated in the automotive and chemical sectors proved strong in this period. And from a regional perspective, Asia recorded particularly solid growth. Overall, segment revenue in the quarter under review was 34% higher than posted for the same period last year. While revenue increased significantly, costs did not follow suit to the same extent. And this was attributable in part to the policy of strict cost discipline adopted by the group. In total, the engineering plastics segment achieved earnings before interest and taxes of EUR 6 million in the second quarter of 2021, which corresponds to an EBIT margin of 19%. On Slide #11, you see that the group was able to further optimize net working capital. The ratio in percent of group revenue improved from 27.8% 1 year ago to 25% at the end of the reporting period. In line with these plans, ElringKlinger is pursuing a disciplined investment policy in 2021. New purchases are targeted, particularly at the strategic fields of the future, and the group's capital expenditure amounted to EUR 10.9 million in the second quarter of 2021 related to production activities worldwide and also included expansion investments for new ramp-ups. As of June 30, 2021, ElringKlinger generated operating free cash flow of EUR 65.6 million in the first half of 2021. This figure does not include exceptional items such as the initial installment paid by Plastic Omnium's purchase interest in EKPO or proceeds from the sale of the Austrian subsidiary. Operating free cash flow in the second quarter reached EUR 37 million. Due to the considerable operating free cash flow, ElringKlinger was able to further reduce its financial liabilities in the period under review. Having already scaled net financial debt back by EUR 59 million in the first quarter, the figure was reduced by further EUR 37 million in the second quarter. From a 12-month perspective, net debt fell by EUR 217 million to EUR 363 million as of June 30, 2021. Against the backdrop of a solid earnings performance and the reduction in debt, the group saw a significant improvement in its debt ratio at the end of the first half. Net debt to EBITDA stood at 1.4 at the end of the reporting period compared to 2.5 at the end of 2020 and 3.8 a year earlier. Moreover, ElringKlinger agreed an extension to the financing framework with the existing bank partners of a syndicated loan that we concluded in 2019. And as part of this new arrangement agreed in July 2021, in particular, after the first half reporting period, the syndicated banks will make a further EUR 100 million available to the group. Additionally, the term of the entire borrowing facility of now EUR 450 million was extended by 2 years until early 2026. Therefore, the group is comfortably positioned for further business development, especially with regard to the far-reaching transformation of the mobility market. The increase in extension of the existing syndicated loan will further strengthen the group's solid position. Having said this, I now turn back to Dr. Wolf.

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

Thank you very much, Mr. Jessulat for explaining the figures. Well, despite the persistently high risk of infection associated with the coronavirus pandemic, global economic activities has been visibly recovering. Fundamentally, this also applies to the automotive industry, although the global markets are subject to significant uncertainties. In the context -- in this context, bottlenecks of the supply of semiconductors play just as much role as the tensed situation within the commodity markets. Prices for polyamides, especially PA66 which we use for our cam covers and oil pans, and steel, but also for aluminum remain very high. What is more, the availability of such materials cannot always be guaranteed throughout, which is due partially to the fact that bottlenecks are generated by overbooking the supply within the supply chain. In addition, the flood disaster here in Germany might have an impact on the supply of raw materials as some raw material providers, especially from the steel sector have been very much affected in some cases, very seriously by the consequences of this flooding. Moreover, there are concerns over the possibility of new waves of COVID infections later in this year, which could again have an impact on the economic activities and this is worldwide. Considering these uncertainties and the strong second half of the previous year, the global market is expected to fall in the third and fourth quarter. Likewise, production figures in the 3 main markets will decrease with the exception of North America, which is expected to grow in the fourth quarter. The development of the global markets is seen very heterogeneously from the 2021 financial year. While Europe and North America are expected to grow by 9% and 12%, respectively, China is expected to grow at a more moderate rate of around 6%. In contrast to the other 2 markets, however, China will thus exceed its precrisis level from 2019. All in all, global light vehicle production is expected to grow by around 10% in the current fiscal year. Regardless of the signs of recovery, the uncertainties for the remainder of the year are still considerable. The situation within commodity markets is tensed and bottlenecks in the semiconductor industry may have a regional or global impact on vehicle production output. Against this backdrop, ElringKlinger continues to anticipate a level of organic revenue growth that is likely to roughly match the rate of expansion in global automotive production. In terms of consolidated earnings, ElringKlinger anticipates an EBIT margin of around 5% to 6% calculated in relation to group revenue. Based on the results of the current financial year-to-date and the impact of the efficiency enhancement program, the group also confirms its expectations of its further key performance indicators. Despite the challenging factors currently driving the business environment in which ElringKlinger operates, the company considers itself to be well positioned in the medium to long term. Thus, the group can also confirm its medium- and long-term targets that you are aware of and that you know. Well, that concludes my presentation. Ladies and gentlemen, thank you very much for your attention. And Mr. Jessulat and myself are now more than happy to answer your questions.

[Operator]

And the first question we received is from Christoph Laskawi of Deutsche Bank.

[Christoph Laskawi, Research Analyst]

I have 3, please. The first one would be, and you already highlighted a bit on it, the raw material impact that you face in the business. In Q2, it was only a small negative in the bridge. How should we think about that in H2? Are you willing to quantify the headwind that you currently work with as an assumption? Or is it that fluid that it's tough to call at the moment? And then also related to that, I would see that primarily being an impact on the OE business given that aftermarket and likely Engineered Plastics are faster in passing on potential input cost increases. Or should we actually see aftermarket in Engineered Plastics deteriorating a bit from the raw material headwind in the second half as well? And then lastly, on free cash flow, you've already comfortably reached the full year target essentially with H1. Why not become more positive on that? Is it working capital which is uncertain or anything else that we should be aware of?

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

Okay. Well, let me start with the raw material situation. I can tell you one thing, I'm since 25 years in this business, and I've never seen a situation like that before. Everything is unclear, and things are changing sometimes within 24 hours. We have good contracts with our suppliers. We have a pretty good and pretty safe situation, but it's not only related to us. This is the whole line of supply. And finally, we are dependent on what our customers need. And sometimes it's not because we cannot supply the parts, but somebody else cannot supply parts, and that's why they don't build cars. So here, this is really, really a very unclear situation, and we are very cautious with regard to what's going to happen in the second half year, which from my point of view is good and necessary. And of course, the OE business is affected, pretty clear. But also, of course, the aftermarket and the engineered plastics business is affected. If you look at our aftermarket business, we have our own products, but we also buy products from suppliers to build those aftermarket gasket kits. So all dynamic sealing like valve stem seals, radial seals, cars, cylinder head bolts or whatever, we buy that and include that in our gasket kits. So of course, also those suppliers that supply products to the aftermarket business here at ElringKlinger, they have -- some of them have severe problems with the supply of materials so that we can sometimes not get all the parts to finish those gasket kits that finally go to the customer. So of course, the aftermarket is also affected. And of course, also the Engineered Plastics because we also see shortage in some materials that are needed to produce our products in the Engineered Plastics business. So it's a situation that goes through the whole group. And we have to see how we deal with it. So far, we dealt with this pretty good, but we see some risks in the second half year. And now Mr. Jessulat with regard to your question of free cash flow.

[Thomas Jessulat, CFO & Member of Management Board]

Yes. Mr. Laskawi, on the one hand, we have a not too bad position now with a 25% working capital on sales. On the other hand, we are confronted, like Dr. Wolf said with a lot of uncertainties in the raw material market. If we look within the working capital rate that is good, we see throughout the first half an increase here in inventory. And we might be in a situation where we have to cover ourselves with spot buying on the one side, which may have a negative impact here on our inventory position. And right now, I have to say the main focus is not the working capital ratio to sales, but that we are covered in terms of raw material, and there is different elements from different industries involved with that. So on the inventory side, we may need to take on some more weight based on the situation here. And second, we have also uncertainty, of course, that is EBIT related, some financial risk that we see also in the current forecast that we give out and those items here bring me to the point to be cautious on that. I can say that if circumstances were better, KPIs were better, which is really good. But that is, again, not so much my focus right now. We have to see that we maintain the ability to deliver our customers. And again, that may have some negative impact, okay?

[Christoph Laskawi, Research Analyst]

Understood. So I read it correctly that at the current point in time, given the volatility in the various markets, which you saw, it's close to impossible to quantify the raw mat headwind also on the EBIT side that is assumed for H2?

[Thomas Jessulat, CFO & Member of Management Board]

Yes.

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

Yes, it's not possible.

[Thomas Jessulat, CFO & Member of Management Board]

EBIT plus working capital when we talk cash flow. And those are the main factors, yes.

[Operator]

The next question received is from Akshat Kacker of JPMorgan.

[Akshat Kacker, Analyst]

Akshat from JPMorgan. Three from my side as well, please. The first one on e-mobility. There was obviously very strong growth in the quarter. Sequentially, revenue is more than doubling. Can you just highlight a few key drivers on that front? Also, if you could split up the order intake that you've had in the first half, do you have a number for us of how much of that was pure beds? Or if not for the first half, if you have a number for us in terms of the cumulative order backlog as of today, how much of that is bed? That would be really helpful. That's the first one. The second one is on your full year guidance. I can understand there is a lot of volatility in the supply chain and a lot of moving parts. But when I split out the top end of your full year guide and when I look at what you've already done in the first half, it basically implies that at the top end of your margin, although OE will make 0 EBIT in the second half compared to the $19 million in the first quarter and $7 million in the second quarter. I'm just trying to understand what leads to this significant decline. Is there anything else other than the raw material and the different cost inflation elements that you spoke about that we should be aware of? That's the second question. And the third one is on CapEx. Again, a very low CapEx number in the first half, below 3% of sales. Can you just give us a euro million amount that you have planned for this year?

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

Well, if you look at the E-Mobility, yes, we are more than happy that numbers increase quite a bit. This is the result of what we have done over the last couple of years. We delivered quite a lot of prototype stacks here. Also in the battery business, we have prototypes that are delivered to customers, and we see series production starting in 2022. So that is now finally the fruit of what we have done in the last couple of years. And of course, EKPO is really working hard, and they are doing a good job and they get a lot of results. So if you look at the nominations in the first half year of 2021, I would say we have 70% non-internal combustion engine, about 30% is internal combustion engine. So we are going in the right direction.

[Thomas Jessulat, CFO & Member of Management Board]

Yes. On the guidance from my side, when we talk about uncertainty in the second half, we have direct factors. I would call direct factors would be, okay, level of sales, availability of raw material prices -- of raw material. But also we have to think about impact topics, second-tier costs, so to say, if we have misses in deliveries, then we would have special freight costs and those things. And the extent, today, we don't see it. But the extent we may be confronted with those costs. To estimate that based on today is very difficult. And that is really the reason why we are very careful because the second-tier cost type, so to say, the follow-up cost is very hard to predict in this situation. And therefore, we are cautious on that end. If we look at CapEx, we indicated in the previous periods that we, in the past, have taken on already investments for new technologies to some extent. And the first half is, in fact, and this is by -- really by accident, so to say, is a very low activity period. My expectation would be that in the second half, activity is going to be increasing and we'll see a higher CapEx levels in the second half, yes. And overall, we will stay within a higher double-digit range in terms of million euros for the full year, yes. But in fact, like you indicated also for the second half, expectation would be more CapEx and in particular, more CapEx from the new business yields.

[Akshat Kacker, Analyst]

Just one follow-up on E-Mobility, please. You mentioned in the report that you are still seeing losses in the first half. Any guidance that you can give us on the full year expectations for losses within this business division? And how do you expect that to evolve going into next year? And on that topic, is there any special start-up costs at the new site in Neuffen? Or is that not very meaningful? I'm just trying to understand if there are a part of start-up or pre-series production costs that will fall away going into next year.

[Thomas Jessulat, CFO & Member of Management Board]

Yes. The new location, Neuffen, will have and we already have embedded start-up costs in there. And as in a broad product spectrum as we have for E-Mobility, we have different start-up costs. For example, if we take the drivetrain systems where we have a current start-up phase in the U.K. Here, we are already going into the revenue cycle, and we see a breakeven pretty soon. On the other side, on the fuel cell area, we are within the industrialization late development cycles. And here, we'll have a little bit a longer period. And if I take all together, then we will have for the next, I would say, 1 to 2 years, we will be in a loss-making situation, but we will have elements of new projects of E-Mobility that are already in the revenue cycle and are -- and have left this area. But overall, we still are in a ramp-up phase that is associated with losses -- start-up losses.

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

And with regard to Neuffen, if you look at the situation with regard to the building, in the site, this gives us cost saving because we, of course, terminated lease contracts that we had with a couple of other -- with regard to a couple of other buildings. And basically, we will have the Neuffen side and the Dettingen side here. And this, of course, saves money because we could terminate in total, I think, 3 or 4 other lead agreements with regard to other buildings here in the area.

[Operator]

[Operator Instructions] And the next question received is from Marc Tonn of Warburg Research.

[Marc-René Tonn]

First one would be on the efficiency program, which you launched in 2019. I think where we've seen very good progress and very good contribution to, let's say, rising earnings over the last 2 years. But I think in the first quarter and also in the second quarter this year, the incremental positive impact has slowed to what we've seen in the past. So perhaps some indication would be helpful whether, let's say, the program now is, let's say, implemented in a way that we should not expect too much, let's say, incremental contribution from this in the years ahead. So that, let's say, earnings growth will most likely come from the revenue growth side. Also, it would be interesting whether you, let's say, are thinking about, let's say, starting a new efficiency program, whether you have anything in mind that if it is necessary at all, but this would be helpful to get some indication there. Second question would be a bit on, I think, the very good progress you are doing when it comes to cash generation, deleveraging the company and improving the financial metrics. And I think with the 1.4 net debt to EBITDA, you are now already well below your EBITDA target of below 2.0. That would be good to hear whether you have, let's say, what your priorities would be? What you would like to do with this, let's say, increased flexibility, which you have there? Whether you're now looking more at M&A than you may have done in the past years? What that may mean for dividend or, let's say, what the first priority is still, say, improving the financial footprint of the company further from where it is already?

[Thomas Jessulat, CFO & Member of Management Board]

Yes. On your first question, efficiency program, it had, of course, it has the elements of profitability and working capital. And the target here with the activity was clearly EBITDA on the one side and the working capital, and to improve those in order on the one side to pay down debt within 3 years to put the company in a strong position to make further investments and commitments into E-Mobility. And of course, on the second side, to get EBITDA up to have a good KPI net debt EBITDA, which is, in fact, today, a good number. Going forward, we will have to focus more on the return on the capital in terms of we'll switch a little bit because we will get more into an investment cycle again within the industrialization phase for E-Mobility and will have a higher focus really on ROCE and all associated factors. And I think the starting point right now is good because we see the group right now at 8%, 9% of ROCE, which is really at or a little bit higher of our weighted average cost of capital, which is good. But now the next step would need to be to raise that. And the balance sheet structure plays into that, but also profitability. I can give this as an indication of what we are thinking about for the upcoming years, but I do not really want to specify more as of today. To your second question, okay, what are the priorities? We really have to focus now on E-Mobility investments and investments that drive the group away from the traditional or classic product applications, the combustion engine. This is the main intent of course. And here, we have E-Mobility and lightweight as the key strategic areas. And the focus in terms of the spending will be on that. And the focus will also be on the high-end products as the focus was in the course of the history of the company. So we will have to use the funds to improve here the exposure of the ElringKlinger Group to technology. And we have to be careful with that. And it's not going to be a big bang investment cycle. I think it's a piggy investment cycle that we will enter into right now.

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

In addition, maybe to that, one thing, we also, of course, moderately invest in our classical business. I'm absolutely convinced despite the fact that there are more and more people in Europe and also in Germany that they think they have to beat themselves with dates when they do not produce combustion engines anymore. This is a global market. And I'm absolutely convinced that we will see the combustion engine for many, many years in China, in the U.S., in South America, in other Asian countries. So this is a business that is still important for us. And as a lot of suppliers do not invest anymore, there are only a few left in the gasketing business, do not invest anymore in this business. We do it moderately to keep ourselves in this classical business on a very high technical level, which opens a lot of doors in the future because in this whole development, the market is going to be quite narrow as capacities will be short. And our customers, they will build for many, many years, combustion engines in lower numbers, but they will build combustion engines worldwide. And if it's not happening in Germany, then it happens in Asia or in South America, and we are prepared to be here a good partner with highly innovative solutions. This is a business that will drive -- will be driven very much over the next 10, 15 years, 20 years, I'm absolutely convinced of that. And the margins are getting better and better, and we will have, I think, pretty good earnings here from this classical business. And so we -- everybody is talking always only about E-Mobility. This is important, and we are well positioned with regard to pure cells, with regard to our battery systems, where we have, for components, a big order that starts next year. So we are well set up here. And the magnitude of our investments, of course, go in those new business units. But I always say, don't forget about the traditional combustion engine, we will have it for many, many years to come.

[Operator]

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

[Michael Punzet, Analyst]

Yes, Michael Punzet, I have only one question left with regard to your tax rate in the second quarter. This was extremely high. Maybe you can explain what happened here?

[Thomas Jessulat, CFO & Member of Management Board]

Tax rate is good and bad, so to say. It shows the structural improvement of the earnings situation in the individual entities and in the regions of the group. So tax rate goes up if earnings go up in regions that have a relative high tax rate. And we are in the process of improving in the companies where we had a loss-making situation in the past. And step by step, this situation is improving. And along that development, we'll see also now a tax rate that will be at or around the expected tax rate for the group, which is going to be close to 30% as a tax rate -- as a taxable rate.

[Michael Punzet, Analyst]

And a follow-up, can you give us a guidance for the full year tax rate do you expect?

[Thomas Jessulat, CFO & Member of Management Board]

My expectation would be that we are in the area of this expected tax rate of around 30%.

[Operator]

As there are no further questions, I will hand back to Dr. Stefan Wolf for some closing remarks.

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

Yes. Well, thank you very much for attending our call today. Thank you for your questions. Yes, we are happy with the performance of the company in the first half year. As we have outlined, we see some risks in the second half year. We all don't know how the coronavirus pandemic is going to develop once we get close to fall and winter. So we are cautious, but we are also -- we think that we are on a good path and we are especially happy about the development in our fuel cell and battery technology business where we got real good orders. And we are really in a lot of good projects so that this will really drive our business in the years to come. So thank you for your attention. Wish you all the best and looking forward talking to you in our conference call for the third quarter. So all the best. Bye-bye.